Accuray
Annual Report 2007

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)xx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the fiscal year ended June 30, 2007oo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the transition period from to .Commission file number 001-33301ACCURAY INCORPORATED(Exact Name of Registrant as Specified in Its Charter)DELAWARE20-8370041(State or Other Jurisdiction ofIncorporation or organization)(I.R.S. EmployerIdentification No.) 1310 Chesapeake TerraceSunnyvale, California 94089(Address of Principal Executive Offices) (Zip Code)Registrants’ telephone number, including area code: (408)716-4600Securities registered pursuant to section 12(b) of the Act:Title of Each ClassName of Each Exchange on Which RegisteredCommon stock, $.001 Par Value Per ShareThe NASDAQ Stock Market LLC Securities registered pursuant to section 12(g) of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No xIndicate 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 thepreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of theRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer in Rule 12-b2 of the Exchange Act.Large accelerated filer o Accelerated filer o Non-accelerated filer xIndicate by check mark whether the registrant is a Shell Company (as defined in Rule12b-2 of the Exchange Act). Yes o No xThe aggregate market value of the registrant’s common stock held by non-affiliates of the registrant based on the last sale price for such stock on December 31, 2006: Notapplicable because trading of the registrant’s common stock on the NASDAQ Global Market commenced on February 8, 2007.As of August 17, 2007, the number of outstanding shares of the registrant’s common stock, $0.001 par value, was 53,851,781. ACCURAY INCORPORATEDYEAR ENDED JUNE 30, 2007FORM 10-KANNUAL REPORTTABLE OF CONTENTSPART IItem 1.Business1Item 1A.Risk Factors26Item 1B.Unresolved Staff Comments47Item 2.Properties47Item 3.Legal Proceedings47Item 4.Submission of Matters to a Vote of Security Holders47PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities48Item 6.Selected Financial Data50Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations53Item 7A.Quantitative and Qualitative Disclosure About Market Risk72Item 8.Financial Statements and Supplementary Data73Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure103Item 9A.Controls and Procedures103Item 9B.Other Information104PART IIIItem 10.Directors and Executive Officers of the Registrant105Item 11.Executive Compensation110Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 131Item 13.Certain Relationships and Related Transactions, and Director Independence143Item 14.Principal Accountant Fees and Services147Item 15.Exhibits and Financial Statement Schedules147Signatures151 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. We have basedthese forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financialcondition of our business. Forward-looking statements should not be read as guarantee of future performance or results, and will not necessarily beaccurate indications of the times at, or by, which such performance or results will be achieved. Factors that could cause our actual results to differmaterially include those discussed under “Risk Factors” in Part I, Item 1A of this report. We undertake no obligation to update or revise any forward-looking statements to reflect any event or circumstance that arises after the date of this report.PART IItem 1. BUSINESSThe CompanyWe have developed the first and only commercially available intelligent robotic radiosurgery system, the CyberKnife system, designed to treat solidtumors anywhere in the body as an alternative to traditional surgery. For over 30 years, traditional radiosurgery systems, or systems that deliver precise, highdose radiation directly to a tumor, have been used primarily to destroy brain tumors. Our CyberKnife system represents the next generation of radiosurgerysystems, combining continuous image-guidance technology with a compact linear accelerator that has the ability to move in three dimensions according to thetreatment plan. Our image-guidance technology continuously acquires images to track a tumor’s location and transmits any position corrections to the roboticarm prior to delivery of each dose of radiation. Our compact linear accelerator, or linac, is a compact radiation treatment device that uses microwaves toaccelerate electrons to create high-energy X-ray beams to destroy the tumor. This combination, which we refer to as intelligent robotics, extends the benefits ofradiosurgery to the treatment of tumors anywhere in the body. The CyberKnife system autonomously tracks, detects and corrects for tumor and patientmovement in real-time during the procedure, enabling delivery of precise, high dose radiation typically with sub-millimeter accuracy. Traditional radiosurgerysystems have limited mobility and generally require the use of a rigid frame attached to a patient’s skull to provide a coordinate system to effectively target atumor, which restricts the ability to effectively treat tumors outside of the brain. The CyberKnife system does not have these limitations and therefore hasincreased flexibility to treat tumors throughout the body from many different directions, while minimizing the delivery of radiation to healthy tissue and vitalorgans. The CyberKnife procedure requires no anesthesia, can be performed on an outpatient basis and allows for the treatment of patients who otherwisewould not have been treated with radiation or who may not have been good candidates for surgery. In addition, the CyberKnife procedure avoids many of thepotential risks and complications that are associated with other treatment options and is more cost effective than traditional surgery.The CyberKnife system received U.S. Food and Drug Administration, or FDA, 510(k) clearance in July 1999 to provide treatment planning and image-guided robotic radiosurgery for tumors in the head and neck. In August 2001, the CyberKnife system received 510(k) clearance to treat tumors anywhere inthe body where radiation treatment is indicated. The CyberKnife system has also received a CE mark for sale in Europe and has been approved for variousindications in Japan, Korea, Taiwan, China and other countries. In Europe, Korea, Taiwan, and China, the CyberKnife system has received approval toprovide treatment planning and image-guided robotic radiosurgery for tumors anywhere in the body where radiation treatment is indicated. In Japan, theCyberKnife system is currently approved to provide treatment for indications in the head and neck. As of June 30, 2007, 109 CyberKnife systems wereinstalled and are in use: 71 in the Americas, 10 of which are pursuant to our shared ownership programs, 26 in Asia and 12 in Europe. Our customers havereported that over 35,000 patients worldwide have been treated1with the CyberKnife system since its commercial introduction. Our customers have increasingly used the CyberKnife system for indications outside of thebrain for tumors on or near the spine and in the lung, liver, prostate and pancreas. Based on customer data, approximately 54% of patients treated with theCyberKnife system in the United States during the year ended June 30, 2007 were treated for tumors outside of the brain.We were incorporated in 1990 and commenced operations in 1992. Initially we funded our operations through individual private investors, as well asfrom the sale of a prototype system to Stanford University Hospital. After 1992, we sold additional prototype systems which helped fund our operations.These prototype systems were granted an Investigational Device Exemption, or IDE, by the FDA and treatment with the CyberKnife system began in 1994.We also were able to secure regulatory approval in Japan, and the subsequent sales of systems in Japan helped to fund our continued operations anddevelopment. While the CyberKnife system was refined and upgraded, additional funding was obtained through private investors, bridge loans and severalrounds of financing.Cancer Market OverviewAccording to the World Health Organization, or WHO, an estimated 7.6 million people died of cancer in 2005, accounting for 13% of all deathsworldwide. The WHO estimates that there are 24.6 million people living with cancer worldwide, with approximately 10.9 million new cases being diagnosedevery year. Cancer is the second leading cause of death in the United States, after heart disease. The American Cancer Society, or ACS, estimates thatapproximately 560,000 Americans will die as a result of cancer in 2007. The ACS also estimates that approximately 1.4 million new cases of cancer will bediagnosed in the United States in 2007, with continued increases in the prevalence of cancer forecasted as the U.S. population ages. The National Institutes ofHealth estimates that the treatment of cancer accounted for more than $74.0 billion in direct medical costs in 2005.Cancers can be divided broadly into two groups: solid tumor cancers, which are characterized by the growth of malignant tumors within the body inareas such as the brain, lung, liver, breast or prostate, and hematological, or blood-borne, cancers, such as leukemia. The ACS estimates that solid tumorcancers will account for approximately 1.34 million, or approximately 92%, of new cancer cases diagnosed and will account for approximately500,000 cancer-related deaths in the United States in 2007. In addition, tumors at the original cancer site, called primary tumors, such as in the breast orprostate, even when diagnosed and treated, can lead to the development of tumors in other locations of the body, called secondary tumors. This is referred to asmetastatic disease, the movement of cancer cells from one part of the body to another.Traditional TreatmentsTraditional methods for the treatment of solid tumor cancers include surgery, radiation therapy, chemotherapy and other drugs. Surgery and radiation areforms of local control, because the tumor is either directly removed through surgery or irradiated with the objective of destroying the cancer cells comprisingthe tumor. Chemotherapy is a systemic treatment method which involves the administration of drugs with the objective of killing cancer cells anywhere in thebody, including any remaining cancer cells that were not destroyed by local treatment.Surgical Removal of TumorsA common treatment approach, if applicable to the patient and tumor type, is the removal of the tumor through surgery, with follow-up radiation therapyto kill any remaining cancer cells in the area surrounding the tumor. Surgery is especially appropriate for certain types of cancer, such as breast cancer, wheretumors are often well-defined and surgically accessible. However, many types of solid tumors,2including those affecting the brain, the spine, the lungs and various other organs, present significant challenges to a traditional surgical approach. In manyinstances, these tumors occur in hard to reach areas or lie within or in close proximity to critical organs. Accordingly, it may be difficult or impossible tosurgically access or remove the entire tumor or organ affected. For example, many tumors located near the base of the skull are difficult to treat with traditionalsurgery without substantial risk of injury to the visual pathways or other critical brain regions.Traditional surgery is highly invasive because it requires entering the body by incision, is painful and involves significant operative and post-operativerisks, including risks associated with anesthesia, infection and other complications. For example, surgery is very difficult to perform on lung tumors becauseincisions in the sternum are often required to access the lung and because the lung is in motion due to respiration. Lung surgery also entails significant risks ofpost-surgical complications, including severe bleeding and pneumonia. Traditional surgery also entails significant costs and recovery times, particularly formore complex and difficult surgeries. In addition, for elderly or seriously ill patients, surgery is not typically an alternative, even if the tumor were otherwiseoperable.Over the past several years, minimally invasive surgical techniques have been developed to destroy tumors including cryotherapy, which is the freezingof cancer cells, radiofrequency ablation, a process which heats and destroys tumors, and injection of ethanol directly into tumors; however, these techniqueshave significant limitations. Cancer cells may not be fully ablated or destroyed and the energy source used in the procedure may damage adjoining healthytissue or organs. In addition, these techniques are currently only available for a limited range of cancer indications. As a result, these techniques remain inlimited use.Radiation TherapyRadiation therapy has been used for several decades to treat the area around a tumor site, typically as an adjunct to surgery after the tumor has beenremoved, in an attempt to eliminate remaining cancer cells in that area. Radiation therapy is also used to directly target the tumor in certain instances whensurgery is not possible. The goal of radiation therapy is to eliminate all cancer cells in an intended treatment region. However, healthy tissue outside of theintended treatment region also receives substantial radiation. In order to minimize the damage to healthy tissue surrounding the tumor area, a large number offractions, or staged treatments, are administered daily over multiple weeks. Despite staging treatments over a period of time, or fractionation, radiation therapycan still damage healthy tissue in the treated region, particularly since treatment delivery is relatively imprecise. Besides the potential damage to healthy tissue,radiation therapy may have a number of other adverse side effects including nausea and skin reactions. The nature and severity of these side effects can varysignificantly depending on the area of the body treated and on the patient.Recent advances in radiation therapy have focused on improving the shaping and targeting of the radiation beams to minimize irradiation of healthytissue. These advances include the development of Intensity Modulated Radiation Therapy, or IMRT, which is designed to vary the intensity and shape of theradiation beam delivered to the tumor, and Image-Guided Radiation Therapy, or IGRT, which is designed to improve targeting accuracy. However, the majorityof these treatments are delivered using gantry-based linear accelerator systems that rotate the radiation source on a single axis and therefore have a limited rangeof motion, which restricts treatment delivery options and generally requires manual repositioning of the patient during treatment. In addition, IMRT and IGRThave a limited ability to accurately target tumors, to conform to tumor shape, and to detect and compensate for tumor and patient motion during treatment.This results in having a cumulative radiation dose pattern for IMRT and IGRT treatments which generally includes not only the tumor, but also surroundinghealthy tissue.3Development of RadiosurgeryBased on the demonstrated principles of radiation as a method of destroying cancer cells, manufacturers have developed radiosurgery systems that haveinitially shown to be effective in the treatment of brain tumors and there have been various attempts to develop similarly accurate systems to performradiosurgery elsewhere in the body. By destroying the tumor with a high dose of radiation, radiosurgery systems have been shown to be effective at localcontrol without the risks, costs and other limitations of traditional surgery. Radiosurgery systems differ from traditional radiation therapy systems in that theyare designed to deliver a very high cumulative dose of radiation, in a single or small number of treatments specifically targeted at the tumor rather than at aregion surrounding the tumor area. The delivery of more accurate radiation allows higher doses to be delivered, increasing the probability of tumor cell deathand better local control. In addition, radiosurgery can be used on patients who cannot, due to advanced age or other health reasons, tolerate traditional surgery.One of the initial radiosurgery techniques was frame-based radiosurgery for the treatment of brain tumors, which requires attaching a rigid frame to thepatient’s skull to immobilize the patient’s head and to aid in targeting the tumor. This procedure begins by attaching a rigid frame to the patient’s head byscrewing it into the skull through the skin. Besides immobilizing the patient, the frame forms a fixed coordinate system that is used to target a tumor inside thehead. Once the frame is attached, the physician then images the head, typically with a computed tomography, or CT, scan, to identify the tumor locationrelative to the frame. The physician then uses the acquired images to develop a treatment plan, and the patient receives treatment. The entire process usuallylasts between four and eight hours.Although frame-based radiosurgery represents an advancement in cancer treatment, it has significant shortcomings. The necessity for a rigid frame to bescrewed into a patient’s skull or affixed to the body restricts the area of the body which can be treated. In addition, frame-based radiosurgery systems do notgenerally succeed in conforming the radiation dose to the tumor, because beam orientations are limited, and therefore it is difficult to match the shape of thetreated volume with the shape of the tumors. Further, because it is difficult to precisely reposition the head frame for multiple treatments, these systems arevery rarely used when more than one dose of radiation is required. Frame-based radiosurgery approaches have been used for treatment of tumors in other partsof the body, but suffer from significant drawbacks. In particular, it is not practical to attach a frame rigidly to parts of the body other than the head. Tumorsin soft tissue organs such as the lung, liver, pancreas and prostate are not rigidly fixed to any external reference points and can move significantly duringtreatment due to normal bodily functions. Frame-based approaches to delivering radiosurgery for tumors in such locations are rarely as accurate as frame-based systems used to treat brain tumors. This lack of accuracy for tumors located outside the head may compromise the efficacy of traditional radiosurgeryand increase the likelihood of delivering significant radiation doses to otherwise healthy tissue.The CyberKnife System SolutionWe have developed and commercialized the CyberKnife system, an intelligent robotic radiosurgery system designed to treat solid tumors throughout thebody where radiation is indicated as an alternative to traditional surgery. The CyberKnife system combines continuous image-guidance technology with acompact linear accelerator mounted on a computer-controlled manipulator arm to precisely deliver high doses of radiation to a tumor from many differentdirections. Our system tracks, detects and corrects for tumor and patient movement in real-time during treatment and precisely delivers high doses of radiationto a tumor typically with sub-millimeter accuracy. Key benefits of the CyberKnife system include:Treatment of inoperable or surgically complex tumors. The CyberKnife system can be used to target tumors that cannot be easily treated withtraditional surgical techniques because of their location, number, size, shape or proximity to vital tissues or organs, or because of the age or health of thepatient. The4CyberKnife system’s intelligent robotics are designed to enable the delivery of radiation doses that conform closely to the shape of the tumor. This enables theprecise targeting of a tumor, while at the same time minimizing damage to surrounding healthy tissue. Treatments performed with the CyberKnife system canalso be staged over two to five treatment sessions.Treatment of tumors throughout the body. The CyberKnife system has been cleared by the FDA to provide treatment planning and image-guidedradiosurgery for tumors anywhere in the body where radiation treatment is indicated. Unlike frame-based radiosurgery systems, which are generally limited totreating brain tumors, the CyberKnife system is being used for the treatment of primary and metastatic tumors outside the brain, including tumors on or nearthe spine and in the lung, liver, prostate and pancreas.Real-time tracking of tumor movement. We believe the CyberKnife system is the first device that is designed to enable the treatment of tumors thatmay change position due to tumor and patient movement during treatment with a level of accuracy associated with radiosurgery procedures for brain tumors.In addition, our Synchrony motion tracking system enables highly accurate treatment of tumors that move with respiration.Significant patient benefits. Patients may be treated with the CyberKnife system on an outpatient basis without anesthesia and without the risks andcomplications inherent in traditional surgery. The CyberKnife procedure is well tolerated. Patients do not require substantial pre-treatment preparation, andtypically there is little to no recovery time or hospital stay associated with the CyberKnife procedure. In addition, the CyberKnife system eliminates the needfor an invasive rigid frame to be screwed into the patient’s skull or affixed to other parts of the body.Facilitates additional revenue generation through increased patient volumes. We believe that the CyberKnife system allows our customers toeffectively treat patients that otherwise would not have been treated with radiation or who may not have been good candidates for surgery. Therefore, we believethe treatment of these patients generates additional revenue without affecting our customers’ traditional radiation therapy practices. In addition, because theCyberKnife treatment is a non-invasive, outpatient procedure requiring little or no recovery time, hospitals can treat more patients than through traditionalsurgery. In traditional surgery, the time a patient must be at the facility for the procedure and the recovery time tend to be measured in days. With theCyberKnife system, the entire procedure is generally completed within 90 minutes, and the patient often leaves the facility very shortly after treatment. Even ifthe patient receives four to five treatments, the total time the patient is at the hospital or treatment center is still shorter than with traditional surgery.Furthermore, the additional time the patient must be at the hospital, the more resources the hospital must dedicate to the patient. The reduction in overall timeand resources required for the CyberKnife procedure, when compared to traditional surgery, leads to an increase in the volume of procedures performed andlower per procedure costs for the hospital. The combination of incremental revenue generation and lower per procedure cost makes the CyberKnife system anattractive addition to our customers’ cancer treatment practice.Upgradeable modular design. Our CyberKnife system has a modular design which facilitates the implementation of upgrades without requiring ourcustomers to purchase an entirely new system. We have a well-established track record of developing and delivering state-of-the-art upgrades to our customers,enabling our customers to take advantage of the continued evolution of our CyberKnife system. We continue to develop and offer new clinical capabilitiesenhancing ease of use, reducing treatment times, improving accuracy and improving patient access.Our StrategyOur goal is to have the CyberKnife system become the standard of care for the treatment of solid tumors, particularly those that are difficult to treat withtraditional surgery. We believe our technology can5significantly enhance the applications of radiosurgery by increasing the number and type of tumors which can be treated effectively. Key elements of ourstrategy include the following:Increase physician adoption and patient awareness to drive utilization. We are continually working to increase adoption and awareness of ourCyberKnife system and demonstrate its advantages over traditional treatment methods. We intend to increase the number of worldwide sales and marketingpersonnel in order to increase sales and drive utilization of the CyberKnife system. In addition, we will continue to hold and sponsor symposia andeducational meetings and to support clinical studies in an effort to demonstrate the clinical benefits of the CyberKnife system. Finally, we will continue toassist our customers in increasing patient awareness in their communities by helping them develop marketing and educational campaigns.Continue to expand the radiosurgery market. While radiosurgery has traditionally been used to treat brain tumors, the CyberKnife system hasreceived FDA clearance for and is increasingly being used to treat tumors anywhere in the body where radiation is indicated. Based on customer data,approximately 54% of patients treated with the CyberKnife system in the United States during the year ended June 30, 2007 were treated for tumors outside ofthe brain. We are facilitating studies to further demonstrate the CyberKnife system’s efficacy for treating tumors outside of the brain, and we believe thesestudies will increase overall utilization of the CyberKnife system and continue to expand the number of patients eligible for radiosurgery. In addition, we arecontinuing to develop new upgrades to enable the CyberKnife system to be even better suited for treating tumors anywhere in the body where radiationis indicated.Continue to innovate through clinical development and collaboration. The clinical success of the CyberKnife system is due in large part to thecollaborative partnerships we have developed over the last decade with clinicians, researchers and patients. We proactively seek out and rely on constructivefeedback from CyberKnife system users to learn what is needed to enhance the technology. Due to this collaborative process, we continually refine andupgrade the CyberKnife system, which ultimately improves our competitive position in the radiosurgery market. Our upgrades are designed to improve theease of use and accuracy of treatment, decrease the treatment times, and improve the utilization for specific types of tumors. For example, in recent years, weintroduced Synchrony, a motion tracking system that is designed to track tumors that move with patient respiration and the Xsight Spine Tracking System, anew target tracking technology, which eliminates the need for surgical implantation of small, inert metal markers, known as fiducials, in the treatment ofspinal tumors. In fiscal 2007, we introduced the Patient Archive and Restore System, the RoboCouch patient positioning system, the Xsight Lung TrackingSystem, the Xchange robotic collimator changer and the 4D Treatment Optimization and Planning System. We also maintain close relationships with ourcustomers through our shared ownership programs and service plans. This further enables us to understand their needs and allows us to develop newtechnologies and upgrades that improve and expand clinical applications and drive increased utilization of our CyberKnife system.Leverage our installed base to generate additional recurring revenue. We have designed the CyberKnife system so that customers may upgradetheir previously purchased systems as we introduce new features. We generate additional revenue by selling multiyear service plans that provide eligibility toreceive upgrades, when and if available. These contracts are typically signed at the time of CyberKnife system purchase and generate additional revenuethroughout the life of the contract. In addition, we sell upgrades to our existing customers who are not covered by service plans or who have exhausted theupgrades deliverable pursuant to their service plans. Finally, we offer shared ownership programs, which enable customers to reduce the upfront investmentrequired for the CyberKnife system in exchange for sharing a significant portion of revenue with us that is derived from each procedure.Continue to expand international sales and geographic reach. We intend to increase our sales and distribution capabilities outside of theUnited States to take advantage of the large international opportunity for our products. We currently have regional offices in Paris, France, Hong Kong,China, and6Tokyo, Japan, and our sales and distribution channels cover more than 45 countries. We intend to increase our international revenue by increasing the numberof distributors and direct sales and support personnel in targeted new international markets, and by further penetrating our established international markets.In an effort to streamline our sales efforts in Japan, our former distributor Meditec Corporation, transferred all of its inventory to our existing distributorChiyoda Technol Corporation in fiscal year 2006. As part of that inventory transfer our former distributor, Meditec paid us a lump sum payment for suchinventory. Such payment was over 10% of our total net revenue for the fiscal year ended June 30, 2006. Meditec was a subsidiary of Marubeni Corporation,one of our stockholders.Pursue acquisitions, strategic partnerships and joint ventures. We intend to actively pursue acquisitions, strategic partnerships and joint venturesthat we believe may allow us to complement our growth strategy, increase market share in our current markets and expand into adjacent markets, broaden ourtechnology and intellectual property and strengthen our relationships with our customers.The CyberKnife SystemOur principal product is the CyberKnife system, an intelligent robotic radiosurgery system that enables the treatment of tumors anywhere in the bodywhere radiation is indicated without the need for invasive surgery or rigid frames. The current list price for the CyberKnife system is approximately$4.2 million, which includes initial training, installation and a one-year warranty. We also offer optional hardware and software, technical enhancements andupgrades to the CyberKnife system, as well as service contracts and training to assist customers in realizing the full benefits of the CyberKnife system. As ofJune 30, 2007, we had 109 units installed at customer sites: 71 in the Americas, 10 of which are pursuant to our shared ownership programs, 26 in Asia and12 in Europe.The CyberKnife system combines continuous image-guidance technology with a compact linear accelerator mounted on a computer-controlledmanipulator arm to precisely deliver high doses of radiation to the tumor from numerous directions during treatment. Our patented image-guidance technologycorrelates low dose, real-time treatment X-rays with images previously taken with a CT scan of the tumor and surrounding tissue to precisely direct each beamof radiation. This enables delivery of a highly conformal, non-isocentric dose of radiation to the tumor, with minimal radiation delivered to surroundinghealthy tissue. With its autonomous ability to track, detect and correct for even the slightest tumor and patient movement throughout the entire treatment, theCyberKnife system gives clinicians an effective, uninterrupted and accurate treatment alternative.Key components and technologies of the CyberKnife system include the following:Compact X-band linear accelerator. This compact linac generates the radiation that destroys the tumor. We believe we are the only commercialmanufacturer of a compact X-band linac. This technology allows us to manufacture linacs that are smaller and weigh significantly less than standard medicallinacs used in radiation therapy while achieving similar performance. Our linac can provide high energy X-ray beams of different diameters and intensitieswithout the use of radioactive material.Robotic manipulator. The manipulator arm, with six-degrees-of-freedom range of movement, is designed to move and direct the linac with an extremelyhigh level of precision and repeatability. The manipulator arm allows doses of radiation to be delivered from nearly any direction and position, without thelimitations of gantry-based systems, creating a non-isocentric composite dose pattern that can precisely conform to the shape of each treated tumor. Thisflexibility enhances the ability to diversify beam trajectories and beam entrance and exit points, helping to minimize risks of radiation damage to healthy cellsnear the tumor. Furthermore, the rapid response time of the manipulator arm allows tracking of tumors that move with respiration in real time.7Real-time image-guidance system with continuous target tracking and feedback. Without the need for clinician intervention or treatmentinterruption, the CyberKnife system’s revolutionary real-time image-guided robotics enables the CyberKnife system to continuously monitor and correct forpatient and tumor movements throughout treatment. The CyberKnife system is able to provide the precise delivery of radiation because of the virtuallyinstantaneous and continuous feedback loop between X-ray-based target localization and automatic correction of the radiation beam throughout the entiretreatment. This target tracking and feedback technology uses two digital image detectors to capture low energy X-ray images. The image guidance softwarecarries out an automated comparison of the X-ray images with the patient’s CT scan to detect, track and correct for any movement of the tumor or patientbefore and during the treatment delivery. This allows the CyberKnife system to dynamically target the tumor and adjust the position of the beam to follow themotion of the tumor throughout the treatment, directing the beam to precisely match tumor movement.X-ray sources. The low-energy X-ray sources generate X-ray images to determine the location of bony landmarks or implanted fiducials throughout theentire treatment.Image detectors. The image detectors capture high-resolution anatomical images throughout the treatment. These live images are continually comparedto previously captured digitally reconstructed radiographs to determine real-time patient positioning. Based on this information, the robotic manipulatorinstantly corrects for any detected movement. In October 2005, we introduced larger, in-floor X-ray image detectors, which provide greater treatment access.In addition to the key components listed above, we also offer the following components and features, several of which have been introduced as upgradessince 2004, including:Synchrony respiratory tracking system. The CyberKnife system employs a proprietary motion tracking system called Synchrony, for targetingtumors that move during respiration. Synchrony software and hardware correlate tumor movement due to respiration with the CyberKnife system treatmentbeam allowing it to continuously track the tumor as it moves throughout the respiratory cycle. Through this process the CyberKnife system delivers beamssynchronized in real-time to tumor position while adapting to changes in breathing patterns, allowing for the delivery of highly conformed radiation beamswhile reducing areas exposed to radiation and unprecedented clinical accuracy of approximately 1.5 millimeters.Xsight Spine Tracking System. For most extracranial tumors, the CyberKnife system uses implanted fiducials to track the position of the tumorthroughout treatment. However, the Xsight Spine Tracking System eliminates the need for surgical implantation of fiducials in the delivery of radiosurgerytreatments on or near the spine. The Xsight Spine Tracking System utilizes skeletal structures to automatically locate and track tumors with sub-millimeteraccuracy. We believe no other commercially available technology today offers this capability.RoboCouch patient positioning system. Fully integrated with the CyberKnife system, the RoboCouch intelligently positions the patient to the plannedtreatment position with unprecedented accuracy, providing not only greater set up precision, but significantly streamlining the patient set up process. Theversatility of the RoboCouch allows for automated patient positioning prior to treatment. Additionally, the RoboCouch offers greater positioning flexibility, alower patient loading height, and a higher patient weight capacity limit when compared to our AXUM treatment couch.Xsight Lung Tracking System. The Xsight Lung Tracking System delivers radiosurgical accuracy to some lung tumors without the need forimplanted fiducials. The Xsight Lung Tracking System directly tracks the anatomy of the tumor. Integrated with the Synchrony Respiratory TrackingSystem, treatment margins are significantly minimized by tracking the motion of the tumor as it moves in respiration.8Xchange robotic collimator changer. The Xchange robotic collimator changer automatically exchanges secondary collimators, which determine theradiation beam size, during the treatment. The use of multiple collimators can enable faster treatments than the use of a single collimator.In-Room CT System. The In-Room CT System enables diagnostic quality 3D and 4D patient imaging just prior to treatment. Combined with theRoboCouch patient positioning system, the In-Room CT System provides a smooth and efficient scan-to-treatment transition without having to re-enter thetreatment room or manually move the patient.4D Treatment Optimization and Planning System. Our 4D Treatment Optimization and Planning System optimizes treatment by taking intoaccount the movement of the tumor as well as the movement and deformation, or change in shape, of the surrounding tissue, thereby minimizing margins andradiation exposure to healthy tissue.MultiPlan treatment planning system. Our proprietary intuitive planning system called MultiPlan is designed for radiosurgery and includes astandard computer workstation. MultiPlan calculates a treatment plan that produces a pattern of radiation designed to conform to the tumor. The MultiPlansystem uses input images from multiple modalities, including computed tomography, or CT, magnetic resonance imaging, or MRI, positron emissiontomography, or PET, and 3D angiography. After the physician outlines a tumor and critical adjacent tissues on the computer, a radiation scientist uses theMultiPlan system to plan the number, intensity, position and direction of radiation beams. Using unique and patented software algorithms, the systemcalculates and displays the resultant treatment plan for evaluation, optimization and approval by the physician.Patient Archive and Restore System. The Patient Archive and Restore System increases utilization by moving the archive and restore processes fromthe treatment delivery workstation to an independent archiving system.InView remote review system. The CyberKnife system employs a remote review workstation to allow referring physicians to participate in thetreatment process, called InView. InView allows physicians to combine and contour diagnostic images as well as review potential treatment plans as generatedby MultiPlan prior to the CyberKnife procedure. By placing InView in physician offices or clinics, we believe that we can expand the number of patientsreferred for treatment using the CyberKnife system.AXUM treatment couch. AXUM is a computer-controlled treatment couch integrated with the image-guidance system that automatically aligns thepatient for treatment at the beginning of the procedure. AXUM moves the treatment couch to position the patient so that the tumor is in the center of the imagingfield. When the tumor is correctly positioned, treatment begins and the CyberKnife system tracking software guides the radiation beams to the precisetumor location.CyberKnife System Clinical WorkflowThe CyberKnife procedure involves scanning, planning, treatment and follow-up, and may be performed on an outpatient basis.Scanning. Prior to treatment with the CyberKnife system, the patient undergoes imaging procedures to determine the size, shape and location of thetumor. The process begins with a standard high-resolution CT scan. Preparation for the scan may also include the placement of fiducials, in or around thetumor when treating tumors outside the brain. For certain tumors, such as brain and spinal tumors, where greater differentiation between different types of softtissue is required, other imaging techniques, such as MRI, angiography, or PET, may also be used to more accurately differentiate the tumor fromsurrounding healthy tissue. Our software helps integrate CT scans and other imaging data into the pre-treatment planning process.9Planning. Following the scanning, the image data is then digitally transferred to the CyberKnife system’s treatment planning workstation, where thetreating physician identifies the exact size, shape and location of the tumor to be targeted and the surrounding vital structures to be avoided. A qualifiedphysician and/or radiation scientist or physicist then uses our proprietary software to generate a treatment plan to provide the desired radiation dose to theidentified tumor location without exceeding the tolerance of adjacent healthy tissue. As part of the treatment plan, our proprietary planning softwareautomatically determines the number, duration and angles of delivery of the radiation beams.Treatment. During a CyberKnife procedure, a patient lies on the treatment table, which automatically positions the patient. Anesthesia is not required,as the procedure is painless and non-invasive. The treatment, which generally lasts between 30 and 90 minutes, typically involves the administration ofbetween 100 and 200 radiation beams delivered from different directions, each lasting from 10 to 15 seconds. Prior to the delivery of each beam of radiation,the CyberKnife system has the ability to simultaneously take a pair of X-ray images and compare them to the original CT scan. This image guided approachcontinuously tracks, detects and corrects for any movement of the patient and tumor throughout the treatment to ensure precise targeting. The patient usuallyleaves the facility immediately upon completion of the procedure.Follow-up. Follow-up imaging, generally with either CT or MRI, is usually performed in the weeks and months following the treatment to confirm thedestruction and eventual elimination of the treated tumor.Shared Ownership Programs and Other ServicesWe provide a variety of services to support the operation and use of our CyberKnife systems. We expect that these services will enable us to generate arecurring revenue stream that will continue to make up an important portion of our revenue.CyberKnife System Shared Ownership ProgramsWe offer shared ownership programs under which we provide a CyberKnife system to a customer while retaining ownership of that system. In addition,we provide physician training, educational support, general reimbursement guidance and technical support, as well as possible future upgrades to customersunder this program. In return, these customers are generally required to pay us the greater of a minimum payment or a portion of the revenue generated throughthe use of the CyberKnife system. Generally, this minimum monthly payment is equivalent to the revenue generated from treating three to four patients permonth, and any revenue received from additional patients is shared between us and the customer. Customers who participate in our shared ownershipprograms are responsible for costs associated with facility preparation and professional and administrative personnel required to operate the CyberKnifesystem. Our legacy shared ownership programs were known as our placement programs.The shared ownership programs typically have a term of five years, during which the customer has the option to purchase the system at pre-determinedprices. As of June 30, 2007, we had installed 10 systems under our shared ownership programs.Warranty and Support ServicesWe provide a one-year warranty on the purchase of the CyberKnife system. In addition, for a fee that is fixed at the time of purchase, customers canenroll in one of our multiyear service plans:Diamond Elite multiyear service plan. Under our Diamond Elite multiyear service plan, or Diamond plan, our customers have the opportunity toacquire up to two unspecified future upgrades per year, when and if they become available. If we offer more than two upgrades a year, customers can exchangetheir10right to receive future upgrades for the current upgrades available. The Diamond plan currently lists in the United States for $460,000 per year, and providesfor annual renewals for four years.Ruby multiyear service plan. Under our Ruby multiyear service plan, or Ruby plan, customers outside the United States have the opportunity toacquire up to two unspecified future software upgrades per year when and if they become available. The Ruby multiyear service plan currently lists for$380,000 per year and provides for annual renewals for four years.Basic and Emerald multiyear service plans. We also offer a basic multiyear service plan, and our Emerald multiyear service plan, or Emerald plan,following the initial one-year warranty period. Under our Emerald plan, customers receive a higher level of support, including a faster response time andcoverage for all replacement parts. The current annual prices of our basic and Emerald service plans are $220,000 and $275,000, respectively.Legacy multiyear service plans. Prior to November 2005, we offered our Platinum multiyear service plan, or Platinum plan, to customers in theUnited States and our Gold Elite multiyear service plan, or Gold plan, to customers outside the United States. While these plans are no longer offered, as ofJune 30, 2007 we were still servicing approximately 46 customers pursuant to these legacy multiyear service plans. These multiyear service plans typicallyprovide for annual renewals for four years, including the one-year warranty period.Under our Platinum plan, in addition to technical support, customers have the opportunity to acquire at least two future upgrades per year for amaximum of eight upgrades over the three or four year term of the arrangement, for an annual fee of approximately $425,000. If we do not offer at least twoupgrades per year, the customer would be entitled to a refund of $100,000 for each upgrade not offered. To date no refunds have been required or are duepursuant to these multiyear service plans.Under our Gold plan, customers typically have the opportunity to acquire up to two unspecified future software upgrades per year, for an annual fee of$350,000. If we do not offer an upgrade in any particular year, the customer would be entitled to a refund of $100,000 for each upgrade not offered, except inJapan. Pursuant to the Gold plan customers are required to pay for additional hardware if required for the implementation of new software features. To date norefunds have been required or are due pursuant to these multiyear service plans.Installation and service. We perform the installation and service of the CyberKnife system in the United States and in selected countries outside theUnited States. In addition, we have trained third-party service organizations and trained our distributors in Korea, Taiwan, Turkey and Italy to perform theCyberKnife system installation and service. We employ service engineers and technical staff with a high degree of expertise, which is required due to thecomplexity of the CyberKnife system. As of June 30, 2007, we had 79 engineers, technicians and support personnel in our installations, service and supportgroup. We intend to increase the number of our installation and service personnel as our sales increase.Training. In addition to the training we offer with the initial installation of the CyberKnife system and the training required when an upgrade isinstalled, we offer various training sessions for our customers or our distributors for an additional fee.Sales and MarketingWe currently market the CyberKnife system through a direct sales force in the United States and a combination of direct sales personnel and distributorsin the rest of the world. Support of our international sales is handled through our European and Asian headquarters in Paris, France and in Hong Kong,China. As of June 30, 2007, we had a total of 107 employees in our worldwide sales and marketing group. We expect to continue to increase the number ofsales and marketing personnel as we expand our business.11In the United States we use a combination of sales directors, sales specialists, customer account sales executives, product managers, account managersand training specialists. Sales directors and sales specialists are responsible for selling the CyberKnife system to hospitals and stand-alone treatment facilities.Customer account sales executives sell upgrade products to existing customers. Our product managers help market our current products and work with ourengineering group to identify and develop upgrades and enhancements for the CyberKnife system. Our account managers are primarily responsible forsupporting the CyberKnife systems with marketing and education after installation is completed. Our training specialists train radiation oncologists,surgeons, physicists and radiation therapists.In addition to marketing to hospitals and stand-alone treatment facilities, we market to radiation oncologists, neurosurgeons, general surgeons, oncologyspecialists and other referring physicians. We will continue to increase our focus on marketing and education efforts to surgical specialists and oncologistsresponsible for treating tumors throughout the body. Our marketing activities also include efforts to inform and educate cancer patients about the benefits of theCyberKnife system.According to the American Society for Therapeutic Radiology and Oncology, or ASTRO, as of 2004 there were approximately 2,010 hospitals and stand-alone treatment facilities in the United States providing radiation therapy services. There are a total of 5,756 hospitals in the United States registered with theAmerican Hospital Organization as of 2004. Our sales and marketing strategy is to target the hospitals and treatment facilities currently providing radiationtherapy services, however, in the future we believe that the CyberKnife system will be marketed to hospitals that do not have radiation therapy facilities. Inaddition, we believe that free-standing cancer centers present a future opportunity to market the CyberKnife system within the United States.On April 3, 2007, we entered into a Distribution and Remarketing Agreement with Siemens Medical Solutions Inc. USA, acting through its OncologyCare Systems Group, or OCS, pursuant to which we are authorized to purchase, license, sell, and sublicense certain OCS products directly from OCS. OCSgranted us the right to purchase and license certain models of CT scanners from OCS, and to promote, market, lease, resell and sublicense the CT scannersto end users, either directly or through its channels of distribution, in the United States and other territories, and to market the CT scanners in conjunctionwith our CyberKnife and/or RoboCouch products.From time to time, we may provide our linac system for use in non-medical areas. For example, we are in discussions with a third party to develop andprovide two prototype units of our next generation X-ray source system for non-destructive testing uses.Manufacturing and AssemblyWe purchase major components of the CyberKnife system, including the robotic manipulator, treatment table or robotic couch, magnetron, which createsthe microwaves for use in the linac, imaging cameras and computers, from outside suppliers. We manufacture certain other electronic and electricalsubsystems, including the linac, at our Sunnyvale, California facility. We then assemble and integrate these components with our proprietary software fortreatment planning and treatment delivery and perform essential testing prior to shipment to customer sites. Approximately 50,000 square feet in our Sunnyvalefacilities are presently dedicated to these manufacturing and assembly activities.In January 2005, we acquired American Science and Engineering’s, or AS&E, High Energy Systems, or HES, business for $8.4 million. Thisacquisition provided us with the sole ownership of the intellectual property associated with our X-band linac, trade secrets and know-how used in themanufacturing process and included the hiring of key technologists previously employed by AS&E. HES had been the sole source manufacturer of the linacused in the CyberKnife system.12Single source suppliers presently provide us with several components, including the magnetron, the treatment couches and the imaging plates. In mostcases, if a supplier were unable to deliver these components, we believe that we would be able to find other sources for these components subject to anyregulatory qualifications, if required. In the event of a disruption in any of these suppliers’ ability to deliver a component, we would need to secure areplacement supplier. Additionally, any disruption or interruption of the supply of key subsystems could result in increased costs and delays in deliveries ofCyberKnife systems, which could adversely affect our reputation and results of operations.Intellectual PropertyThe proprietary nature of, and protection for, our products, product components, processes and know-how are important to our business. We seekpatent protection in the United States and internationally for our product systems and other technology where available and when appropriate. Our policy is topatent or in-license the technology, inventions and improvements that we consider important to the development of our business. In addition, we use licenseagreements to selectively convey rights to our intellectual property to others. We also rely on trade secrets, know-how and continuing innovation to develop andmaintain our competitive position.As of June 30, 2007, we held 16 U.S. patents, three allowed U.S. patent applications, 68 pending U.S. patent applications, and are pursuing additionalU.S. patent applications on additional key inventions to enhance our intellectual property rights. The first of our patents will expire in 2010 and currently thelast of our patents will expire in 2024. As of June 30, 2007, we also held 21 foreign patents, 15 pending published Patent Cooperation Treaty applications and38 foreign patent applications which correspond to our issued U.S. patents and pending U.S. patent applications. We cannot be sure that any patents willissue from any of our pending patent applications, nor can we assure you that any of our existing patents or any patents that may be granted to us in the futurewill be commercially useful in protecting our technology. An additional key component of our intellectual property is our proprietary software used in planningand delivering the CyberKnife system’s therapeutic radiation dose. Through the HES acquisition, we acquired certain intellectual property rights for thecompact linac used in current versions of the CyberKnife system.In addition to our patents, we also rely upon trade secrets, know-how, trademarks, copyright protection and continuing technological and licensingopportunities to develop and maintain our competitive position. We require our employees, consultants and outside scientific collaborators to executeconfidentiality and invention assignment agreements upon commencing employment or consulting relationships with us.Patents may provide some degree of protection for our intellectual property. However, patent protection involves complex legal and factual determinationsand is therefore uncertain. In addition, the laws governing patentability and the scope of patent coverage continue to evolve, particularly in the areas oftechnology of interest to us. As a result, we cannot assure you that patents will issue from any of our patent applications. The scope of any of our issuedpatents may not be sufficiently broad to offer meaningful protection. In addition, our issued patents or patents licensed to us may be successfully challenged,invalidated, circumvented or unenforceable so that our patent rights would not create an effective competitive barrier. Moreover, the laws of some foreigncountries may not protect our proprietary rights to the same extent as do the laws of the United States. In view of these factors, our intellectual propertypositions bear some degree of uncertainty.We have also entered into licensing agreements with third parties relating to rights and technologies. On January 30, 1991, we entered into aManufacturing License and Technology Transfer Agreement with Schonberg Radiation Corporation under which Schonberg granted us a perpetual exclusivelicense to use and manufacture products utilizing some of Schonberg’s patent and other intellectual property rights relating to the design, engineering andmanufacturing of the compact linacs that may be used in the13CyberKnife system for medical applications. On November 29, 2006, we entered into a Patent and Trademark License Agreement with Forte AutomationSystems, Inc., or Forte, under which we granted Forte a license, exclusive with respect to one customer for patent rights and trademark rights related to ourpatient positioning system.On April 27, 2007, we entered into a License and Development Agreement with CyberHeart, Inc., or CyberHeart. As part of this agreement, we willlicense certain intellectual property rights and technologies to CyberHeart, which CyberHeart will use to develop and commercialize new systems andapplications in the field of cardiac disease. In the event CyberHeart is able to successfully develop and commercialize such an application, under theagreement, we would be the sole supplier of radiosurgery equipment to CyberHeart and would also be entitled to receive specified payments based on usage ofthe CyberHeart system. Roderick Young, who resigned from our board of directors in January 2007, is a founder, officer and director of CyberHeart, Inc.In December 2004 and in connection with the HES acquisition, we entered into a license agreement with AS&E relating to the intellectual property weobtained from the HES acquisition. We granted AS&E an exclusive, worldwide, fully paid license for use of the purchased intellectual property in the nationalsecurity and non-destructive testing markets, as well as a non-exclusive worldwide, fully paid license of the intellectual property for all uses other than (a) thenational security and non-destructive testing markets and (b) medical use or applications. In addition, we received an exclusive, worldwide, fully paid licenseto any modifications, improvements, enhancements or new developments to the acquired intellectual property by AS&E which are limited to medical uses orapplications. We recently began the development of a next-generation linac, using technology developed independently from the intellectual property we obtainedfrom the HES acquisition. We are developing this technology for medical uses and applications and other markets, including national security and non-destructive testing. In October 2006, January 2007 and February 2007, we received correspondence from AS&E expressing concerns that we may be using theintellectual property obtained from the HES acquisition in a manner that breaches, or may intend to breach, our contractual obligations under the licenseagreement. The intellectual property at issue relates to the development of a next-generation linac for use in national security and non-destructive testing areas,as well as medical uses. We are developing the technology used in the next-generation linac independently from the intellectual property we obtained from theHES acquisition. While we do not believe our activities breach or violate the terms of the license agreement, we cannot assure you that AS&E will not assertthat we are breaching our obligations under our license agreement with them.On July 9, 1997, we entered into a license agreement with The Board of Trustees of the Leland Stanford Junior University for technology and patents todevelop, manufacture, use and sell products utilizing feature matching technology to align images used in radiosurgery.Although we are not currently a party to any legal proceedings relating to our intellectual property, in the future, third parties may file claims assertingthat our technologies or products infringe on their intellectual property. We cannot predict whether third parties will assert these claims against us or against thelicensors of technology licensed to us, or whether those claims will harm our business. If we are forced to defend against these claims, whether they are with orwithout any merit, whether they are resolved in favor of or against us or our licensors, we may face costly litigation and diversion of management’s attentionand resources. As a result of these disputes, we may have to develop costly non-infringing technology, or enter into licensing agreements. These agreements, ifnecessary, may be unavailable on terms acceptable to us, if at all, which could seriously harm our business or financial condition.Research and DevelopmentContinued innovation is critical to our future success. Our current product development activities include projects expanding clinical applications inradiosurgery, driving product differentiation, and14continually improving the CyberKnife system’s capabilities. Some of our product upgrades include AXUM, Express, Synchrony, Xsight Spine TrackingSystem, InView, MultiPlan and RoboCouch. Research activities strive to enable new product development opportunities by developing new technologies andadvancing areas of existing core technology such as a next generation linac.The modular design of our products supports rapid development for new clinical capabilities and performance enhancements by generally allowing eachsubsystem to evolve within the overall platform design. Access to regular product upgrades protects customer investment in the CyberKnife system, facilitatesthe rapid adoption of new features and capabilities among existing installed base customers, and drives increasing value in our multiyear service plans. Theseupgrades will generally consist of software and hardware enhancements designed to increase the ease of use of our CyberKnife system and improve the speedand accuracy of treatment.As of June 30, 2007, we had 127 employees in our research and development departments. Research and development expenses for the fiscal years endedJune 30, 2007, 2006 and 2005 were $26.8 million, $17.8 million and $11.7 million, respectively. We plan to continue to increase our investment in researchand development in future periods.CompetitionThe medical device industry in general, and the non-invasive cancer treatment field in particular, are subject to intense and increasing competition andrapidly evolving technologies. Because our products often have long development and government approval cycles, we must anticipate changes in themarketplace and the direction of technological innovation and customer demands. To compete successfully, we will need to continue to demonstrate theadvantages of our products and technologies over well-established alternative procedures, products and technologies, and convince physicians and otherhealthcare decision makers of the advantages of our products and technologies. Traditional surgery, minimally invasive procedures, radiation therapychemotherapy and other drugs are other means to treat cancer. Also, we compete directly with frame-based radiosurgery systems primarily from Elekta AB(publ), or Elekta, BrainLAB AG, and the Integra Radionics business of Integra Life Sciences Holding Corporation.The market for standard linacs is dominated by three companies: Elekta, Siemens AG, or Siemens, and Varian Medical Systems, Inc., or Varian. Inaddition, a more recent entrant, TomoTherapy Incorporated, or TomoTherapy, markets a radiation therapy product. The CyberKnife system does not performradiotherapy, which uses low doses of radiation over a long period of time with fractionated treatments to kill cancer cells, and generally does not competedirectly with standard medical linacs that perform traditional radiotherapy, although some manufacturers of standard accelerator systems, including Varianand Elekta, have products that can be used in combination with body and/or head frame systems and image-guidance systems to perform radiosurgery. Inaddition, many government, academic and business entities are investing substantial resources in research and development of cancer treatments, includingsurgical approaches, radiation treatment, drug treatment, gene therapy, which is the treatment of disease by replacing, manipulating, or supplementingnonfunctional genes, and other approaches. Successful developments that result in new approaches for the treatment of cancer could reduce the attractivenessof our products or render them obsolete.15Our future success will depend in large part on our ability to establish and maintain a competitive position in current and future technologies. Rapidtechnological development may render the CyberKnife system and its technologies obsolete. Many of our competitors have or may have greater corporate,financial, operational, sales and marketing resources, and more experience in research and development than we have. We cannot assure you that ourcompetitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products or thatwould render our technologies and products obsolete. We may not have the financial resources, technical expertise, marketing, distribution or supportcapabilities to compete successfully in the future. Our success will depend in large part on our ability to maintain a competitive position with our technologies.Our competitive position also depends on:· widespread awareness, acceptance and adoption by the radiation oncology and cancer therapy markets of our products;· the discovery of new technologies that improve the effectiveness and productivity of the CyberKnife system radiosurgery process;· product coverage and reimbursement from third-party payors, insurance companies and others;· properly identifying customer needs and delivering new upgrades to address those needs;· published studies supporting the efficacy and safety of the CyberKnife system;· limiting the time required from proof of feasibility to routine production;· limiting the timing and cost of regulatory approvals;· the manufacture and delivery of our products in sufficient volumes on time, and accurately predicting and controlling costs associated withmanufacturing, installation, warranty and maintenance of the products;· our ability to attract and retain qualified personnel;· the extent of our patent protection or our ability to otherwise develop proprietary products and processes;· securing sufficient capital resources to expand both our continued research and development, and sales and marketing efforts; and· obtaining any necessary United States or foreign marketing approvals or clearances.ReimbursementIn the United States, healthcare providers generally rely on third-party payors, principally private insurers and governmental payors such as Medicareand Medicaid, to cover and reimburse all or part of the cost of a medical procedure performed with a medical device. Our ability to commercialize our productssuccessfully depends in significant part on the extent to which appropriate coverage and reimbursement for our products and related procedures are obtainedfrom third-party payors. We cannot assure you that government or private third-party payors will cover and reimburse the procedures using our technology inwhole or in part in the future or that payment rates will be adequate.Medicare coverage and reimbursement policies are particularly significant to our business. Not only is Medicare the single largest third-party payor, butmany other governmental and commercial payors follow its coverage and reimbursement policies. The Medicare coverage and reimbursement policies aredeveloped by the Centers for Medicare and Medicaid Services, or CMS, the federal agency responsible for administering the Medicare program and itscontractors. Medicare reimbursement rates for the same or16similar procedures vary due to geographic location, nature of the facility in which the procedure is performed (e.g., teaching or community hospital) andother factors.Medicare coverage for procedures using our technology currently exists in the hospital outpatient setting and in the free-standing clinic setting. Forhospital outpatient procedures, where currently the vast majority of procedures using our CyberKnife system are performed, Medicare payments generally aremade under a prospective payment system, which is based on the Ambulatory Payment Classifications, or APCs, under which procedures are categorized.CMS assigns procedures that are comparable clinically and in terms of resources to the same APC. Hospitals are paid the applicable APC payment ratefor the outpatient procedure, regardless of the actual cost for such treatment. CMS will frequently categorize a procedure or service in a new technology APCwhere the procedure does not have sufficient claims data to be placed in an existing APC that is appropriate in terms of clinical characteristics and resourcecosts. Once CMS has collected sufficient claims data on the procedure being paid under a new technology APC, the agency will assign the procedure to anexisting APC group. Procedures generally are reimbursed under new technology APCs for two to three years. Beginning in 2004, both planning and treatmentusing our CyberKnife system were assigned to new technology APCs. Medicare accomplished this through certain temporary billing codes: HealthcareCommon Procedure Coding System, or HCPCS, code G0338 (“Linear-accelerator-based stereotactic radiosurgery planning”), HCPCS code G0339 (“Image-guided robotic linear accelerator-based stereotactic radiosurgery, complete course of therapy in one session, or first session of fractionated treatment”) for thefirst or single treatment, and HCPCS code G0340 (“Image-guided robotic linear accelerator-based stereotactic radiosurgery, delivery including collimatorchanges and custom plugging, fractionated treatment, all lesions, per session, second through fifth sessions, maximum five sessions per course of treatment”)for any subsequent treatments.CMS has determined that planning for stereotactic radiosurgery procedures using our technology should be reported using several Category I CurrentProcedure Terminology, or CPT, codes. The CPT planning codes are assigned to clinical APCs with payment levels that resulted in a slight increase inpayment in 2006 and 2007 as compared to prior years. For calendar 2008, CMS has proposed increases in payment rates for certain CPT codes applicable totreatment planning resulting in a cumulative increase for treatment planning reimbursement in 2008 as compared to 2007, assuming the proposed increases areimplemented.For 2004 to 2006, placement of HCPCS codes G0339 and G0340 in the new technology APCs resulted in a national payment rate of $5,250 for the firsttreatment and $3,750 for each treatment thereafter, up to a maximum of five treatments. For 2007, CMS determined that procedures performed in the hospitaloutpatient department using our technology be transitioned from the new technology APCs to two clinical APCs. Under the finalized payment rules, thenational payment rate for procedures billed using HCPCS code G0339 is $3,896, and procedures billed under HCPCS code G0340 are paid $2,645. For2008, CMS has proposed HCPCS codes G0339 and G0440 remain in clinical APCs assigned in 2007 at increased payment rates as compared to 2007. Theproposed payment rates for 2008 for HCPCS codes G0339 and G0440 are $3,918 and $3,017, respectively. We cannot assure you that these proposedpayment rates will be implemented as proposed.Medicare payment to free-standing clinics generally is based on the physician fee schedule. There are no national payment rates for HCPCS codes G0339and G0340, and Medicare contractors determine the payment rates for their jurisdiction. We understand that some Medicare contractors may require the use ofother billing codes for the procedures.In addition to Medicare reimbursement to hospitals and clinics, physicians receive reimbursement for their professional services in the hospital outpatientsetting and the free-standing clinic setting. Payment is based on the physician fee schedule, and payment amounts are updated on an annual basis. Beginningin172007, CMS changed how it determines payment levels under the physician fee schedule. Specifically, CMS revised the methodology for calculating thephysician work component, which reflects physician time and intensity of effort in performing a procedure or service. CMS also changed its methodology forcalculating the practice expense component, which reflects the overhead expenses that a physician incurs, such as rent, equipment and salaries. We do notexpect that these changes will result in any significant change in reimbursement for physician professional services performed in connection with theCyberKnife procedure. At this time, we cannot predict the full impact of these changes on our operations. Under proposed guidelines for 2008 Medicarereimbursements, CMS has proposed changes in payment rates for certain CPT codes applicable to physician services that may result in increases in someareas and decreases in others. We expect that the net effect of these changes will not result in significant changes in reimbursement for physician professionalservices performed in connection with the CyberKnife procedure.We also cannot assure you that Medicare will continue to cover and reimburse the procedures using the CyberKnife system, or that the amountsreimbursed under applicable codes will be adequate. While private third-party payors frequently follow Medicare coverage, coding and paymentdeterminations, we cannot assure you that these payors will adopt coverage and reimbursement policies similar to those established by Medicare or whetherthey will cover and reimburse the procedures using CyberKnife systems in whole or in part. In the United States, we believe that a majority of privatehealthcare payors provide coverage for CyberKnife procedures under negotiated contracts with hospitals and clinics.The American Medical Association, or AMA, established four new Category I CPT codes relating to stereotactic radiosurgery, which became effectiveJanuary 1, 2007. Third-party payors may decide to use three of these codes to describe treatment (CPT codes 77372 and 77373) and treatment management(CPT code 77435) using our technology. CMS has announced that these codes are not to be used for our technology for Medicare payments for hospitaloutpatient services under the prospective payment system in 2007. These codes were assigned values for payments under the Medicare physician fee schedulefor 2007 and may be required by Medicare contractors for use in other settings. CMS has again proposed that these codes are not to be used for our technologyfor Medicare payments for hospital outpatient services under the prospective payment system in 2008. Instead, CMS has again proposed that the G-codes beretained for use in these settings in 2008. At this time, most freestanding clinics seeking reimbursement for services using our technology have not yet begunto use these new codes. The extent to which any of these new codes would be required in the future by Medicare contractors for services using our technologyand performed in free-standing clinics or by other third-party payors is unclear. It is also unclear at this time whether or for how long the new codes willcontinue to coexist with or replace the existing codes for treatment using our technology (HCPCS codes G0339 and G0340) and how the level of reimbursementwould be impacted by the new codes. If Medicare contractors begin to require the use of the new codes for 2007 or 2008, the reimbursement rates for CPTcodes 77372 and 77373 under the 2007 and proposed 2008 Medicare physician fee schedule could result in a material adverse effect on our business.The current emphasis on cost-containment by third-party payors makes it exceedingly difficult for new medical devices and surgical procedures to obtainadequate coverage and reimbursement. Often, it is necessary to convince these payors that the new devices or procedures will establish an overall cost savingscompared to currently reimbursed devices and procedures. We believe that the CyberKnife system may offer an opportunity for payors to reduce the cost oftreatment for solid tumors as compared with surgical removal; however, we cannot assure you that payors will agree that these advantages exist or that payorswill make reimbursement decisions based upon any such advantages. Hospitals would be less likely to purchase our products if they do not receive sufficientlevels of reimbursement. In addition, if physicians or hospital administrators believe that our system will add cost to a procedure but will not add sufficientoffsetting economic or clinical benefits, physician adoption could be impaired. Any reduction or limitation in use of our products could cause our salesto suffer.18Reimbursement by third-party payors is often positively influenced by the existence of peer-reviewed publications of long-term safety and efficacy data.We have collected and published data on clinical results for patients that have undergone surgical procedures involving use of the CyberKnife system,although we do not yet have long-term safety and efficacy data for a significant patient population size. We cannot assure you that our products will continueto be covered and reimbursed without publication of additional data, including data supporting long-term safety and efficacy of the CyberKnife system.We have hired a director of reimbursement and have established a dedicated reimbursement group that seeks to provide education to physicians andfacilities in working with payors on coverage and reimbursement issues for procedures involving the use of the CyberKnife system. This group participates inreimbursement application processes worldwide, assists our customers in obtaining pre-approval from third-party payors for patients who will be undergoingtreatment using the CyberKnife system and provides our customers with copies of relevant coverage, coding and payment policies, including those of theMedicare program, as well as published literature and clinical data supporting clinical safety and efficacy in the device.To further support adequate coverage and reimbursement, a group of customers has formally organized into a non-profit organization to pursue patientaccess to the CyberKnife technology, adequate reimbursement, coverage and payment of our product worldwide, with a strong emphasis on the United States.This group, the CyberKnife Coalition, has a charter to promote patient access to CyberKnife system technology and treatment, and realize adequate coverageand reimbursement to support that treatment. The Coalition seeks to assure and advocate that procedures using the CyberKnife system continue to bereimbursed at appropriate levels by Medicare and other third-party payors.Internationally, reimbursement and healthcare payment systems vary substantially from country to country and include single-payor, governmentmanaged systems as well as systems in which private payors and government-managed systems exist side-by-side. In addition, in many internationalmarkets, consumers of healthcare services, particularly services involving new or specialized technology, may pay out-of-pocket for such services. Ourability to achieve market acceptance or significant sales volume in international markets we enter will be dependent in large part on the availability ofreimbursement for procedures performed using our products under health care payment systems in such markets. To date, healthcare providers in Europe andin Asian markets with installed CyberKnife systems have been able to successfully negotiate coverage contracts with their local payors at adequatepayment rates.Regulatory MattersDomestic RegulationOur products and software are medical devices subject to regulation by the U.S. Food and Drug Administration, or FDA, as well as other regulatorybodies. FDA regulations govern the following activities that we perform and will continue to perform to ensure that medical products distributed domesticallyor exported internationally are safe and effective for their intended uses:· product design and development;· document and purchasing controls;· production and process controls;· acceptance controls;· product testing;· product manufacturing;· product safety;19· product labeling;· product storage;· recordkeeping;· complaint handling;· pre-market clearance or approval;· advertising and promotion; and· product sales and distribution.FDA pre-market clearance and approval requirements. Unless an exemption applies, each medical device we wish to commercially distribute inthe United States will require either prior 510(k) clearance or pre-market approval from the FDA. The FDA classifies medical devices into one of three classes.Devices deemed to pose lower risks are placed in either class I or II, which requires the manufacturer to submit to the FDA a pre-market notification requestingpermission to commercially distribute the device. This process is generally known as 510(k) clearance. Some low risk devices are exempted from thisrequirement. Devices deemed by the FDA to pose the greatest risks, such as life-sustaining, life-supporting or implantable devices, or devices deemed notsubstantially equivalent to a previously cleared 510(k) device, are placed in class III, requiring pre-market approval. All of our current products areclass II devices.510(k) clearance pathway. When a 510(k) clearance is required, we must submit a pre-market notification demonstrating that our proposed device issubstantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA hasnot yet called for the submission of pre-market approval applications, or PMA. By regulation, the FDA is required to clear or deny a 510(k) pre-marketnotification within 90 days of submission of the application. As a practical matter, clearance may take longer. The FDA may require further information,including clinical data, to make a determination regarding substantial equivalence.In July 1999, we received 510(k) clearance for the CyberKnife system for use in the head and neck regions of the body. In August 2001, we received510(k) clearance for the CyberKnife system to provide treatment planning and image guided stereotactic radiosurgery and precision radiotherapy for lesions,tumors and conditions anywhere in the body where radiation treatment is indicated. In April 2002, we received 510(k) clearance for the Synchrony MotionTracking System as an option to the CyberKnife system, intended to enable dynamic image guided stereotactic radiosurgery and precision radiotherapy oflesions, tumors and conditions that move under influence of respiration.Pre-market approval (PMA) pathway. A PMA must be submitted to the FDA if the device cannot be cleared through the 510(k) process. A PMAmust be supported by extensive data, including but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to theFDA’s satisfaction the safety and effectiveness of the device. No device that we have developed has required pre-market approval, nor do we currently expectthat any future device or indication will require pre-market approval.Product modifications. After a device receives 510(k) clearance or a PMA, any modification that could significantly affect its safety or effectiveness,or that would constitute a significant change in its intended use, will require a new clearance or approval. We have modified aspects of our CyberKnife systemfamily of products since receiving regulatory clearance, and we have applied for and obtained additional 510(k) clearances for these modifications when wedetermined such clearances were required for the modifications. The FDA requires each manufacturer to make this determination initially, but the FDA canreview any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with our determination not to seek a new 510(k)clearance or PMA, the FDA may retroactively20require us to seek 510(k) clearance or pre-market approval. The FDA could also require us to cease marketing and distribution and/or recall the modifieddevice until 510(k) clearance or pre-market approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.From January 1, 2003 to June 30, 2007, we submitted an additional eight 510(k) clearances notifications for modifications made to the operation of theCyberKnife system. These applications were cleared by the FDA. Pervasive and continuing regulation. After a device is placed on the market, numerous regulatory requirements apply. These include:· Quality System Regulation, or QSR, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control,documentation and other quality assurance procedures during product design and throughout the manufacturing process;· labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label uses; and· medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death orserious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur.The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA and the Food and DrugBranch of the California Department of Health Services to determine our compliance with the QSR and other regulations, and these inspections may includethe manufacturing facilities of some of our subcontractors. In the past, our prior facility has been inspected, and observations were noted. In May 2004 andApril 2006, during routine inspections performed by the FDA, two minor observations were made in each inspection. We have taken corrective action on theminor observations in response to the FDA’s observations. There were no observations that involved a material violation of regulatory requirements. We believethat we are in substantial compliance with the QSR. In February 2007, during routine inspections performed by the FDA of one of our manufacturingfacilities, no observations were made.Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the followingsanctions:· fines, injunctions, consent decrees and civil penalties;· recall or seizure of our products;· operating restrictions, partial suspension or total shutdown of production;· refusing our requests for 510(k) clearance or pre-market approval of new products or new intended uses;· withdrawing 510(k) clearance or pre-market approvals that are already granted; and· criminal prosecution.The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we have manufactured or distributed. If anyof these events were to occur, they could have a material adverse effect on our business.21Radiological health. Because our CyberKnife system contains both laser and X-ray components, and because we assemble these components duringmanufacturing and service activities, we are also regulated under the Electronic Product Radiation Control Provisions of the Federal Food, Drug, and CosmeticAct. This law requires laser and X-ray products to comply with regulations and applicable performance standards, and manufacturers of these products tocertify in product labeling and reports to the FDA that their products comply with all such standards. The law also requires manufacturers to file new productreports, and to file annual reports and maintain manufacturing, testing and sales records, and report product defects. Various warning labels must be affixed.Assemblers of diagnostic X-ray systems are also required to certify in reports to the FDA, equipment purchasers, and where applicable, to state agenciesresponsible for radiation protection, that diagnostic and/or therapeutic X-ray systems they assemble meet applicable requirements. Failure to comply with theserequirements could result in enforcement action by the FDA, which can include injunctions, civil penalties, and the issuance of warning letters. In the past, wefailed to submit required reports to the FDA in a timely fashion. To correct our reporting deficiencies we initiated in 2003, a corrective action plan thatincluded, among other things, filing all past due reports with the FDA, applicable state agencies, and customers. We have also developed and implementedprocedures to ensure future reports are made in a timely manner. While we believe all past reporting deficiencies have been corrected, we cannot assure you thatFDA will deem our corrective actions sufficient or that FDA will not initiate enforcement action against us.Fraud and Abuse LawsWe are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws.Violations of these laws are punishable by significant criminal and civil sanctions, including, in some instances, exclusion from participation in federal andstate healthcare programs, including Medicare and Medicaid. Because of the far-reaching nature of these laws, there can be no assurance that we would not berequired to alter one or more of our practices to be in compliance with these laws. Evolving interpretations of current laws, or the adoption of new federal orstate laws or regulations could adversely affect many of the arrangements we have with customers and physicians. In addition, there can be no assurance thatthe occurrence of one or more violations of these laws or regulations would not result in a material adverse effect on our financial condition and resultsof operations.Anti-kickback laws. Our operations are subject to broad and changing federal and state anti-kickback laws. The Office of the Inspector General of theDepartment of Health and Human Services, or the OIG, is primarily responsible for enforcing the federal Anti-Kickback Statute and generally for identifyingfraud and abuse activities affecting government programs. The federal Anti-Kickback Statute, prohibits persons from knowingly and willfully soliciting,receiving, offering or providing remuneration directly or indirectly to induce either the referral of an individual, or the furnishing, recommending, or arrangingof a good or service, for which payment may be made under a federal health care program such as Medicare and Medicaid. “Remuneration” has been broadlyinterpreted to include anything of value, including such items as gifts, discounts, the furnishing of supplies or equipment, credit arrangements, waiver ofpayments, and providing anything of value at less than fair market value.Penalties for violating the federal Anti-Kickback Statute include criminal fines of up to $25,000 and/or imprisonment for up to five years for eachviolation, civil fines of up to $50,000 and possible exclusion from participation in federal health care programs such as Medicare and Medicaid. Many stateshave adopted prohibitions similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare services reimbursed byany source, not only by the Medicare and Medicaid programs, and do not include comparable exceptions.The Office of the Inspector General of the Department of Health and Human Services, or OIG, has issued safe harbor regulations which set forth certainactivities and business relationships that are deemed22safe from prosecution under the federal Anti-Kickback Statute. There are safe harbors for various types of arrangements, including, without limitation,certain investment interests, leases and personal services and management contracts. The failure of a particular activity to comply in all regards with the safeharbor regulations does not mean that the activity violates the federal Anti-Kickback Statute or that prosecution will be pursued. However, conduct andbusiness arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities such asthe OIG.The OIG has identified the following arrangements with purchasers and their agents as ones raising potential risk of violation of the federal Anti-Kickback Statute:· Discount and free good arrangements that are not properly disclosed or accurately reported to federal health care programs;· Product support services, including billing assistance, reimbursement consultation and other services specifically tied to support of the purchasedproduct, offered in tandem with another service or program (such as a reimbursement guarantee) that confers a benefit to the purchaser;· Educational grants conditioned in whole or in part on the purchase of equipment, or otherwise inappropriately influenced by sales and marketingconsiderations;· Research funding arrangements, particularly post-marketing research activities, that are linked directly or indirectly to the purchase of products, orotherwise inappropriately influenced by sales and marketing considerations; and· Other offers of remuneration to purchasers that are expressly or impliedly related to a sale or sales volume, such as “prebates” and “upfrontpayments,” other free or reduced-price goods or services, and payments to cover costs of “converting” from a competitor’s products, particularlywhere the selection criteria for such offers vary with the volume or value of business generated.We have a variety of financial relationships with physicians who are in a position to generate business for us. For example, physicians own our stockwho also provide medical advisory and other consulting and personal services. Similarly, we have a variety of different types of arrangements with ourcustomers. For example, our placement and shared ownership programs entail the provision of our CyberKnife system to our customers under a deferredpayment program, where we generally receive the greater of a fixed minimum payment or a portion of the revenues of services. Included in the fee we charge forthe placement and shared ownership programs are a variety of services, including physician training, educational and marketing support, generalreimbursement guidance and technical support, and, in the case of the placement program, certain services and upgrades are provided without additionalcharge based on procedure volume. In the past, we have also provided loans to our customers. We also provide research grants to customers to supportcustomer studies related to, among other things, our CyberKnife systems.If our past or present operations are found to be in violation of the federal Anti-Kickback Statute or similar government regulations to which we or ourcustomers are subject, we or our officers may be subject to the applicable penalty associated with the violation, including significant civil and criminalpenalties, damages, fines, imprisonment, and exclusion from the Medicare and Medicaid programs. The impact of any such violation may lead to curtailmentor restructuring of our operations. Any penalties, damages, fines, or curtailment or restructuring of our operations could adversely affect our ability to operateour business and our financial results. The risk of our being found in violation of these laws is increased by the fact that some of these laws are open to avariety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legalexpenses, divert our management’s attention from the operation of our business and damage our reputation. If an enforcement action were to occur, ourreputation and our business and financial condition could be harmed, even if we were to prevail or settle the action. Similarly, if the physicians or otherproviders or23entities with whom we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could also have a negativeimpact on our business.Physician self-referral laws. We are also subject to federal and state physician self-referral laws. The federal Ethics in Patient Referral Act of 1989,commonly known as the Stark Law, prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providingcertain “designated health services” if the physician or an immediate family member has any financial relationship with the entity. The Stark Law alsoprohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral.In addition, in connection with the release of proposed Medicare reimbursement rates for calendar 2008, CMS has also proposed significant amendmentsto the regulations under the federal Ethics in Patient Referrals Act, which is more commonly known as the Stark Law. These proposed regulations would,among other things, impose additional limitations on the ability of physicians to refer patients to medical facilities in which the physician has an ownershipinterest for treatment. Physician owned entities have increasingly become involved in the acquisition of medical technologies, including the CyberKnife. Inmany cases, these entities enter into arrangements with hospitals that bill Medicare for the furnishing of medical services, and the physician owners are amongthe physicians who refer patients to the entity for services. The proposed regulations, if adopted, would limit these arrangements and could require therestructuring of existing arrangements between physician owned entities and hospitals and may also discourage physicians from participating in theacquisition and ownership of medical technologies. As a result, these proposed regulations, if enacted, could have an adverse impact on our product sales andtherefore on our business and results of operations.A person who engages in a scheme to circumvent the Stark Law’s referral prohibition may be fined up to $100,000 for each such arrangement or scheme.In addition, any person who presents or causes to be presented a claim to the Medicare or Medicaid programs in violation of the Stark Law is subject to civilmonetary penalties of up to $15,000 per bill submission, an assessment of up to three times the amount claimed, and possible exclusion from federalhealthcare programs such as Medicare and Medicaid. Various states have corollary laws to the Stark Law, including laws that require physicians to discloseany financial interest they may have with a healthcare provider to their patients when referring patients to that provider. Both the scope and exceptions for suchlaws vary from state to state.Federal False Claims Act. The federal False Claims Act prohibits the knowing filing or causing the filing of a false claim or the knowing use of falsestatements to obtain payment from the federal government. When an entity is determined to have violated the False Claims Act, it must pay three times theactual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. Suits filed underthe False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, sometimes known as“relators” or, more commonly, as “whistleblowers”, may share in any amounts paid by the entity to the government in fines or settlement. In addition, certainstates have enacted laws modeled after the federal False Claims Act. Qui tam actions have increased significantly in recent years, causing greater numbers ofhealthcare companies to have to defend a false claim action, pay fines or be excluded from Medicare, Medicaid or other federal or state healthcare programs asa result of an investigation arising out of such action. We have retained the services of a reimbursement consultant, for which we pay certain consulting fees,to provide us and facilities that have purchased a CyberKnife system or acquired a CyberKnife system through our shared ownership program with generalreimbursement advice. While we believe this will assist our customers in filing proper claims for reimbursement; and such consultants do not submit claimson behalf of our customers, the fact that we provide these consultant services could expose us to additional scrutiny and possible liability in the event one ofour customers is investigated as a result of any of these laws.24HIPAA. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, created two new federal crimes: healthcare fraud and falsestatements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefitprogram, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsoredprograms. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false,fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felonyand may result in fines or imprisonment.International RegulationInternational sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The time requiredto obtain clearance or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements maybe different.The primary regulatory environment in Europe is that of the European Union and the three additional member states of the European Economic Area, orEEA, which have adopted similar laws and regulations with respect to medical devices. The European Union has adopted numerous directives and theEuropean Committee for Standardization has promulgated standards regulating the design, manufacture, clinical trials, labeling and adverse event reportingfor medical devices. Devices that comply with the requirements of the relevant directive will be entitled to bear CE conformity marking, indicating that thedevice conforms with the essential requirements of the applicable directives and, accordingly, may be commercially distributed throughout the member statesof the European Economic Area.The method of assessing conformity to applicable standards and directives depends on the type and class of the product, but normally involves acombination of self-assessment by the manufacturer and a third-party assessment by a notified body, an independent and neutral institution appointed by aEuropean Union member state to conduct the conformity assessment. This relevant assessment may consist of an audit of the manufacturer’s quality system(currently ISO 13485), provisions of the Medical Devices Directive, and specific testing of the manufacturer’s device. In September 2002, our facility wasawarded the ISO 13485 certification, which replaces the ISO 9001 and EN 46001 approvals, which has been subsequently maintained through periodicassessments, in accordance with the expiration dates of the standards, and we are currently authorized to affix the CE mark to our products, allowing us tosell our products throughout the European Economic Area.We are also currently subject to regulations in Japan. A Japanese distributor received the first government approval to market the CyberKnife systemfrom the Ministry of Health and Welfare in November 1996. In December, 2003, we received approval from the Ministry of Health, Labour and Welfare tomarket the CyberKnife system in Japan and a new distributor, Chiyoda Technol Corporation, was appointed to distribute the CyberKnife system. Currentclinical use in Japan is limited to head and neck applications. Although we and our distributor have applied for approval of broader clinical use of theCyberKnife system in Japan, it is not possible to accurately predict the timing of this approval.We are subject to additional regulations in other foreign countries, including, but not limited to, Canada, Taiwan, China and Korea, in order to sell ourproducts. We intend that either we or our distributors will receive any necessary approvals or clearance prior to marketing our products in those internationalmarkets.State Certificate of Need LawsIn some states, a certificate of need or similar regulatory approval is required prior to the acquisition of high-cost capital items or the provision of newservices. These laws generally require appropriate state25agency determination of public need and approval prior to the acquisition of such capital items or addition of new services. Certificate of need regulations maypreclude our customers from acquiring the CyberKnife system, whether through purchase or our shared ownership programs, and from performingstereotactic radiosurgery procedures using the CyberKnife system. Several of our prospective customers currently are involved in appeals of certificate of needdeterminations. If these appeals are not resolved in favor of these prospective customers, they may be precluded from purchasing and/or performing servicesusing the CyberKnife system. Certificate of need laws are the subject of continuing legislative activity, and a significant increase in the number of statesregulating the acquisition and use of the CyberKnife system through certificate of need or similar programs could adversely affect us.EmployeesAs of June 30, 2007, we had 449 employees worldwide, including 127 in research and development, 107 in sales and marketing, 79 in installation andservice, 58 in manufacturing, and 78 in administration. None of the employees are represented by a labor union or is covered by a collective bargainingagreement. We have never experienced any employment-related work stoppages and we believe our relationship with our employees is good.Item 1A. Risk FactorsRisks Related to Our BusinessWe have a large accumulated deficit, expect future losses and may be unable to achieve or maintain profitability.We have incurred net losses in every fiscal year since our inception. As of June 30, 2007, we had an accumulated deficit of $126.3 million. We maycontinue to incur net losses in the future, particularly as we increase our manufacturing, sales and marketing and administrative activities and as we continueour research and development activities. Our ability to achieve and maintain long-term profitability is largely dependent on our ability to successfully marketand sell the CyberKnife system and to control our costs and effectively manage our growth. We are required to defer revenue associated with our legacymultiyear service plans due to specified obligations related to the delivery of upgrades to the CyberKnife system. Although we anticipate our deferred revenuewill begin to decline in future periods, we may not be able to recognize some portions of our deferred revenue until we have satisfied all obligations for deliveryof upgrades. We cannot assure you that we will be able to achieve or maintain profitability. In the event we fail to achieve and maintain profitability, our stockprice could decline.If the CyberKnife system does not achieve widespread market acceptance, we will not be able to generate the revenue necessary to supportour business.Achieving physician, patient, hospital administrator and third-party payor acceptance of the CyberKnife system as a preferred method of tumortreatment will be crucial to our continued success. Physicians will not begin to use or increase the use of the CyberKnife system unless they determine, basedon experience, clinical data and other factors, that the CyberKnife system is a safe and effective alternative to current treatment methods. The CyberKnifesystem was initially used primarily for the treatment of tumors in the brain, and the broader use of the system to treat tumors elsewhere in the body has been amore recent development. As a result, physician and patient acceptance of the CyberKnife system as a comprehensive tool for treatment of solid tumor cancersanywhere in the body has not yet been fully demonstrated, particularly as compared to products, systems or technologies that have longer histories in themarketplace. The CyberKnife system is a major capital purchase and purchase decisions are greatly influenced by hospital administrators who are subject toincreasing pressures to reduce costs. These and other factors may affect the rate and level of the CyberKnife system’s market acceptance, including:· the CyberKnife system’s price relative to other products or competing treatments;26· effectiveness of our sales and marketing efforts;· capital equipment budgets of healthcare institutions;· perception by physicians and other members of the healthcare community of the CyberKnife system’s safety, efficacy and benefits compared tocompeting technologies or treatments;· publication in peer-reviewed medical journals of data regarding the successful use and longer term clinical benefits of the CyberKnife system;· willingness of physicians to adopt new techniques and the ability of physicians to acquire the skills necessary to operate the CyberKnife system;· extent of third-party coverage and reimbursement for procedures using the CyberKnife system;· development of new products and technologies by our competitors or new treatment alternatives;· regulatory developments related to manufacturing, marketing and selling the CyberKnife system both within and outside the United States;· perceived liability risks arising from the use of new products; and· unfavorable publicity concerning the CyberKnife system or radiation-based treatment alternatives.If the CyberKnife system is unable to achieve or maintain market acceptance, our business would be harmed and our stock price would decline.The high unit price of the CyberKnife system, as well as other factors may contribute to substantial fluctuations in our operating results andstock price.Because of the high unit price of the CyberKnife system, and the relatively small number of units installed each quarter, each installation of aCyberKnife system can represent a significant component of our revenue for a particular quarter. Therefore, if we do not install a CyberKnife system whenanticipated, our operating results may vary significantly and our stock price may be materially harmed. These fluctuations and other potential fluctuationsmean that you should not rely upon our operating results in any particular period as an indication of future performance. In particular, factors which maycontribute to these fluctuations may include:· timing of when we are able to recognize revenue associated with sales of the CyberKnife system, which varies depending upon the terms of theapplicable sales and service contracts;· the proportion of revenue attributable to purchases of the CyberKnife system, shared ownership programs and installations associated with our legacyservice plans;· timing and level of expenditures associated with new product development activities;· regulatory requirements in some states for a certificate of need prior to the installation of a radiation device;· delays in shipment due, for example, to unanticipated construction delays at customer locations where our products are to be installed, cancellationsby customers, natural disasters or labor disturbances;· delays in our manufacturing processes or unexpected manufacturing difficulties;· timing of the announcement, introduction and delivery of new products or product upgrades by us and by our competitors;27· timing and level of expenditures associated with expansion of sales and marketing activities such as trade shows and our overall operations;· disruptions in the supply or changes in the costs of raw materials, labor, product components or transportation services; and· changes in third party coverage and reimbursement, changes in government regulation, or a change in a customer’s financial condition or ability toobtain financing.These factors are difficult to forecast and may contribute to substantial fluctuations in our quarterly revenues and substantial variation from ourprojections, particularly during the periods in which our sales volume is low. Any failure to meet investor expectations regarding our operating results maycause our stock price to decline.We experience a long and variable sales and installation cycle, which may result in inconsistent quarterly results.The CyberKnife system has a lengthy sales and purchase order cycle because it is a major capital equipment item and requires the approval of seniormanagement at purchasing institutions. The sales process in the United States often begins with a letter of intent between us and the customer. After the letter ofintent is signed, we enter into a definitive purchase contract with the customer. Generally following the execution of the contract, the customer begins thebuilding or renovation of a facility to house the CyberKnife system, which together with the subsequent installation of the CyberKnife system, can takeapproximately 12 months or longer to complete. During this period, the customer must build a radiation-shielded facility to house their CyberKnife system. Inorder to construct this facility, the customer must typically obtain radiation device installation permits, which are granted by state and local governmentbodies, each of which may have different criteria for permit issuance. If a permit were denied for installation at a specific hospital or treatment center, ourCyberKnife system could not be installed at that location.Under our revenue recognition policy, we generally do not recognize revenue attributable to a CyberKnife system purchase until after installation hasoccurred. For international sales through distributors, we typically recognize revenue when the system is delivered to the end user’s site. Therefore the longsales cycle together with the timing of CyberKnife system shipments and installations may result in significant fluctuations in our reporting of quarterlyrevenues. Under our current forms of purchase and service contracts, we receive a majority of the purchase price for the CyberKnife system upon installationof the system. Events beyond our control may delay installation and the satisfaction of contingencies required to receive cash inflows and recognize revenue,such as:· procurement delay;· customer funding or financing delay;· organizational delay caused by customer personnel;· construction delay;· delay pending customer receipt of a building or radiation device installation permit; and· delay caused by weather or natural disaster.In the event that a customer does not, for any of the reasons above or other reasons, proceed with installation of the system after entering into a purchasecontract, we would only recognize up to the deposit portion of the purchase price as revenue, unless the deposit was refunded to the customer. Therefore,delays in the installation of CyberKnife systems or customer cancellations would adversely affect our cash flows and revenue, which would harm our resultsof operations and could cause our stock price to decline.28If third-party payors do not continue to provide sufficient coverage and reimbursement to healthcare providers for use of the CyberKnife system,our revenue would be adversely affected.Our ability to commercialize our products successfully will depend in significant part on the extent to which appropriate coverage and reimbursement forour products and related procedures are obtained from third-party payors, including governmental payors such as Medicare. Third-party payors, and inparticular managed care organizations, are increasingly challenging the prices charged for medical products and services and instituting cost containmentmeasures to control or significantly influence the purchase of medical products and services. These cost containment measures, if instituted in a manneraffecting the coverage for or payment of our products, could have a material adverse effect on our operating results.Uncertainty exists as to the coverage and reimbursement status of new medical products and services and new indications for existing products. TheCyberKnife procedure is currently covered and reimbursed by Medicare and other governmental and non-governmental third-party payors. However, wecannot assure you that the CyberKnife procedure will continue to be reimbursed at current rates or that third-party payors will continue to consider ourproducts cost-effective relative to other treatments and provide coverage and reimbursement for our products, in whole or in part. For 2007, CMS issued afinal rule that resulted in a downward adjustment to the reimbursement rates for treatments using our technology in the hospital outpatient department. For2007, under the finalized Medicare payment rules, the national payment rates for procedures billed using these codes are $3,896 and $2,645, respectively.For 2004 to 2006, the Medicare billing codes for treatments using the CyberKnife system in the hospital outpatient department were assigned a nationalpayment rate of $5,250 for the first treatment and $3,750 for each treatment thereafter, up to a maximum of five treatments. For 2008, CMS has proposedincreasing the payment rates for procedures billed using these codes to $3,918 and $3,017, respectively. However, we cannot assure you that thesereimbursement rates will be implemented as proposed.In addition, new billing codes for stereotactic radiosurgery have been established by the American Medical Association, effective 2007. CMS hasdetermined that the new codes are not to be used for hospital outpatient claims under the prospective payment system for 2007 and, instead, existing billingcodes for our technology continue to be in effect. It appears that the new billing codes established by the American Medical Association generally are not beingused for treatments using the CyberKnife system in non-hospital settings, or free-standing clinic settings, as well. It remains unclear how these new billingcodes will be used for procedures in other settings for Medicare purposes or how they will be used by non-Medicare payors in the future. Payment amounts for2007 under the Medicare physician fee schedule for freestanding clinic settings may result in a decrease from current payment amounts if these codes arerequired for billing our technology. Physicians, hospitals and other healthcare providers may be reluctant to purchase the CyberKnife system or may decline todo so entirely if they determine there is not sufficient coverage and reimbursement from third-party payors for the cost of the CyberKnife procedure. Inaddition, if physicians or hospital administrators believe that our CyberKnife system will add costs to a procedure, but will not add sufficient offsettingeconomic or clinical benefits, adoption could be impaired. Any reduction or limitation in use of the CyberKnife system could have an adverse impact onour sales.Our success in international markets also depends upon the eligibility of reimbursement for the CyberKnife procedure through government-sponsoredhealthcare payment systems and third-party payors. Reimbursement and healthcare payment systems in international markets vary significantly by countryand, within some countries, by region. In many international markets, payment systems may control reimbursement for procedures performed using newproducts as well as procurement of these products. In addition, as economies of emerging markets develop, these countries may implement changes in theirhealthcare delivery and payment systems. Furthermore, healthcare cost containment efforts similar to those underway in the United States are prevalent inmany of the other countries in which we intend to sell our products and these efforts are expected to continue. Market acceptance of our products in a particular29country may depend on the availability and level of reimbursement in that country. In the event that our customers are unable to obtain adequatereimbursement for the CyberKnife procedures in international markets in which we are selling, or are seeking to sell, CyberKnife systems, market acceptanceof our products would be adversely affected.Future legislative or regulatory changes to the healthcare system may affect our business.Even if third-party payors provide adequate coverage and reimbursement for the CyberKnife procedure, adverse changes in third-party payors’ generalpolicies toward reimbursement could preclude market acceptance for our products and materially harm our sales and revenue growth, which could cause ourstock price to decline. In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes andproposals to change the healthcare system, and some could involve changes that significantly affect our business. For instance, on December 8, 2003,President George W. Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which, among other things,established a new prescription drug benefit and changed reimbursement methodologies for drugs and devices used in hospital outpatient departments and inthe home. In addition, certain federal regulatory changes occur at least annually. CMS has determined that, beginning in 2007, treatments in hospital outpatientdepartments using our technology will no longer be assigned a new technology classification and, instead, will be transitioned to a classification that wouldresult in a reduction in Medicare payments to hospitals. Further, new billing codes that went into effect in 2007 may be required by third-party payors in thefuture and may result in a decrease in payments for services using our technology. A downward adjustment in reimbursement could have a material adverseeffect on our operations.In addition, in connection with the release of proposed Medicare reimbursement rates for calendar 2008, CMS has also proposed significant amendmentsto the regulations under the federal Ethics in Patient Referrals Act, which is more commonly known as the Stark Law. These proposed regulations would,among other things, impose additional limitations on the ability of physicians to refer patients to medical facilities in which the physician has an ownershipinterest for treatment. Physician owned entities have increasingly become involved in the acquisition of medical technologies, including the CyberKnife. Inmany cases, these entities enter into arrangements with hospitals that bill Medicare for the furnishing of medical services, and the physician owners are amongthe physicians who refer patients to the entity for services. The proposed regulations, if adopted, would limit these arrangements and could require therestructuring of existing arrangements between physician owned entities and hospitals and may also discourage physicians from participating in theacquisition and ownership of medical technologies. As a result, these proposed regulations, if enacted, could have an adverse impact on our product sales andtherefore on our business and results of operations.Future legislative or policy initiatives directed at reducing costs could be introduced at either the federal or state level. We cannot predict the impact on ourbusiness of any legislation or regulations related to the healthcare system that may be enacted or adopted in the future.We are required to comply with federal and state “fraud and abuse” laws, and, if we are unable to comply with such laws, we could facesubstantial penalties and we could be excluded from government healthcare programs, which would adversely affect our business, financialcondition and results of operations.We are directly, or indirectly through our customers, subject to various federal and state laws pertaining to healthcare fraud and abuse. These laws whichdirectly or indirectly affect our ability to operate our business primarily include, but are not limited to, the following:· the federal Anti-Kickback Statute, which prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration,directly or indirectly, in cash or in kind, to induce30either the referral of an individual, or furnishing or arranging for a good or service, for which payment may be made under federal healthcareprograms such as Medicare and Medicaid; and· state law equivalents to the Anti-Kickback Statute, which may not be limited to government reimbursed items.The following arrangements with purchasers and their agents have been identified by the Office of the Inspection General of the Department of Health andHuman Services as ones raising potential risk of violation of the federal Anti-Kickback Statute:· Discount and free good arrangements that are not properly disclosed or accurately reported to federal health care programs;· Product support services, including billing assistance, reimbursement consultation and other services specifically tied to support of the purchasedproduct, offered in tandem with another service or program (such as reimbursement guarantee) that confers a benefit to the purchaser;· Educational grants conditioned in whole or in part on the purchase of equipment, or otherwise inappropriately influenced by sales and marketingconsiderations;· Research funding arrangements, particularly post-market research activities, that are linked directly or indirectly to the purchase of products, orotherwise inappropriately influenced by sales and marketing considerations; and· Other offers of remuneration to purchasers that is expressly or impliedly related to a sale or sales volume, such as “prebates” and “upfront payment,”other free or reduced-price goods or services, and payments to cover costs of “converting” from a competitor’s products, particularly where theselection criteria for such offers vary with the volume or value of business generated.We have various arrangements with physicians, hospitals and other entities which implicate these laws. For example, physicians own our stock who alsoprovide medical advisory and other consulting and personal services. Similarly, we have a variety of different types of arrangements with our customers. Forexample, our placement and shared ownership programs entail the provision of our CyberKnife system to our customers under a deferred payment program,where we generally receive the greater of a fixed minimum payment or a portion of the revenues of services. Included in the fee we charge for the placement andshared ownership programs are a variety of services, including physician training, educational and marketing support, general reimbursement guidance andtechnical support, and, in the case of the placement program, certain services and upgrades are provided without additional charge based on procedurevolume. In the past, we have also provided loans to our customers. We also provide research grants to customers to support customer studies related to, amongother things, our CyberKnife systems. Certain of these arrangements do not meet Anti-Kickback Statute safe harbor protections, which may result inincreased scrutiny by government authorities having responsibility for enforcing these laws.If our past or present operations are found to be in violation of any of the laws described above or other similar governmental regulations to which we orour customers are subject, we may be subject to the applicable penalty associated with the violation, including significant civil and criminal penalties,damages, fines, imprisonment and exclusion from the Medicare and Medicaid programs. The impact of any such violations may lead to curtailment orrestructuring of our operations, which could adversely affect our ability to operate our business and our financial results. The risk of our being found inviolation of these laws is increased by the fact that many of these laws are open to a variety of interpretations. Any action against us for violation of these laws,even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of ourbusiness and damage our reputation. If enforcement action were to occur, our reputation and our business and financial condition may be harmed, even if wewere to prevail or settle the action. Similarly, if the physicians or31other providers or entities with whom we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could alsohave a negative impact on our business. See “Business—Regulatory Matters” for further information regarding federal and state fraud and abuse laws.Modifications, upgrades and future products related to the CyberKnife system or new indications may require new U.S. Food and DrugAdministration, or FDA, premarket approvals or 510(k) clearances, and such modifications, or any defects in design or manufacture may requireus to recall or cease marketing the CyberKnife system until approvals or clearances are obtained.The CyberKnife system is a medical device that is subject to extensive regulation in the United States by local, state and the federal government,including by the FDA. The FDA regulates virtually all aspects of a medical device’s design, development, testing manufacturing, labeling, storage, recordkeeping, reporting, sale, promotion, distribution and shipping. Before a new medical device, or a new use of or claim for an existing product, can be marketedin the United States, it must first receive either premarket approval or 510(k) clearance from the FDA, unless an exemption exists. Either process can beexpensive and lengthy. The FDA’s 510(k) clearance process usually takes from three to twelve months, but it can last longer. The process of obtainingpremarket approval is much more costly and uncertain than the 510(k) clearance process and it generally takes from one to three years, or even longer, fromthe time the application is filed with the FDA. Despite the time, effort and cost, there can be no assurance that a particular device will be approved or clearedby the FDA through either the premarket approval process or 510(k) clearance process.Medical devices may be marketed only for the indications for which they are approved or cleared. The FDA also may change its policies, adoptadditional regulations, or revise existing regulations, each of which could prevent or delay premarket approval or 510(k) clearance of our device, or couldimpact our ability to market our currently cleared device. We are also subject to medical device reporting regulations which require us to report to the FDA ifour products cause or contribute to a death or a serious injury, or malfunction in a way that would likely cause or contribute to a death or a serious injury. Wealso are subject to Quality System and Medical Device Reporting regulations, which regulate the manufacturing and installation and also require us to report tothe FDA if our products cause or contribute to a death or serious injury, or malfunction in a way that would likely cause or contribute to a death or seriousinjury. Our products are also subject to state regulations and various worldwide laws and regulations.A component of our strategy is to continue to upgrade the CyberKnife system. Upgrades previously released by us required 510(k) clearance before wewere able to offer them for sale. We expect our future upgrades will similarly require 510(k) clearance; however, future upgrades may be subject to thesubstantially more time consuming and uncertain premarket approval process.The FDA requires device manufacturers to make a determination of whether or not a modification requires an approval or clearance; however, the FDAcan review a manufacturer’s decision not to submit for additional approvals or clearances. Any modification to an FDA approved or cleared device that wouldsignificantly affect its safety or efficacy or that would constitute a major change in its intended use would require a new premarket approval or510(k) clearance. We cannot assure you that the FDA will agree with our decisions not to seek approvals or clearances for particular device modifications orthat we will be successful in obtaining 510(k) clearances for modifications.We have obtained 510(k) clearances for the CyberKnife system for the treatment of tumors anywhere in the body where radiation is indicated. We havemade modifications to the CyberKnife system in the past and may make additional modifications in the future that we believe do not or will not requireadditional approvals or clearances. If the FDA disagrees and requires us to obtain additional premarket approvals or 510(k) clearances for any modificationsto the CyberKnife system and we fail to obtain such approvals or clearances or fail to secure approvals or clearances in a timely manner, we may be requiredto cease32manufacturing and marketing the modified device or to recall such modified device until we obtain FDA approval or clearance and we may be subject tosignificant regulatory fines or penalties.In addition, even if the CyberKnife system is not modified, the FDA and similar governmental authorities in other countries in which we market and sellour products have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. A governmentmandated recall, or a voluntary recall by us, could occur as a result of component failures, manufacturing errors or design defects, including defects inlabeling and user manuals. Any recall could divert management’s attention, cause us to incur significant expenses, harm our reputation with customers,negatively affect our future sales and business, require redesign of the CyberKnife system, harm our operating results, and result in a decline in our stockprice. In these circumstances, we may also be subject to significant enforcement action. If any of these events were to occur, our ability to introduce new orenhanced products in a timely manner would be adversely affected, which in turn would harm our future growth.Our reliance on single source suppliers for critical components of the CyberKnife system could harm our ability to meet demand for our productsin a timely and cost effective manner.We currently depend on single source suppliers for some of the critical components necessary for the assembly of the CyberKnife system, including therobotic manipulator, imaging plates, treatment table, robotic couch and magnetron, which creates the microwaves for use in the linear accelerator. If any singlesource suppliers were to cease delivering components to us or fail to provide the components on a timely basis, we might be required to qualify an alternatesupplier and we would likely experience a lengthy delay in our manufacturing processes, which would result in delays of shipment to end users. We cannotassure you that our single source suppliers will be able or willing to meet our future demands.We generally do not maintain large volumes of inventory. Furthermore, if we are required to change the manufacturer of a critical component of theCyberKnife system, we will be required to verify that the new manufacturer maintains facilities, procedures and operations that comply with our qualityrequirements. We also will be required to assess the new manufacturer’s compliance with all applicable regulations and guidelines, which could further impedeour ability to manufacture our products in a timely manner. If the change in manufacturer results in a significant change to the product, a new510(k) clearance would be necessary, which would likely cause substantial delays. The disruption or termination of the supply of key components for theCyberKnife system could harm our ability to generate revenue, lead to customer dissatisfaction and damage our reputation and cause the price of our commonstock to decline.Our accountants have identified and reported to us material weaknesses for the years ended June 30, 2007, 2006 and 2005, relating to ourinternal controls over financial reporting. If we fail to maintain proper and effective internal controls, our ability to produce accurate financialstatements could be impaired, which could adversely affect our operating results, our ability to operate our business and our stock price.In connection with the audit of our consolidated financial statements for the years ended June 30, 2007, 2006 and 2005, our independent registered publicaccounting firm identified material weaknesses and significant deficiencies in our internal controls over financial reporting. Material weaknesses andsignificant deficiencies relate to a lack of segregation of duties, inadequate review procedures and the misapplication of accounting policies related to revenuerecognition and stock-based compensation.Our independent registered public accounting firm has not yet audited the effectiveness of our internal controls over financial reporting. Accordingly, ourindependent registered public accounting firm has not rendered an opinion on our internal controls over financial reporting. Beginning with our annual reporton Form 10-K for the fiscal year ending June 30, 2008, we will become subject to the rules33promulgated under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, which requires publicly-held companies to include in its annual report onForm 10-K an assessment by management of the effectiveness of our internal controls over financial reporting. We have begun the process of evaluatinginternal controls over financial reporting, and in the process of conducting this evaluation additional material weaknesses, significant deficiencies and othercontrol deficiencies may be identified. To comply with our Section 404 obligations, we are incurring additional expenses including hiring additional personneland outside consultants, and we may experience a diversion on management’s time and attention. Ensuring that we have adequate internal financial andaccounting controls and procedures in place to help ensure that we can produce accurate financial statements on a timely basis is a costly and time-consumingeffort that needs to be evaluated frequently.Even after any corrective actions are implemented, the effectiveness of our controls and procedures may be limited by a variety of risks including:· faulty judgment, omissions or mistakes;· circumvention of our internal controls and procedures;· inappropriate management override of internal controls and procedures; and· risk that enhanced internal controls and procedures may still not be adequate to assure timely and reliable financial information, processingand reporting.Although we have taken measures to remediate the material weaknesses as well as the other significant deficiencies and control deficiencies, we cannotassure you that we have identified all, or that we will not in the future have additional material weaknesses, significant deficiencies and control deficiencies.Our independent registered public accounting firm has not evaluated any of the measures we have taken, or that we propose to take, to address thematerial weaknesses and the significant deficiencies and control deficiencies discussed above. Any failure to maintain or implement required new or improvedcontrols, or any difficulties we encounter in implementation, could cause us to fail to meet our periodic reporting obligations or result in material misstatementsin our consolidated financial statements, which in turn could cause investors to lose confidence in our reported financial information, leading to a decline inour stock price. Any such failure could also adversely affect management’s assessment of our disclosure controls and procedures, required with the filing ofour quarterly and annual reports and the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of ourinternal controls over financial reporting that will be required when the Securities and Exchange Commission’s, or SEC’s, rules under Section 404 becomeapplicable to us beginning with our Annual Report on Form 10-K for the year ending June 30, 2008.In addition, the complexity of our financial model contributes to our need for effective financial reporting systems and internal controls. We recognizerevenue from a range of transactions including CyberKnife system sales, shared ownership programs and services. The CyberKnife system is a complexproduct that contains both hardware and software elements. The complexity of the CyberKnife system and of our financial model requires us to process abroader range of financial transactions than would be required by a company with a less complex financial model. Accordingly, deficiencies or weaknesses inour internal controls would likely impact us more significantly than they would impact a company with a less complex financial model.34We are subject to numerous risks in connection with Section 404 of the Sarbanes-Oxley Act.As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies toinclude in annual reports on Form 10-K an assessment by management of the effectiveness of internal controls over financial reporting. In addition, ourindependent auditors must attest to and report on management’s assessment of the effectiveness of our internal controls over financial reporting. We will need tocomply with this requirement commencing with our Annual Report on Form 10-K for the fiscal year ending June 30, 2008. To comply with this requirement,we are incurring additional expenses and a diversion of management’s time. While we currently anticipate completion of testing and evaluation of our internalcontrol over financial reporting with respect to the requirements of Section 404 of Sarbanes-Oxley in a timely fashion, we may not be able to accomplish thisbecause the applicable requirements are complex and time-consuming. In addition, as a result of our evaluation of internal control over financial reporting andrelated systems, we and our auditors had identified one or more material weaknesses in our internal control over financial reporting as described above.If we fail to evaluate our internal control over financial reporting and related systems in compliance with the requirements of Section 404, if we or ourauditors determine that we have material weakness in our internal controls, if we fail to maintain the adequacy of our internal controls (including any failure toimplement required new or improved controls), or if we experience difficulties in their implementation, our business and results of operations could beharmed, and we could fail to meet our reporting obligations which would negatively impact the market price of our shares and increase the volatility of ourstock price.Our industry is subject to intense competition and rapid technological change, which may result in products or new tumor treatments that aresuperior to the CyberKnife system. If we are unable to anticipate or keep pace with changes in the marketplace and the direction of technologicalinnovation and customer demands, our products may become less useful or obsolete and our operating results will suffer.The medical device industry in general and the non-invasive cancer treatment field in particular are subject to intense and increasing competition andrapidly evolving technologies. Because our products often have long development and government approval cycles, we must anticipate changes in themarketplace and the direction of technological innovation and customer demands. To compete successfully, we will need to continue to demonstrate theadvantages of our products and technologies over well-established alternative procedures, products and technologies, and convince physicians and otherhealthcare decision makers of the advantages of our products and technologies. Traditional surgery and other forms of minimally invasive procedures,chemotherapy or other drugs remain alternatives to the CyberKnife system. Also, we compete directly with traditional radiosurgery systems primarily fromElekta AB (publ), or Elekta, BrainLAB AG, the Integra Radionics business of Integra LifeSciences Holdings Corporation, or Radionics, and Varian MedicalSystems, Inc., or Varian.The market for standard linear accelerators is dominated by three companies: Elekta, Siemens AG and Varian. In addition, TomoTherapy Incorporatedmarkets and sells a radiation therapy product. The CyberKnife system is not typically used to perform traditional radiation therapy and therefore does notusually compete directly with standard medical linacs that perform standard radiation therapy. However, some manufacturers of standard linac basedradiation therapy systems, including Varian and Elekta, have products that can be used in combination with body and/or head frames and image-guidancesystems to perform radiosurgery. In addition, many government, academic and business entities are investing substantial resources in research anddevelopment of cancer treatments, including surgical approaches, radiation treatment, drug treatment, gene therapy, which is the treatment of disease byreplacing, manipulating, or supplementing nonfunctional genes, and other approaches. Successful developments that result in new approaches for thetreatment of cancer could reduce the attractiveness of our products or render them obsolete.35Our future success will depend in large part on our ability to establish and maintain a competitive position in current and future technologies. Rapidtechnological development may render the CyberKnife system and its technologies obsolete. Many of our competitors have or may have greater corporate,financial, operational, sales and marketing resources, and more experience in research and development than we have. We cannot assure you that ourcompetitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products or thatwould render our technologies and products obsolete. We may not have the financial resources, technical expertise, marketing, distribution or supportcapabilities to compete successfully in the future. Our success will depend in large part on our ability to maintain a competitive position with our technologies.Our competitive position also depends on:· widespread awareness, acceptance and adoption by the radiation oncology and cancer therapy markets of our products;· the discovery of new technologies that improve the effectiveness and productivity of the CyberKnife system radiosurgery process;· product coverage and reimbursement from third-party payors, insurance companies and others;· properly identifying customer needs and delivering new products or product enhancements to address those needs;· published studies supporting the efficacy and safety and long-term clinical benefit of the CyberKnife system;· limiting the time required from proof of feasibility to routine production;· limiting the timing and cost of regulatory approvals;· our ability to attract and retain qualified personnel;· the extent of our patent protection or our ability to otherwise develop proprietary products and processes;· securing sufficient capital resources to expand both our continued research and development, and sales and marketing efforts; and· obtaining any necessary United States or foreign marketing approvals or clearances.If the CyberKnife system is not competitive based on these or other factors, our business would be harmed.We must obtain and maintain regulatory approvals in international markets in which we sell, or seek to sell, our products.In order for us to market and sell the CyberKnife system internationally, either through direct sales personnel or through distributors, we must obtainand maintain regulatory clearances applicable to the countries and regions in which we are selling, or are seeking to sell, our products. These regulatoryapprovals and clearances, and the process required to obtain and maintain them, vary substantially among international jurisdictions. In some jurisdictions,we rely on our distributors to manage the regulatory process and we are dependent on their ability to do so effectively. For example, in Japan, our clearances arecurrently limited to use of the CyberKnife system in the head and neck. In addition, our regulatory approval in Japan was suspended for a period of twelvemonths during 2003 as a result of a failure of our distributor to coordinate product modifications and obtain necessary regulatory clearances in a timelymanner. As a result, the CyberKnife system was recalled in Japan and our former Japanese distributor was told to stop selling the CyberKnife system. Inresponse, we retained a regulatory consultant who was not36affiliated with our former Japanese distributor and worked with the Japanese Ministry of Health, Labor and Welfare and applied for, and received, approval tosell an updated version of the CyberKnife system under the name of CyberKnife II in Japan. By working with a new distributor, Chiyoda TechnolCorporation, we were able to begin distributing the CyberKnife II system in 2004 with no probationary period. In the event that we are unable to obtain andmaintain regulatory clearances for the CyberKnife system, including new clearances for system upgrades and use of the system anywhere in the body, ininternational markets we have entered or desire to enter, our international sales could fail to grow or decline. These events would harm our business and couldcause our stock price to decline.It is difficult and costly to protect our intellectual property and our proprietary technologies, and we may not be able to ensure their protection.Our success depends significantly on our ability to obtain, maintain and protect our proprietary rights to the technologies used in our products. Patentsand other proprietary rights provide uncertain protections, and we may be unable to protect our intellectual property. For example, we may be unsuccessful indefending our patents and other proprietary rights against third party challenges.In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements and other contractualprovisions and technical security measures to protect our intellectual property rights. These measures may not be adequate to safeguard the technologyunderlying our products. If they do not protect our rights adequately, third parties could use our technology, and our ability to compete in the market would bereduced. Although we have attempted to obtain patent coverage for our technology where available and appropriate, there are aspects of the technology for whichpatent coverage was never sought or never received. There are also countries in which we sell or intend to sell the CyberKnife system but have no patents orpending patent applications. Our ability to prevent others from making or selling duplicate or similar technologies will be impaired in those countries in whichwe have no patent protection. Although we have several issued patents in the United States and in foreign countries protecting aspects of the CyberKnifesystem, our pending United States and foreign patent applications may not issue, may issue only with limited coverage or may issue and be subsequentlysuccessfully challenged by others and held invalid or unenforceable.Similarly, our issued patents and those of our licensors may not provide us with any competitive advantages. Competitors may be able to design aroundour patents or develop products which provide outcomes comparable or superior to ours. Our patents may be held invalid or unenforceable as a result of legalchallenges by third parties, and others may challenge the inventorship or ownership of our patents and pending patent applications. In addition, the laws ofsome foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. In the event a competitor infringesupon our patent or other intellectual property rights, enforcing those rights may be difficult and time consuming. Even if successful, litigation to enforce ourintellectual property rights or to defend our patents against challenge could be expensive and time consuming and could divert our management’s attention. Wemay not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge.We also license patent and other proprietary rights to aspects of our technology to third parties in fields where we currently do not operate as well as infields where we currently do operate. Disputes with our licensees may arise regarding the scope and content of these licenses. Further, our ability to expand intoadditional fields with our technologies may be restricted by our existing licenses or licenses we may grant to third parties in the future.In October 2006, January 2007 and February 2007, we received correspondence from American Science and Engineering, Inc., or AS&E, expressingconcerns that we may be using certain intellectual property we acquired from AS&E through the HES acquisition in a manner that breaches, or may breach,37our contractual obligations under a license agreement with them in certain nonmedical fields. The intellectual property at issue relates to the development of anext-generation linac that could be used for medical as well as non-medical purposes. We are developing the technology used in the next-generation linacindependently from the intellectual property we obtained from the HES acquisition. While we do not believe our activities breach or violate the terms of thelicense agreement, we cannot assure you that AS&E will not commence litigation on the grounds that we are in breach of our obligations under the licenseagreement.The policies we use to protect our trade secrets may not be effective in preventing misappropriation of our trade secrets by others. In addition,confidentiality agreements executed by our employees, consultants and advisors may not be enforceable or may not provide meaningful protection for our tradesecrets or other proprietary information in the event of unauthorized use or disclosure. Litigating a trade secret claim is expensive and time consuming, and theoutcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors mayindependently develop equivalent knowledge methods and know-how. If we are unable to protect our intellectual property rights, we may be unable to preventcompetitors from using our own inventions and intellectual property to compete against us, and our business may be harmed.Because the medical device industry is characterized by competing intellectual property, we may be sued for violating the intellectual property rightsof others.The medical device industry is characterized by a substantial amount of litigation over patent and other intellectual property rights. In particular, the fieldof radiation treatment of cancer is well established and crowded with the intellectual property of competitors and others. A number of companies in our market,as well as universities and research institutions, have issued patents and have filed patent applications which relate to the use of stereotactic radiosurgery totreat solid cancerous and benign tumors.Determining whether a product infringes a patent involves complex legal and factual issues, and the outcome of patent litigation actions is often uncertain.We have not conducted an extensive search of patents issued to third parties, and no assurance can be given that third party patents containing claims coveringour products, parts of our products, technology or methods do not exist, have not been filed, or could not be filed or issued. Because of the number of patentsissued and patent applications filed in our technical areas or fields, our competitors or other third parties may assert that our products and the methods weemploy in the use of our products are covered by United States or foreign patents held by them. In addition, because patent applications can take many yearsto issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware,and which may result in issued patents which our current or future products infringe. Also, because the claims of published patent applications can changebetween publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There could also beexisting patents that one or more of our products or parts may infringe and of which we are unaware. As the number of competitors in the market for lessinvasive cancer treatment alternatives grows, and as the number of patents issued in this area grows, the possibility of patent infringement claims againstus increases. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they havesubstantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effecton our ability to raise the funds necessary to continue our operations.In the event that we become subject to a patent infringement or other intellectual property lawsuit and if the relevant patents or other intellectual propertywere upheld as valid and enforceable and we were found to infringe or violate the terms of a license to which we are a party, we could be prevented from sellingour products unless we could obtain a license or were able to redesign the product to avoid infringement. If we were unable to obtain a license or successfullyredesign our system, we might be38prevented from selling our system. If there is an allegation or determination that we have infringed the intellectual property rights of a competitor or otherperson, we may be required to pay damages, or a settlement or ongoing royalties. In these circumstances, we may be unable to sell our products at competitiveprices or at all, our business and operating results could be harmed and our stock price may decline.We could become subject to product liability claims, product recalls, other field actions and warranty claims that could be expensive, divertmanagement’s attention and harm our business.Our business exposes us to potential liability risks that are inherent in the manufacturing, marketing and sale of medical device products. We may beheld liable if the CyberKnife system causes injury or death or is found otherwise unsuitable during usage. Our products incorporate sophisticated componentsand computer software. Complex software can contain errors, particularly when first introduced. In addition, new products or enhancements may containundetected errors or performance problems that, despite testing, are discovered only after installation. Because our products are designed to be used to performcomplex surgical procedures, defects could result in a number of complications, some of which could be serious and could harm or kill patients. It is alsopossible that defects in the design, manufacture or labeling of our products might necessitate a product recall or other field corrective action, which may resultin warranty claims beyond our expectations and may harm our reputation. A product liability claim, regardless of its merit or eventual outcome, could resultin significant legal defense costs. The coverage limits of our insurance policies may not be adequate to cover future claims. If sales of our products increase orwe suffer future product liability claims, we may be unable to maintain product liability insurance in the future at satisfactory rates or with adequate amounts.A product liability claim, any product recalls or other field actions or excessive warranty claims, whether arising from defects in design or manufacture orotherwise, could negatively affect our sales or require a change in the design, manufacturing process or the indications for which the CyberKnife system maybe used, any of which could harm our reputation and business, result in a decline in revenue and cause our stock price to fall.In addition, if a product we designed or manufactured is defective, whether due to design or manufacturing defects, improper use of the product or otherreasons, we may be required to notify regulatory authorities and/or to recall the product, possibly at our expense. We have voluntarily conducted recalls andproduct corrections in the past. In 2002, we were subject to a product recall in Japan, as a result of a failure of our prior distributor to coordinate productmodifications and obtain necessary regulatory approvals in a timely manner. Most recently, in April 2007, we initiated a product correction at twenty differentsites related to a software malfunction of the CyberKnife system. As a result of this software malfunction, we are providing affected devices with softwareupgrades designed to correct the problems that have been identified. We have notified the FDA regarding these software upgrades and corrections. We cannotensure that the FDA will not require that we take additional actions to address the software malfunctions. A required notification to a regulatory authority orrecall could result in an investigation by regulatory authorities of our products, which could in turn result in required recalls, restrictions on the sale of theproducts or other civil or criminal penalties. The adverse publicity resulting from any of these actions could cause customers to review and potentiallyterminate their relationships with us. These investigations or recalls, especially if accompanied by unfavorable publicity or termination of customer contracts,could result in our incurring substantial costs, losing revenues and damaging our reputation, each of which would harm our business.The safety and efficacy of our products for certain uses is not yet supported by long-term clinical data and may therefore prove to be less safe andeffective than initially thought.Although we believe that the CyberKnife system has advantages over competing products and technologies, we do not have sufficient clinical datademonstrating these advantages for all tumor39indications. For example, because our CyberKnife procedures are relatively new, we have limited clinical data relating to the effectiveness of the CyberKnifesystem as a means of controlling the growth of cancer at a particular body site. In addition, we have only limited five-year patient survival rate data, which isa common long-term measure of clinical effectiveness in cancer treatment. Further, future patient studies or clinical experience may indicate that treatment withthe CyberKnife system does not improve patient outcomes. Such results could slow the adoption of our products by physicians, significantly reduce ourability to achieve expected revenues and could prevent us from becoming profitable. In addition, if future results and experience indicate that our productscause unexpected or serious complications or other unforeseen negative effects, the FDA could rescind our clearances, our reputation with physicians, patientsand others may suffer and we could be subject to significant legal liability.The CyberKnife system has been in use for a limited period of time for uses outside the brain and the medical community has not yet developed alarge quantity of peer-reviewed literature that supports safe and effective use in those locations in the body.The CyberKnife system was initially cleared by a number of regulatory authorities for the treatment of tumors in the brain and neck. More recently, theCyberKnife system has been cleared in the United States to treat tumors anywhere in the body where radiation is indicated, and our future growth is dependentin large part on continued growth in full body use of the system. Currently, however, there are a limited number of peer-reviewed medical journal publicationsregarding the safety and efficacy of the CyberKnife system for treatment of tumors outside the brain or spine. If later studies show that the CyberKnife systemis less effective or less safe with respect to particular types of solid tumors, use of the CyberKnife system could fail to increase or could decrease and ourgrowth and operating results would therefore be harmed.International sales of the CyberKnife system account for a significant portion of our revenue, which exposes us to risks inherent in internationaloperations.We anticipate that a significant portion of our revenue will continue to be derived from sales of the CyberKnife system in foreign markets. This revenueand related operations will therefore continue to be subject to the risks associated with international operations, including:· economic or political instability;· shipping delays;· changes in foreign regulatory laws governing sales of medical devices;· difficulties in enforcing agreements with and collecting receivables from customers outside the United States;· longer payment cycles associated with many customers outside the United States;· adequate reimbursement for the CyberKnife procedure outside the United States;· failure of local laws to provide the same degree of protection against infringement of our intellectual property;· protectionist laws and business practices that favor local competitors; and· contractual provisions governed by foreign laws and various trade restrictions, including U.S. prohibitions and restrictions on exports of certainproducts and technologies to certain nations.In addition, future imposition of, or significant increases in, the level of customs duties, export quotas, regulatory restrictions or trade restrictions couldmaterially harm our business. Currently, the majority of our international sales are denominated in U.S. dollars. As a result, an increase in the value of theU.S. dollar relative to foreign currencies could require us to reduce our sales price or make our products40less competitive in international markets. If we are unable to address these risks and challenges effectively, our international operations may not be successfuland our business would be materially harmed.We depend on third-party distributors to market and distribute the CyberKnife system in international markets. If our distributors fail tosuccessfully market and distribute the CyberKnife system, our business will be materially harmed.We depend on a limited number of distributors in our international markets. These international distribution relationships are exclusive by geographicregion. We cannot control the efforts and resources our third-party distributors will devote to marketing the CyberKnife system. Our distributors may not beable to successfully market and sell the CyberKnife system, may not devote sufficient time and resources to support the marketing and selling efforts andmay not market the CyberKnife system at prices that will permit the product to develop, achieve or sustain market acceptance. If we or our distributorsterminate our existing agreements, finding new distributors could be an expensive and time-consuming process and sales could decrease during and after anytransition period. If we are unable to attract additional international distributors, our international revenue may not grow. If our distributors experiencedifficulties, do not actively market the CyberKnife system or do not otherwise perform under our distribution agreements, our potential for revenue frominternational markets may be dramatically reduced, and our business could be harmed. In certain cases our distributors are responsible for the service andsupport of our CyberKnife systems.We have limited experience and capability in manufacturing and may encounter manufacturing problems or delays that could result inlost revenue.The CyberKnife system is complex, and requires the integration of a number of components from several sources of supply. We must manufacture andassemble these complex systems in commercial quantities in compliance with regulatory requirements and at an acceptable cost. We have a limited history ofmanufacturing commercial quantities of the CyberKnife system. In particular, we have recently begun manufacturing compact linacs as a component of theCyberKnife system. Our linac components are extremely complex devices and require significant expertise to manufacture, and as a result of our limitedmanufacturing experience we may have difficulty producing needed materials in a commercially viable manner. We may encounter difficulties in scaling upproduction of the CyberKnife system, including problems with quality control and assurance, component supply shortages, increased costs, shortages ofqualified personnel and/or difficulties associated with compliance with local, state, federal and foreign regulatory requirements. If our manufacturing capacitydoes not keep pace with product demand, we will not be able to fulfill orders in a timely manner which in turn may have a negative effect on our financialresults and overall business. Conversely, if demand for our products decreases, the fixed costs associated with excess manufacturing capacity may adverselyaffect our financial results.41Our manufacturing processes and the manufacturing processes of our third-party suppliers are required to comply with the FDA’s Quality SystemRegulation, or QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, production processes,controls, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. We are also subject to state requirements and licensesapplicable to manufacturers of medical devices. Because our manufacturing processes include diagnostic and therapeutic X-ray equipment and laserequipment, we are subject to the electronic product radiation control provisions of the Federal Food, Drug and Cosmetic Act, which requires that we file reportswith the FDA, applicable states and our customers regarding the distribution, manufacturing and installation of these types of equipment. The FDA enforcesthe QSR and the electronic product radiation control provisions through periodic unannounced inspections. We have been, and anticipate in the future to be,subject to such inspections. Our failure or the failure of a third-party supplier to pass a QSR inspection or to comply with these and other applicableregulatory requirements could result in disruption of our operations and manufacturing delays. Our failure to take prompt and satisfactory corrective action inresponse to an adverse inspection or our failure to comply with applicable standards could result in enforcement actions, including a public warning letter, ashutdown of our manufacturing operations, a recall of our products, civil or criminal penalties, or other sanctions, which would cause our sales and businessto suffer. We cannot assure you that the FDA or other governmental authorities would agree with our interpretation of applicable regulatory requirements or thatwe or our third-party suppliers have in all instances fully complied with all applicable requirements.If we cannot achieve the required level and quality of production, we may need to outsource production or rely on licensing and other arrangements withthird parties who possess sufficient manufacturing facilities and capabilities in compliance with regulatory requirements. Even if we could outsource neededproduction or enter into licensing or other third party arrangements, this could reduce our gross margin and expose us to the risks inherent in relying on others.We also cannot assure you that our suppliers will deliver an adequate supply of required components on a timely basis or that they will adequately complywith the QSR. Failure to obtain these components on a timely basis would disrupt our manufacturing processes and increase our costs, which would harmour operating results.We depend on key employees, the loss of whom would adversely affect our business. If we fail to attract and retain employees with the expertiserequired for our business, we cannot grow or achieve profitability.We are highly dependent on the members of our senior management, operations and research and development staff. Our future success will depend inpart on our ability to retain these key employees and to identify, hire and retain additional personnel. Competition for qualified personnel in the medical deviceindustry, particularly in northern California, is intense, and finding and retaining qualified personnel with experience in our industry is very difficult. Webelieve there are only a limited number of individuals with the requisite skills to serve in many of our key positions and we compete for key personnel withother medical equipment and software manufacturers and technology companies, as well as universities and research institutions. It is increasingly difficult tohire and retain these persons, and we may be unable to replace key persons if they leave or fill new positions requiring key persons with appropriateexperience. A significant portion of our compensation to our key employees is in the form of stock option grants. A prolonged depression in our stock pricecould make it difficult for us to retain our employees and recruit additional qualified personnel. We do not maintain, and do not currently intend to obtain, keyemployee life insurance on any of our personnel. If we fail to hire and retain personnel in key positions, we may be unable to grow our business successfully.If we do not effectively manage our growth, our business may be significantly harmed.The number of our employees increased from 194 as of June 30, 2005 to 449 as of June 30, 2007. In addition, we have significantly expanded ourdevelopment and operational facilities, including our recent42acquisition of a linac manufacturing facility and our new manufacturing site. In order to implement our business strategy, we expect continued growth in ouremployee and infrastructure requirements, particularly as we expand our manufacturing and sales and marketing capacities. To manage our growth, we mustexpand our facilities, augment our management, operational and financial systems, hire and train additional qualified personnel, scale-up our manufacturingcapacity and expand our marketing and distribution capabilities. Our manufacturing, assembly and installation process is complex and occurs over manymonths, and we must effectively scale this entire process to satisfy customer expectations and changes in demand. We also expect to increase the number ofsales and marketing personnel as we expand our business. Further, to accommodate our growth and compete effectively, we will be required to improve ourinformation systems. We cannot be certain that our personnel, systems, procedures and internal controls will be adequate to support our future operations. Ifwe cannot manage our growth effectively, our business will suffer.Any failure in our physician training efforts could result in lower than expected product sales and potential liabilities.A critical component of our sales and marketing efforts is the training of a sufficient number of physicians to properly utilize the CyberKnife system.We rely on physicians to devote adequate time to learn to use our products. If physicians are not properly trained, they may misuse or ineffectively use ourproducts. This may result in unsatisfactory patient outcomes, patient injury and related liability or negative publicity which could have an adverse effect onour product sales.As a result of being a public company, we are incurring increased costs.As a recently public company, we are incurring increased legal, accounting and other expenses that we did not incur as a private company as we are nowsubject to SEC, the NASDAQ Stock Market and other rules focusing on corporate governance and financial reporting. In particular, as a public company wewill be required to comply with Section 404 regarding management assessment of internal controls. We will first become subject to Section 404 in connectionwith the audit of our consolidated financial statements for the fiscal year ending June 30, 2008, and we expect to continue to incur substantial additional auditfees and costs for that year’s audit as well as for future audits. We also expect these new rules and regulations to make it more difficult and more expensive forus to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs toobtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or asexecutive officers. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount ofadditional costs we may incur or the timing of such costs.Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our growthstrategy.While we believe that our existing cash and short-term and long-term investments will be sufficient to meet our anticipated cash needs for at least the next12 months, the timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors,including:· market acceptance of our products;· the need to adapt to changing technologies and technical requirements;· the existence of opportunities for expansion; and· access to and availability of sufficient management, technical, marketing and financial personnel.43If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtainother debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additionaldebt would result in increased expenses and could result in covenants that would restrict our operations. We have not made arrangements to obtain additionalfinancing, and we cannot assure you that financing, if required, will be available in amounts or on terms acceptable to use, if at all.We may attempt to acquire new businesses, products or technologies, and if we are unable to successfully complete these acquisitions or tointegrate acquired businesses, products, technologies or employees, we may fail to realize expected benefits or harm our existing business.Our success will depend, in part, on our ability to expand our product offerings and grow our business in response to changing technologies, customerdemands and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses, products ortechnologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time consuming and costly, andwe may not be able to successfully complete identified acquisitions. Furthermore, even if we successfully complete an acquisition, we may not be able tosuccessfully integrate newly acquired organizations, products or technologies into our operations, and the process of integration could be expensive, timeconsuming and may strain our resources. In addition, we may be unable to retain employees of acquired companies, or retain the acquired company’scustomers, suppliers, distributors or other partners who are our competitors or who have close relationships with our competitors. Consequently, we may notachieve anticipated benefits of the acquisitions which could harm our existing business. In addition, future acquisitions could result in potentially dilutiveissuances of equity securities or the incurrence of debt, contingent liabilities or expenses, or other charges such as in-process research and development, any ofwhich could harm our business and affect our financial results or cause a reduction in the price of our common stock.Our operations are vulnerable to interruption or loss due to natural disasters, epidemics, terrorist acts and other events beyond our control,which would adversely affect our business.Our manufacturing facility is located in a single location in Sunnyvale, California. We do not maintain a backup manufacturing facility, so we dependon our current facility for the continued operation of our business. In addition, we conduct a significant portion of other activities including administration anddata processing at facilities located in the State of California which has experienced major earthquakes in the past, as well as other natural disasters. We carrylimited earthquake insurance for inventory only. Such coverage may not be adequate or continue to be available at commercially reasonable rates and terms. Inthe event of a major earthquake or other disaster affecting our facilities, it could significantly disrupt our operations, delay or prevent product manufactureand shipment for the time required to repair, rebuild or replace our manufacturing facilities, which could be lengthy, and result in large expenses to repair orreplace the facilities. In addition, concerns about terrorism or an outbreak of epidemic diseases such as avian influenza or severe acute respiratory syndrome,or SARS, especially in our major markets of North America, Europe and Asia could have a negative effect on travel and our business operations, and result inadverse consequences on our revenues and financial performance.Risks Related to Our Common StockThe price of our common stock is volatile and may continue to fluctuate significantly, which could lead to losses for stockholders.The trading prices of the stock of newly public companies can experience extreme price and volume fluctuations. These fluctuations often have beenunrelated or out of proportion to the operating performance of these companies. Since we became a public company in February 2007, our stock price has44been similarly volatile. These broad market fluctuations may continue and could harm our stock price. Any negative change in the public’s perception of theprospects of companies that employ similar technology or sell into similar markets could also depress our stock price, regardless of our actual results.Factors affecting the trading price of our common stock include:· regulatory developments related to manufacturing the CyberKnife system;· variations in our operating results;· changes in our operating results as a result of problems with our internal controls;· announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by ourcompetitors;· recruitment or departure of key personnel;· changes in the estimates of our operating results or changes in recommendations by any securities analyst that elects to follow our common stock;· market conditions in our industry, the industries of our customers and the economy as a whole;· sales of large blocks of our common stock; and· changes in accounting principles or changes in interpretations of existing principles, which could affect our financial results.Substantial sales of our common stock by our stockholders could depress our stock price regardless of our operating results.Sales of substantial amounts of our common stock in the public market could reduce the prevailing market prices for our common stock. As ofAugust 17, 2007, we have 53,851,781 shares of common stock outstanding. The lockup agreements related to our initial public offering will expire with theopening of the securities markets on September 4, 2007, and as a result a large number of shares of our common stock will become eligible for sale. If ourexisting stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of commonstock, the market price of our common stock could decline significantly. These sales might also make it more difficult for us to sell equity securities at a timeand price that we deem appropriate.Our directors, executive officers and major stockholders own approximately 32.6% of our outstanding common stock as of August 17, 2007,which could limit your ability to influence the outcome of key transactions, including changes of control.As of August 17, 2007, our directors, executive officers, and current holders of 5% or more of our outstanding common stock, held, in the aggregate,approximately 32.6% of our outstanding common stock. As a result, a small number of stockholders have voting control and may be able to control theelection of directors and the approval of significant corporate transactions. This concentration of ownership may also delay, deter or prevent a change ofcontrol of our company and will make some transactions more difficult or impossible without the support of these stockholders.45We have implemented anti-takeover provisions that could discourage or prevent a takeover, even if an acquisition would be beneficial in theopinion of our stockholders.Provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficialin the opinion of our stockholders. These provisions include:· authorizing the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding sharesand thwart a takeover attempt;· establishing a classified board of directors, which could discourage a takeover attempt;· prohibiting cumulative voting in the election of directors, which would limit the ability of less than a majority of stockholders to elect directorcandidates;· limiting the ability of stockholders to call special meetings of stockholders;· prohibiting stockholder action by written consent and requiring that all stockholder actions be taken at a meeting of our stockholders; and· establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon bystockholders at stockholder meetings.In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change of control of our company. Generally,Section 203 prohibits stockholders who, alone or together with their affiliates and associates, own more than 15% of the subject company from engaging incertain business combinations for a period of three years following the date that the stockholder became an interested stockholder of such subject companywithout approval of the board or 663% of the independent stockholders. The existence of these provisions could adversely affect the voting power of holdersof common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.An active trading market for our common stock may not be sustained.Prior to the initial public offering of our common stock in February 2007, there had been no public market for our common stock. Although our commonstock is listed on the NASDAQ Global Market, an active trading market for our shares may not be sustained. Accordingly, you may not be able to sell yourshares quickly or at the market price if trading in our stock is not active.We have not paid dividends in the past and do not expect to pay dividends in the future.We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings for the operation and expansion ofour business and, therefore, do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will be at the discretionof our board of directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, anylimitations on payments of dividends present in our current and future debt agreements, and other factors our board of directors may deem relevant. We aresubject to several covenants under our debt arrangements that place restrictions on our ability to pay dividends. If we do not pay dividends, a return on yourinvestment will only occur if our stock price appreciates.462Item 1B. UNRESOLVED STAFF COMMENTSNone.Item 2. PROPERTIESFacilitiesWe lease approximately 176,000 square feet of product development, manufacturing and administrative space in three buildings in Sunnyvale,California, and approximately 25,000 square feet of development and manufacturing space in Mountain View, California. Our headquarters building, whichis approximately 73,000 square feet, is leased to us until February 2008 and an additional office building, which is approximately 53,000 square feet, is leasedto us until May 2010. Our manufacturing facility in Sunnyvale is approximately 50,000 square feet and is leased to us until July 2011. The Mountain Viewfacility is leased to us until October 2010. We have the right to renew the term of our headquarters lease for one three-year term upon prior written notice and thefulfillment of certain conditions. We also maintain offices in France, China and Japan. We believe our current facilities are adequate to meet our current needs,but additional space, including additional radiation-shielded areas in which systems can be assembled and tested, will be required in the future toaccommodate anticipated increases in manufacturing needs.Item 3. LEGAL PROCEEDINGSFrom time to time we are involved in legal proceedings arising in the ordinary course of our business. We believe that there is no litigation pending thatcould have a material adverse effect on our results of operations and financial condition.Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNone.47PART IIItem 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERS MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIESStock InformationOur common stock is traded on the Nasdaq Global Market under the symbol “ARAY.” The high and low sale prices for each of the quarters ended are asfollows:2007HighLowFirst QuarterN/AN/ASecond QuarterN/AN/AThird Quarter (beginning February 8, 2007)$31.09$19.66Fourth Quarter$27.58$21.50 We have never paid cash dividends on our common stock. Our Board of Directors intend to use any future earnings to support operations and reinvest inthe growth and development of our business. There are no current plans to pay out cash dividends to common stockholders in the foreseeable future.As of August 17, 2007, there were 209 registered stockholders of record of our common stock.Stock Performance GraphThe graph set forth below compares the cumulative total stockholder return on our common stock between February 8, 2007 (the date of our initial publicoffering) and June 30, 2007, with the cumulative total return of (i) the S&P Health Care Index and (ii) the Nasdaq Composite Index, over the same period.This graph assumes the investment of $100.00 on February 8, 2007 in our common stock, the S&P Health Care Index and the Nasdaq Composite Index, andassumes the reinvestment of dividends, if any. The graph assumes the initial value of our common stock on February 8, 2007 was the closing sales price of$28.47 per share.The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is notnecessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtainedfrom Research Data Group, a source believed to be reliable, but we are not responsible for any errors or omissions in such information.48COMPARISON OF 5 MONTH CUMULATIVE TOTAL RETURN*Among Accuray Incorporated, The NASDAQ Composite IndexAnd The S&P Health Care Index* $100 invested on February 8, 2007 in stock or on January 31, 2007 in index-including reinvestment of dividends.Sale of Unregistered SecuritiesDuring the fiscal year ended June 30, 2007, the Registrant made sales of the following unregistered securities:1. The Registrant sold an aggregate of 1,175,824 shares of common stock to employees, directors and consultants for consideration in the form ofcash and forfeited shares in the aggregate amount of $1,176,189 upon the exercise of stock options and stock awards, no shares of which have beenrepurchased.2. The Registrant granted stock options and stock awards to employees, directors and consultants under its 1998 Equity Incentive Plan covering anaggregate of 1,504,280 shares of common stock, with exercise prices ranging from $9.00 to $13.05 per share. Of these, options covering an aggregate of56,156 were cancelled without being exercised.3. The Registrant sold an aggregate of 495,833 shares of common stock to an individual investor upon the cashless exercise of a warrant.4. In connection with the Registrant’s initial public offering of shares of its common stock, the outstanding preferred stock of the Registrant convertedinto shares of common stock in accordance with the Registrant’s certificate of incorporation immediately prior to the initial public offering.495. In connection with the reincorporation of Registrant’s predecessor, Accuray Incorporated, a California corporation, or Accuray-CA, into Delaware,shareholders, optionholders and a warrantholder of Accuray-CA exchanged securities held in Accuray-CA for corresponding securities of the Registrant.6. The Registrant claimed exemption from registration under the Securities Act for the sales and issuances of securities in the transactions described inparagraphs (1) and (2) above under Section 4(2) of the Securities Act in that such sales and issuances did not involve a public offering or under Rule 701promulgated under the Securities Act, in that they were offered and sold either pursuant to written compensatory plans or pursuant to a written contract relatingto compensation, as provided by Rule 701.7. The Registrant claimed exemption from registration under the Securities Act for the sale and issuance of securities in the transactions described inparagraphs (3) through (6) by virtue of Section 4(2) and/or Regulation D promulgated thereunder as transactions not involving any public offering. All of thepurchasers of unregistered securities for which the Registrant relied on Section 4(2) and/or Regulation D represented that they were accredited investors asdefined under the Securities Act. The Registrant claimed such exemption on the basis that (a) the purchasers in each case represented that they intended toacquire the securities for investment only and not with a view to the distribution thereof and that they either received adequate information about the registrantor had access, through employment or other relationships, to such information and (b) appropriate legends were affixed to the stock certificates issued in suchtransactions.Use of Proceeds from Public Offering of Common StockOur initial public offering of 18,399,998 shares of our common stock, par value $0.001, by us and certain stockholders was effected through aRegistration Statement on Form S-1 (Reg. No. 333-138622) which was declared effective by the Securities and Exchange Commission on February 7, 2007.We issued 10,399,998 shares on February 13, 2007 for gross proceeds of $187.2 million. We paid the underwriters a commission of $13.1 million andincurred additional offering expenses of approximately $3.5 million. After deducting the underwriters’ commission and the offering expenses, we received netproceeds of approximately $170.6 million. The managing underwriters of our IPO were J.P. Morgan Securities Inc. and UBS Securities LLC.No payments for such expenses were made directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% ormore of any class of our equity securities or (iii) any of our affiliates.The net proceeds have been invested primarily into money market mutual funds. We have begun, and intend to continue to use, our net proceeds for salesand marketing activities to support the ongoing commercialization of the CyberKnife system, including, but not limited to, expansion of our sales force,additional participation in trade shows and symposia, and expanding our international sales and service presence, for research and development activities,including support of hardware and software product development and clinical study initiatives, and for increased working capital and general corporatepurposes. We may also use a portion of the net proceeds for the acquisition of, or investment in, companies, technologies, products or assets that complementour business. We have no present understandings, commitments or agreements to enter into any material acquisitions or investments.Securities authorized for issuance under equity compensation plansRefer to Item 12. Equity Compensation Plan Information, for information on the Company’s equity compensation plans.50Item 6. SELECTED FINANCIAL DATAThe following selected consolidated financial data should be read in conjunction with, and are qualified by reference to, our consolidated financialstatements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in thisForm 10-K. The consolidated statements of operations for the years ended June 30, 2007, 2006 and 2005, and the consolidated balance sheet data at June 30,2007 and 2006, are derived from, and are qualified by reference to, the consolidated financial statements that have been audited by our independent registeredpublic accounting firm, which are included elsewhere in this Form 10-K. The consolidated statements of operations data for the years ended June 30, 2004 and2003 and the consolidated balance sheet data at June 30, 2005, 2004 and 2003 are derived from our audited consolidated financial statements not included inthis Form 10-K. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, which include only normalrecurring adjustments, necessary for the fair presentation of the financial data set forth in those statements. The historical results presented below are notnecessarily indicative of future results.51 Years Ended June 30,20072006200520042003(in thousands, except per share data)Consolidated Statements of Operations Data:Net revenue$140,452$52,897$22,377$19,569$2,710Cost of revenue(1)60,41327,49211,1158,4963,027Gross profit80,03925,40511,26211,073(317)Operating expenses:Selling and marketing(1)37,88925,18616,36110,6476,710Research and development(1)26,77517,78811,6557,3115,844General and administrative(1)23,91515,9238,1294,6723,015Total operating expenses88,57958,89736,14522,63015,569Loss from operations(8,540)(33,492)(24,883)(11,557)(15,886)Interest and other income (expense), net3,53056(238)(136)46Loss before provision for income taxes and cumulativeeffect of change in accounting principle(5,010)(33,436)(25,121)(11,693)(15,840)Provision for income taxes1,444258683—Loss before cumulative effect of change in accountingprinciple(6,454)(33,694)(25,189)(11,696)(15,840)Cumulative effect of change in accounting principle,net of tax of $0838————Net loss(5,616)(33,694)(25,189)(11,696)(15,840)Deemed dividend(2)————(339)Net loss attributable to common stockholders$(5,616)$(33,694)$(25,189)$(11,696)$(16,179)Net loss per common share, basic and diluted:Loss before cumulative effect of change inaccounting principle$(0.21)$(2.11)$(1.76)$(1.00)$(1.53)Cumulative effect of change in accountingprinciple0.03————Basic and diluted net loss per share$(0.18)$(2.11)$(1.76)$(1.00)$(1.53)Weighted average common shares outstanding usedin computing net loss per share:Basic and diluted30,76415,99714,28311,73710,608(1) Includes stock-based compensation expense as follows:Years Ended June 30,20072006200520042003(in thousands)Cost of revenue$1,205$863$454$190$71Selling and marketing$3,958$2,569$1,903$826$453Research and development$2,448$1,574$1,157$648$319General and administrative$5,016$3,237$2,812$785$451 52(2) In accordance with EITF Issue No. 98-5, “Accounting for Convertible Securities With Beneficial Conversion Features or Contingently AdjustableConversion Features” and EITF Issue No. 00-27, “Application of EITF Issue No. 98-5 to Certain Convertible Instruments,” we recognized deemeddividends as related to the contingent beneficial conversion features of our preferred stock.Years Ended June 30,200720062005Selected Operating Data:Number of CyberKnife systems installed per yearUnited States222214International11610Total332824 As of June 30,20072006200520042003(in thousands)Consolidated Balance Sheet Data:Cash and cash equivalents$204,830$27,856$17,024$9,722$6,676Deferred cost of revenue$61,231$56,588$36,476$22,443$10,987Total assets$332,109$138,623$86,860$52,443$32,347Short-term debt$—$—$2,893$817$277Long-term debt, net of current portion$—$—$—$—$1,151Deferred revenue$154,257$149,664$89,975$47,953$25,703Working capital (deficit)$148,522$(3,783)$2,181$(163)$489Redeemable convertible preferred stock$—$27,504$27,504$27,504$27,504Stockholders’ equity (deficiency)$125,443$(80,855)$(56,172)$(38,861)$(33,048) 53Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion of our consolidated financial condition and results of operations in conjunction with the financialstatements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans,estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause orcontribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”OverviewWe have developed the first and only commercially available intelligent robotic radiosurgery system, the CyberKnife system, designed to treat solidtumors anywhere in the body as an alternative to traditional surgery. The CyberKnife system combines continuous image-guidance technology with a compactlinear accelerator that has the ability to move in three dimensions according to the treatment plan. Our image-guidance technology continuously acquires imagesto track a tumor’s location and transmits any position corrections to the robotic arm prior to delivery of each dose of radiation. Our compact linear accelerator,or linac, is a compact radiation treatment device that uses microwaves to accelerate electrons to create high-energy X-ray beams to destroy the tumor. Thiscombination, which we refer to as intelligent robotics, extends the benefits of radiosurgery to the treatment of tumors anywhere in the body. The CyberKnifesystem autonomously tracks, detects and corrects for tumor and patient movement in real-time during the procedure, enabling delivery of precise, high doseradiation typically with sub-millimeter accuracy. The CyberKnife procedure requires no anesthesia, can be performed on an outpatient basis and allows forthe treatment of patients that otherwise would not have been treated with radiation or who may not have been good candidates for surgery. In addition, theCyberKnife procedure avoids many of the potential risks and complications that are associated with other treatment options and is more cost effective thantraditional surgery.In July 1999, we obtained 510(k) clearance from the FDA to market the CyberKnife system for the treatment of tumors and certain other conditions inthe head, neck and upper spine. In August 2001, we received FDA clearance for the treatment of tumors anywhere in the body where radiation treatment isindicated. In September 2002, we received a CE mark for the sale of the CyberKnife system in Europe. The CyberKnife system has also been approved forvarious indications in Japan, Korea, Taiwan, China and other countries. Our customers have reported that over 35,000 patients worldwide have been treatedwith the CyberKnife system since its commercial introduction.In the United States, we sell to customers, including hospitals and stand-alone treatment facilities, directly through our sales organization. Outside theUnited States, we sell to customers in over 45 countries directly and through distributors. We have sales and service offices in Paris, France, Hong Kong,China and Tokyo, Japan. As of June 30, 2007, we had 51 sales personnel in our sales organization.Our CyberKnife systems are either sold to our customers or placed with our customers pursuant to our shared ownership programs. As of June 30, 2007,we had 109 CyberKnife systems installed at customer sites, including 99 sold and 10 pursuant to shared ownership programs. Of the 109 systems sold andinstalled, 71 are in the Americas, 26 are in Asia and 12 are in Europe.Under our shared ownership program, we retain title to the CyberKnife system while the customer has use of the system. Our shared ownershipcontracts generally require a minimum monthly payment from the customer, and we may earn additional revenue through the use of the system at the site.Generally, minimum monthly payments are equivalent to the revenue generated from treating three to four patients per month, and any revenue received fromadditional patients is shared between us and the customer. We expect to continue to offer shared ownership programs to new customers and believe the numberof54installed units pursuant to and revenue from our shared ownership programs to increase in future periods, but to decrease as a percentage of total revenue aswe recognize revenue from CyberKnife systems sold to customers.The shared ownership programs typically have a term of five years, during which the customer has the option to purchase the system at pre-determinedprices. As of June 30, 2007, we had installed 10 systems under our shared ownership programs. During the year ended June 30, 2007, two former sharedownership program customers had each purchased their CyberKnife system. The total selling price in the aggregate for both systems was $6.8 million, ofwhich $3.0 million has been recognized as product revenue and $3.8 million remains recorded in deferred revenue at June 30, 2007.We manufacture and assemble our CyberKnife systems at our manufacturing facility in Sunnyvale, California. We purchase major components,including the robotic manipulator, treatment table or robotic couch, magnetron, which creates the microwaves for use in the linear accelerator, imaging camerasand computers, from outside suppliers, some of which are single source. Our reliance on single source suppliers could harm our ability to meet demand forour products in a timely and cost effective manner. However, in most cases, if a supplier were unable to deliver these components, we believe that we would beable to find other sources for these components subject to any regulatory qualifications, if required. We manufacture certain other electronic and electricalsubsystems, including the linear accelerator. We then assemble and integrate these components with our proprietary software and perform testing prior toshipment to customer sites.We generate revenue by selling the CyberKnife system and by providing ongoing services and upgrades to customers following installation of theCyberKnife system. The current list price for the CyberKnife system is approximately $4.2 million, which includes installation, initial training and a one-year warranty. We also offer optional hardware and software, technical enhancements and upgrades to the CyberKnife system, as part of our multiyear serviceplans. Currently, our most comprehensive service plan is our Diamond Elite multiyear service plan, or Diamond plan. Under our Diamond plan, customersare eligible to receive up to two upgrades per year, when and if available. The Diamond plan has a list price of $460,000 per year, and provides for annualrenewal for four years including the one-year warranty period. The customer may cancel the service plan at any time. As of June 30, 2007, 77 of our customershad purchased service plans. Prior to introducing our Diamond plan, we offered legacy service plans, some of which continue to have future upgradeobligations. In these cases, revenue, including Cyberknife product revenue, is recognized ratably over the remaining life of the contract once all upgradeobligations have been satisfied.The CyberKnife procedure is currently covered and reimbursed by Medicare and other governmental and non-governmental third-party payors. Medicarecoverage currently exists in the hospital outpatient setting and in the free-standing clinic setting. For 2007, the CMS issued a final rule that resulted in adownward adjustment to the reimbursement rates for treatments using our technology in the hospital outpatient department. For 2007, under the finalizedMedicare payment rules, the national payment rates for procedures billed using Medicare billing codes for treatments using the CyberKnife system are $3,896for the first treatment and $2,645 for each treatment thereafter, up to a maximum of five treatments, which is an approximately 25 to 29 percent reduction ascompared to 2006 payment rates. The implementation of this reimbursement reduction did not have a material impact on our consolidated financial position orresults of operations for the year ended June 30, 2007. For 2008, CMS has proposed an increase in payment rates as compared to 2007. The proposed paymentrates for 2008 are $3,918 for the first treatment and $3,017 for each treatment thereafter. However, we cannot assure you that these proposed payment rateswill be implemented as proposed.Our total net revenue was $140.5 million, $52.9 million and $22.4 million during the years ended June 30, 2007, 2006 and 2005, respectively. Our netloss was $5.6 million, $33.7 million and $25.2 million55during the years ended June 30, 2007, 2006 and 2005, respectively. Our net cash provided by operating activities was $11.6 million, $22.1 million and$14.4 million during the years ended June 30, 2007, 2006 and 2005, respectively. As of June 30, 2007, our backlog was approximately $618.8 million.Our future success will depend in large part on our ability to establish and maintain a competitive position in the market. To compete successfully, wewill need to continue to demonstrate the advantages of our products and technologies over alternative procedures, products and technologies, and convincephysicians and other healthcare decision makers of the advantages of our products and technologies. Our business and sales and installation cycle does notimmediately create recognizable revenue. As such, we must invest in sales and marketing activities 12 to 18 months prior to realizing the revenue from thoseactivities. Our ability to achieve and maintain long-term profitability is largely dependent on our ability to successfully market and sell the CyberKnife systemand to control our costs and effectively manage our growth.Material Weaknesses in Internal ControlsIn connection with the audit of our consolidated financial statements for the years ended June 30, 2007, 2006 and 2005, our independent registered publicaccounting firm identified material weaknesses and significant deficiencies in our internal controls over financial reporting. Material weaknesses andsignificant deficiencies relate to a lack of segregation of duties, inadequate review procedures and the misapplication of accounting policies, related to revenuerecognition and stock-based compensation.Our efforts to remediate these material weaknesses in our internal controls over financial reporting consist of the following corrective actions: (i) hiringand training additional, qualified finance and accounting personnel; and (ii) strengthening our processes and procedures related to complex revenue recognitionand equity transactions. However, even after these corrective actions are implemented, the effectiveness of our controls and procedures may be limited by avariety of risks.Although we have taken measures to remediate the material weaknesses as well as other significant deficiencies and control deficiencies, we cannot assureyou that we have identified all, or that we will not in the future have additional material weaknesses, significant deficiencies and control deficiencies.Financial OperationsSales and Installation CycleThe CyberKnife system has a relatively long sales and installation cycle because it is a major capital item and requires the approval of seniormanagement at purchasing institutions. The typical sales and installation cycle is 12 to 18 months in duration and involves multiple steps. Initial steps mayinclude pre-selling activity followed by execution of a letter of intent, or LOI, which is typically non-binding in nature but which sets forth the customer’sintention to acquire a CyberKnife as well as, in the case of a purchase transaction, the proposed purchase price for the system. The next step is typically theexecution of a terms agreement setting forth the business and economic terms for the purchase or acquisition of the CyberKnife system and multiyear serviceplan. After execution of a terms agreement, the customer typically has a 30 to 45 day window in which to complete final negotiation of legal terms for thepurchase or acquisition of the CyberKnife system. We bifurcated the process of negotiating agreements on business and legal terms in order to reduce the levelof sales force involvement in negotiation of legal terms and improve the efficiency of our customer contracting process. The last step in the sales andinstallation cycle is installation of the CyberKnife system. Prior to installation, a purchasing institution must typically obtain a radiation device installationpermit, and in some cases, a certificate of need, both of which must be granted by state and local government bodies. In addition, the purchasing institutionmust build a radiation shielded facility or upgrade an existing facility to house the CyberKnife system. On average it takes three months from the signing of anLOI to the execution of a terms agreement. We typically receive a deposit at the time the56terms agreement is entered into, and the remaining balance for the purchase of the CyberKnife system upon installation. The customer also typically selects aservice plan at the time of signing a CyberKnife system terms agreement and enters into the service plan agreement prior to installation of the system.Upon installation, we typically recognize the CyberKnife system purchase price minus the fair value of one year of service. We recognize the fair value ofthe first year of service as revenue pro rata over the twelve months following installation. In addition, if the customer has purchased our Diamond plan andassuming annual renewals, we would receive a $460,000 payment at the beginning of each of the second, third and fourth years of the multiyear service planand recognize the revenue pro rata over each year.Legacy Service PlansPrior to introducing our Diamond plan, we offered a Platinum Elite multiyear service plan, or Platinum plan. These legacy service plans are structured sothat we have an obligation to deliver two upgrades per year over the course of the multiyear service plan. If we fail to deliver the upgrades, our customers areentitled to receive refunds of up to $200,000. Since November 2005, we have not offered these legacy service plans to new customers. To date no refunds havebeen required or are due pursuant to these multiyear service plans.The Platinum plan obligates us to deliver two upgrades per year during the term of the contract. We have not established fair value for those futureobligations; hence, generally accepted accounting principles in the United States, or GAAP, requires that we cannot begin to recognize any of the revenuederived from the sale of the CyberKnife system or the associated service plans until all upgrade obligations have been fulfilled. Therefore, the payments madeby our customers who have our legacy Platinum plan are categorized as deferred revenue and are recognized as revenue when we fulfill all obligations to deliverupgrades. Once we fulfill all upgrade obligations with respect to a specific Platinum plan, we ratably recognize the revenue from the sale of the CyberKnifesystem and the Platinum plan over the remaining life of the contract.WarrantyAll customers purchasing a CyberKnife system receive a one-year warranty. In the event that a customer does not purchase a multiyear service plan, werecognize the CyberKnife system purchase price minus the fair value of one year of support upon installation. We recognize the value of one year of supportpro rata over the twelve months following installation. If the customer does purchase a multiyear service plan, the revenue recognition is as described above.Shared Ownership Programs RevenueAs of June 30, 2007, our shared ownership programs involved U.S. sites only. We recognize revenue monthly from our shared ownership programs thatconsists of a minimum monthly payment. We also recognize usage-based revenue in excess of the monthly minimum based on usage reports from ourcustomers. We recognized revenue from shared ownership programs of $10.1 million, $8.1 million and $8.1 million for the years ended June 30, 2007, 2006and 2005, respectively. In limited cases, we received nonrefundable upfront payments from shared ownership program customers which are treated as deferredrevenue and recognized over the term of the contract.The CyberKnife system shared ownership systems are recorded within property and equipment and are depreciated over their estimated life of ten years.Depreciation and warranty expense attributable to shared ownership systems are recorded within cost of shared ownership programs as they are incurred.57Japan Customized Service RevenueIn May and December 2003, we entered into separate contractual arrangements to deliver customized upgrade services to our distributor in Japan for22 CyberKnife systems previously sold. These customized upgrade services consist of two upgrade levels and are being delivered over an extended periodconcurrent with the distributor’s efforts to coordinate delivery with their end user customers. Once the obligations under the upgrade programs for these22 systems are complete, we do not plan to offer this customized service program and will instead be offering our standard multiyear service plans.International Sales RevenueFor international sales, we recognize revenue once we have met all of our obligations associated with the purchase agreement, other than for undeliveredservice elements for which we have vendor specific objective evidence, or VSOE, of fair value. In most cases, this occurs after the distributor has shipped theunit to the end user, assuming all other obligations have been satisfied. Payments are sometimes secured through letters of credit. In situations where we aredirectly responsible for installation, we recognize revenue once we have installed the CyberKnife system and have confirmed performance againstspecification.In November 2005, we introduced the Ruby multiyear service plan, or Ruby plan, for international customers. Under the Ruby plan, customers areeligible to receive software only upgrades when and if available. We expect to recognize revenue for Ruby plans in a manner similar to revenue recognitionunder our Diamond plans.In situations with legacy plans where we have future obligations related to software upgrades that are subject to potential refunds, we defer revenue fromthe sale and service of the CyberKnife system until the final upgrade has been delivered and accepted. After we have delivered all upgrades associated with aservice plan and thus eliminated any contractual right to a refund, we ratably recognize the revenue from the sale of the CyberKnife system and the plan overthe remaining life of the contract or until we have VSOE of the fair value of remaining undelivered elements. Net revenue from international customers was$49.3 million, $12.1 million and $8.1 million for the years ended June 30, 2007, 2006 and 2005, respectively.BacklogWe previously defined backlog as the sum of the following two components: deferred revenue and future payments that our customers are contractuallycommitted to make, but which we have not yet received. Beginning with the quarter ended March 31, 2007, we revised our definition of backlog to consist ofthe sum of deferred revenue, future payments that our customers are contractually committed to make and signed contingent contracts that we believe have asubstantially high probability of being booked as revenue from CyberKnife system purchase agreements, service plans and minimum payment requirementsassociated with our shared ownership programs. We adopted this new definition of backlog in part because of the changes in our customer contracting processunder which customers initially enter into terms agreements setting forth the business and economic terms for purchase or acquisition of a CyberKnife systemand then have a specified time frame in which to negotiate legal terms. Contingencies associated with contingent contracts that are included within backlog mayinclude final negotiation and agreement upon our legal terms for the purchase or acquisition of the CyberKnife system, state or local government approval of acertificate of need for the installation of a radiosurgery system, approval by the board of directors of the hospital or other purchaser of the system andestablishment of financing and legal entities by purchasers of systems. We review, on a quarterly basis with respect to each contingent contract included inbacklog, whether customer engagement and progress toward satisfaction of contingencies warrants continued inclusion of the contract within backlog.58As of June 30, 2007, our backlog under this new definition was approximately $618.8 million. Of the total backlog, $321.3 million representedCyberKnife system sales, and $297.5 million represented revenue from service plans and other recurring revenues. We anticipate that this backlog will berecognized over the next five years as installations occur, upgrades are delivered and services are provided. Although backlog includes contractualcommitments from our customers, we may be unable to convert all of this backlog into recognized revenue due to factors outside our control.Results of OperationsOverviewOur results of operations are divided into the following components:Net revenue. Our net revenue consists primarily of product revenue (revenue derived from the sale of CyberKnife systems and the sale of linacs forother uses), shared ownership programs revenue (revenue generated from shared ownership programs), services revenue (revenue generated from sales of plansand training) and other revenue (revenue from Japan upgrade services).Cost of revenue. Cost of revenue consists primarily of material, labor and overhead costs. In future periods we expect cost of revenue to decrease as apercentage of total net revenue due to improved absorption of manufacturing overhead costs associated with increased production volumes, improvedefficiencies for supplies and materials and improved labor and manufacturing efficiencies.Selling and marketing expenses. Selling and marketing expenses consist primarily of costs for personnel and costs associated with participation inmedical conferences, physician symposia, and promotional activities. In future periods, we expect selling and marketing expenses to grow in absolute terms aswe increase headcount and further increase participation in trade shows and symposia and invest in other marketing and promotional activities, but todecrease as a percentage of total net revenue as we leverage our existing infrastructure and realize economies of scale.Research and development expenses. Research and development expenses consist primarily of activities associated with our product development,regulatory, and clinical organizations. In future periods, we expect research and development expenses to grow in absolute terms as we increase headcount anddevelopment activities, but to decrease as a percentage of total net revenue as we leverage our existing infrastructure and realize economies of scale.General and administrative expenses. General and administrative expenses consist primarily of compensation and related costs for finance andhuman resources, and expenses related to accounting, legal and other consulting fees. In future periods, we expect general and administrative expenses to growin absolute terms as we become subject to the reporting requirements of a public company and incur additional costs related to the overall growth of ourbusiness, but to decrease as a percentage of total net revenue as we leverage our existing infrastructure and realize economies of scale.Interest and other income. Interest and other income consists primarily of interest earned on our cash and cash equivalents.Interest and other expense. Interest and other expense consists primarily of losses from the disposal of property and equipment and foreign exchangetransaction losses.Deferred Revenue—Legacy Multiyear Service PlansWe are required to defer all of the revenue associated with our legacy multiyear service plans, including our Platinum and Gold service plans, until wehave satisfied all of the specified obligations related to the delivery of upgrades to the CyberKnife system during the life of the service plan. This includesdeferring the cash received for the purchase of the CyberKnife system itself and multiyear service59plans until we have delivered all upgrades which the customer is eligible to receive. Once we have satisfied our obligations for delivery of upgrades under theplans, we recognize revenue ratably over the remaining life of the service plan. We have not offered these legacy multiyear service plans to new customers sincewe introduced our Diamond plan in October 2005, but have provided service for 46 legacy plans as of June 30, 2007. Therefore, our deferred revenue has beenhigher in certain periods where we have installed more units with legacy contracts, and it will be higher until we can satisfy the contractual obligations andrecognize the revenue associated with those installed units. This has led to significant fluctuations in total net revenue in historical periods. Consequently, ouroperating expenses as a percentage of total net revenue are relatively higher, when compared to companies at a similar stage of commercialization, in the periodswhere we have had a higher mix of deferred revenue and thus lower total net revenue. In future periods, we expect our deferred revenue, and operating expensesas a percentage of total net revenue, to decline.Years Ended June 30, 2007, 2006 and 2005Net revenue.Years Ended June 30,200720062005(in thousands)Net revenue$140,452$52,897$22,377Products$110,320$36,089$9,636Shared ownership programs$10,090$8,145$8,067Services$16,860$4,848$3,050Other$3,182$3,815$1,624 Total net revenue increased $87.6 million from fiscal 2006 to fiscal 2007. Products revenue increased $74.2 million from fiscal 2006 to fiscal 2007,primarily attributable to an increase in the number of CyberKnife system units shipped and installed and a change in the mix of service plans. In the yearended June 30, 2007, 33 CyberKnife system units were installed, including 31 units sold and two units attributable to our shared ownership programs,compared to 28 units installed, including 25 units sold and 3 units attributable to our shared ownership program in the year ended June 30, 2006. Inaccordance with our revenue recognition policy and reflecting the terms of our service plans, we recognized revenue from the sale of 33 and 11 CyberKnifesystems during the years ended June 30, 2007 and 2006, respectively. In addition, we satisfied our upgrade delivery obligations for nine units and one unitattributable to our legacy multiyear service plans during the years ended June 30, 2007 and 2006, respectively, and began recognizing revenue ratably over theremaining lives of the service plans. Shared ownership revenue increased $1.9 million from fiscal 2006 to fiscal 2007, primarily due to an increase in patienttreatment volume at the existing sites as well as an increase in the number of shared ownership sites. Services revenue increased $12.0 million from fiscal2006 to fiscal 2007, primarily attributable to an increase in the number of customer sites under a service plan. Revenue from upgrade services in Japan,classified as “Other revenue” in our consolidated statements of operations, decreased $633,000 from fiscal 2006 to fiscal 2007.60Total net revenue increased $30.5 million from fiscal 2005 to fiscal 2006. Products revenue increased $26.5 million from fiscal 2005 to fiscal 2006,primarily attributable to an increase in the number of CyberKnife system units shipped and installed and a change in the mix of service plans. In the yearended June 30, 2006, 28 CyberKnife system units were installed, including 25 units sold and three units attributable to our shared ownership programs. Inthe year ended June 30, 2005, 24 were installed, including 21 that were sold, and three that were attributable to our shared ownership programs. Pursuant toour service plans, we recognized revenue from the sale of 11 and two CyberKnife systems in fiscal 2006 and fiscal 2005, respectively. Services revenueincreased $1.8 million from fiscal 2005 to fiscal 2006, primarily attributable to an increase in the number of customer sites under a service plan. Otherrevenue increased $2.2 million from fiscal 2005 to fiscal 2006.Cost of revenue.Years Ended June 30,200720062005(Dollars in thousands)Cost of revenue$60,413$27,492$11,115% of net revenue43.0%52.0%49.7% Total cost of revenue increased $32.9 million from fiscal 2006 to fiscal 2007. The increase was primarily attributable to an increase in the number ofCyberKnife systems installed and recognized as revenue during fiscal 2007 compared to fiscal 2006, as well as an increase of $342,000 in stock-basedcompensation expense. The decrease in total cost of revenue as a percentage of total net revenue from fiscal 2006 to fiscal 2007 was a result of improvedabsorption of manufacturing overhead costs associated with increased production volumes of CyberKnife systems and the significant increase in productrevenue, which typically has a lower cost of revenue as a percentage of revenue than other revenue streams.Total cost of revenue increased $16.4 million from fiscal 2005 to fiscal 2006. The increase was primarily attributable to an increase in CyberKnifesystems installed and recognized as revenue during fiscal 2006 compared to fiscal 2005, as well as an increase of $409,000 in stock-based compensationexpense. The increase in total cost of revenue as a percentage of total net revenue was a result of costs associated with introducing our latest generationCyberKnife system.Selling and marketing expenses.Years Ended June 30,200720062005(Dollars in thousands)Sales and marketing$37,889$25,186$16,361% of net revenue27.0%47.6%73.1% Selling and marketing expenses increased $12.7 million from fiscal 2006 to fiscal 2007. The increase was primarily attributable to an increase of$3.8 million in salary and related costs largely due to increased headcount, an increase of $3.3 million in consulting expenses due to an increase in promotionalactivities, an increase of $1.8 million in marketing and promotional activities, an increase of $1.2 million in travel expense, an increase of $914,000 in salescommissions expenses resulting from increased sales volume and an increase of $1.4 million in stock-based compensation expense.Selling and marketing expenses increased $8.8 million from fiscal 2005 to fiscal 2006. The increase was primarily attributable to an increase of$3.0 million in salary and related costs largely due to increased headcount, an increase of $1.4 million in travel and related expenses attributable to selling andmarketing activities, an increase of $1.1 million in consulting expenses, an increase of $1.0 million in marketing and61promotional activities, an increase of $820,000 in sales commission expenses resulting from increased sales volume and an increase of $666,000 in stock-based compensation expense.Research and development expenses.Years Ended June 30,200720062005(Dollars in thousands)Research and development$26,775$17,788$11,655% of net revenue19.1%33.6%52.1% Research and development expenses increased $9.0 million from fiscal 2006 to fiscal 2007. The increase was primarily attributable to an increase of$5.7 million in salary and related costs largely due to increased headcount, an increase of $1.5 million in purchases of non-inventory materials, an increaseof $874,000 of stock-based compensation expense, an increase in consulting and outside services of $227,000 and an increase of $214,000 in travel expenses.Research and development expenses increased $6.1 million from fiscal 2005 to fiscal 2006. The increase was primarily attributable to an increase of$3.4 million in salary and related costs largely due to increased headcount, an increase of $1.5 million in consulting services, an increase of $515,000 inpurchases of non-inventory materials and an increase of $417,000 in stock-based compensation expense.General and administrative expenses.Years Ended June 30,200720062005(Dollars in thousands)General and administrative$23,915$15,923$8,129% of net revenue17.0%30.1%36.3% General and administrative expenses increased $8.0 million from fiscal 2006 to fiscal 2007. The increase was primarily attributable to an increase of$5.2 million in salary and related costs largely due to increased headcount, an increase of $1.8 million in stock-based compensation expense, an increase of$567,000 in non-inventory materials and an increase of $343,000 in travel expense.General and administrative expenses increased $7.8 million from fiscal 2005 to fiscal 2006. The increase was primarily attributable to an increase inlegal and accounting costs of $3.4 million, an increase in salary and related costs of $2.1 million, an increase of $565,000 in other consulting fees and anincrease of $425,000 in stock-based compensation expense.Interest and other income.Years Ended June 30,200720062005(Dollars in thousands)Interest and other income$4,261$503$200% of net revenue3.0%1.0%0.9% Interest and other income increased $3.8 million from fiscal 2006 to fiscal 2007. The increase was primarily due to larger cash balances kept in interestbearing accounts. The significant increase in cash balances held in interest bearing accounts was primarily due to the investing of the proceeds from our initialpublic offering.62Interest and other income increased $303,000 from fiscal 2005 to fiscal 2006. The increase was due to larger cash balances kept in interest bearingaccounts.Interest and other expense.Years Ended June 30,200720062005(Dollars in thousands)Interest and other expense$731$447$438% of net revenue0.5%0.8%2.0% Interest and other expense increased $284,000 from fiscal 2006 to fiscal 2007. The increase was primarily due to an increase in loss from the disposal ofproperty and equipment and an increase in loss from foreign exchange transactions, offset by a decrease in interest expense on advanced payments receivedfrom third-party financing arrangements in connection with our shared ownership programs.Cumulative effect of change in accounting principle. For the year ended June 30, 2007, we recorded a cumulative effect of a change in accountingprinciple of $838,000 related to our adoption effective July 1, 2006, of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-BasedPayment, an amendment of FASB Statements Nos. 123 and 95 (“SFAS 123R”), related to our accounting for stock-based compensation. We had previouslyaccounted for our stock-based compensation expense in accordance with SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), whichpermitted us to either estimate forfeitures in determining our stock-based compensation expense or to adjust the expense at the time forfeitures occurred.SFAS 123R requires that we estimate forfeitures. Since we had previously adjusted our stock-based compensation expense at the time forfeitures occurred, wehave included in our consolidated statement of operations for the year ended June 30, 2007 a cumulative effect of a change in accounting principle for theadjustment to reflect forfeitures related to compensation expense recorded in prior periods.Provision for income taxes. The provision for income taxes increased $1.2 million from fiscal 2006 to fiscal 2007. We recorded an increase in foreigntaxes of $308,000 as compared to prior year primarily due to increased activity and higher net income in our foreign jurisdictions. We also recorded an increasein federal and state AMT taxes of $878,000 primarily due to the increased recognition of revenue for tax purposes while such revenue continues to be deferredfor book purposes.The provision for income taxes increased from $68,000 for the year ended June 30, 2005 to $258,000 for the year ended June 30, 2006 due to an increasein foreign operations, as well as federal alternative minimum tax and additional state taxes.As of June 30, 2007, we had federal and state net operating loss carryforwards of $12.1 million and $1.9 million, respectively. These federal and statenet operating loss carryforwards are available to offset against future taxable income, if any, in varying amounts and will begin to expire in varying amountsbeginning in 2025 and 2017 for federal and state purposes, respectively. We also had federal and state research and development tax credit carryforwards ofapproximately $2.2 million. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2008 and 2025. Theamounts of and benefits from net operating loss carryforwards may be subject to a substantial annual limitation due to changes in ownership under theInternal Revenue Code of 1986. The annual limitation may result in the expiration of our net operating losses before they can be utilized. In addition, amongother matters, realization of the entire deferred tax asset is dependent on our ability to generate sufficient taxable income prior to the expiration of thecarryforwards. While we had taxable income in 2007, based on the available objective evidence and the history of losses, we cannot conclude that the netdeferred tax assets will be realized. Accordingly, we have recorded a valuation allowance equal to the amount of our net deferred tax assets.63Stock-Based Compensation ExpenseEffective July 1, 2006, we adopted SFAS 123R using the modified prospective method under which compensation cost is recognized beginning with theeffective date (a) based on the requirements of SFAS 123R for all share-based payments granted or modified after the effective date and (b) based on theprevious requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date.SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as anoperating cash flow as required under previous literature. This requirement may reduce future net operating cash flows and increase net financing cash flows.SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary in subsequent periods if actual forfeitures differ from initialestimates Stock-based compensation expense was recorded net of estimated forfeitures for the year ended June 30, 2007 such that expense was recorded only forthose stock-based awards that are expected to vest. For the year ended June 30, 2007, we recorded $12.6 million of stock-based compensation expense, net ofestimated forfeitures, for stock options, ESPP options and restricted stock units granted to employees.For the year ended June 30, 2007, we recorded a cumulative effect of a change in accounting principle of $838,000 related to the adoption of SFAS 123Rsince we had previously adjusted stock-based compensation expense at the time forfeitures occurred in accordance with SFAS 123. The cumulative effect ofthis change in accounting principle reflects forfeitures related to periods prior to July 1, 2006.As of June 30, 2007, there was approximately $45.0 million, net of forfeitures, of unrecognized compensation cost related to unvested stock options,ESPP options and restricted stock units which we expect to be recognized over a weighted average period of 2.96 years.Prior to July 1, 2006, stock-based compensation expense was reflected on our statement of operations in accordance with SFAS 123 and SFAS No. 148,Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS 148”). In accordance with the requirements of SFAS 123, we recordeddeferred stock-based compensation for the estimated fair value of options awarded on the date of grant. This deferred stock-based compensation was amortizedto expense over the period during which the options become exercisable, generally four years. During the years ended June 30, 2006 and 2005, we reversed$1.7 million and $1.2 million of deferred stock-based compensation expense, respectively, related to cancellations of unvested options of certain employeeswho had been granted stock options and subsequently terminated their employment with us. During the years ended June 30, 2006 and 2005 we recorded$7.9 million and $5.5 million of stock-based compensation expense, respectively, for stock options granted to employees.During the years ended June 30, 2007, 2006 and 2005, we recognized $172,000, $186,000 and $164,000 of stock-based compensation expense,respectively, for stock options granted to non-employees. For certain stock option grants, we made modifications to the option terms. These modificationsincluded extensions of the vesting period and acceleration of vesting. During the years ended June 30, 2007, 2006 and 2005, we recognized $0, $112,000 and$631,000 of stock-based compensation expense, respectively, for modifications of stock options granted.High Energy Systems AcquisitionIn January 2005, we acquired AS&E’s High Energy Systems, or HES, business for $8.4 million. This acquisition included the intellectual propertyassociated with our X-band linac and included the hiring of key employees from AS&E. HES had been the sole source manufacturer of the linac used in theCyberKnife system. We believe that the HES acquisition stabilizes the sourcing of a component critical to the CyberKnife system and provides opportunitiesfor focused cost reduction efforts to improve overall64product margins. In addition to making and developing our own compact linacs, we supply linacs to AS&E for non-destructive testing and national securityuses and to a medical device manufacturer for medical applications.Liquidity and Capital ResourcesWe have used cash from operations and the sale of our equity securities to fund our working capital needs and our capital expenditure requirements. AtJune 30, 2007, we had $204.8 million in cash and cash equivalents. We believe that we have sufficient cash resources and anticipated cash flows to continuein operation for at least the next 12 months.In February 2007, we completed our initial public offering in which a total of 18,399,998 shares were sold, including 8,000,000 shares sold by sellingstockholders at an initial public offering price of $18.00 per share. We raised a total of $187.2 million in gross proceeds, or approximately $170.6 million innet proceeds after deducting underwriting discounts and commissions of $13.1 million and other offering costs of $3.5 million.Years Ended June 30, 2007, 2006 and 2005Cash Flows From Operating Activities. Net cash provided by operating activities was $11.6 million for the year ended June 30, 2007. Our net lossof $5.6 million during fiscal 2007 was offset by non-cash charges of $6.2 million of depreciation and amortization expense, $805,000 of write-down ininventories and $12.6 million of stock-based compensation offset by a cumulative effect of change in accounting principle of $838,000 due to the adoption ofFAS 123R. Other significant working capital changes that contributed to positive cash flows provided by operations in fiscal 2007 included an increase inaccounts payables of $9.5 million, an increase in accrued liabilities of $3.1 million and an increase in deferred revenue, net of deferred cost of revenue of$1.9 million. The increase in accounts payable is due to increases in the volume of our business and the increase in accrued liabilities is due to increases incompensation related accruals due to increased headcount. The increase in deferred revenue, net of deferred cost of revenue, was primarily a result of thetiming differences between invoicing customers under service contracts and the recognition of revenue over the contractual service period, and the continuedinstallation of units covered by our legacy service plans. Offsets to positive cashflow include an increase in inventories of $8.8 million, an increase in prepaidexpenses and other current assets of $5.1 million and an increase in accounts receivable of $936,000 due to increases in the volume of our business, and adecrease in customer advances of $1.5 million due to an increase in the number of systems shipped.Net cash provided by operating activities was $22.1 million for the year ended June 30, 2006. Our net loss of $33.7 million during fiscal 2006 wasoffset by a $39.6 million increase in deferred revenue, net of deferred cost of revenue, non-cash charges of $8.2 million related to stock-based compensationcharges and $3.8 million of depreciation and amortization expense on purchases of property and equipment. The increase in deferred revenue, net of deferredcost of revenue, was primarily a result of the timing differences between invoicing customers under service contracts and the recognition of revenue over thecontractual service period, and the continued installation of units covered by our legacy service plans. Other significant working capital changes thatcontributed to positive cash flow in fiscal 2006 included an increase in customer advances of $10.9 million due to increased payments made by customers inadvance of product shipments and an increase in accrued liabilities of $9.4 million primarily due to increases in accrued commissions on higher revenues andother compensation related accruals due to increased headcount. Significant working capital changes that offset positive cash flows in fiscal 2006 included anincrease in accounts receivable of $6.6 million and an increase in inventory of $7.8 million as a result of increased revenues and volumes of orders from ourcustomers.65Net cash provided by operating activities was $14.4 million for the year ended June 30, 2005. Our net loss of $25.2 million during fiscal 2005 wasoffset by a $28.0 million increase in deferred revenue, net of deferred cost of revenue, non-cash charges of $6.3 million related to stock-based compensationcharges and $2.1 million of depreciation and amortization expense on purchases of property and equipment. The increase in deferred revenue, net of deferredcost of revenue, was primarily a result of the continued installation of units covered by our legacy service plans. Other significant working capital changesthat contributed to positive cash flow in fiscal 2005 included customer advances of $3.7 million due to increased payments made by customers in advance ofproduct shipment, an increase in accounts payable of $2.1 million and an increase in accrued liabilities of $1.9 million due to increases in the volume of ourbusiness. Significant working capital changes that offset positive cash flows in fiscal 2005 included an increase in inventory of $5.9 million as a result ofincreased volumes of orders from our customers and inventory acquired in the HES acquisition.Cash Flows From Investing Activities. Net cash used in investing activities was $7.5 million for the year ended June 30, 2007, which was primarilydue to purchases of property and equipment of $7.2 million and investment purchases of $283,000.Net cash used in investing activities was $9.0 million for the year ended June 30, 2006 compared to $8.7 million for the year ended June 30, 2005. Thenet cash used in investing activities in fiscal 2006 was primarily due to purchases of property and equipment of $10.2 million. In fiscal 2005, net cash usedin investing activities was primarily due to purchases of property and equipment of $2.6 million and cash paid for the acquisition of HES of $5.6 million.Cash Flows From Financing Activities. Net cash provided by financing activities was $172.9 million for the year ended June 30, 2007 and wasprimarily attributable to net proceeds from the recently completed initial public offering of $170.6 million, proceeds from the exercise of common stockoptions of $1.7 million and $553,000 of income tax benefits from our employee stock plans.Net cash used in financing activities was $2.2 million for the year ended June 30, 2006 compared to net cash provided by financing activities of$1.6 million for the year ended June 30, 2005. The net cash used in financing activities in fiscal 2006 was due to the payment of a note payable of$3.0 million offset by proceeds from the exercise of common stock options and common stock warrants of $705,000. In fiscal 2005 net cash provided byfinancing activities was attributable to proceeds from the exercise of common stock options and common stock warrants of $1.7 million.Operating Capital and Capital Expenditure RequirementsOur future capital requirements depend on numerous factors. These factors include but are not limited to the following:· revenue generated by sales of the CyberKnife system, shared ownership programs and service plans;· costs associated with our sales and marketing initiatives and manufacturing activities;· rate of progress and cost of our research and development activities;· costs of obtaining and maintaining FDA and other regulatory clearances of the CyberKnife system;· effects of competing technological and market developments; and· number and timing of acquisitions and other strategic transactions.66We believe that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expendituresfor at least 12 months. If these sources of cash and cash equivalents are insufficient to satisfy our liquidity requirements, we may seek to sell additionalequity or debt securities or obtain a credit facility. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. Ifadditional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock andcould contain covenants that would restrict our operations. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If weare unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts.Contractual Obligations and CommitmentsThe following table is a summary of our non-cancelable contractual cash obligations, net of sublease income as of June 30, 2007:Payments due by periodLess thanTotal1 year, net of $108 ofsublease income1 - 3 years(in thousands)Operating leases$7,470$2,694$4,776 Off Balance Sheet ArrangementsWe do not have any significant off balance sheet arrangements.InflationWe do not believe that inflation has had a material impact on our business and operating results during the periods presented.Critical Accounting Policies and EstimatesThe discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have beenprepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments thataffect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, aswell as revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historicalexperience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about thecarrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimatesunder different assumptions or conditions.Our significant accounting policies are more fully described in the notes to our consolidated financial statements included elsewhere in this report. Webelieve the following are our critical accounting policies including the more significant estimates and assumptions used in preparation of our consolidatedfinancial statements.Revenue RecognitionRevenue is generated from the sale of our products, our shared ownership programs, and by providing related services, which include installationservices, post-contract customer support, or PCS, training and consulting. Our products and upgrades to those products include software that is essential tothe67functionality of the products and accordingly, we account for the sale of our products pursuant to Statement of Position (“SOP”) No. 97-2, Software RevenueRecognition (“SOP 97-2”), as amended.We recognize product revenues, for sales of the CyberKnife system, replacement parts and accessories, when there is persuasive evidence of anarrangement, the fee is fixed or determinable, collection of the fee is probable and delivery has occurred as prescribed by SOP 97-2. Payments received inadvance of product shipment are recorded as customer advances and are recognized as revenue or deferred revenue upon product shipment or installation.For arrangements with multiple elements, we allocate arrangement consideration to services and PCS based upon vendor specific objective evidence(“VSOE”) of fair value of the respective elements. VSOE of fair value for the services element is based upon our standard rates charged for the services whensuch services are sold separately or based upon the price established by management having the relevant authority when that service is not yet being soldseparately. When contracts contain multiple elements, and VSOE of fair value exists for all undelivered elements, we account for the delivered elements,principally the CyberKnife system, based upon the “residual method” as prescribed by SOP No. 98-9, Modification of SOP No. 97-2 with Respect toCertain Transactions (“SOP 98-9”). If VSOE of fair value does not exist for the undelivered elements, all revenue is deferred until the earlier of: (1) deliveryof all elements; or (2) establishment of VSOE of fair value for all undelivered elements.For PCS arrangements that include specified or committed upgrades for which we have not established VSOE of fair value, all revenue is deferred andaccounted for as described above. Once all upgrade obligations have been delivered, all revenue is recognized ratably over the remaining life of the PCSarrangement.In fiscal year 2006, we began selling PCS contracts that only provide for upgrades when and if they become available. We have established VSOE of thefair value of PCS in these circumstances. For arrangements with multiple elements that include the CyberKnife system, installation services, training servicesand a PCS service agreement, we recognize the CyberKnife system and installation services revenue following installation and acceptance of the system byapplication of the residual method as prescribed in SOP 98-9 when VSOE of fair value exists for all undelivered elements in the arrangement, including PCS.Other revenues primarily consist of upgrade services revenues related to the sale of specialized services specifically contracted to provide currenttechnology capabilities for units previously sold through a distributor into the Japan market. The upgrade programs include elements where VSOE of fairvalue has not been established for the PCS. As a result, associated revenues are deferred and recognized ratably over the term of the PCS arrangement,generally four years.Service revenue for providing PCS, which includes warranty services, extended warranty services, unspecified when and if available product upgrades,and technical support is deferred and recognized ratably over the service period, generally one year, until no further obligation exists. At the time of sale, weprovide for the estimated incremental costs of meeting product warranty if the incremental warranty costs are expected to exceed the related service revenues.Training and consulting service revenues, that are not deemed essential to the functionality of the CyberKnife system, are recognized as such services areperformed. Costs associated with providing PCS and maintenance services are expensed when incurred, except when those costs are related to units whererevenue recognition has been deferred. In those cases, the costs are deferred until the recognition of the related revenue and are recognized over the period ofrevenue recognition.For all sales, we use either a signed agreement or a binding purchase order as evidence of an arrangement. Sales to third party distributors are evidencedby a distribution agreement governing the relationship together with binding purchase orders on a transaction-by-transaction basis. We record68revenue from arrangements with distributors based on a sell-through method where revenue is recognized upon shipment of the products to the end usercustomer once all revenue recognition criteria are met. These criteria require that persuasive evidence of an arrangement exists, the fees are fixed ordeterminable, collection of the resulting receivable is probable and there is no right of return. Our agreements with customers and distributors do not containproduct return rights.We assess the probability of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness ofthe customer. We generally do not request collateral from our customers. If we determine that collection of a fee is not probable, we will defer the fee andrecognize revenue upon receipt of cash.We also enter into shared ownership programs with certain customers. Under the terms of such programs, we retain title to the CyberKnife system, whilethe customer has use of the system. We generally receive a minimum monthly payment and earn additional revenues from the customer based upon its use ofthe product. We may provide unspecified upgrades to the products during the term of each program, when and if available. Upfront non-refundable paymentsfrom the customer are deferred and recognized as revenue over the contractual period. Revenues from shared ownership programs are recorded as they becomeearned and receivable, and are included within shared ownership revenue in the consolidated statement of operations.The CyberKnife systems associated with our shared ownership programs are recorded within property and equipment and are depreciated over theirestimated useful life of ten years. Depreciation and warranty expense attributable to the CyberKnife shared ownership systems are recorded within cost ofshared ownership programs.We recognize revenue and cost of revenue related to long-term manufacturing contracts using contract accounting on the percentage-of-completion methodin accordance with SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (“SOP 81-1”). Werecognize any loss provisions from the total contract in the period such loss is identified. During the year ended June 30, 2007 no revenues or loss provisionshave been recorded. As of June 30, 2007, $323,000 of costs have been recorded in deferred cost of revenues related to the manufacture of linacs for other uses.Deferred Revenue and Deferred Cost of RevenueDeferred revenue consists of deferred product revenue, deferred shared ownership revenue, deferred service revenue and deferred other revenue. Deferredproduct revenue arises from the timing differences between the shipment of products and satisfaction of all revenue recognition criteria consistent with ourrevenue recognition policy. Deferred shared ownership revenue results from the receipt of advance payments of monthly minimum lease payments, which willbe recognized ratably over the term of the shared ownership program. Deferred service revenue results from the advance payment for services to be deliveredover a period of time, usually one year. Service revenue is recognized ratably over the service period. Deferred other revenue results primarily from the Japanupgrade services programs and is due to timing difference between the receipt of cash payments for those upgrades and final delivery to the end user customer.Deferred cost of revenue consists of the direct costs associated with the manufacture of units, direct service costs and deferred costs associated with the Japanupgrade services for which the revenue has been deferred in accordance with our revenue recognition policies. Deferred revenue, and associated deferred cost ofrevenue, expected to be realized within one year are classified as current liabilities and current assets, respectively.69Stock-Based CompensationPrior to adoption of FAS 123REffective July 1, 2003, we began to account for stock-based employee compensation arrangements in accordance with SFAS 123 and SFAS 148. UnderSFAS 123, stock-based compensation expense is measured on the date of grant based on the fair value of the award. Upon adoption of this standard, weelected to use the retrospective restatement method of transition.We believe that the fair value of the stock options is more reliably measurable than the fair value of the services received. We determined the estimated fairvalue of our common stock in light of the expected completion of our initial public offering. We engaged an unrelated third-party appraisal firm to assistmanagement in this process by providing a valuation analysis. The estimated fair value of stock options granted is calculated at the date of grant using theBlack-Scholes option pricing model, as prescribed by SFAS 123, using fair values of common stock between $4.64 and $7.63 per share and the followingweighted-average assumptions during the years ended June 30, 2006 and 2005:Years Ended June 30, 2006 2005 Risk-free interest rate4.42%3.81%Dividend yield——Expected life6.256.25Expected volatility86.7%94.8% In accordance with the requirements of SFAS 123, we recorded deferred stock-based compensation for the estimated fair value of the options on the dateof grant. This deferred stock-based compensation was amortized to expense over the period during which the options become exercisable, generally four years.During the years ended June 30, 2006 and 2005, we reversed $1.7 million and $1.2 million, respectively, of deferred stock-based compensation related tocancellations of unvested options of certain employees who had been granted stock options and subsequently terminated their employment with the Company.During the years ended June 30, 2006 and 2005, we amortized $7.9 million and $5.5 million, respectively, of stock-based compensation expense for stockoptions granted to employees.Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock options are earned in accordance withSFAS 123 and Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, orin Conjunction with Selling, Goods or Services. We believe that the fair value of the stock options is more reliably measurable than the fair value of theservices received. The estimated fair value of the stock options granted is calculated using the Black-Scholes option pricing model, as prescribed bySFAS 123, using fair values of common stock between $4.64 and $7.63 per share and the following weighted-average assumptions during the year endedJune 30, 2005:Year EndedJune 30, 2005(1)Risk-free interest rate4.20%Dividend yield—Expected life10 yearsExpected volatility71.0%(1) No options granted to non-employees in 2007 or 2006.We recognized $172,000, $186,000 and $164,000 during the years ended June 30, 2007, 2006 and 2005, respectively, of stock-based compensationexpense for stock options granted to non-employees.70For certain stock option grants, we made modifications to the option terms. These modifications included extension of the vesting period and accelerationof vesting. These modifications included extensions of the vesting period and acceleration of vesting. We recognized $0, $112,000 and $631,000 during theyears ended June 30, 2007, 2006 and 2005, respectively, of stock-based compensation expense for modifications of stock options granted.Adoption of SFAS 123REffective July 1, 2006, we adopted SFAS 123R using the modified prospective method under which compensation cost is recognized beginning with theeffective date (a) based on the requirements of SFAS 123R for all share-based payments granted or modified after the effective date and (b) based on theprevious requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date.SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as anoperating cash flow as required under previous guidance.SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary in subsequent periods if actual forfeitures differ from initialestimates. Stock-based compensation expense was recorded net of estimated forfeitures for the year ended June 30, 2007 such that expense was recorded onlyfor those stock-based awards that are expected to vest. For the year ended June 30, 2007, we recorded a cumulative effect of a change in accounting principle of$838,000, net of tax of $0, related to the adoption of SFAS 123R since it had previously adjusted stock-based compensation expense at the time forfeituresoccurred in accordance with SFAS 123. The cumulative effect of this change in accounting reflects estimated forfeitures related to periods prior to July 1,2006.Under SFAS 123R, we estimated the fair value of each option award on the date of grant using the Black-Scholes option-pricing model using theassumptions noted in the table below. Expected volatility is based on the historical volatility of a peer group of publicly traded companies. The expected term ofoptions is based upon the vesting term (i.e., 25% on the first anniversary of the vesting start date and 36 equal monthly installments thereafter) and on itspartial life history. The risk-free rate for the expected term of the option is based on the U.S. Treasury Constant Maturity rate. During the year ended June 30,2007, the estimated fair values of the stock options granted were calculated at each date of grant using the Black-Scholes option pricing model, using fairvalues of common stock between $12.88 and $29.25 per share. Following our IPO, the fair value of our common stock is determined by its closing marketprice as published by the Nasdaq Global Market. During the year ended June 30, 2007, we recognized $10.5 million of stock-based compensation expense forstock options granted to employees. The weighted-average assumptions used to value options granted during the year ended June 30, 2007 were as follows:Year EndedJune 30, 2007Risk-free interest rate4.89%Dividend yield—Expected life6.25Expected volatility74.8% 71The impact of adopting SFAS 123R in the year ended June 30, 2007, was as follows (in thousands, except per share amounts):Year Ended June 30, 2007UsingPreviousSFAS 123RAsAccountingAdjustmentsReportedLoss from operations$(9,724)$1,184$(8,540)Loss before income taxes$(6,194)$1,184$(5,010)Loss before cumulative effect of a change in accounting principle,net of tax$(7,638)$1,184$(6,454)Net loss$(7,638)$2,022$(5,616)Basic and diluted loss per sharePrior to cumulative effect of change in accounting principle$(0.25)$0.04$(0.21)Cumulative effect of change in accounting principle—0.030.03$(0.25)$0.07$(0.18) In January 2007, in connection with our IPO, the Board of Directors approved the 2007 Incentive Award Plan (“2007 Plan”) and 2007 Employee StockPurchase Plan (“ESPP”). The ESPP is deemed compensatory and compensation costs are accounted for under SFAS 123R.Under the ESPP, qualified employees are entitled to purchase common stock at 85% of the fair market value on specified dates. During the year endedJune 30, 2007, the estimated fair value of ESPP shares was calculated at the date of grant using the Black-Scholes option pricing model, using a fair value ofcommon stock of $18.00 per share. Expected volatility is based on the historical volatility of a peer group of publicly traded companies. The expected term isbased upon the offering period of the ESPP. The risk-free rate for the expected term of the ESPP option is based on the U.S. Treasury Constant Maturity rate.For the year ended June 30, 2007, we recognized $441,000 of compensation expense related to its ESPP. The following weighted-average assumptions were usedduring the year ended June 30, 2007:Year EndedJune 30, 2007Risk-free interest rate5.16%Dividend yield—Expected life0.75Expected volatility49.9% In connection with the 2007 Plan, we issued restricted stock units (“RSU’s”) and recognized $1.5 million of stock-based compensation expense, net offorfeitures for restricted stock units granted during the year ended June 30, 2007, at a weighted-average grant date fair value of $28.17.InventoriesInventories are stated at the lower of cost (on a first-in, first-out basis) or market. Excess and obsolete inventories are written down based on historicalsales and forecasted demand, as judged by management. We determine inventory and product costs through use of standard costs which approximate actualaverage costs.Provision for Income TaxesEstimates and significant management judgment occur in the calculation of certain tax liabilities and in the determination of the recoverability of certaindeferred tax assets, which arise from temporary72differences and carryforwards. Due to uncertainties related to our ability to realize our deferred tax assets, we record a valuation allowance equal to the amountof our net deferred tax assets. If we subsequently determine that it is more likely than not we will be able to realize a portion or the full amount of deferred taxassets, we record an adjustment to the deferred tax asset valuation allowance as a credit to earnings in the period such determination is made.Recent Accounting PronouncementsIn February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, The Fair Value Option for Financial Assets andFinancial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”), which allows an entity the irrevocable option to elect fair valuefor the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurementsfor the financial assets and liabilities an entity elects to fair value will be recognized in earnings. SFAS 159 also establishes additional disclosurerequirements. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided that the entity also adoptsSFAS No. 157, “Fair Value Measurement” (“SFAS 157”). We have not yet determined the impact this standard will have on our consolidated financialstatements.In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). This interpretation clarifies theaccounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS109”). FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact this standard will have on ourconsolidated financial statements.In September 2006, the FASB issued SFAS 157. The standard defines fair value and provides a framework for using fair value to measure assets andliabilities. SFAS 157 establishes the principle that fair value should consider characteristics specific to the asset or liability based on the assumptions thatmarket participants would use when pricing the asset or liability. SFAS 157 is effective for the Company beginning in fiscal 2008, though early adoption ispermitted. We have not yet determined the impact this standard will have on our consolidated financial statements.Item 7A. QUANTITATIVE & QUALITATIVE DISCLOSURE ABOUT MARKET RISKWe do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions ortransactions.For direct sales outside the United States it is likely we will sell in the local currency. For the year ended June 30, 2007, all of our executed sales contractswere denominated in U.S. dollars, with the exception of three sales contracts denominated in Euros. Future fluctuations in the value of the U.S. dollar mayaffect the price competitiveness of our products outside the United States. Some of our commissions related to sales of the CyberKnife system are payable inEuros. To the extent that management can predict the timing of payments under these contracts, we may engage in hedging transactions to mitigate such risksin the future.At June 30, 2007 we had $204.8 million of cash and cash equivalents. These amounts were invested primarily in money market funds, U.S. governmentsecurities, corporate bonds and commercial paper and were primarily held for operations. We believe that while the instruments we hold are subject to changesin the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currencyexchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments. However, should interest rates decline,our future interest income will decrease. If overall interest rates had fallen by 10% in the year ended June 30, 2007, our interest income would have decreasedby approximately $426,000, assuming consistent levels.73Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAACCURAY INCORPORATEDINDEX TO CONSOLIDATED FINANCIAL STATEMENTSPageReport of Independent Registered Public Accounting Firm75Consolidated Balance Sheets76Consolidated Statements of Operations77Consolidated Statements of Temporary Equity and Stockholders’ Equity (Deficiency)78Consolidated Statements of Cash Flows80Notes to Consolidated Financial Statements81 74REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and StockholdersAccuray IncorporatedWe have audited the accompanying consolidated balance sheets of Accuray Incorporated and subsidiaries as of June 30, 2007 and 2006, and the relatedconsolidated statements of operations, temporary equity and stockholders’ equity (deficiency), and cash flows for each of the three years in the period endedJune 30, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company isnot required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AccurayIncorporated and subsidiaries as of June 30, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the periodended June 30, 2007 in conformity with accounting principles generally accepted in the United States of America.As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123 (revised2004), Share-Based Payment on a modified prospective basis as of July 1, 2006.Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II, listed in the index offinancial statements, is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has beensubjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relationto the basic financial statements taken as a whole./s/ GRANT THORNTON LLPSan Francisco, CaliforniaAugust 28, 200775Accuray IncorporatedConsolidated Balance Sheets(in thousands, except share and per share amounts)June 30,20072006AssetsCurrent assets:Cash and cash equivalents$204,830$27,856Restricted cash—1Accounts receivable, net of allowance for doubtful accounts of $20 at June 30, 2007 and 200610,10511,698Inventories16,98410,100Prepaid expenses and other current assets7,9373,512Deferred cost of revenue—current30,7094,810Total current assets270,56557,977Property and equipment, net23,93721,945Goodwill4,4954,495Intangible assets, net1,1841,446Deferred cost of revenue—noncurrent30,52251,778Other assets1,406982Total assets$332,109$138,623Liabilities, temporary equity and stockholders’ equity (deficiency)Current liabilities:Accounts payable$14,147$4,726Accrued compensation13,1278,561Other accrued liabilities4,1136,494Customer advances—current12,63410,338Deferred revenue—current78,02231,641Total current liabilities122,04361,760Long-term liabilities:Customer advances—noncurrent8,38812,191Deferred revenue—noncurrent76,235118,023Total liabilities206,666191,974Commitments and contingencies (Note 7)Temporary equityRedeemable convertible preferred stock, no par value; authorized: 30,000,000 shares; issued and outstanding: none and17,419,331 at June 30, 2007 and 2006, respectively; liquidation amount: none and $40,354 at June 30, 2007 and 2006,respectively—27,504Stockholders’ equity (deficiency)Preferred stock, $0.001 par value; authorized: 5,000,000 shares and none at June 30, 2007 and 2006,respectively; no shares issued and outstanding——Common stock, $0.001 par value and no par value at June 30, 2007 and 2006, respectively;authorized: 100,000,000 and 70,000,000 shares at June 30, 2007 and 2006, respectively; issued andoutstanding: 53,798,643 and 16,243,150 shares at June 30, 2007 and 2006, respectively5313,276Additional paid-in capital251,63743,988Notes receivable from stockholders—(206)Deferred stock-based compensation—(17,272)Accumulated other comprehensive income10—Accumulated deficit(126,257)(120,641)Total stockholders’ equity (deficiency)125,443(80,855)Total liabilities, temporary equity and stockholders’ equity (deficiency)$332,109$138,623Assets and liabilities include related party transaction amounts as follows:Accounts receivable$—$1Deferred cost of revenue—current$2,276$2,929Deferred cost of revenue—noncurrent$4,827$7,254Customer advances—current$—$2,290Customer advances—noncurrent$5,251$3,951Deferred revenue—current$5,728$7,169Deferred revenue—noncurrent$10,093$15,375 The accompanying notes are an integral part of these consolidated financial statements.76Accuray IncorporatedConsolidated Statements of Operations(in thousands, except per share amounts)Years Ended June 30,200720062005Net revenue:Products$110,320$36,089$9,636Shared ownership programs10,0908,1458,067Services16,8604,8483,050Other3,1823,8151,624Total net revenue140,45252,89722,377Cost of revenue:Cost of products43,36318,5316,422Cost of shared ownership programs2,6372,5131,572Cost of services12,2693,9482,044Cost of other2,1442,5001,077Total cost of revenue60,41327,49211,115Gross profit80,03925,40511,262Operating expenses:Selling and marketing37,88925,18616,361Research and development26,77517,78811,655General and administrative23,91515,9238,129Total operating expenses88,57958,89736,145Loss from operations(8,540)(33,492)(24,883)Other income (expense):Interest and other income4,261503200Interest and other expense(731)(447)(438)Loss before provision for income taxes and cumulative effect of change in accounting principle(5,010)(33,436)(25,121)Provision for income taxes1,44425868Loss before cumulative effect of change in accounting principle(6,454)(33,694)(25,189)Cumulative effect of change in accounting principle, net of tax of $0838——Net loss$(5,616)$(33,694)$(25,189)Net loss per common share, basic and diluted:Loss before cumulative effect of change in accounting principle$(0.21)$(2.11)$(1.76)Cumulative effect of change in accounting principle0.03——Basic and diluted net loss per share$(0.18)$(2.11)$(1.76)Weighted average common shares outstanding used in computing net loss per share:Basic and diluted30,76415,99714,283Cost of revenue, selling and marketing, research and development, and general and administrativeexpenses include stock-based compensation charges as follows:Cost of revenue$1,205$863$454Selling and marketing$3,958$2,569$1,903Research and development$2,448$1,574$1,157General and administrative$5,016$3,237$2,812Revenue and cost of revenue include related party transaction amounts as follows:Net revenue:Products$6,389$—$7,252Services$2,665$2,195$1,446Other$3,182$3,754$1,583Cost of revenue:Cost of products$2,422$—$1,954Cost of services$1,592$140$47Cost of other$2,144$2,463$1,037 The accompanying notes are an integral part of these consolidated financial statements.77Accuray IncorporatedConsolidated Statements of Temporary Equity and Stockholders’ Equity (Deficiency)(in thousands, except share amounts)NotesAccumulatedConvertibleAdditionalReceivable DeferredOtherTotalPreferred StockCommon StockPaid-InfromStock-BasedComprehensiveAccumulatedStockholders’SharesAmountSharesAmountCapitalStockholderCompensationIncome (Loss)DeficitDeficiencyBalances at June 30, 200417,419,331$ 27,50413,597,364$ 10,757$ 22,270$ —$ (10,123)$ (7)$ (61,758)$ (38,861)Exercise of common stock warrants——1,000,0001,400—————1,400Exercise of stock options——842,315416—————416Exercise of stock options usingnotes——447,839331—(331)————Stock repurchased——(71,986)(251)—————(251)Deferred stock-based compensation————15,631—(15,631)———Reversal of deferred stock-basedcompensation————(1,215)—1,215———Amortization of deferred stock-basedcompensation——————5,531——5,531Compensation expense related tooptions issued to non-employees————164————164Compensation expense related tomodification of options granted————631————631Cumulative translation adjustment———————(13)—(13)Net loss————————(25,189)(25,189)Total comprehensive loss—————————(25,202)Balances at June 30, 200517,419,33127,50415,815,53212,65337,481(331)(19,008)(20)(86,947)(56,172)Exercise of common stock warrants——16,666167—————167Exercise of stock options——431,659538—————538Settlement of notes receivable—————125———125Stock repurchased——(20,707)(82)—————(82)Deferred stock-based compensation————7,860—(7,860)———Reversal of deferred stock-basedcompensation————(1,651)—1,651———Amortization of deferred stock-basedcompensation——————7,945——7,945Compensation expense related tooptions issued to non-employees————186————186 78Accuray IncorporatedConsolidated Statements of Temporary Equity and Stockholders’ Equity (Deficiency) (Continued)(in thousands, except share amounts)NotesAccumulatedConvertibleAdditionalReceivable DeferredOtherTotalPreferred StockCommon StockPaid-InfromStock-BasedComprehensiveAccumulatedStockholders’SharesAmountSharesAmountCapitalStockholderCompensationIncome (Loss)DeficitDeficiencyCompensation expense related tomodification of options granted————112————112Cumulative translation adjustment———————20—20Net loss————————(33,694)(33,694)Total comprehensive loss—————————(33,674)Balances at June 30, 200617,419,33127,50416,243,15013,27643,988(206)(17,272)—(120,641)(80,855)Conversion of redeemablepreferred stock to common stock(17,419,331)(27,504)25,186,2852527,479————27,504Conversion of common stockwarrants——495,833———————Proceeds from initial publicoffering, net of expenses——10,399,99710170,555————170,565Reclassification of par value forDelaware reincorporation(13,260)13,260—————Exercise of stock options, net——1,538,00421,739————1,741Stock repurchased for settlement of notes receivable——(64,626)—(454)206———(248)Reversal of deferred stock-basedcompensation upon adoption ofSFAS 123R————(17,272)—17,272———Stock-based compensation————12,456————12,456Compensation expense related tooptions issued to non-employees————171————171Income tax benefits from employeestock plans————553———— 553Cumulative effect of change inaccounting principle————(838)————(838)Cumulative translation adjustment———————10—10Net loss———————(5,616)(5,616)Total comprehensive loss—————————(5,606)Balances at June 30, 2007—$ —53,798,643$ 53$ 251,637$ —$ —$ 10$ (126,257)$ 125,443 The accompanying notes are an integral part of these consolidated financial statements.79Accuray IncorporatedConsolidated Statements of Cash Flows(in thousands)Years Ended June 30,200720062005Cash Flows From Operating ActivitiesNet loss$(5,616)$(33,694)$(25,189)Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization6,2463,8062,080Stock-based compensation12,6278,2436,326Provision for bad debts2(21)45Loss on write-down of inventories8056191,747Loss on disposal of property and equipment24954932Accrued interest expense on note payable—10393Cumulative effect of change in accounting principle(838)——Changes in assets and liabilities:Accounts receivable(936)(6,590)(293)Inventories(8,770)(7,762)(5,896)Prepaid expenses and other current assets(5,061)(1,579)(939)Deferred cost of revenue(5,389)(20,112)(14,028)Other assets(146)(315)(112)Accounts payable9,525(719)2,077Accrued liabilities3,1259,4231,866Customer advances(1,495)10,9463,682Deferred revenue7,26959,68942,022Net cash provided by operating activities11,59722,09114,413Cash Flows From Investing ActivitiesPurchases of property and equipment(7,230)(10,188)(2,647)Cash received for tenant improvements—1,000—Restricted cash1157(153)Business acquisition, net of cash acquired——(5,613)Purchase of investment(283)—(250)Net cash used in investing activities(7,512)(9,031)(8,663)Cash Flows From Financing ActivitiesPayment of note payable—(2,996)—Exercise of common stock options1,741538342Payment received on notes used to exercise stock options—64—Stock repurchases—(21)(177)Proceeds from intial public offering, net of issuance costs170,565——Income tax benefits from employee stock plans553——Exercise of common stock warrants—1671,400Net cash provided by (used in) financing activities172,859(2,248)1,565Effect of exchange rate changes on cash3020(13)Net increase in cash and cash equivalents176,97410,8327,302Cash and cash equivalents at beginning of period27,85617,0249,722Cash and cash equivalents at end of period$204,830$27,856$17,024Supplemental Disclosure of Cash Flow InformationCash paid for interest$—$196$8Income taxes paid$138$183$527Non-cash Investing and Financing ActivitiesNote payable from business acquisition$—$—$2,800Common stock options exercised using notes$—$—$331Stock repurchased for settlement of notes receivable$206$—$—Cashless stock repurchases and options exercised$—$122$74Settlement of receivable in exchange for reduction in debt$—$—$(817)Cash flows include related party transaction amounts as follows:Accounts receivable$(1)$439$423Deferred cost of revenue$3,080$2,248$3,272Customer advances$(990)$5,241$—Deferred revenue$(6,723)$(1,059)$(8,131) The accompanying notes are an integral part of these consolidated financial statements.80Accuray IncorporatedNotes to Consolidated Financial Statements1. Description of BusinessOrganizationAccuray Incorporated (the “Company”) was incorporated in California in December 1990 and commenced operations in January 1992. The Companydesigns, develops and sells the CyberKnife system, an image-guided robotic radiosurgery system used for the treatment of solid tumors anywhere in the body.In December 2003, the Company formed a wholly owned subsidiary, Accuray International SARL, headquartered in Geneva, Switzerland. The purposeof Accuray International is to manage the sales, marketing and service activities of Accuray’s international subsidiaries. In January 2004, the Companyformed a wholly owned subsidiary, Accuray Europe SARL, headquartered in Paris, France. The purpose of Accuray Europe is to market the Company’sproducts in Europe. In January 2005, the Company completed the purchase of the High Energy Systems Division (“HES”) of American Science andEngineering, Inc. (“AS&E”) and integrated this operation into the Company’s existing manufacturing operation. In October 2005, the Company formed awholly owned subsidiary, Accuray UK Ltd, headquartered in London, United Kingdom. The purpose of Accuray UK Ltd is to market the Company’sproducts in the United Kingdom and other countries in northern Europe. In December 2005, the Company formed a wholly owned subsidiary, Accuray AsiaLimited, headquartered in Hong Kong, SAR. The purpose of Accuray Asia Limited is to market the Company’s products in Asia. In January 2007, theCompany formed a wholly owned subsidiary, Japan Accuray KK, headquartered in Tokyo, Japan. The purpose of Japan Accuray KK is to market theCompany’s products in Japan. In June 2007, the Company formed a wholly owned subsidiary, Accuray Spain, S.L.U. The purpose of Accuray Spain is tomarket the Company’s products in Spain.Initial Public OfferingIn February 2007, the Company completed its initial public offering (IPO) of common stock in which a total of 18,399,998 shares were sold andissued, including 8,000,000 shares sold by selling stockholders, at an issue price of $18.00 per share. The Company raised a total of $187.2 million in grossproceeds from the IPO, or approximately $170.6 million in net proceeds after deducting underwriting discounts and commissions of $13.1 million and otheroffering costs of approximately $3.5 million. Upon the closing of the IPO, all shares of convertible preferred stock outstanding and warrants outstandingautomatically converted into 25,186,285 and 495,833 shares of common stock, respectively.2. Summary of Significant Accounting PoliciesFiscal YearOn October 1, 2006, the Company prospectively changed its fiscal calendar to a 52- or 53- week period. The Company’s fiscal year ends on theSaturday closest to June 30, so that in a 52 week period, each fiscal quarter consists of 13 weeks. The additional week in a 53-week year is added to thefourth quarter, making such quarter consist of 14 weeks. Fiscal years 2007, 2006 and 2005 are comprised of 52-weeks.Basis of Presentation and Principles of ConsolidationThe consolidated financial statements include the accounts of the Company’s subsidiaries, and all inter-company transactions and balances have beeneliminated. Certain prior period balances have been reclassified to conform to current period presentation.81thUse of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires managementto make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of thefinancial statements. Key estimates and assumptions made by the Company relate to stock-based compensation, valuation of excess and obsolete inventories,valuation allowances for deferred tax assets, impairment of long-lived assets and goodwill, deferred revenue and deferred cost of revenue. Actual results coulddiffer from those estimates.Foreign CurrencyThe Company’s international subsidiaries use their local currencies as their functional currencies. For those subsidiaries, assets and liabilities aretranslated at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. Resulting translationadjustments are recorded directly to accumulated comprehensive income within the statement of stockholders’ equity (deficiency). Foreign currency transactiongains and losses are included as a component of other income (expense).Cash and Cash EquivalentsThe Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents consist ofamounts invested in money market accounts and amounted to $191.4 million and $3.6 million at June 30, 2007 and 2006, respectively.Restricted CashRestricted cash includes amounts deposited as collateral to assure future credit availability, typically credit card purchases, arrangements in contractswith others requiring that specific cash amounts be set aside, or the Company’s statements of intention with regard to particular deposits. Restricted cashamounts were $0 and $1,000 at June 30, 2007 and 2006, respectively.Fair Value of Financial InstrumentsThe carrying values of the Company’s financial instruments including cash and cash equivalents, restricted cash, accounts receivable and accountspayable are approximately equal to their respective fair values due to the relatively short-term nature of these instruments.Concentration of Credit Risk and Other Risks and UncertaintiesThe Company’s cash and cash equivalents are mainly deposited with one major financial institution. At times, deposits in this institution exceed theamount of insurance provided on such deposits. The Company has not experienced any losses in such accounts and believes that it is not exposed to anysignificant risk on these balances.The following summarizes revenues from customers in excess of 10% of total net revenue:Years Ended June 30,200720062005Meditec/Marubeni Corporation (related party)—11%32%President Medical Technology Corportion (related party)—12% 82The following summarizes the accounts receivable from customers in excess of 10% of total accounts receivable:As of June 30,20072006Centre Oscar Lambert (France)36%—Cowealth Medical Science (China)14%18%Northwest Community Healthcare (Arlington Heights, IL)—26%St. Joseph Mercy Health System (Ann Arbor, MI)11%— Accounts receivable are typically not collateralized. The Company performs ongoing credit evaluations of its customers and maintains reserves forpotential credit losses. Accounts receivable are deemed past due in accordance with the contractual terms of the agreement. Accounts are charged against theallowance for doubtful accounts once collection efforts are unsuccessful. Historically, such losses have been within management’s expectations. TheCompany’s allowance for doubtful accounts was $20,000 at both June 30, 2007 and 2006.The Company is subject to risks common to companies in the medical device industry including, but not limited to: new technological innovations,dependence on key personnel, dependence on key suppliers, protection of proprietary technology, compliance with government regulations, uncertainty ofwidespread market acceptance of products and product liability. The Company’s products include components subject to rapid technological change. Certaincomponents used in manufacturing have relatively few alternative sources of supply, and establishing additional or replacement suppliers for suchcomponents cannot be accomplished quickly. While the Company has ongoing programs to minimize the adverse effect of such uncertainty and considerstechnological change in estimating its allowances, uncertainty continues to exist.The products currently under development by the Company may require clearance by the U.S. Food and Drug Administration (“FDA”) or otherinternational regulatory agencies prior to commercial sales. There can be no assurance that the Company’s products will receive the necessary clearance. Denialor delay of such clearance could have a material adverse impact on the Company.InventoriesInventories are stated at the lower of cost (on a first-in, first-out basis) or market. Excess and obsolete inventories are written down based on historicalsales and forecasted demand, as judged by management. The Company determines inventory and product costs through use of standard costs whichapproximate actual average costs.Revenue RecognitionRevenue is generated from the sale of products, shared ownership programs, and by providing related services, which include installation services, post-contract customer support (“PCS”), training and consulting. The Company’s products and upgrades to those products include software that is essential to thefunctionality of the products and accordingly, the Company accounts for the sale of its products pursuant to Statement of Position (“SOP”) No. 97-2,Software Revenue Recognition (“SOP 97-2”), as amended.The Company recognizes product revenues for sales of the CyberKnife system, replacement parts and accessories when there is persuasive evidence ofan arrangement, the fee is fixed or determinable, collection of the fee is probable and delivery has occurred as prescribed by SOP 97-2. Payments received inadvance of product shipment are recorded as customer advances and are recognized as revenue or deferred revenue upon product shipment or installation.83For arrangements with multiple elements, the Company allocates arrangement consideration to services and PCS based upon vendor specific objectiveevidence (“VSOE”) of fair value of the respective elements. VSOE of fair value for the services element is based upon the Company’s standard rates chargedfor the services when such services are sold separately or based upon the price established by management having the relevant authority when that service isnot yet being sold separately. When contracts contain multiple elements, and VSOE of fair value exists for all undelivered elements, the Company accounts forthe delivered elements, principally the CyberKnife system, based upon the “residual method” as prescribed by SOP No. 98-9, Modification of SOP No. 97-2 with Respect to Certain Transactions (“SOP 98–9”). If VSOE of fair value does not exist for all the undelivered elements, all revenue is deferred until theearlier of; (1) delivery of all elements, or (2) establishment of VSOE of fair value for all undelivered elements.For PCS arrangements that include specified or committed upgrades for which the Company has not established VSOE of fair value, all revenue isdeferred and accounted for as described above. Once all upgrade obligations have been delivered, all revenue is recognized ratably over the remaining life of thePCS arrangement.In fiscal year 2006, the Company began selling PCS contracts that only provide for upgrades when and if they become available. The Company hasestablished VSOE of the fair value of PCS in these circumstances. For arrangements with multiple elements that include the CyberKnife system, installationservices, training services and a PCS service agreement, the Company recognizes the CyberKnife system and installation services revenue followinginstallation and acceptance of the system by application of the residual method as prescribed in SOP 98-9 when VSOE of fair value exists for all undeliveredelements in the arrangement, including PCS.Other revenue primarily consists of upgrade services revenues related to the sale of specialized services specifically contracted to provide currenttechnology capabilities for units previously sold through a distributor into the Japan market. The upgrade programs include elements where VSOE of fairvalue has not been established for the PCS. As a result, associated revenues are deferred and recognized ratably over the term of the PCS arrangement,generally four years.Service revenue for providing PCS, which includes warranty services, extended warranty services, unspecified when and if available product upgradesand technical support is deferred and recognized ratably over the service period, generally one year, until no further obligation exists. At the time of sale, theCompany provides for the estimated incremental costs of meeting product warranty if the incremental warranty costs are expected to exceed the related servicerevenues. Training and consulting service revenues, that are not deemed essential to the functionality of the CyberKnife system, are recognized as suchservices are performed.Costs associated with providing PCS and maintenance services are expensed when incurred, except when those costs are related to units where revenuerecognition has been deferred. In those cases, the costs are deferred until the recognition of the related revenue and are recognized over the period of revenuerecognition.For all sales, the Company uses either a signed agreement or a binding purchase order as evidence of an arrangement. Sales to third party distributors areevidenced by a distribution agreement governing the relationship together with binding purchase orders on a transaction-by-transaction basis. The Companyrecords revenues from an arrangement with distributors based on a sell-through method where revenue is recognized upon shipment of the product to the enduser customer once all revenue recognition criteria are met. These criteria require that persuasive evidence of an arrangement exists, the fees are fixed ordeterminable, collection of the resulting receivable is probable and there is no right of return.The Company’s agreements with customers and distributors do not contain product return rights.84The Company assesses the probability of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company generally does not request collateral from its customers. If the Company determines that collection of a fee is notprobable, the Company will defer the fee and recognize revenue upon receipt of cash.The Company also enters into shared ownership programs with certain customers. Under the terms of such programs, the Company retains title to itsCyberKnife system, while the customer has use of the product. The Company generally receives a minimum monthly payment and earns additional revenuesfrom the customer based upon its use of the product. The Company may provide unspecified upgrades to the product during the term of each program whenand if available. Upfront non-refundable payments from the customer are deferred and recognized as revenue over the contractual period. Revenues fromshared ownership programs are recorded as they become earned and receivable and are included within shared ownership program revenues in the consolidatedstatements of operations. The Company recognized $10.1 million, $8.1 million and $8.1 million for the years ended June 30, 2007, 2006 and 2005,respectively of revenue from these shared ownership programs.The CyberKnife systems associated with the Company’s shared ownership programs are recorded within property and equipment and are depreciatedover their estimated useful life of ten years. Depreciation and warranty expense attributable to the CyberKnife shared ownership systems are recorded withincost of shared ownership programs.The Company recognizes revenue and cost of revenue related to long-term manufacturing contracts using contract accounting on the percentage-of-completion method in accordance with SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, (“SOP81-1”). The Company recognizes any loss provisions from the total contract in the period such loss is identified. During the year ended June 30, 2007, norevenues or loss provisions have been recorded. As of June 30, 2007, $323,000 of costs have been recorded in deferred cost of revenues related to themanufacture of linacs for other uses.Deferred Revenue and Deferred Cost of RevenueDeferred revenue consists of deferred product revenue, deferred shared ownership program revenue, deferred service revenue and deferred other revenue.Deferred product revenue arises from timing differences between the shipment of product and satisfaction of all revenue recognition criteria consistent with theCompany’s revenue recognition policy. Deferred shared ownership program revenue results from the receipt of advance payments, which will be recognizedratably over the term of the shared ownership program. Deferred service revenue results from the advance payment for services to be delivered over a period oftime, usually one year. Service revenue is recognized ratably over the service period. Deferred other revenue results primarily from the Japan upgrade servicesprograms and is due to timing differences between the receipt of cash payments for those upgrades and final delivery to the end user customer. Deferred cost ofrevenue consists of the direct costs associated with the manufacturing of units, direct service costs for which the revenue has been deferred in accordance withthe Company’s revenue recognition policies, and deferred costs associated with the Japan upgrade services. Deferred revenue, and associated deferred cost ofrevenue, expected to be realized within one year are classified as current liabilities and current assets, respectively.Customer AdvancesCustomer advances represent payments made by customers in advance of product shipment.85Property and EquipmentProperty and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method overthe estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the life of the lease or the estimated useful lifeof the asset, whichever is shorter. Machinery and equipment are depreciated over five years. Furniture and fixtures are depreciated over four years. Computerand office equipment are depreciated over three years. CyberKnife systems covered by the shared ownership program are depreciated over their estimateduseful life of ten years. Repairs and maintenance costs, which are not considered improvements and do not extend the useful life of the property andequipment, are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or no longer in service are eliminated fromthe accounts and any gain or loss is recognized.Impairment of Long-Lived AssetsIn accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal ofLong-lived Assets, (“SFAS 144”) the Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes inbusiness circumstances indicate that the carrying amount of the assets may not be fully recoverable. Under SFAS 144, an impairment loss would berecognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carryingamount. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Through June 30, 2007,there have been no such impairment losses.Goodwill and Purchased Intangible AssetsGoodwill represents the excess of acquisition cost over the fair value of tangible and identified intangible net assets of businesses acquired. Goodwill isnot amortized, but is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired.Purchased intangible assets other than goodwill are amortized over their useful lives unless their lives are determined to be indefinite. Purchased intangibleassets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets which is typicallyseven years.Shipping and HandlingThe Company’s shipping and handling costs billed to customers are included in product revenue. Shipping and handling costs incurred are included incost of products.Research and Development CostsCosts related to research, design and development of products are charged to research and development expense as incurred. These costs include directsalary costs for research and development personnel, costs for materials used in research and development activities, costs for outside services and allocatedportions of facilities and other corporate costs.86Software Development CostsSoftware development costs are included in research and development and are expensed as incurred. After technological feasibility is established, materialsoftware development costs are capitalized. The capitalized cost is then amortized on a straight-line basis over the estimated product life, or on the ratio ofcurrent revenues to total projected product revenue, whichever is greater. To date, the period between achieving technological feasibility, which the Companyhas defined as the establishment of a working model which typically occurs when the beta testing commences, and the general availability of such softwarehas been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized anysoftware development costs.Advertising ExpensesThe Company expenses the costs of advertising and promoting its products and services as incurred. Advertising expenses were approximately $1.0million, $20,000, and $16,000 for the years ended June 30, 2007, 2006 and 2005, respectively.Stock-Based CompensationPrior to adoption of SFAS 123REffective July 1, 2003, the Company began to account for stock-based employee compensation arrangements in accordance with Statement of FinancialAccounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and SFAS No. 148, Accounting for Stock-BasedCompensation-Transition and Disclosure (“SFAS 148”). Under SFAS 123, stock-based compensation expense is measured on the date of grant based onthe fair value of the award. Upon adoption of this standard, the Company elected to use the retrospective restatement method of transition.The Company believes that the fair value of the stock options is more reliably measurable than the fair value of the services received. The Companydetermined the estimated fair value of its common stock in light of the expected completion of its initial public offering. The Company engaged an unrelatedthird-party appraisal firm to assist management in this process by providing a valuation analysis. The estimated fair value of stock options granted iscalculated at the date of grant using the Black-Scholes option pricing model, as prescribed by SFAS 123, using fair values of common stock between $4.64and $7.63 per share and the following weighted-average assumptions during the years ended June 30, 2006 and 2005:Years Ended June 30, 2006 2005 Risk-free interest rate4.42%3.81%Dividend yield——Expected life6.256.25Expected volatility86.7%94.8% In accordance with the requirements of SFAS 123, the Company recorded deferred stock-based compensation for the estimated fair value of the optionson the date of grant. This deferred stock-based compensation was amortized to expense over the period during which the options become exercisable, generallyfour years. During the years ended June 30, 2006 and 2005, the Company reversed $1.7 million and $1.2 million, respectively, of deferred stock-basedcompensation related to cancellations of unvested options of certain employees who had been granted stock options and subsequently terminated theiremployment with the Company. During the years ended June 30, 2006 and 2005, the Company amortized $7.9 million and $5.5 million, respectively, ofstock-based compensation expense for stock options granted to employees.87Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock options are earned in accordance withSFAS 123 and Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, orin Conjunction with Selling, Goods or Services. The Company believes that the fair value of the stock options is more reliably measurable than the fairvalue of the services received. The estimated fair value of the stock options granted is calculated using the Black-Scholes option pricing model, as prescribedby SFAS 123, using fair values of common stock between $4.64 and $7.63 per share and the following weighted-average assumptions during the year endedJune 30, 2005:Year EndedJune 30, 2005(1)Risk-free interest rate4.20%Dividend yield—Expected life10 yearsExpected volatility71.0%(1) No options granted to non-employees in 2007 and 2006.The Company recognized $172,000, $186,000 and $164,000 during the years ended June 30, 2007, 2006 and 2005, respectively, of stock-basedcompensation expense for stock options granted to non-employees.For certain stock option grants, the Company made modifications to the option terms. Those modifications included extensions of the vesting period andacceleration of vesting. The Company recognized $0, $112,000 and $631,000 during the years ended June 30, 2007, 2006 and 2005, respectively, of stock-based compensation expense for modifications of stock options granted.Adoption of SFAS 123REffective July 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95(“SFAS 123R”) using the modified prospective method under which compensation cost is recognized beginning with the effective date (a) based on therequirements of SFAS 123R for all share-based payments granted or modified after the effective date and (b) based on the previous requirements of SFAS 123for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date. SFAS 123R also requires the benefits oftax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required underprevious guidance.SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary in subsequent periods if actual forfeitures differ from initialestimates. Stock-based compensation expense was recorded net of estimated forfeitures for the year ended June 30, 2007 such that expense was recorded onlyfor those stock-based awards that are expected to vest. For the year ended June 30, 2007, the Company recorded a cumulative effect of a change in accountingprinciple of $838,000, net of tax of $0, related to the adoption of SFAS 123R since it had previously adjusted stock-based compensation expense at the timeforfeitures occurred in accordance with SFAS 123. The cumulative effect of this change in accounting reflects estimated forfeitures related to periods prior toJuly 1, 2006.Under SFAS 123R, the Company estimated the fair value of each option award on the date of grant using the Black-Scholes option-pricing model usingthe assumptions noted in the table below. Expected volatility is based on the historical volatility of a peer group of publicly traded companies. The expectedterm of options is based upon the vesting term (i.e., 25% on the first anniversary of the vesting start date and 36 equal monthly installments thereafter) and onits partial life history. The risk-free rate for the expected term of the option is based on the U.S. Treasury Constant Maturity rate. During the year endedJune 30, 2007, the estimated fair values of the stock options granted were calculated at each date of grant88using the Black-Scholes option pricing model, using fair values of common stock between $12.88 and $29.25 per share. Following its IPO, the fair value ofthe Company’s common stock is determined by its closing market price as published by the Nasdaq Global Market. During the year ended June 30, 2007, theCompany recognized $10.5 million of stock-based compensation expense for stock options granted to employees. The weighted-average assumptions used tovalue options granted during the year ended June 30, 2007 were as follows:Year EndedJune 30, 2007Risk-free interest rate4.89%Dividend yield—Expected life6.25Expected volatility74.8% The impact of adopting SFAS 123R in the year ended June 30, 2007, was as follows (in thousands, except per share amounts):Year Ended June 30, 2007UsingPreviousSFAS 123RAsAccountingAdjustmentsReportedLoss from operations$(9,724)$1,184$(8,540)Loss before income taxes$(6,194)$1,184$(5,010)Loss before cumulative effect of a change in accounting principle,net of tax$(7,638)$1,184$(6,454)Net loss$(7,638)$2,022$(5,616)Basic and diluted loss per sharePrior to cumulative effect of change in accounting principle$(0.25)$0.04$(0.21)Cumulative effect of change in accounting principle—0.030.03$(0.25)$0.07$(0.18) In January 2007, in connection with the Company’s IPO, the Board of Directors approved the 2007 Incentive Award Plan (“2007 Plan”) and 2007Employee Stock Purchase Plan (“ESPP”). The ESPP is deemed compensatory and compensation costs are accounted for under SFAS 123R.Under the ESPP, qualified employees are entitled to purchase common stock at 85% of the fair market value on specified dates. During the year endedJune 30, 2007, the estimated fair value of ESPP shares was calculated at the date of grant using the Black-Scholes option pricing model, using a fair value ofcommon stock of $18.00 per share. Expected volatility is based on the historical volatility of a peer group of publicly traded companies. The expected term isbased upon the offering period of the ESPP. The risk-free rate for the expected term of the ESPP option is based on the U.S. Treasury Constant Maturity rate.For the year ended June 30, 2007, the Company recognized $441,000 of compensation expense related to its ESPP. The following weighted-average assumptionswere used during the year ended June 30, 2007:Year EndedJune 30, 2007Risk-free interest rate5.16%Dividend yield—Expected life0.75Expected volatility49.9% 89In connection with the 2007 Plan, the Company issued restricted stock units, (“RSU’s”) and recognized $1.5 million of stock-based compensationexpense, net of forfeitures, for RSU’s granted during the year ended June 30, 2007, at a weighted-average grant date fair value of $28.16.Excess tax benefits from tax deductions for exercised options and disqualifying dispositions, in excess of the deferred tax asset attributable to stockcompensation costs for such options are credited to additional paid-in capital. Realized excess tax benefits for the years ended June 30, 2007, 2006 and 2005were $553,000, $0 and $0, respectively.Net Loss Per Common ShareBasic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted netloss per share is computed by dividing net loss by the weighted-average number of dilutive common shares outstanding during the period. Dilutive sharesoutstanding is calculated by adding to the weighted shares outstanding any common stock equivalents from outstanding stock options and warrants based onthe treasury stock method. In periods when net income is reported, the calculation of diluted net income per share typically results in lower earnings per sharethan is calculated using the basic method. In periods when a net loss is reported, potential shares from stock options and warrants are not included in thecalculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods when a loss is reported, thecalculation of basic and diluted net loss per share results in the same value.For the fiscal years ended June 30, 2007, 2006 and 2005, the basic and diluted net loss per share amounts were based on weighted-average shares of30,764,447, 15,997,419 and, 14,282,643, respectively. The number of anti-dilutive shares excluded from the calculation of diluted net loss per share is asfollows:Years ended June 30,200720062005Preferred stock (as if converted)15,318,78225,186,28525,186,285Options to purchase common stock9,600,3437,225,1435,641,864Restricted stock units248,648——Warrants—451,353428,15725,167,77332,862,78131,256,306 The following table sets forth the basic and diluted per share computations:Year ended June 30,200720062005Numerator:Net loss (in thousands)$(5,616)$(33,694)$(25,189)Denominator:Basic and diluted weighted-average shares of commonstock outstanding30,764,44715,997,41914,282,643Basic and diluted net loss per share:$(0.18)$(2.11)$(1.76) Income TaxesDeferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities, using tax ratesexpected to be in effect when the differences will reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amountsexpected to be realized.90Comprehensive LossComprehensive loss is defined as the change in equity from transactions and other events and circumstances other than those resulting from investmentsby owners and distributions to owners. For the years ended June 30, 2007, 2006 and 2005, the Company recorded comprehensive losses of $5.6 million,$33.7 million and $25.2 million, respectively. Comprehensive loss is comprised of net loss and the cumulative translation adjustment arising uponconsolidation of the Company’s foreign subsidiaries.Segment InformationThe Company has determined that it operates in only one segment in accordance with SFAS No. 131, Disclosures about Segments of an Enterpriseand Related Information (“SFAS 131”) as it only reports profit and loss information on an aggregate basis to its chief operating decision maker. TheCompany’s long-lived assets maintained outside the United States are not material.Revenue by geographic region is based on the ship to address of the customer. The following summarizes revenue by geographic region (in thousands):Years ended June 30,200720062005United States (including Puerto Rico)$91,174$40,826$14,295Europe30,1753,390464Asia (except Japan)13,7973,0582,707Japan5,3065,6234,911Total$140,452$52,897$22,377 Recent Accounting PronouncementsIn February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, The Fair Value Option for Financial Assets andFinancial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”), which allows an entity the irrevocable option to elect fair valuefor the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurementsfor the financial assets and liabilities an entity elects to fair value will be recognized in earnings. SFAS 159 also establishes additional disclosurerequirements. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided that the entity also adoptsSFAS No. 157, “Fair Value Measurement” (“SFAS 157”). The Company has not yet determined the impact this standard will have on its consolidatedfinancial statements.In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). This interpretation clarifies theaccounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS109”). FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact this standard will have on itsconsolidated financial statements.In September 2006, the FASB issued SFAS 157. The standard defines fair value and provides a framework for using fair value to measure assets andliabilities. SFAS 157 establishes the principle that fair value should consider characteristics specific to the asset or liability based on the assumptions thatmarket participants would use when pricing the asset or liability. SFAS 157 is effective for the Company beginning in fiscal 2008, though early adoption ispermitted. The Company has not yet determined the impact this standard will have on its consolidated financial statements.913. Balance Sheet ComponentsAccounts Receivable, netAccounts receivable, net consists of the following (in thousands):June 30,20072006Accounts receivable$9,267$10,866Unbilled fees and services85885210,12511,718Less: Allowance for doubtful accounts(20)(20)$10,105$11,698 InventoriesInventories consist of the following (in thousands):June 30,20072006Raw materials$9,776$4,447Work-in-process2,5251,559Finished goods4,6834,094$16,984$10,100 Property and Equipment, netProperty and equipment consist of the following (in thousands):June 30,20072006Furniture and fixtures$1,605$1,038Computer and office equipment5,5294,271Leasehold improvements7,3876,325Machinery and equipment9,7478,313CyberKnife shared ownership systems12,39312,38036,66132,327Less: Accumulated depreciation and amortization(12,724)(10,382)Property and equipment, net$23,937$21,945 Depreciation and amortization expense related to property and equipment for the years ended June 30, 2007, 2006 and 2005 was $6.0 million, $3.6million and $2.0 million, respectively. Accumulated depreciation related to the CyberKnife Systems attributable to the shared ownership programs at June 30,2007 and 2006 was $3.3 million and $2.3 million, respectively.Under the terms of the shared ownership programs, the Company retains title to its CyberKnife system, while the customer has use of the product. TheCompany generally receives a minimum monthly payment and earns additional contingent revenues from the customer based upon its use of the product. Theshared ownership programs typically have a term of five years. During this term the customer has the option to purchase the CyberKnife system at pre-determined prices based on the period the system has been in use and considering the lease payments already received. Revenue from such sales is recorded inaccordance with our revenue recognition policy, taking into account the PCS and any other elements that might be purchased as part of the arrangement.During the year ended June 30, 2007, two former shared92®ownership program customers had each purchased a CyberKnife system. The total selling price in the aggregate for both systems was $6.8 million, of which$3.0 million has been recognized as product revenue and $3.8 million remains recorded in deferred revenue at June 30, 2007.Future minimum revenues under the shared ownership arrangements as of June 30, 2007 are as follows (in thousands):Year ending June 30,2008$2,72020093,00020102,46020111,98020121,0802013 and thereafter95Total$11,335 Total contingent revenues, included in shared ownership revenue, earned from the CyberKnife systems attributable to the shared ownership programswere $7.5 million, $6.1 million and $6.7 million for the years ended June 30, 2007, 2006 and 2005, respectively.4. Business CombinationOn January 10, 2005, the Company completed its purchase of the High Energy Systems Division (“HES”) of American Science and Engineering, Inc.(“AS&E”) and integrated this operation into the Company’s existing manufacturing operation. HES had been the sole source manufacturer of the linearaccelerator used in the CyberKnife system. The transaction was accounted for in accordance with SFAS No. 141, Business Combinations, (“SFAS 141”).The transaction was valued at approximately $8,413,000 and the consideration was comprised of $5,500,000 in cash, a note payable for $2,800,000 due oneyear after closing, and expenses related to the transaction. The total purchase cost of HES was allocated as follows (in thousands):Net tangible assets$2,108Goodwill and other purchased intangible assets:Complete technology1,740Customer contract / relationship70Goodwill4,495Total purchase price$8,413 The Company allocated the purchase price based on the fair value of the net tangible and intangible assets acquired. Tangible assets were valued atcarrying costs, subsequent to due diligence supporting those costs. The fair value of the intangible assets acquired was determined through valuationtechniques that included discounted cash flows and weighted average cost of capital methods used in the technology industry using assumptions and estimatesfrom management.The purchase price was settled as follows (in thousands):Cash$5,500Note payable2,800Transaction costs and expenses113Total$8,413 93Pro forma information has not been presented as the pro forma impact is immaterial.5. Goodwill and Other Purchased IntangiblesGoodwill and other intangible assets with indefinite lives are not amortized in accordance with SFAS No. 142, Goodwill and Other Intangible Assets(“SFAS 142”). Intangible assets with determinable useful lives are amortized on a straight line basis over their useful lives. Goodwill and other intangibleassets have resulted from the Company’s January 2005 acquisition of HES. SFAS 142 requires that the Company perform an annual test for impairment ofintangible assets with indefinite lives, and interim tests if indications of potential impairment exist. The Company performed the annual test for impairment inDecember 2006 concluding that there was no impairment of goodwill. At June 30, 2007, there have been no indicators to perform an interim test.The amortization expense relating to intangible assets for the years ending June 30, 2007, 2006 and 2005 was $262,000, $242,000 and $122,000,respectively. The following represents the gross carrying amounts and accumulated amortization of amortized intangible assets at June 30, 2007 and 2006(in thousands):June 30,20072006Complete technology$1,740$1,740Customer contract / relationship70701,8101,810Less: Accumulated amortization(626)(364)Intangible assets, net$1,184$1,446 The following table represents the estimated useful life of the intangible assets subject to amortization:YearsAmortized intangible assets:Complete technology7.0Customer contract / relationship7.0 The estimated future amortization expense of purchased intangible assets as of June 30, 2007, is as follows (in thousands):Year ending June 30,2008$2582009258201025820112582012152Total$1,184 In conjunction with its acquisition of HES, the Company executed a promissory note in the principal amount of $2,800,000 as part of the purchaseprice. The note carried an interest rate of 7% and was repaid in full in January 2006.946. Service Plan ContractsService contract revenue for providing parts, warranty, product upgrades and customer support is deferred and recognized ratably over the contractualservice period, generally one year, until no further obligation exists.Deferred service contract revenue included in deferred revenue was (in thousands):Balance at June 30, 2004$6,003Add payments received8,890Less revenue recognized(2,573)Balance at June 30, 2005$12,320Add payments received20,419Less revenue recognized(3,635)Balance at June 30, 2006$29,104Add payments received26,572Less revenue recognized(14,596)Balance at June 30, 2007$41,080 Costs incurred under service contracts included in cost of revenue were $9.7 million, $2.4 million and $1.4 million during the years ended June 30,2007, 2006 and 2005, respectively.7. Commitments and ContingenciesOperating Lease AgreementsThe Company leases office space under non-cancelable operating leases with various expiration dates through June 2011. Rent expense was $2.4 million,$2.0 million and $964,000 for the years ended June 30, 2007, 2006 and 2005, respectively. Sublease income was $165,000, $0 and $0 for the years endedJune 30, 2007, 2006 and 2005, respectively. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rentexpense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid.Future minimum lease payments under non-cancelable operating lease agreements as of June 30, 2007 are as follows (in thousands):Year ending June 30,2008 (net of $108 of sublease income)$2,69420092,25220101,8162011708Total$7,470 The Company enters into standard indemnification agreements with its landlords and all superior mortgagees and their respective directors, officers’agents, and employees in the ordinary course of business. Pursuant to these agreements, the Company will indemnify, hold harmless, and agree to reimbursethe indemnified party for losses suffered or incurred by the indemnified party, generally the landlords, in connection with any loss, accident, injury, ordamage by any third party with respect to the leased facilities. The term of these indemnification agreements is from the commencement of the lease agreementsuntil termination of the lease agreements. The maximum potential amount of future payments the Company could be required to make under theseindemnification agreements is unlimited; however,95the Company has not incurred claims or costs to defend lawsuits or settle claims related to these indemnification agreements.Royalty AgreementsThe Company entered into a license and royalty agreement with Schonberg Research Corporation (“Schonberg”) in January 1991 in exchange for anexclusive license to use certain technology. Under the terms of the agreement, as amended in April 1996, the Company is obligated to pay Schonberg $25,000for each CyberKnife system sold that includes the licensed technology. Maximum total aggregate payments under this license agreement are $2,500,000.Royalty expense recognized in cost of revenue or deferred cost of revenue sold under this agreement was $169,000, $850,000 and $375,000 during the yearsended June 30, 2007, 2006 and 2005, respectively. At June 30, 2007 and 2006, the Company had accrued amounts of approximately $0 and $219,000,respectively, included in other accrued liabilities in the consolidated balance sheets relating to this license and royalty agreement. As of June 30, 2007, theCompany had no outstanding commitments regarding this amended agreement.In July 1997, the Company entered into a license and royalty agreement with Stanford University (“Stanford”) under which the Company has a non-exclusive license to use certain technology. Under this agreement, the Company is obligated to pay Stanford up to $10,000 for each CyberKnife system soldthat includes the licensed technology, with the stipulation that the Company must make minimum annual payments of $25,000. Royalty expense recorded incost of revenue or deferred cost of revenue was $195,000, $175,000 and $80,000 for the years ended June 30, 2007, 2006 and 2005, respectively. At June 30,2007 and 2006, the Company had accrued amounts of approximately $45,000 and $20,000, respectively, included in other accrued liabilities in theconsolidated balance sheets relating to this license and royalty agreement.In January 1999, the Company entered into a license and royalty agreement with Professor Dr. Achim Schweikard (“Schweikard”) of the University ofMunich. Under this agreement, the Company has a non-exclusive license to use certain technology. The Company is obligated to pay Schweikard up to$5,000 for each CyberKnife system sold that includes the licensed technology, with the stipulation that the Company must make minimum annual paymentsof $5,000. Royalty expense under this agreement recorded in cost of revenue or deferred cost of revenue was $165,000, $120,000 and $115,000 for the yearsended June 30, 2007, 2006 and 2005, respectively. At June 30, 2007 and 2006, the Company had accrued amounts of approximately $45,000 and $45,000,respectively, included in other accrued liabilities in the consolidated balance sheets relating to this license and royalty agreement.ContingenciesFrom time to time, the Company may become involved in litigation relating to claims arising from the ordinary course of business. Management does notbelieve the final disposition of these matters will have a material adverse effect on the financial position, results of operations or future cash flows ofthe Company.Software License IndemnityUnder the terms of the Company’s software license agreements with its customers, the Company agrees that in the event the software sold infringes uponany patent, copyright, trademark, or any other proprietary right of a third party, it will indemnify its customer licensees, against any loss, expense, orliability from any damages that may be awarded against its customer. The Company includes this infringement indemnification in all of its software licenseagreements and selected managed services arrangements. In the event the customer cannot use the software or service due to infringement and the Companycannot obtain the right to use, replace or modify the license or service in a commercially feasible manner so that it no longer infringes, then the Company mayterminate the license and provide the96customer a refund of the fees paid by the customer for the infringing license or service. The Company has recorded no liability associated with thisindemnification, as it is not aware of any pending or threatened actions that are probable losses.8. Stockholders’ Equity (Deficiency)Common StockIn February 2007, the Company completed its IPO of common stock in which a total of 18,399,998 shares were sold and issued, including 8,000,000shares sold by selling stockholders at an issue price of $18.00 per share. The Company raised a total of $187.2 million in gross proceeds from the IPO, orapproximately $170.6 million in net proceeds after deducting underwriting discounts and commissions of $13.1 million and estimated other offering costs ofapproximately $3.5 million. Upon the closing of the IPO, all shares of convertible preferred stock outstanding and warrants outstanding automaticallyconverted into 25,186,285 and 495,833 shares of common stock, respectively.As of June 30, 2007, the Company’s Amended and Restated Certificate of Incorporation authorized the Company to issue 100,000,000 shares of commonstock. As of June 30, 2007 and 2006, 53,798,643 and 16,243,150 shares of common stock were issued and outstanding.In October 2006, the Company repurchased 64,626 shares of common stock from a stockholder and former employee of the Company. Proceeds fromthe repurchase totaling $454,000 were used to settle two notes receivable from the stockholder of $206,000 and $227,000 and the related accrued interest on thenotes.Stock Option PlansIn 1993, the Company’s stockholders approved the 1993 Stock Option Plan (the “1993 Plan”). Under the 1993 Plan, the Board of Directors isauthorized to grant options to purchase shares of common stock at fair value, as determined by the Board of Directors, to employees, directors andconsultants for up to 1,744,268 shares.In 1998, the Company’s stockholders approved the 1998 Equity Incentive Plan (the “1998 Plan”). Under the 1998 Plan, the Board of Directors isauthorized to grant options to purchase shares of common stock to employees, directors and consultants for up to 14,100,000 shares.In 2007, in connection with the Company’s IPO, the Board of Directors approved the 2007 Incentive Award Plan (the “2007 Plan”). Under the 2007 Plan,the Board of Directors is authorized to award stock-based grants to employees, directors, and consultants for up to 4,500,000 shares. As of June 30, 2007, the1993 Plan and the 1998 Plan continued to remain in effect along with the 2007 Plan; however, options can no longer be granted from the 1993 and 1998Plans.Only employees are eligible to receive incentive stock options. Non-employees may be granted non-qualified options. The Board of Directors has theauthority to set the exercise price of all options granted, subject to the exercise price of incentive stock options being no less than 100% of the fair value of ashare of common stock on the date of grant; and no less than 85% of the fair value for non-qualified stock options.Generally, the Company’s outstanding options vest at a rate of 25% per year. However, certain options granted to certain employees vest and expense isrecognized based upon performance. Continued vesting typically terminates when the employment or consulting relationship ends.The maximum term of the options granted to persons who own at least 10% of the voting power of all outstanding stock on the date of grant is 5 years.The maximum term of all other options is 10 years.97The options outstanding and exercisable, by exercise price, at June 30, 2007 were as follows:Options OutstandingOptions ExercisableExercise PriceNumber ofOptionsWeightedAverageRemainingContractualLife (Years)WeightedAverageExercisePriceNumber ofOptionsWeightedAverageExercisePrice $ 0.25 - $ 0.40195,0000.86$0.28195,000$0.28 $ 0.753,775,2264.76$0.753,700,850$0.75 $ 0.85 - $ 3.001,530,0676.69$1.811,226,788$1.77 $ 3.00 - $ 3.502,379,2147.48$3.501,483,215$3.50 $ 3.51 - $ 3.752,6003.48$3.752,600$3.75 $ 3.76 - $ 6.731,235,6848.24$4.80558,503$4.68 $ 6.74 - $ 13.051,411,1959.20$9.9633,297$9.42$13.06 - $28.47262,8899.69$26.4821,250$28.4710,791,8756.66$3.797,221,503$1.90 The aggregate intrinsic value in the table below represents the total pretax intrinsic value (the difference between the fair value of the Company’s commonstock on June 30, 2007 of $22.18 and the exercise price for stock options) that would have been received by option holders if all options exercised had beenexercised on June 30, 2007. The total intrinsic value of options exercised in the years ended June 30, 2007, 2006 and 2005 was approximately $26.3 million,$2.5 million and $3.7 million, respectively. Cash received from option exercises for the year ended June 30, 2007 was $1.7 million.Option activity during the year ended June 30, 2007 was as follows:WeightedaverageAggregateWeightedremainingintrinsicOptionsaveragecontractualvalue as ofoutstandingexercise pricelife (years)June 30, 2007Balance at June 30, 200610,900,285$2.07Options granted1,775,774$12.50Options forfeited(344,315)$5.93Options exercised(1,539,869)$1.14Balance at June 30, 200710,791,875$3.796.66$199,554,019Vested or Expected to vest at June 30, 200710,439,389$3.636.60$194,657,879Exercisable at June 30, 20077,221,503$1.905.81$146,570,324 As of June 30, 2007, there was approximately $27.4 million, net of forfeitures, of unrecognized compensation cost related to unvested stock optionswhich is expected to be recognized over a weighted-average period of 2.58 years. The Company’s current practice is to issue new shares to satisfy share optionexercises. The total fair value of shares vested during the years ended June 30, 2007, 2006 and 2005 was $9.5 million, $8.4 million and $4.0 million,respectively.The weighted average fair value of options granted was $11.40, $5.53 and $4.45 per share for the years ended June 30, 2007, 2006 and 2005,respectively.Restricted Stock UnitsRestricted stock units granted generally vest at a rate of 25% per year. However, certain RSU’s granted vest 10% upon the first anniversary year of thegrant date, 20% upon the second anniversary year of the grant date, 30% upon the third anniversary year of the grant date and 40% upon the fourthanniversary year of the grant date. Compensation charges for such graded RSU’s are recognized using the straight-line method. Continued vesting typicallyterminates when the employment relationship ends.98As of June 30, 2007, there was approximately $17.2 million of unrecognized compensation cost related to RSU’s, which is expected to be recognized overa weighted-average period of 3.62 years.Combined activity under the 1993 Plan, 1998 Plan and 2007 Plan (the “Plans”) was as follows:SharesAvailableFor GrantNumber ofOptionsWeightedAverageExercisePriceNumber ofRSUsWeightedAverageGrantDate FairValueBalance at June 30, 20041,054,9118,623,419$0.82—$—Additional shares reserved2,200,000—$——$—Grants(3,589,500)3,589,500$3.26—$—Forfeitures425,371(425,371)$1.24—$—Exercises or releases—(1,290,154)$0.58—$—Balance at June 30, 200590,78210,497,394$1.67—$—Additional shares reserved2,900,000—$——$—Grants(1,407,883)1,407,883$4.80—$—Forfeitures573,333(573,333)$2.15—$—Exercises or releases—(431,659)$1.25—$—Balance at June 30, 20062,156,23210,900,285$2.07—$—Additional shares reserved4,500,000—$——$—Plan shares expired(987,662)—$——$—Grants(2,440,289)1,775,774$12.50664,515$28.17Forfeitures360,500(344,315)$5.93(16,185)$28.47Exercises or releases—(1,539,869)$1.14—$—Balance at June 30, 20073,588,78110,791,875$3.79648,330$28.16 Employee Stock Purchase PlanIn January 2007, in connection with the Company’s IPO, the Board of Directors approved the 2007 ESPP. Under the ESPP, the Company is authorizedto issue up to 1,000,000 shares of common stock. Qualified employees may purchase shares of common stock through payroll deductions at a price per sharethat is 85% of the lesser of the fair market value of our common stock as of the beginning of an applicable offering period or the applicable purchase date,with purchases generally occurring every six months. Employees’ payroll deductions may not exceed 10% of their salary. Employees may purchase up to2,500 shares per period provided that the value of the shares purchased in any calendar year may not exceed $25,000, as calculated pursuant to the purchaseplan.The ESPP was initiated in February 2007. As of June 30, 2007, there was approximately $465,000 of unrecognized compensation cost related to theESPP, which is expected to be recognized over a weighted-average period of 0.4 years. The fair value of ESPP shares was $6.94 per share for the year endedJune 30, 2007.WarrantsDuring April 2000, in connection with an extension of a line of credit, the Company issued a warrant to purchase 1,000,000 shares of common stock at$3.00 per share to Pacific Republic. Using the Black-Scholes option pricing model, the Company estimated that the fair value of the warrants was $2,754,000on the date of issue, with the following assumptions: fair value of a share of common stock equal to $3.90; term of 5 years; exercise price of $3.00; volatilityof 75.0%; dividend rate of 0% and risk-free interest rate of 6.26%. The estimated fair value of the warrant was amortized to interest expense over the remainingterm of the line of credit. During February 2002, in connection with an extension of99Pacific Republic’s line of credit to the Company and Series C financing, the Company reduced the exercise price of the 1,000,000 warrants from $3.00 pershare to $1.40 per share. The Company measured the incremental fair value of the warrants at the date of modification, using the Black-Scholes option pricingmodel. The incremental value of $127,000 was recorded as interest expense during the year ended June 30, 2002. During March 2005, Pacific Republicexercised the warrants to purchase 1,000,000 shares of common stock at $1.40 per share.In August 2002, in connection with the renegotiation of a contractual commitment with a distributor, the Company issued a warrant to purchase525,000 shares of common stock at an exercise price of $1.00 per share. Using the Black-Scholes option pricing model, the Company estimated that the fairvalue of the warrant was $225,000 on the date of issue and recorded the warrant in additional paid in capital. In February 2007, these warrants were exercisedas a cashless exercise in which 495,833 shares of common stock were issued in connection with the Company’s IPO.In connection with the Series B preferred stock financing in April 2001, the Company was obligated to issue up to 333,333 warrants to purchase commonstock at a price per share of $10.00, based on the Company not meeting certain deadlines relating to an initial public offering of the Company’s commonstock. Using the Black-Scholes option pricing model, the Company estimated the fair value of the warrants to be $373,000 based on the followingassumptions: fair value of a share of common stock equal to $3.00; term of 5 years; exercise price of $10.00; volatility of 75.0%; dividend rate of 0% andrisk-free interest rate of 5.34%. The estimated fair value of the warrants was credited to additional paid-in capital with a corresponding debit to Series Bpreferred stock. During November 2005, warrants to purchase 16,666 shares of common stock were exercised, and the remaining 316,667 warrants expiredunexercised in April 2006.9. Income TaxesThe provision for income taxes consists of the following (in thousands):June 30,200720062005Current:Federal$558$134$—State508544Foreign3787064Total current1,44425868Deferred:Federal———State———Foreign———Total deferred———Total provision$1,444$258$68 100A reconciliation of income taxes at the statutory federal income tax rate to net income taxes included in the accompanying consolidated statements ofoperations is as follows (in thousands):June 30,200720062005U.S. federal taxes (benefit):At federal statutory rate$(1,672)$(11,304)$(8,608)State tax, net of federal benefit(218)(1,571)(1,315)Stock-based compensation expense2,3111,8941,236Change in valuation allowance1,95811,2778,745Credits(1,394)(437)(408)Change in state rate9—256Federal AMT558134—Other(486)19598Foreign3787064Total$1,444$258$68 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets at June 30, 2007 and 2006 were asfollows (in thousands):June 30,20072006Deferred tax assets:Federal and state net operating losses$4,205$14,853Accrued vacation964603Deferred revenue27,10817,969Credits4,4572,579Capitalized research and development409481Other7,9807,223Total deferred tax assets45,12343,708Deferred tax liabilities:Fixed assets(404)(947)Total deferred tax liabilities(404)(947)Valuation allowance(44,719)(42,761)Net deferred tax assets:$—$— At June 30, 2007, the Company had approximately $12.1 million in federal and $1.9 million in state net operating loss carryforwards, which expire invarying amounts beginning in 2025 and 2017 for federal and state purposes, respectively. In addition, at June 30, 2007, the Company had federal and stateresearch and development tax credits of approximately $2.2 million each. The federal research credits will begin to expire in 2008 and the state research creditshave no expiration date.Utilization of the Company’s net operating loss carryforwards may be subject to substantial annual limitation due to the ownership change limitationsprovided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating losscarryforwards before utilization.Based on the available objective evidence and history of losses, the Company has established a 100% valuation allowance against its deferred tax assetsdue to the uncertainty surrounding the realization of such assets.101The Company’s net operating loss carryforwards exclude deductions of approximately $14.7 million at June 30, 2007 related to stock option exercisesand disqualifying dispositions. The excess tax benefit arising from these deductions wil be credited to additional paid-in capital once realized.10. Other Income (Expense)For the fiscal years ended June 30, 2007, 2006 and 2005, other income (expense) consisted of the following (in thousands):Years Ended June 30,200720062005Interest income$4,261$501$198Other—22Total interest and other income$4,261$503$200 Years Ended June 30,200720062005Interest expense$(157)$(324)$(291)Loss on asset disposition(249)(44)(18)Foreign currrency transaction loss(131)(21)(26)State sales and local taxes(194)(23)(88)Other—(35)(15)Total interest and other expense$(731)$(447)$(438) 11. Related Party TransactionsThe Company recognized revenue of $5.3 million, $5.6 million and $7.1 million during the years ended June 30, 2007, 2006 and 2005, respectively,relating to products and services provided to Meditec. Meditec’s parent, Marubeni Corporation, is a common stockholder of the Company. At June 30, 2007and 2006, amounts of $20.1 million and $25.1 million, respectively, were recorded as deferred revenue and advances relating to payments made by Meditecfor certain products and services. At June 30, 2007 and 2006, no amounts were due from Meditec.The Company recognized revenue of $3.8 million, $195,000 and $585,000, during the years ended June 30, 2007, 2006 and 2005, respectively,relating to products and services provided to Stanford. The Company’s former Chief Executive Officer was an active member of the faculty at Stanford.Currently, he is a member of the Board of Directors and he holds the position of Professor of Neurosurgery and Radiation Oncology at Stanford. At June 30,2007 and 2006, amounts of $231,000 and $1.3 million, respectively, were recorded as deferred revenue and advances relating to payments made by Stanford.At June 30, 2007 and 2006, no amounts were due from Stanford. The Company also has a license agreement with Stanford as disclosed in Note 7.The Company recognized revenue of $3.2 million, $130,000 and $2.6 million, during the years ended June 30, 2007, 2006 and 2005, respectively,relating to products and services provided to President Medical Technology Co. (“President”). President is related to President International InvestmentHoldings, Ltd., a common stockholder of the Company. At June 30, 2007 and 2006, amounts of $714,000 million and $2.3 million, respectively, wererecorded as deferred revenue and advances relating to payments made by President for certain products and services. At June 30, 2007 and 2006, amounts of$0 and $1,000, respectively, were recorded as trade accounts receivable from President. In May 2006, President International Investment Holdings, Ltd. soldall of its interest in President.In April 2006, the Company entered into a new consulting agreement with Dr. Adler, which terminated any prior consulting agreements. Under thisconsulting agreement, Dr. Adler was entitled to receive a maximum compensation of $137,000 per year, payable at the beginning of each quarter beginning onApril 1, 2006. Additionally Dr. Adler entered into a consulting agreement with the CyberKnife Society in April 2006. The Company assumed the contractualobligations of the CyberKnife Society under this102agreement, effective as of October 3, 2006. Under this consulting agreement, Dr. Adler provides services to the CyberKnife Society and was entitled to receivea maximum compensation of $76,000 per year, payable at the beginning of each quarter beginning on April 1, 2006. This agreement had a term of one yearand was to be renewed for successive one-year periods, unless 30 days’ written notice of termination is provided by either party prior to the expiration of eachone-year period. The CyberKnife Society decided not to renew and issued a notice of non-renewal to Dr. Adler in February of 2007.In April 2007, the Company entered into a new consulting agreement with Dr. Adler, which terminated the prior consulting agreement discussed above.Dr. Adler is a stockholder and a former officer and a current director of the Company. Under the new consulting agreement, Dr. Adler is entitled to receive amaximum compensation of $149,100 per year, payable at the beginning of each quarter beginning on April 1, 2007. This agreement has a term of one yearand will renew for successive one-year periods, unless either party provides 30 days’ written notice of termination prior to the expiration of each one-yearperiod. The Company recognized consulting expense for Dr. Adler in the amounts of $178,000, $155,000 and $215,000 for the years ended June 30, 2007,2006 and 2005, respectively, pursuant to these agreements.12. Employee Benefit PlansThe Company’s employee savings and retirement plan is qualified under Section 401(k) of the United States Internal Revenue Code. Employees maymake voluntary, tax-deferred contributions to the 401(k) Plan up to the statutorily prescribed annual limit. The Company makes discretionary matchingcontributions to the 401(k) Plan on behalf of employees up to the limit determined by the Board of Directors. The Company contributed $730,000, $528,000and $283,000 to the 401(k) Plan during the years ended June 30, 2007, 2006 and 2005, respectively.13. Quarterly Financial Data (unaudited)Quarters endedSeptember 30, 2006December 31, 2006March 31, 2007June 30, 2007(in thousands, except per share data)Net sales$32,771$26,347$37,340$43,994Gross profit$19,303$14,702$21,118$24,916Net income (loss) before cumulative effect ofchange in accounting principle$1,120$(7,291)$(785)$502Net income (loss)(1)$1,958$(7,291)$(785)$502Basic net income (loss) per share$0.05$(0.45)$(0.02)$0.01Diluted net income (loss) per share$0.04$(0.45)$(0.02)$0.01Shares used in basic per share calculation41,44516,20937,01853,732Shares used in diluted per share calculation49,85116,20937,01862,553 Quarters endedSeptember 30, 2005December 31, 2005March 31, 2006June 30, 2006(in thousands, except per share data)Net sales$3,871$11,326$16,300$21,400Gross profit$1,844$6,360$6,778$10,423Net loss$(10,210)$(7,936)$(7,690)$(7,858)Basic and diluted net loss per share$(0.65)$(0.50)$(0.48)$(0.49)Shares used in basic and diluted per sharecalculation15,82115,94216,10016,141(1) Includes $838,000 of cumulative effect of change in accounting principle for the adoption of FAS 123R.103Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENot applicable.Item 9A. CONTROLS AND PROCEDURESWe maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports isrecorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that suchinformation is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allowfor timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that anycontrols and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and inreaching a reasonable level of assurance, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls andprocedures.Material WeaknessesAs of the fiscal year ended June 30, 2007, 2006 and 2005, management identified material weaknesses and significant deficiencies in our internal controlover financial reporting, which are described below.As described herein, and as previously reported in our Registration Statement on Form S-1, in connection with the audit of our consolidated financialstatements for the years ended June 30, 2007, 2006 and 2005, our independent registered public accounting firm identified material weaknesses andsignificant deficiencies in our internal controls over financial reporting. Material weaknesses and significant deficiencies relate to a lack of segregation ofduties, inadequate review procedures and the misapplication of accounting policies, related to revenue recognition and stock-based compensation. Thesecontrol deficiencies could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected ina timely manner.Throughout the year ended June 30, 2007, we implemented procedures designed to correct the material weaknesses and significant deficiencies notedabove. Management continues to implement new processes and controls to expand our accounting staff to efficiently and timely execute our new procedures andenhance the training and education for our finance and accounting personnel. We are still evaluating the design and operation of these new procedures. Onceplaced in operation for a sufficient period of time we will subject them to appropriate tests in order to conclude whether they are operating effectively.Changes in Internal Control Over Financial Reporting:Our efforts to remediate these material weaknesses in our internal controls over financial reporting consist of the following corrective actions: (i) hiringand training additional, qualified finance and accounting personnel; and (ii) strengthening our processes and procedures related to complex revenue recognitionand equity transactions. However, even after these corrective actions are implemented, the effectiveness of our controls and procedures may be limited by avariety of risks.There were no changes in our internal control over financial reporting, other than those stated above, during our most recent fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internal control over financial reporting.104Inherent Limitations of Internal ControlsInternal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdownsresulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because ofsuch limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards toreduce, though not eliminate, this risk.As of June 30, 2007, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief ExecutiveOfficer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing andbecause of the material weaknesses and significant deficiencies noted, our Chief Executive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were not effective.Item 9B. OTHER INFORMATIONNot applicable.105PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.Our directors and executive officers as of August 30, 2007 are as follows:NameAgePosition(s)Euan S. Thomson, Ph.D.44President, Chief Executive Officer and DirectorRobert E. McNamara50Senior Vice President, Chief Financial OfficerChris A. Raanes42Senior Vice President, Chief Operating OfficerEric P. Lindquist47Senior Vice President, Chief Marketing OfficerWade B. Hampton52Senior Vice President, Chief Sales OfficerChristopher D. Mitchell46Senior Vice President and General CounselTheresa L. Dadone53Senior Vice President, Human ResourcesWayne Wu(1)(2)(3)44Chairman of the Board of DirectorsJohn R. Adler, Jr., M.D.53DirectorTed T.C. Tu.51DirectorRobert S. Weiss(1)(2)(3)60DirectorLi Yu(1)(2)(3)66Director(1) Member of the audit committee(2) Member of the compensation committee(3) Member of the nominating and corporate governance committeeThe principal occupations and positions for at least the past five years of our executive officers and directors are described below. There are no familyrelationships among any of our directors or executive officers.Euan S. Thomson, Ph.D. has served as our Chief Executive Officer and a member of our board of directors since March 2002 and as our Presidentsince October 2002. Prior to joining Accuray, Dr. Thomson served as Chief Executive Officer of Photoelectron Corporation, a medical device company andheld various positions as a medical physicist within the United Kingdom National Health Service. He also previously worked as a consultant for othermedical device companies, including Varian Oncology Systems and Radionics, Inc. Dr. Thomson holds a B.S. in Physics, an M.S. in Radiation Physics anda Ph.D. in Physics, with an emphasis on stereotactic brain radiotherapy, each from the University of London.Robert E. McNamara has served as our Senior Vice President, Chief Financial Officer since December 2004. From March 2003 to June 2004,Mr. McNamara served initially as a consultant and then as Chief Executive Officer for InDefense, Inc., a security software company that was acquired byMicrosoft, Inc. After the acquisition, Mr. McNamara provided consulting services to the surviving entity until November 2004. From March 2001 toAugust 2002, Mr. McNamara served as Senior Vice President and Chief Financial Officer of Recourse Technologies, Inc., a security software firm that wasacquired by Symantec Corporation. After the acquisition, Mr. McNamara provided consulting services to the surviving entity from September 2002 toFebruary 2003. From August 1999 to February 2001, Mr. McNamara founded and served as CFO for EB Direct, an online employee benefits provider,acquired by InsuranceWize. From August 1997 to July 1998, Mr. McNamara served as Executive Vice President and Chief Financial Officer for SomnusMedical Technologies, Inc., a medical device company. From August 1998 to August 1999, Mr. McNamara provided consulting services to Somnus. FromApril 1995 to August 1997, Mr. McNamara served as Chief Financial Officer of Target Therapeutics Inc., a medical device company. Mr. McNamaracurrently sits on the board of directors of Northstar Neuroscience Inc., a medical device company. Mr. McNamara holds a B.S. in Accounting from theUniversity of San Francisco and an M.B.A. from the Wharton School at the University of Pennsylvania.106thChris A. Raanes has served as our Senior Vice President, Chief Operating Officer since September 2002. Between March 2002 and September 2002,Mr. Raanes was attending to personal matters. From December 1999 to March 2002, Mr. Raanes served as Vice President and General Manager of DigitalImaging for PerkinElmer Optoelectronics, a business unit of PerkinElmer, Inc. From December 1998 to December 1999, Mr. Raanes was the GeneralManager of Amorphous Silicon, a business unit of PerkinElmer, Inc. From July 1992 to December 1998, Mr. Raanes held a number of positions, includingPresident and General Manager of EG&G Reticon, a subsidiary of a predecessor to PerkinElmer. Mr. Raanes holds a B.S. and an M.S., each in ElectricalEngineering, from the Massachusetts Institute of Technology.Eric P. Lindquist has served as our Senior Vice President, Chief Marketing Officer since November 2004. From March 2004 to November 2004,Mr. Lindquist served as Senior Vice President of Marketing at Omnicell, Inc., a healthcare services company. From March 1997 to March 2004,Mr. Lindquist served in various senior management roles, including President of BrainLAB, Inc. and Director of North American Sales of BrainLAB AG, amedical technology company. Mr. Lindquist holds a B.S. in Mechanical Engineering from Washington State University, an M.S. in Mechanical Engineeringfrom Stanford University and an M.B.A. from the Haas School of Business at the University of California, Berkeley.Wade B. Hampton has served as our Senior Vice President, Chief Sales Officer since May 2007. Mr. Hampton first joined us as Senior Vice President,Worldwide Sales in August 2006. From March 2003 to August 2006, Mr. Hampton served in various senior management roles, including Senior VicePresident, Americas at Lumenis Ltd., a medical device company. From October 2001 to March 2003, he served as Vice President of International at NatusMedical, Inc., a medical device company. From September 1999 to October 2001 he served as Vice President of International at Coherent, Inc., a medicaldevice company. From January 1997 to September 1999, he served in various positions, including President and Vice President, at Andros Incorporated, ascientific instrumentation company. Mr. Hampton holds a B.A. in Business Administration from the University of Florida.Christopher D. Mitchell joined us as Senior Vice President and General Counsel in April 2007. From January 2007 to April 2007, Mr. Mitchell wasattending to personal matters. From October 2006 to January 2007, Mr. Mitchell served as General Counsel of St. Francis Medical Technologies, Inc., aprivately-held medical device company that was acquired by Kyphon, Inc. in January 2007. From February 1995 to October 2006, Mr. Mitchell was apartner in the law firm of Wilson Sonsini Goodrich & Rosati. Mr. Mitchell was an associate in such firm from April 1989 through January 1995.Mr. Mitchell holds a B.A. in Economics from Haverford College and a J.D. from the University of Minnesota.Theresa L. Dadone joined us as Senior Vice President, Human Resources in July 2007. From April 2007 to July 2007, Ms. Dadone was attending topersonal matters. From February 2003 through April 2007 Ms. Dadone served in various human resources management roles, including Vice President ofHuman Resources at Hewlett-Packard Company. Prior to that, from January 2001 through February 2003, Ms. Dadone served as Vice President HumanResources for Propel, Inc., a web acceleration company, and as Senior Vice President, Human Resources for Healtheon/ WebMD from January 1998 toJanuary 2001. Ms. Dadone holds a B.S. degree in Clinical Psychology from San Jose State University.Wayne Wu has served as a member of our board of directors since April 1998 and the Chairman of our board of directors since May 2004. SinceJune 2005, Mr. Wu has been the President of Pacific Health Investment, Inc., a life science investments company. From February 1998 through May 2005,he served as manager of Pacific Republic Capital Group, a life science investments fund. Mr. Wu holds a B.S. in Mathematics from the National CentralUniversity in Taiwan and an M.A. in Mathematics from the University of Southern California. Mr. Wu also serves on the Board of Directors of Green TreeInvestment Company, a chain of upscale budget business hotels in the People’s Republic of China.107John R. Adler, Jr., M.D. is one of our founders and has served as a member of our board of directors since December 1990. From September 1999through May 2004, Dr. Adler served as Chairman of our board of directors, and from October 1999 to March 2002, as our Chief Executive Officer. FromJanuary 1995 until July 1999, he served as the Vice Chairman of our board of directors. Since July 1987, Dr. Adler has been a member of the faculty atStanford University and a Professor of Neurosurgery and Radiation Oncology at Stanford University since September 1998. Dr. Adler also serves on theeditorial boards of Computer-Aided Surgery, The Journal of Medical Robotics and Computer Assisted Surgery, Chinese Journal of Clinical Oncology andTechnology in Cancer Research and Treatment. Dr. Adler holds an A.B. in Biochemistry from Harvard College and an M.D. from Harvard Medical School.Ted T.C. Tu has served as a member of our board of directors since May 2004. Since May 2005, Mr. Tu has served as the president of PresidentInternational Development Corporation, an investment holding company, and since January 2006, Mr. Tu has been the president of President Life SciencesCo., Ltd. From May 2000 to May 2005, Mr. Tu served as Executive Vice President of President International Development Corporation. Mr. Tu holds a B.A.in Industry and Business Administration from National Taiwan University and an M.B.A. from the University of Houston.Robert S. Weiss has served as a member of our board of directors since January 2007. Since January 2005, Mr. Weiss has served as the Executive VicePresident and Chief Operating Officer of The Cooper Companies, Inc., or Cooper, a global specialty medical products company. In August 2007, Mr. Weisswas appointed Chief Executive Officer of Cooper, effective November 1, 2007. Prior to that, he served as Cooper’s Executive Vice President sinceOctober 1995 and Chief Financial Officer from September 1989 to January 2005. Mr. Weiss also served as Cooper’s Treasurer from September 1989 toMarch 2002. From March 1984 until October 1995 he served at Cooper in various roles, including Senior Vice President, Vice President and CorporateController. Mr. Weiss also serves on the board of directors of Cooper. Mr. Weiss holds a B.S. in Accounting from the University of Scranton.Li Yu has served as a member of our board of directors since June 2004. Since December 1991, Mr. Yu has served as the Chairman of the board ofdirectors and, since January 1993, as the President and Chief Executive Officer of Preferred Bank, a financial institution. From 1987 until December 1991,Mr. Yu served as President of Greenway International, a privately held real estate investment company. From 1982 to 1987, he served as Chairman of theBoard of California Pacific National Bank, which was acquired by an entity subsequently acquired by Bank of America. Mr. Yu holds an M.B.A. from theUniversity of California, Los Angeles.Dr. Thomson, our President and Chief Executive Officer, served during various periods from March 1999 to February 2002 as President, ChiefExecutive Officer and a member of the board of directors of Photoelectron Corporation, a publicly held medical device company. In July 2003, PhotoelectronCorporation filed for bankruptcy.Board CompositionOur board of directors may establish from time to time by resolution the authorized number of directors. Seven directors are currently authorized. SECrules and NASDAQ listing requirements require our board of directors to determine the independence of its members. Accordingly, our board of directors hasdetermined that Mr. Weiss, Mr. Wu and Mr. Yu are independent (as independence is currently defined by NASDAQ listing standards). Our board of directorsmust consist of a majority of independent board members by February 8, 2008. We have retained an executive search firm to identify and recruit additionalcandidates for membership on our board of directors who would qualify as independent directors. Any such candidates would meet the SEC and NASDAQrequirements for independence.In accordance with our amended and restated certificate of incorporation, our board of directors is divided into three classes with staggered three-yearterms. At each annual meeting of stockholders, the108successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting followingelection. Our directors will be divided among the three classes as follows:· the Class I directors are Mr. Weiss and Mr. Yu, and their terms will expire at the next annual meeting of stockholders, to be held in 2007;· the Class II directors are Dr. Adler and Mr. Tu, and their terms will expire at the annual meeting of stockholders to be held in 2008; and· the Class III directors are Dr. Thomson and Mr. Wu, and their terms will expire at the annual meeting of stockholders to be held in 2009.Our amended and restated certificate of incorporation provides that the authorized number of directors may be changed only by resolution of the board ofdirectors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly aspossible, each class will consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delayor prevent a change of our management or a change of control at our company.Board CommitteesOur board of directors has the following standing committees: an audit committee, a compensation committee and a nominating and corporate governancecommittee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or untilotherwise determined by our board.Audit CommitteeOur audit committee oversees our corporate accounting and financial reporting process. Among other matters, the audit committee evaluates theindependent auditors’ qualifications, independence and performance; determines the engagement of the independent auditors; reviews and approves the scopeof the annual audit and the audit fee; discusses with management and the independent auditors the results of the annual audit and the review of our quarterlyconsolidated financial statements; approves the retention of the independent auditors to perform any proposed permissible non-audit services; monitors therotation of partners of the independent auditors on the Accuray engagement team as required by law; reviews our critical accounting policies and estimates;oversees our internal audit function and annually reviews the audit committee charter and the committee’s performance. The current members of our auditcommittee are Mr. Weiss, who is the chair of the committee, Mr. Yu and Mr. Wu. All members of our audit committee meet the requirements for financialliteracy under the applicable rules and regulations of the SEC and NASDAQ. Our board has determined that Mr. Weiss is an audit committee financial expertas defined under the applicable rules of the SEC and has the requisite financial sophistication as defined under the applicable rules and regulations ofNASDAQ. Mr. Weiss, Mr. Yu and Mr. Wu are independent directors as defined under the applicable rules and regulations of the SEC and NASDAQ. Theaudit committee operates under a written charter that satisfies the applicable standards of the SEC and NASDAQ.The audit committee met 11 times during the fiscal year ended June 30, 2007. The audit committee did not act by written consent during such fiscal year.109Compensation CommitteeOur compensation committee reviews and recommends policies relating to compensation and benefits of our officers and employees. The compensationcommittee reviews and approves corporate goals and objectives relevant to compensation of our chief executive officer and other executive officers, evaluates theperformance of these officers in light of those goals and objectives, and sets the compensation of these officers based on such evaluations. The compensationcommittee also administers the issuance of stock options and other awards under our stock plans (other than awards granted to non-employee members of ourboard of directors). The compensation committee will review and evaluate, at least annually, the performance of the compensation committee and its members,including compliance of the compensation committee with its charter. The current members of our compensation committee are Mr. Weiss, Mr. Wu andMr. Yu, with Mr. Yu serving as the chair of the committee. Each of the members of our compensation committee are independent under the applicable rules andregulations of the SEC, NASDAQ and the Internal Revenue Service.The compensation committee met 12 times during the fiscal year ended June 30, 2007. The compensation committee did not act by written consent duringsuch fiscal year.Nominating and Corporate Governance CommitteeThe nominating and corporate governance committee will be responsible for making recommendations to our board of directors regarding candidates fordirectorships and the size and composition of our board. In addition, the nominating and corporate governance committee will be responsible for overseeing ourcorporate governance guidelines and reporting and making recommendations to our board concerning governance matters. The current members of ournominating and corporate governance committee are Mr. Weiss, Mr. Wu and Mr. Yu, with Mr. Wu serving as the chair of the committee. Each of the membersof our nominating and corporate governance committee are independent under the applicable rules and regulations of the SEC and NASDAQ.There are no family relationships among any of our directors or executive officers.The nominating and corporate governance committee met one time during the fiscal year ended June 30, 2007 and did not act by written consent duringsuch fiscal year.Section 16(a) Beneficial Ownership Reporting ComplianceSection 16(a) of the Securities Exchange Act of 1934, as amended, requires that our executive officers and directors, and persons who own more than10% of a registered class of our equity securities, file reports of ownership and changes in ownership (Forms 3, 4 and 5) with the Securities and ExchangeCommission. Executive officers, directors and greater-than-10% holders are required to furnish us with copies of all of these forms which they file. Basedsolely on our review of these reports or written representations from certain reporting persons, we believe that during fiscal year 2007, all filing requirementsapplicable to our officers, directors, greater-than-10% beneficial owners and other persons subject to Section 16(a) of the Exchange Act were met.Codes of Conduct and EthicsWe have adopted a Code of Conduct and Ethics that applies to all employees including principal executive officer and principal financial officer. The fulltexts of our codes of business conduct and ethics are posted on our website at http://www.accuray.com under the Investor Relations section. The inclusion ofour Web site address in this report does not include or incorporate by reference the information on our Web site into this report.110ITEM 11. EXECUTIVE COMPENSATIONREPORT OF THE COMPENSATION COMMITTEEThis report, filed in accordance with Item 407(e)(5) of Regulation S-K, should be read in conjunction with the other information relating to executivecompensation which is contained elsewhere in this report and is not repeated here.In this context, the Compensation Committee hereby reports as follows:1. The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis section contained herein withmanagement.2. Based on the review and discussions referred to in paragraph (1) above, the Compensation Committee recommended to our board of directors,and our board of directors has approved, that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K forthe fiscal year ended June 30, 2007 for filing with the SEC and in the Company’s Proxy StatementThe foregoing report is provided by the undersigned members of the Compensation Committee.August 29, 2007Li Yu (Chairman)Robert S. WeissWayne WuThe foregoing Compensation Committee report shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, asamended, or the Securities Exchange Act of 1934, as amended and shall not otherwise be deemed filed under these acts, except to the extent weincorporate by reference into such filings.Compensation Discussion & AnalysisRole of the Compensation CommitteeThe Compensation Committee of our board of directors, which is comprised solely of non-employee, independent directors, administers our executivecompensation programs. The Compensation Committee is responsible for reviewing and approving the specific compensation of our Chief Executive Officerand for reviewing and determining the compensation of all of our other executive officers. In addition, the Compensation Committee may, from time to time,hire one or more independent compensation and benefits consultants to assist in developing and reviewing overall executive compensation strategies.Compensation ObjectivesThe objective of our fiscal year 2007 executive compensation program was to attract, retain, motivate and reward our executives with a competitive levelof compensation, weighted toward incentive opportunities and linked to individual and company performance. The elements of our fiscal year 2007 executivecompensation program includes base salary, incentive bonus, equity ownership opportunities and other benefits. The guiding principles of our compensationprogram applicable to our named executive officers (NEO’s) were as follows:· Provide competitive levels of total rewards relative to comparable medical device, biotechnology and high technology companies, which will enable usto attract and retain the best possible executive talent;· Motivate our executive officers to achieve optimum performance for us and our stockholders;111· Align the financial interests of our executive officers and stockholders through equity-based awards and incentive pay opportunities;· Provide a total compensation program that recognizes individual contributions as well as overall business results;· Provide incentives that promote the achievement of both short- and long-term objectives; and· Ensure that a significant portion of our executives officers’ compensation is at risk based achievement of pre-established corporate, financial andindividual objectives.Beginning with our initial public offering in February 2007, one of our principal goals became to provide incentives to our executives to maximizestockholder value over time. The focus of the Compensation Committee and our executive compensation program is therefore to closely align the interests of theexecutive officers with those of our stockholders, while delivering compensation in a cost-effective manner. To achieve this goal, the Compensation Committeeattempts to (i) offer compensation opportunities that attract and retain executives whose abilities are critical to our long-term success; (ii) motivate individualsto perform at their highest level and reward achievement; (iii) tie a significant portion of the executive officers’ total compensation to achievement of financial,organizational and management performance goals; and (iv) encourage executive officers to manage our business from the perspective of owners with an equitystake in our company.Our overall compensation program is structured to attract, motivate and retain highly qualified executive officers by paying them competitively,consistent with our success and their contribution to that success. Accordingly, the Compensation Committee sets goals based on advice from managementand after our initial public offering, an independent compensation consultant retained by the Compensation Committee, as discussed below. The goals aredesigned to link each NEO’s compensation to our performance and the NEO’s own performance within our company. Consistent with this performance-basedphilosophy, we provide a base salary to our executive officers, and also include significant incentive-based components. The incentive-based componentsinclude annual cash and equity awards based on our company’s independent financial performance to provide incentives to reward both short- and long-termperformance. In fiscal year 2007, prior to our initial public offering, the Compensation Committee allocated total compensation between cash and equity basedon data generated from the Radford 2005 Executive Compensation Survey and the MEDIC Executive Compensation Survey. The Radford ExecutiveCompensation Survey is an executive compensation survey of companies in the medical device, software and other high technology industries. The MEDICsurvey is a survey of executive compensation of companies in the medical device industry. In establishing salaries for fiscal 2007, the CompensationCommittee considered the Radford data and the MEDIC data and sought to establish salary levels that were at least at the average of the median salary levelsreflected in the two surveys. In establishing incentive bonus targets for fiscal 2007, the Committee sought to provide the executive officers with an opportunityto realize total target cash compensation that was at least at the average of the median of the Radford survey data and the MEDIC survey data reviewed by theCommittee. The Committee also sought to use bonus metrics that would be related to our operating plan objectives and closely correlated with stockholdervalue.Determination of Compensation AwardsPursuant to its charter, the Compensation Committee has the responsibility (i) to review and determine all forms of compensation for all of our executiveofficers, including cash awards, equity awards and other benefits; (ii) to review and recommend to the full board of directors any compensation for thedirectors; and (iii) to establish and review general policies relating to compensation, benefits, and all bonus and stock compensation for our Chief ExecutiveOfficer, our other executive officers and for all of our other employees. In addition, as described above the Compensation Committee may, from time to time,112hire compensation and benefits consultants to assist in developing and reviewing overall executive compensation strategies.For fiscal year 2007, the Compensation Committee structured compensation for the NEOs that was composed of the following components:· Base salary;· Annual cash bonus; and· Equity compensation awards.In April 2007, the Compensation Committee engaged the firm of Watson Wyatt, a compensation consulting firm, to serve as its independent advisor withregard to the determination of the key elements of our company’s total compensation program. Watson Wyatt specializes in global human resources consultingand reports directly to the Compensation Committee. Watson Wyatt advises the Compensation Committee on structuring our various compensation programsand determining the appropriate levels of salary, bonus and other awards payable to our executive officers by providing industry competitive analysis andassessing the reasonableness of compensation programs for the executive officers. Although Watson Wyatt did not participate in the process by which fiscal2007 salaries were set, Watson Wyatt was involved in advising our Compensation Committee in connection with determination of fiscal 2007 cash incentivebonus awards to executive officers.Beginning in fiscal year 2008, the Compensation Committee engaged Watson Wyatt to conduct an assessment of the competitive practices and theamounts and nature of total compensation paid to executive officers. The Committee has engaged Watson Wyatt to perform a total rewards compensationsurvey, which will encompass all elements of compensation including base salary, cash incentive bonus compensation, equity awards and benefits andperquisites. The purpose of this survey is to benchmark all elements of the Company’s compensation program, for both executive officers and otheremployees, against an industry peer group. Based in part on the information provided by Watson Wyatt, the Compensation Committee recommends and, ifapplicable, approves executive total compensation packages consisting of base salary and variable cash and stock-based incentive awards, consistent with theCompensation Committee’s charter. We believe that a significant portion of compensation should be weighted towards the variable components ofcompensation objectives to ensure that total compensation awarded reflects our overall success, and to motivate executive officers to meet appropriateperformance measures, thereby maximizing total return to stockholders.To aid the Compensation Committee in making its determination, our Chief Executive Officer provides recommendations annually to the CompensationCommittee regarding the compensation of all executive officers, excluding himself. The Chief Executive Officer also conducts an annual performance review ofthe other executive officers to evaluate their performance for the period being assessed and presents the results of those performance reviews to theCompensation Committee for their consideration in approving each executive’s compensation. Similarly, the Chief Executive Officer’s performance is reviewedannually by the Compensation Committee.In determining which elements of compensation are to be paid, and how they are weighted, we also take into account whether a particular form ofcompensation will be deductible under Section 162(m) of the Internal Revenue Code, as amended (the “Code”). Section 162(m) generally limits thedeductibility of compensation paid to our NEOs to $1 million during any fiscal year unless such compensation is “performance-based” underSection 162(m). However, under a Section 162(m) transition rule for compensation plans of corporations which are privately held and which become publiclyheld in an initial public offering, compensation paid under a plan that existed prior to the initial public offering will not be subject to Section 162(m) until theearlier of (i) a material modification of the plan; (ii) the issuance of all employer stock and other compensation that has been allocated under the plan; or(iii) the first meeting of113stockholders at which directors are to be elected that occurs after the close of the third calendar year following the year of the initial public offering (the“Transition Date”). After the Transition Date, rights or awards granted under the plan, other than options and stock appreciation rights, will not qualify as“performance-based compensation” for purposes of Section 162(m) unless such rights or awards are granted or vest upon pre-established objectiveperformance goals, the material terms of which are disclosed to and approved by the stockholders of the company.Our compensation program is intended to maximize the deductibility of the compensation paid to our NEOs to the extent that we determine it is in our bestinterests. Consequently, we may rely on the exemption from Section 162(m) afforded to us by the transition rule described above for compensation paidpursuant to our pre-existing plans. In addition, our 2007 Incentive Award Plan has been designed to permit our Compensation Committee to grant stock optionsand other awards which will qualify as “qualified performance-based compensation” under Section 162(m).Compensation Benchmarking and Peer GroupFor fiscal year 2007, the Compensation Committee reviewed executive cash and equity compensation survey data from the Radford 2005 ExecutiveCompensation Survey and the 2005 MEDIC Executive Compensation Survey including salary, equity and target bonus data comparisons and approved cashand equity compensation competitive with the market and industry data provided. Salary, equity and target bonus compensation for fiscal year 2007 is onaverage near the average of the median of the two survey data sets reviewed by the Committee.For fiscal year 2008, an important component of setting and structuring compensation for our executive officers will be determining the compensationpackages offered by similar companies in terms of revenue size, industry, business model complexity and growth. We will also consider retention needs indetermining the compensation packages. We will evaluate the compensation practices of a select peer group of companies to assess competitiveness. WatsonWyatt, the Compensation Committee’s independent compensation consultant, will review our evaluation, assesses its reasonableness and advise theCompensation Committee. Watson Wyatt will also perform the total rewards survey, report the results of the survey to the Compensation Committee and workwith the Committee to develop a specific peer group of comparable companies against which we will benchmark our executive total rewards program.Our Current PhilosophyAt the beginning of fiscal 2008, in consultation with Watson Wyatt, our independent compensation consultant, the Compensation Committee establisheda total rewards philosophy that will guide the Committee in future compensation decisions. Our total rewards philosophy is comprised of benefits, base pay,short term cash incentives and equity. These components will be regularly reviewed and adjusted as needed to ensure we are able to attract, retain, motivate andreward our employees, inclusive of our executive officers, to achieve both their individual and our business objectives necessary to meet our strategic goals andenhance stockholder value. As part of our company’s total rewards philosophy, it is our intent to provide direct compensation that enables us to attract, retain,motivate and reward strong performance that deliver results in support of our company’s business objectives.In fiscal 2008 the components of our total rewards philosophy will include base salary, cash incentives, equity incentives and other benefits.Base Salary. Our Company’s goal is to attract and retain the level of talent necessary to fuel the Company’s success. We believe that paying on average at the60th percentile or greater of our appropriate marketplace based on company and individual performance provides us access to the top talent and protects thecompensation of our current high caliber employees from falling behind market.114Fiscal year 2007. In fiscal year 2007, we provided our NEOs with base salaries at or near the average of the median of data from the Radford ExecutiveCompensation Survey and the MEDIC Executive Compensation Survey. The individual NEO’s base salary level was determined based on an assessment ofthe survey data, the individual’s performance, retention needs, and the critical nature of the individual’s position relative to our success. We do not provideformulaic base salary increases to our NEOs.Fiscal year 2008. In conjunction with our annual review of fiscal year 2007 performance, we provided an average base salary increase ofapproximately 20% to our NEOs for fiscal 2008. In determining the fiscal 2008 salaries for NEOs, the Compensation Committee considered compensationdata for comparable companies from the Radford select list. This list includes publicly held technology and life sciences companies with annual revenueranging from $250 to $449 million. The Committee also considered company performance for 2007 and, for each individual NEO, the individual’sperformance, retention needs, and the critical nature of the individual’s position relative to our success. The Committee also determined that these base salaryadjustments for NEOs were necessary to bring our NEOs’ base salaries in line with our compensation philosophy of paying base salaries at the 60 percentileof our appropriate marketplace.Cash Incentive Bonus. Cash incentives are a key re-enforcer of our performance based culture. On average, we believe in providing a total target cashopportunity at the 75th percentile or greater of our appropriate marketplace, tied to performance. The marketplace used in fiscal 2007 for comparable companybenchmarking purposes was the 2005 Radford and MEDIC Executive Compensation surveys. Our employees and executive officers, including our ChiefExecutive Officer, receive an annual cash bonus based on attainment of specific pre-determined corporate and individual objectives.Overview. The Compensation Committee oversees the administration of our overall incentive cash bonus program, pursuant to which annual cashbonuses are paid to our Chief Executive Officer and our other executive officers, as well as management and individual contributors who are not members ofour sales force. Each participant has a target bonus, which is a percentage of his or her base salary. Individual bonuses are determined based on individualachievement of set goals and objectives and overall performance for the year. In fiscal year 2007, executive bonus awards may exceed 100% of the applicablebase salary, as reviewed and determined by the Compensation Committee by assessing performance against previously established individual and companygoals.The cash bonus performance targets for our NEOs are established annually at levels that the Compensation Committee believes are achievable based onits assessment of the probable performance of the Company and our executive officers. In the Compensation Committee’s judgment, the revenue and netincome targets for fiscal year 2007 were not substantially certain to be attained and required strong performance by the Company and each of our executiveofficers in order for the targets to be attained.The individual performance bonus for each NEO other than the Chief Executive Officer is recommended by the Chief Executive Officer and approved bythe Compensation Committee. The individual performance bonus for the Chief Executive Officer is approved by the Compensation Committee and reported tothe full Board of Directors. Individual performance factors are based on an assessment of an individual’s overall performance and achievement of objectivesduring the year.Fiscal year 2007. In fiscal 2007 we structured our cash incentive bonus program to drive behavior consistent with meeting and exceeding company andindividual goals and objectives. We rewarded executive officers based on Accuray’s performance and the individual executive’s contribution to thatperformance. Target bonus percentages were set at 60% of base salary for the Chief Executive Officer and 40% of base salary for the Chief Financial Officer,Chief Marketing Officer and Chief Operating Officer. Target bonus percentage for the Chief Sales Officer was set at 75% of base pay. These target bonuspercentages were set based on a review of market data, including the 2005 Radford and MEDIC Executive Compensation Surveys, and to align executivebehavior with increasing stockholder value.115thThe metrics utilized for fiscal year 2007 bonuses were revenue, profit before stock compensation charges, cash balance, and operating loss. TheCommittee determined that these financial metrics were substantially achieved. In addition to these corporate financial metrics, each NEO also had specificindividual performance goals and objectives for 2007, which were in most cases largely qualitative in nature and related to each NEO’s area of responsibilitywithin the Company. While none of these metrics carried specific weightings, the Compensation Committee reviewed each executive’s overall performanceagainst each of these metrics when determining bonus payments for fiscal year 2007. The Committee reviewed overall company performance against thesefinancial metrics as well as individual performance of the NEOs against the goals and objectives established for each of them at the outset of the fiscal year.Based on this review, the Committee determined the fiscal 2007 bonus to be paid to each NEO.Fiscal year 2008. For fiscal year 2008, our Compensation Committee has established specific financial metrics and weighting that will be used todetermine bonus payments. The metrics are:· Net income· Operating income· Revenue· Gross margin· BacklogThe bonus for our Chief Executive Officer for fiscal 2008 will be based 70% on achievement of these metrics and 30% on achievement of qualitativeobjectives. Weighting of financial metrics in the case of our Chief Executive Officer shall be as follows: net income (10%), operating income (10%), revenue(20%), gross margin (10%), and backlog (20%). Fiscal 2008 bonuses for the Chief Operating Officer, Chief Financial Officer and Chief Marketing Officerwill based in part on achievement of these metrics and in part on achievement of individual qualitative goals and objectives, which are specific to each suchNEO and relate to each NEO’s area of responsibility. For the Chief Operating Officer, 50% of his bonus will be based on achievement of financial objectives(operating income 10%, revenue 20% and gross margin 20%) with the remainder based on achievement of qualitative goals. For the Chief Financial Officer,60% of his bonus will be based on achievement of financial objectives (net income 15%, operating income 15%, revenue 15% and gross margin 15%) withthe remainder based on achievement of qualitative goals. For the Chief Marketing Officer, 35% of his bonus will be based on achievement of financialobjectives (operating income 15% and revenue 20%), with the remainder based on achievement of qualitative goals. For our Chief Sales Officer, approximately15% of his bonus will be based on achievement of corporate financial objectives (revenue 3.5%, net income 1.75%, operating income 1.75%, gross margin1.75% and backlog 6.5%). The remaining approximately 85% of his bonus will be based primarily on achievement of quarterly sales quotas.The Compensation Committee has also established target bonus amounts equal to 100% of base salary for our Chief Executive Officer, 65% of basesalary for each of our Chief Operating Officer, Chief Financial Officer and Chief Marketing Officer and 83% of base salary for our Chief Sales Officer.Bonuses may, in the discretion of the Committee based on its review of corporate and individual performance, be paid at levels in excess of such targetamounts, provided that each NEO’s cash incentive bonus will not, in any event, exceed two times such NEO’s target bonus amount.In establishing the bonus metrics and target bonus percentages for fiscal 2008, the Committee considered the Radford select data as well as advice fromWatson Wyatt regarding appropriate metrics that were both consistent with industry practice and would serve to align the interests of management with those ofstockholders.116Incentive amounts to be paid under our cash incentive bonus program may be adjusted by the Compensation Committee to account for unusual events,such as extraordinary transactions, asset dispositions and purchases, and mergers and acquisitions if, and to the extent, the Compensation Committee doesnot consider the effect of such events indicative of Accuray’s performance. Bonus payments for executives hired during the applicable fiscal year are proratedbased on length of service during such year. Our executive officers must be employed by Accuray in good standing on the last day of the year to be eligible fora bonus payment for that year, though prorated bonus payments may be considered, at the discretion of our board of directors, under unusual circumstancessuch as death, disability, retirement or transition to a consultant role based on actual performance at the date relative to the targeted performance measures forthe program. In addition, under the NEO’s employment agreements with us, severance compensation includes a prorated portion of target bonus amounts.Equity Incentives. We believe that equity awards provide the strongest alignment between employee and stockholder interest. Our goal is to provide maximummotivation consistent with the need to control equity expense and dilution. To achieve these multiple goals, we will make use of a variety of equity basedprograms authorized by our stockholders.Our 2007 Incentive Award Plan permits the issuance of stock options to our Chief Executive Officer, other executive officers and employees to purchaseshares of our common stock at an exercise price that is not less than the fair market value of such stock on the date of grant. Stock options and other equityawards are granted to our Chief Executive Officer, other executive officers and other employees both as a reward for past individual and company performanceand as an incentive for future performance. The amount of individual equity grants to executive officers are determined after considering the individual’sperformance, retention needs, an evaluation of the individual’s total compensation package, an evaluation of the particular executive officer’s equity positionincluding an assessment of equity position relative to comparable company survey data, the critical nature of the individual’s position relative to our successand the competitive market positioning with respect to peer group companies. The Compensation Committee believes that equity-based performancecompensation arrangements are essential in promoting the retention of our executives and in aligning the interests of our executives and stockholders to enhancestockholder return.In August 2007, the Compensation Committee approved option grants of 60,000 shares and restricted stock unit awards of 10,000 shares to each of ourChief Operating Officer, Chief Financial Officer and Chief Marketing Officer. The Compensation Committee also approved an option grant of 175,000 sharesto our Chief Executive Officer, of which options for 40,000 shares were considered by the Compensation Committee to have been granted in satisfaction ofprovisions of Dr. Thomson’s employment agreement with us which provides that he is entitled to a 40,000 share option grant at the first regularly scheduledmeeting of the board of directors in each calendar year. (See Item 11 Executive Compensation – Employment, Change of Control and Severance Agreements).In awarding these options and restricted stock unit grants, the Compensation Committee sought to provide each NEO with equity ownership at approximatelythe 75th percentile of the executive officer equity ownership reflected in the Radford 2006 Executive Compensation Survey. The Committee also considered theCompany’s fiscal 2007 performance as well as the factors set forth above.Stock options granted under our 2007 Incentive Award Plan generally have a four-year vesting schedule in order to provide an incentive for continuedemployment, and generally expire ten years from the date of the grant. This provides a reasonable time frame in which to align the executive officer’sperformance with the price appreciation of our shares, and is consistent with a typical ten-year option term. The per share exercise price of options grantedunder our 2007 Incentive Award Plan, including the options granted to the NEOs described above, is not less than the closing price of a share of our commonstock on the NASDAQ Global Select Market on the date of grant. With regard to the 40,000 contractually-117based options awarded to Dr. Thomson, the Compensation Committee determined that the exercise price for these options should be the greater of the fairmarket value at the date of the grant or the fair market value of our common stock on the date such options should have been granted pursuant to Dr.Thomson’s employment agreement, which such fair market value would have been $28.47 per share.Our Chief Executive Officer, other executive officers and employees are also eligible to participate in our 2007 Employee Stock Purchase Plan, which ourstockholders approved in fiscal year 2007 and which took effect upon effectiveness of our initial public offering. Our 2007 Employee Stock Purchase Plan isintended to be qualified under Section 423 of the Internal Revenue Code, and permits the purchase of shares of common stock through employee payrolldeductions. The purchase price per share of common stock under our 2007 Employee Stock Purchase Plan is 85% of the lesser of the fair market value of ashare of the underlying stock as of the beginning of an applicable offering period or the applicable purchase date, with purchases generally occurring every sixmonths.Stock Ownership GuidelinesWe do not have fixed corporate governance guidelines relative to stock ownership of our executive officers.Compensation Recovery PolicyWe do not maintain a policy to seek the reimbursement of cash hire bonus awards or relocation amounts if paid to an executive officer if the executivevoluntarily terminates his or her employment with the Company. Since July 1, 2006, we have not paid any cash new hire bonuses to executive officers.Policies with Respect to Equity Compensation AwardsWe grant all stock option awards based on the fair market value as of the date of grant. We do not have a policy of granting stock option awards at lessthan the fair market value. The exercise price for stock option grants is systematically determined based on the last quoted price per share of our commonstock on the Nasdaq Global Market on the date of grant. We have also implemented a policy that prohibits grants of stock options or other equity awards toexecutive officers during periods when trading in our common stock is prohibited by the terms of our insider trading compliance policy.Defined Contribution PlansWe maintain an employee savings/retirement plan that is intended to be qualified under Section 401(k) of the Internal Revenue Code and which allows ourexecutive officers and our employees to defer up to $15,500 of their annual compensation, and employees, including our executive officers, over the age of 50to defer up to $20,500, subject to certain limitations imposed by the Code. We currently make dollar-for-dollar matching contributions to the 401(k) plan, on apayroll by payroll basis, subject to a maximum calendar-year matching contribution of $2,000 per participant, based on applicable IRS limitations. 401(k)plan participants who were our employees as of January 1, 2006 vest immediately in the amounts contributed by us. Any 401(k) plan participants whobecame our employees after January 1, 2006 vest with respect to 25% of the amounts contributed by us on each yearly anniversary of such participant’s dateof hire, for each of the first four years of such participants’ employment. For such participants, beginning at year five of employment, employees are 100%vested in company contributions to the 401(k) plan. All employees, including our executive officers, are eligible to participate in the 401(k) plan on the firstday of the month coinciding with, or immediately following, their date of hire. The elective deferrals of all participants, including our executive officers, areimmediately vested and non-forfeitable upon contribution to the 401(k) plan.118Defined Benefit Pension PlansWe do not have a defined benefit pension plan.Other Elements of Compensation and PerquisitesOur executive officers participate in the same group medical, life and disability insurance and employee benefit plans as our other salaried employees onthe same terms and conditions.Medjet Assist. At this time, we provide our NEOs with a company-paid membership in a program providing medical transportation in the event ofhospitalization. This program, known as Medjet Assist, provides air medical transportation both worldwide and domestically if an NEO is hospitalized as aninpatient and chooses to be transferred to any other hospital of his or her choice. We do not provide this benefit to our employees generally.2007 Summary Compensation TableThe following table sets forth all of the compensation awarded to, earned by, or paid to our principal executive officer, principal financial officer and thethree other highest paid executive officers whose total compensation in fiscal year 2007 exceeded $100,000. We refer to these executive officers as our “namedexecutive officers”.Name and Principal PositionSalary($)Bonus($)(1)OptionAwards($)(2)Non-EquityIncentive PlanCompensation($)(3)AllOtherCompensation($)Total ($)Euan S. Thomson, Ph.D.,President and ChiefExecutive Officer420,0003,4001,656,768330,0003,828(4)2,413,996Robert E. McNamara,Senior Vice President, ChiefFinancial Officer275,000—912,883128,7002,858(5)1,319,441Chris A. Raanes,Sr. Vice President, ChiefOperating Officer290,000148492,190131,0802,906(6)916,324Eric P. Lindquist,Sr. Vice President, ChiefMarketing Officer275,00074598,571126,5002,882(7)1,003,027Wade B. Hampton,Senior Vice President, ChiefSales Officer206,570—490,735109,395(8)4,208(9)810,908(1) Refers to payment of bonus for patent inventions.(2) The amounts in this column represent the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordancewith SFAS 123R. These amounts may reflect options granted in years prior to 2007. See Note 2 of the notes to our consolidated financial statementscontained elsewhere in this Annual Report on Form 10-K for a discussion of all assumptions made by us in determining the FAS 123R values of itsequity awards.(3) Refers to annual bonus earned in fiscal year 2007, which will be paid in fiscal year 2008.(4) Consists of: $2,000 in company matching contributions to our 401(k) plan for Dr. Thomson’s benefit, $600 in company matching contributions to aFlexible Spending Account for Dr. Thomson’s benefit, $970 in reimbursement for taxes paid on Dr. Thomson’s bonus for patent inventions, $53 incontributions in life insurance premiums paid by Accuray, on the same terms as paid for non-executive119employees, for Dr. Thomson’s benefit and $205 in Company contributions to MedJet Assist for the benefit of Dr. Thomson.(5) Consists of $2,000 in company matching contributions to our 401(k) plan for Mr. McNamara’s benefit, $600 in company matching contributions to aFlexible Spending Account for Mr. McNamara’s benefit, $53 in contributions in life insurance premiums paid by Accuray, on the same terms as paidfor non-executive employees, for Mr. McNamara’s benefit and $205 in Company contributions to MedJet Assist for the benefit of Mr. McNamara.(6) Consists of: $2,000 in company matching contributions to our 401(k) plan for Mr. Raanes’ benefit, $600 in company matching contributions to aFlexible Spending Account for Mr. Raanes’ benefit, $48 in reimbursement for taxes paid on Mr. Raanes’ bonus for patent inventions, $53 incontributions in life insurance premiums paid by Accuray, on the same terms as paid for non-executive employees, for Mr. Raanes’ benefit and $205 inCompany contributions to MedJet Assist for the benefit of Mr. Raanes.120(7) Consists of: $2,000 in company matching contributions to our 401(k) plan for Mr. Lindquist’s benefit, $600 in company matching contributions to aFlexible Spending Account for Mr. Lindquist’s benefit, $24 in reimbursement for taxes paid on Mr. Lindquist’s bonus for patent inventions, $53 incontributions in life insurance premiums paid by Accuray, on the same terms as paid for non-executive employees, for Mr. Lindquist’s benefit and $205in Company contributions to MedJet Assist for the benefit of Mr. Lindquist.(8) Includes $55,000 in bonuses earned and paid during fiscal year 2007 in connection with sales objectives satisfied by Mr. Hampton.(9) Consists of $600 in company matching contributions to a Flexible Spending Account for Mr. Hampton’s benefit, $53 in contributions in life insurancepremiums paid by Accuray, on the same terms as paid for non-executive employees, for Mr. Hampton’s benefit and $205 in Company contributions toMedJet Assist for the benefit of Mr. Hampton. Also consists of $3,350 in company matching contribution to our 401(k) plan for Mr. Hampton’s benefitbut subject to vesting over a four year period under our 401(k) plan. The amounts of company matching contributions in excess of $2,000 relate toamounts that were matched during calendar year 2006 when Mr. Hampton joined us but that also fall within fiscal year 2007.Grants of Plan-Based AwardsThe following table sets forth summary information regarding grants of plan-based awards made to each of our named executive officers during the fiscalyear ended June 30, 2007. The per share exercise price of each option grant was not less than the fair market value of our common stock on the date of grant(which in the case of options granted after our initial public offering, was the closing price of a share of our common stock on the NASDAQ Global Marketon the date of grant).EstimatedPossiblePayoutsUnderNon-EquityIncentivePlan AwardsTarget ($)All OtherOptionAwards:Numberof SecuritiesUnderlyingExercise orBasePrice ofOptionAwardsGrant DateFairValue ofStockand OptionNameGrant DateThreshold ($)(1)Maximum ($)Options (#)($/Share)Awards ($)(2)Euan S. Thomson,Ph.D.8/23/2006—252,000—300,0009.50$10.45Robert E. McNamara8/23/2006—110,000—100,0009.50$10.45Chris A. Raanes8/23/2006—116,000—100,0009.50$10.45Eric P. Lindquist8/23/2006—110,000—100,0009.50$10.45Wade B. Hampton10/24/2006—154,928—250,00010.00$10.97(1) These columns are intended to show the annual bonus payments made to the NEOs for our fiscal year ended June 30, 2007. The potential payments are performance-driven andtherefore completely at risk. Our Compensation Committee approved the target bonus amounts (as a percentage of the NEO’s base salary) in the first quarter of 2007 for fiscal 2007for those NEOs then employed by us, and again in each NEO’s employment terms agreement in the second quarter of 2007. There are no threshold or maximum amounts presentedin this table because when determining the target bonus, our Compensation Committee did not place a minimum or a limit on the non-equity incentive compensation that could beearned by the NEO’s in fiscal year 2007.(2) Represents the fair value of each stock option as of the date it was granted, computed in accordance with FAS 123R.Description of Awards Granted in 2007On August 23, 2006, each of Dr. Thomson, Messrs. McNamara, Raanes and Lindquist were granted options to purchase shares of our Common Stockat an exercise price of $9.50 per share. Subject to the executive’s continued employment, a total of 25% of the entire number of shares subject to each of these121options becomes vested and exercisable on the first anniversary of the grant date and the remaining shares subject to these stock options vest and becomeexercisable in equal monthly installments ratably over the following 36 months.On October 24, 2006, Mr. Hampton was granted an option to purchase 250,000 shares of our Common Stock at an exercise price of $10.00 per share inconnection with the commencement of his employment. Subject to Mr. Hampton’s continued employment, a total of 25% of the entire number of shares subjectto Mr. Hampton’s options becomes vested and fully exercisable on the first anniversary of his date of hire, and the remaining shares subject to this stockoption vest and become exercisable in equal monthly installments, ratably over the following 36 months.Outstanding Equity Awards at Fiscal Year-EndThe following table describes for our named executive officers the exercisable and unexercisable options held by them as of June 30, 2007.Number ofSecuritiesUnderlyingUnexercisedOptions (#)Number ofSecuritiesUnderlyingUnexercisedOptions (#)OptionExerciseOptionExpirationNameExercisableUnexercisablePrice ($)DateEuan S. Thomson, Ph.D.437,499—0.7503/28/201239,167833(1)0.7507/09/2013499,16823,333(2)0.7508/27/201333,3336,667(3)1.4003/16/2014212,50087,500(4)2.5008/10/201422,50017,500(5)3.5005/12/201575,70882,292(6)4.3811/07/201510,00030,000(7)6.7304/05/20160300,000(8)9.5008/23/2016Robert E. McNamara312,501187,499(9)3.5001/25/201571,87578,125(10)4.3811/07/20150100,000(11)9.5008/23/2016Chris A. Raanes360,000—0.7512/02/201265,0005,000(12)0.7508/27/201359,00035,000(13)2.5008/10/201428,75131,249(14)4.3811/07/20150100,000(11)9.5008/23/2016Eric P. Lindquist178,043123,957(15)3.5011/06/201416,77118,229(16)4.3811/07/20150100,000(11)9.5008/23/2016Wade B. Hampton0250,000(17)10.0010/24/2016 (1) 10,000 shares (or 25% of the total award) vested on July 9, 2004. Thereafter, 833 (or 1/36 of the remaining shares) will vest on the 9th of each month. (2) 11,666 shares (or 1/48th of the total award) vest on 27 of each month. (3) 833 (or 1/48th of the total award) vest on the 11th of each month. (4) 6,250 (or 1/48th of the total award) will vest on the 10th of each month.122th (5) 10,000 shares (or 25% of the total award) vested on March 11, 2006. Thereafter, 833 (or 1/36 of the remaining shares) will vest on the 11th of eachmonth. (6) 39,500 shares (or 25% of the total award) vested on July 1, 2006. Thereafter, 3,292 (or 1/36 of the remaining shares) will vest on the 1 of eachmonth. (7) 10,000 shares (or 25% of the total award) vested on March 1, 2007. Thereafter, 833 (or 1/36 of the remaining shares) will vest on the 1 of each month. (8) 75,000 shares (or 25% of the total award) will vest on August 23, 2007. Thereafter, 6,250 (or 1/36 of the remaining shares) will vest on the 23rd ofeach month. (9) 125,000 shares (or 25% of the total award) vested on December 13, 2005. Thereafter, 10,416 (or 1/36 of the remaining shares) will vest on the 13th ofeach month.(10) 37,500 shares (or 25% of the total award) vested on July 1, 2006. Thereafter, 3,125 (or 1/36 of the remaining shares) will vest on the 1 of each month.(11) 25,000 shares (or 25% of the total option) will vest on August 23, 2007. Thereafter, 2083 shares (or 1/36 of the remaining shares) vest on the 23rd ofeach month.(12) 2,500 shares (or 1/48th of the total award) vest on 27 of each month.(13) 2,500 (or 1/48th of the total award) will vest on the 10 of each month.(14) 15,000 shares (or 25% of the total award) vested on July 1, 2006. Thereafter, 1,250 (or 1/36 of the remaining shares) will vest on the 1 of each month.(15) 87,500 shares (or 25% of the total award) vested on November 1, 2005. Thereafter, 7,291 (or 1/36 of the remaining shares) will vest on the 1 of eachmonth.(16) 8,750 shares (or 25% of the total award) vested on July 1, 2006. Thereafter, 729 (or 1/36 of the remaining shares) will vest on the 1 of each month.(17) 62,500 shares (or 25% of the total option) will vest on September 5, 2007. Thereafter, 5,208 shares (or 1/36 of the remaining shares) vest on the 5 ofeach month.Options Exercises During Fiscal Year 2007The following table summarizes the options exercised during the year ended June 30, 2007 and the value realized upon exercise:Option AwardsNameNumberof SharesAcquiredonExerciseValueRealizedUponExercise($)Euan S. Thomson, Ph.D200,0003,450,000Robert E. McNamara——Chris A. Raanes76,0001,265,500Eric P. Lindquist48,000696,000Wade B. Hampton—— 123ththstthstthththstththththstthstthstththEmployment, Change of Control and Severance AgreementsEuan S. Thomson, Ph.D.On November 10, 2006, we entered into an employment letter agreement with Dr. Thomson which amends and restates our prior employment letteragreement with him. Under the agreement, Dr. Thomson will serve as our President and Chief Executive Officer. The agreement provides that he is entitled toreceive an initial annual base salary of $420,000 and is eligible to participate in our executive bonus plan under which he may earn annual incentive bonusestargeted at 60% of his base salary based upon the attainment of performance criteria established and evaluated by our compensation committee. InAugust 2007, the Compensation Committee approved an annual base salary of $500,000 for Dr. Thomson and an annual incentive bonus targeted at 100% ofhis base salary, for fiscal year 2008. Subject to approval by our board and pursuant to our incentive award plan, we have agreed to grant Dr. Thomson anoption to purchase 40,000 shares of our common stock not later than the first regularly scheduled meeting of our board of each calendar year during the periodof his employment by us. Each such option will be granted with an exercise price per share equal to the fair market value of a share of our common stock onthe date of grant and will vest in equal monthly installments over a 4-year period from the date of grant.Under our letter agreement with Dr. Thomson, in the event of a termination of his employment by us without “cause” or by Dr. Thomson for “goodreason,” as each term is defined in the agreement, Dr. Thomson will be entitled to receive a severance payment in an amount equal to the sum of 12 months ofhis annual base salary then in effect, a pro rata portion of his target annual bonus for the year of such termination, plus 100% of his target annual bonus thenin effect. In addition, in the event of such a termination of employment, Dr. Thomson’s then outstanding stock options will become vested and exercisableimmediately prior to the effective time of such termination to the extent they would have become vested during the 12-month period following the date of suchtermination had he remained employed by us through such period, and we will pay for 12 months of COBRA continuation coverage for Dr. Thomson and hiseligible dependents if he elects such coverage upon such a termination. In the event of a change in control of our company (as defined in the agreement) duringthe term of Dr. Thomson’s employment, all of his then outstanding stock options will become fully vested and exercisable immediately prior to the effectivetime of such change in control. If such a change in control occurs and Dr. Thomson’s employment is terminated either (i) by us without cause or byDr. Thomson for good reason within twelve months following the change in control or (ii) by Dr. Thomson for any reason within the 30-day periodimmediately following the change in control, then in lieu of the severance payments and benefits described above, he will be entitled to receive a severancepayment in an amount equal to the sum of 18 months of his annual base salary then in effect, a pro rata portion of his target annual bonus for the year ofsuch termination, plus 150% of his target annual bonus then in effect. In addition, we will pay for 18 months of COBRA continuation coverage forDr. Thomson and his eligible dependents if he elects such coverage. The foregoing benefits and payments may be subject to a delay of up to 6 months asnecessary to avoid the imposition of additional tax under Section 409A of the Code. In addition, if any payments or benefits payable to Dr. Thomson under theemployment letter or otherwise would be subject to the excise tax under Section 4999 of the Code, such payments and/or benefits will be reduced to the extentnecessary so that no amount will be subject to such excise tax, provided that such reduction will only occur if Dr. Thomson will be in a more favorable after-tax position than if no such reduction was made.The employment letter also provides for certain restrictive covenants by Dr. Thomson, including a confidentiality covenant that will apply during hisemployment with our company and thereafter, a non-solicitation covenant for the duration of his employment and one year thereafter, and a non-competitioncovenant for the duration of his employment.124Robert E. McNamaraOn November 10, 2006, we entered into an employment letter agreement with Mr. McNamara which amends and restates our prior employment letteragreement with him. Under the agreement, Mr. McNamara will serve as our Senior Vice President and Chief Financial Officer. The agreement provides that heis entitled to receive an initial annual base salary of $275,000 and is eligible to participate in our executive bonus plan under which he may earn annualincentive bonuses targeted at 40% of his base salary based upon the attainment of performance criteria established and evaluated by our compensationcommittee. In August 2007, the Compensation Committee approved an annual base salary at $316,250 for Mr. McNamara and an annual incentive bonustargeted at 65% of his base salary, for fiscal year 2008.Under our letter agreement with Mr. McNamara, in the event of a termination of his employment by us without “cause” or by Mr. McNamara for “goodreason,” as each term is defined in the agreement, or if a change in control of our company (as defined in the employment letter) occurs and Mr. McNamaraterminates his employment for any reason within the 30-day period immediately following such change in control, then Mr. McNamara will be entitled toreceive a severance payment in an amount equal to the sum of 12 months of his annual base salary then in effect, a pro rata portion of his target annual bonusfor the year of such termination, plus 100% of his target annual bonus then in effect. In addition, we will pay for 12 months of COBRA continuation coveragefor Mr. McNamara and his eligible dependents if he elects such coverage upon such a termination. In the event of a termination of Mr. McNamara’semployment by us without cause or by Mr. McNamara for good reason prior to a change in control, Mr. McNamara’s then outstanding stock options topurchase shares of our common stock will become vested and exercisable immediately prior to the effective time of such termination to the extent they wouldhave become vested during the 12-month period following the date of such termination had he remained employed by us through such period. In the event of achange in control of our company during the term of Mr. McNamara’s employment, all of his then outstanding stock options will become fully vested andexercisable immediately prior to the effective time of such change in control. The foregoing benefits and payments may be subject to a delay of up to 6 monthsas necessary to avoid the imposition of additional tax under Section 409A of the Code. In addition, if any payments or benefits payable to Mr. McNamaraunder the employment letter or otherwise would be subject to the excise tax under Section 4999 of the Code, such payments and/or benefits will be reduced tothe extent necessary so that no amount will be subject to such excise tax, provided that such reduction will only occur if Mr. McNamara will be in a morefavorable after-tax position than if no such reduction was made.The employment letter also provides for certain restrictive covenants by Mr. McNamara, including a confidentiality covenant that will apply during hisemployment with our company and thereafter, a non-solicitation covenant for the duration of his employment and one year thereafter, and a non-competitioncovenant for the duration of his employment.Chris A. RaanesOn November 10, 2006, we entered into an employment letter agreement with Mr. Raanes which amends and restates our prior employment letteragreement with him. Under the agreement, Mr. Raanes will serve as our Senior Vice President and Chief Operating Officer. The agreement provides that he isentitled to receive an initial annual base salary of $290,000 and is eligible to participate in our executive bonus plan under which he may earn annual incentivebonuses targeted at 40% of his base salary based upon the attainment of performance criteria established and evaluated by our compensation committee. InAugust 2007, the Compensation Committee approved an annual base salary at $333,500 for Mr. Raanes and an annual incentive bonus targeted at 65% of hisbase salary, for fiscal year 2008.Under our letter agreement with Mr. Raanes, in the event of a termination of his employment by us without “cause” or by Mr. Raanes for “good reason,”as each term is defined in the agreement,125Mr. Raanes will be entitled to receive a severance payment in an amount equal to the sum of 8 months of his annual base salary then in effect, a pro rataportion of his target annual bonus for the year of such termination, plus 663% of his target annual bonus then in effect. In addition, we will pay for8 months of COBRA continuation coverage for Mr. Raanes and his eligible dependents if he elects such coverage upon such a termination. If a change incontrol of our company (as defined in the employment letter) occurs during the term of Mr. Raanes’ employment and his employment is terminated by uswithout cause or by Mr. Raanes for good reason, in each case within the 12-month period following the change in control, then in addition to the foregoingseverance payments and benefits, all of Mr. Raanes’ then outstanding stock options to purchase shares of our common stock will become fully vested andexercisable immediately prior to the effective time of such termination of employment. The foregoing benefits and payments may be subject to a delay of up to6 months as necessary to avoid the imposition of additional tax under Section 409A of the Code. In addition, if any payments or benefits payable toMr. Raanes under the employment letter or otherwise would be subject to the excise tax under Section 4999 of the Code, such payments and/or benefits will bereduced to the extent necessary so that no amount will be subject to such excise tax, provided that such reduction will only occur if Mr. Raanes will be in amore favorable after-tax position than if no such reduction was made.The employment letter also provides for certain restrictive covenants by Mr. Raanes, including a confidentiality covenant that will apply during hisemployment with us and thereafter, a non-solicitation covenant for the duration of his employment and one year thereafter, and a non-competition covenant forthe duration of his employment.Eric P. LindquistOn November 10, 2006, we entered into an employment letter agreement with Mr. Lindquist which amends and restates our prior employment letteragreement with him. Under the agreement, Mr. Lindquist will serve as our Senior Vice President and Chief Marketing Officer. The agreement provides that heis entitled to receive an initial annual base salary of $275,000 and is eligible to participate in our executive bonus plan under which he may earn annualincentive bonuses targeted at 40% of his base salary based upon the attainment of performance criteria established and evaluated by our compensationcommittee. In August 2007, the Compensation Committee approved an annual base salary at $316,250 for Mr. Lindquist and an annual incentive bonustargeted at 65% of his base salary, for fiscal year 2008.Under our letter agreement with Mr. Lindquist, in the event of a termination of his employment by us without “cause” or by Mr. Lindquist for “goodreason,” as each term is defined in the agreement, Mr. Lindquist will be entitled to receive a severance payment in an amount equal to the sum of 8 months ofhis annual base salary then in effect, a pro rata portion of his target annual bonus for the year of such termination, plus 663% of his target annual bonusthen in effect. In addition, we will pay for 8 months of COBRA continuation coverage for Mr. Lindquist and his eligible dependents if he elects such coverageupon such a termination. If a change in control of our company (as defined in the employment letter) occurs during the term of Mr. Lindquist’s employmentand his employment is terminated by us without cause or by Mr. Lindquist for good reason, in each case within the 12-month period following the change incontrol, then in addition to the foregoing severance payments and benefits, all of Mr. Lindquist’s then outstanding stock options to purchase shares of ourcommon stock will become fully vested and exercisable immediately prior to the effective time of such termination of employment. The foregoing benefits andpayments may be subject to a delay of up to 6 months as necessary to avoid the imposition of additional tax under Section 409A of the Code. In addition, ifany payments or benefits payable to Mr. Lindquist under the employment letter or otherwise would be subject to the excise tax under Section 4999 of the Code,such payments and/or benefits will be reduced to the extent necessary so that no amount will be subject to such excise tax, provided that such reduction willonly occur if Mr. Lindquist will be in a more favorable after-tax position than if no such reduction was made.12622The employment letter also provides for certain restrictive covenants by Mr. Lindquist, including a confidentiality covenant that will apply during hisemployment with us and thereafter, a non-solicitation covenant for the duration of his employment and one year thereafter, and a non-competition covenant forthe duration of his employment. In addition, we have agreed to indemnify Mr. Lindquist in the event a suit is filed against him in connection with his non-competition agreement with a former employer.Wade B. HamptonOn November 10, 2006, we entered into an employment letter agreement with Mr. Hampton which amends and restates our prior employment letteragreement with him. The agreement provided that Mr. Hampton would serve as our Senior Vice President, Worldwide Sales. In May 2007, Mr. Hampton waspromoted to Senior Vice President, Chief Sales Officer. The agreement provides that he is entitled to receive an initial annual base salary of $250,000 and iseligible to participate in our executive bonus plan under which he may earn annual incentive bonuses targeted at 75% of his base salary based upon theattainment of performance criteria established and evaluated by our compensation committee. In August 2007, the Compensation Committee approved anannual base salary at $276,000 for Mr. Hampton and an annual incentive bonus targeted at 83% of his base salary, for fiscal year 2008.In addition, pursuant to our incentive award plan and the terms of our prior employment letter agreement with him, we have granted Mr. Hampton anoption to purchase 250,000 shares of our common stock with an exercise price per share equal to $10.00. The option will vest over a 4-year period from thedate of commencement of Mr. Hampton’s employment with us, with 25% of the shares subject to the option vesting on the first anniversary of such date, andthe remaining 75% vesting in equal monthly installments on each monthly anniversary thereafter. We have agreed to recommend to our board thatMr. Hampton be granted an additional option no later than the September 30 following each of the first three anniversaries of Mr. Hampton’s commencement ofemployment with us to purchase 100,000 shares of our common stock, with each such option to have an exercise price per share equal to the fair market valueof a share of our common stock on the date of grant and to vest in equal monthly installments over a 4-year period from the date of grant.Under our letter agreement with Mr. Hampton, in the event of a termination of his employment by us without “cause” or by Mr. Hampton for “goodreason,” as each term is defined in the agreement, Mr. Hampton will be entitled to receive a severance payment in an amount equal to the sum of 6 months ofhis annual base salary then in effect, a pro rata portion of his target annual bonus for the year of such termination, plus 50% of his target annual bonus thenin effect. In addition, we will pay for six months of COBRA continuation coverage for Mr. Hampton and his eligible dependents if he elects such coverageupon such a termination. If a change in control of our company (as defined in the employment letter) occurs during the term of Mr. Hampton’s employmentand his employment is terminated by us without cause or by Mr. Hampton for good reason, in each case within the 12-month period following the change incontrol, then in addition to the foregoing severance payments and benefits, all of Mr. Hampton’s then outstanding stock options to purchase shares of ourcommon stock will become fully vested and exercisable immediately prior to the effective time of such termination of employment. The foregoing benefits andpayments may be subject to a delay of up to six months as necessary to avoid the imposition of additional tax under Section 409A of the Code. In addition, ifany payments or benefits payable to Mr. Hampton under the employment letter or otherwise would be subject to the excise tax under Section 4999 of the Code,such payments and/or benefits will be reduced to the extent necessary so that no amount will be subject to such excise tax, provided that such reduction willonly occur if Mr. Hampton will be in a more favorable after-tax position than if no such reduction was made.The employment letter also provides for certain restrictive covenants by Mr. Hampton, including a confidentiality covenant that will apply during hisemployment with us and thereafter, a non-solicitation covenant for the duration of his employment and one year thereafter, and a non-competition covenant forthe duration of his employment.127Potential Payments and Benefits Upon Termination or Change in ControlThe table below reflects potential payments to our named executive officers in the event of a termination of employment or a change in control of ourcompany, based on the terms of employment agreements in effect as of June 30, 2007 as described on page 122. In addition, we reflect amounts that would bepaid to any named executive officer if a named executive officer is terminated by us without cause or by the executive for good reason, within the twelvemonths following a change of control. The amounts shown assume that the termination or change in control, as applicable, occurred on June 29, 2007, thelast business day of our last fiscal year. The amounts set forth in the table below represent our reasonable estimates of the amounts which would be paid to thenamed executive officers upon their termination or a change in control. The actual amounts to be paid can only be determined at the time of the named executiveofficers’ separation from the Company or upon the occurrence of a change in control.The value of the option and restricted stock vesting acceleration was calculated based on the assumption that the change in control and the executive’semployment termination occurred on June 29, 2007. The closing price of our stock as of June 29, 2007 was $22.18, which was used as the value of ourstock for purposes of these calculations. The value of the vesting acceleration was calculated by multiplying the number of accelerated option shares andcommon stock as of June 29, 2007 by the spread between the closing price of our stock as of June 29, 2007 and the exercise price for such unvested optionshares and common stock. The values reflected also assume that the payments and benefits to the NEOs are not reduced by virtue of the provisions in theemployment agreements relating to Section 4999 of the Internal Revenue Code.The payments and benefits that would be provided to the named executive officers in the event of a termination of employment or change in control aremore fully described above.Euan S. Thomson, Ph.D.BenefitsTermination byCompany without Causeor by NEO for GoodReason (No Change inControl)($)Change inControlOnly($)Termination by Company withoutCause or by NEO for Good ReasonWithin 12 months Following aChange in Control or Terminationby NEO for any reason within30 days of Change in Control($)Base Salary Severance420,000—630,000Pro Rata Bonus Year252,000—252,000Target Bonus252,000—378,000COBRA Benefits Coverage Continuation(1)11,793—17,690Options or Stock Acceleration(2)4,958,9628,437,6158,437,615Accrued Vacation(3)67,117—67,117Total5,961,8728,437,6159,782,422(1) Assumes Dr. Thomson elects medical, dental and vision COBRA coverage for himself and his spouse for full 12-month or 18-month period he is sopermitted, as applicable.(2) The value is based on the difference between the option exercise price and $22.18, which was the closing price of our common stock on June 29, 2007,with respect to all unvested options.(3) Assumes that Dr. Thomson had 332 hours of accrued but unused Paid Time Off, which was paid based on his annual base salary for the last fiscalyear.128Robert E. McNamaraBenefitsTermination by Companywithout Cause or by NEOfor Good Reason or uponTermination by NEO forany reason within 30 daysfollowing a Change inControl($)Change inControlOnly($)Termination by Companywithout Cause or by NEO forGood Reason Within12 months Following aChange in Control($)Base Salary Severance275,000—275,000Pro Rata Bonus Year110,000—110,000Target Bonus110,000—110,000COBRA Benefits Coverage Continuation(1)17,892—17,892Options or Stock Acceleration(2)3,583,6626,161,1066,161,106Accrued Vacation(3)29,621—29,621Total4,126,1756,161,1066,703,619(1) Assumes Mr. McNamara elects medical, dental and vision COBRA coverage for himself and his family for the full permitted 12 month period.(2) The value is based on the difference between the option exercise price and $22.18, which was the closing price of our common stock on June 29, 2007,with respect to all unvested options.(3) Assumes that Mr. McNamara had 224 hours of accrued but unused Paid Time Off which was paid based on his annual base salary for the last fiscalyear.Chris A. RaanesBenefitsTermination by Companywithout Cause or by NEOfor Good Reason (NoChange in Control)($)Change inControlOnly($)Termination by Companywithout Cause or by NEOfor Good Reason Within12 months Following aChange in Control($)Base Salary Severance193,333—193,333Pro Rata Bonus Year116,000—116,000Target Bonus77,333—77,333COBRA Benefits Coverage Continuation(1)11,928—11,928Options or Stock Acceleration(2)——2,620,182Accrued Vacation(3)53,410—53,410Total452,004—3,072,186(1) Assumes Mr. Raanes elects medical, dental and vision COBRA coverage for himself and his family for the full permitted 8 month period.(2) The value is based on the difference between the option exercise price and $22.18, which was the closing price of our common stock on June 29, 2007,with respect to all unvested options.(3) Assumes that Mr. Raanes had 383 hours of accrued but unused Paid Time Off, which was paid based on his annual base salary for the last fiscal year.129Eric P. LindquistBenefitsTermination by Companywithout Cause or by NEOfor Good Reason (NoChange in Control)($)Change inControlOnly($)Termination by Companywithout Cause or by NEOfor Good Reason Within12 months Following aChange in Control($)Base Salary Severance183,333—183,333Pro Rata Bonus Year110,000—110,000Target Bonus73,333—73,333COBRA Benefits Coverage Continuation(1)11,928—11,928Options or Stock Acceleration(2)——3,907,993Accrued Vacation(3)22,481—22,481Total401,075—4,309,068(1) Assumes Mr. Lindquist elects medical, dental and vision COBRA coverage for himself and his family for the full permitted 8 month period.(2) The value is based on the difference between the option exercise price and $22.18, which was the closing price of our common stock on June 29, 2007,with respect to all unvested options.(3) Assumes that Mr. Lindquist had 170 hours of accrued but unused Paid Time Off, which was paid based on his annual base salary for the last fiscalyear.Wade B. HamptonBenefitsTermination by Companywithout Cause or by NEOfor Good Reason (NoChange in Control)($)Change inControlOnly($)Termination by Companywithout Cause or by NEOfor Good Reason Within12 months Following aChange in Control($)Base Salary Severance125,000—125,000Pro Rata Bonus Year154,928—154,928Target Bonus77,464—77,464COBRA Benefits Coverage Continuation(1)8,946—8,946Options or Stock Acceleration(2)——3,045,000Accrued Vacation(3)8,418—8,418Total374,756—3,419,756(1) Assumes Mr. Hampton elects medical, dental and vision COBRA coverage for himself and his family for the full permitted 6 month period.(2) The value is based on the difference between the option exercise price and $22.18, which was the closing price of our common stock on June 29, 2007,with respect to all unvested options.(3) Assumes that Mr. Hampton had 70 hours of accrued but unused Paid Time Off, which was paid based on his annual base salary for the last fiscal year.Compensation Committee Interlocks and Insider ParticipationAs noted above, the compensation committee of our board of directors currently consists of Mr. Weiss, Mr. Wu and Mr. Yu. None of these individualshas at any time during the prior three years been an officer or employee of ours. None of our executive officers currently serves or in the prior three130years has served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board orcompensation committee.COMPENSATION OF NON-EMPLOYEE DIRECTORSDirector Compensation TableThe following Director Compensation Table (DCT) sets forth summary information concerning the compensation paid to our non-employee directors infiscal year 2007.NameFees Earnedor Paid inCash ($)OptionAwards ($)(1)All OtherCompensation ($)Total ($)John R. Adler, Jr., M.D15,000126,680178,025(2)319,705Ted T.C. Tu15,000——15,000Robert S. Weiss29,000397,225—426,225Wayne Wu52,000135,726—187,726Li Yu32,500179,843—212,343Total143,500839,474178,0251,160,999(1) The amount reflected in this column represents the compensation expense recognized for financial statement purposes for the year ended June 30, 2007associated with the stock options granted in fiscal year 2007 and prior years, measured in accordance with FAS 123R. On February 8, 2007, as a newdirector, Mr. Weiss was granted an option under the 2007 Equity Incentive Plan to purchase 108,000 shares with a grant date fair value of $18.39. In2007, Mr. Yu and Mr. Wu were each granted an option under the 2007 Equity Incentive Plan to purchase 18,000 shares with grant date fair values of$10.45. The aggregate number of shares subject to stock options outstanding for each non-employee director, at June 30, 2007 was: Dr. Adler:1,702,900; Mr. Tu: 0; Mr. Weiss: 108,000 Mr. Wu: 108,000; Mr. Yu: 144,000. The assumptions used to calculate the value of option awards are setforth under Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report.(2) Consists of consulting service fees paid during the year ended June 30, 2007.Director Cash CompensationCurrently, each non-employee director (including Dr. Adler) receives an annual cash retainer of $30,000 per year, paid quarterly, except that the leaddirector receives an annual cash retainer of $60,000 per year, paid quarterly. Each director who serves on our compensation committee also receives anadditional annual cash retainer of $5,000 per year, paid quarterly, except that the chairperson of our compensation committee receives an additional annualcash retainer of $10,000 per year, paid quarterly. Each non-employee director who serves on our nominating and corporate governance committee also receivesan additional annual cash retainer of $3,000 per year, paid quarterly, except that the chairperson of our nominating and corporate governance committeereceives an additional annual cash retainer of $5,000 per year, paid quarterly. Each director who serves on our audit committee also receives an additionalannual cash retainer of $10,000 per year, paid quarterly, except that the chairperson of our audit committee receives an additional annual cash retainer of$20,000 per year, paid quarterly.All of our directors are reimbursed for the reasonable expenses incurred in connection with participating in the meetings of our board of directors.Employee directors are not compensated for Board services in addition to their regular employee compensation.131Non-Employee Director Equity CompensationPrior to the completion of our initial public offering in February 2007, we granted options to our non employee directors (excluding Dr. Adler) who are notaffiliated with any person, or group of affiliated persons, who beneficially own more than 5% of our voting securities (each, an “Eligible Director”) inaccordance with certain informal guidelines. Under these guidelines, upon becoming a board member, each Eligible Director has received an option to purchase90,000 shares of common stock. Each Eligible Director has also generally received an annual option grant to purchase 9,000 shares of common stock forserving on a board committee and an additional option grant to purchase 9,000 shares of common stock for serving as chair of a board committee. Optiongrants in connection with board committee service may not exceed 18,000 shares of common stock per year, regardless of the number of committees served onor chaired. Subject to the director’s continued service, options granted to Eligible Directors vest on a monthly basis such that 50% of the shares subject to theoption vest during the first year following the vesting commencement date and 25% of the shares subject to the option vest during each of the second and thirdyears following the vesting commencement date. All outstanding options granted to Eligible Directors will vest in full upon a change of control.Consistent with these guidelines, effective February 8, 2007, we granted Mr. Weiss options to purchase 108,000 shares of our common stock at a pershare exercise price equal to the closing price of our common stock on NASDAQ on the date of grant, which was a price of $28.47 per share. Subject toMr. Weiss’ continued service, these options vest on a monthly basis such that 50% of the shares subject to the option vest during the first year following thevesting commencement date and 25% of the shares subject to the option vest during each of the second and third years following the vesting commencementdate.In August 23, 2006, we granted Mr. Wu and Mr. Yu options to purchase 18,000 shares of our common stock, each with an exercise price equal to $9.50per share. Subject to the directors’ continued service, these options vest on a monthly basis such that 50% of the shares subject to the option vest during thefirst year following the vesting commencement date and 25% of the shares subject to the option vest during each of the second and third years following thevesting commencement date.The compensation committee of our board of directors has made recommendations to our board of directors that would reduce the number of sharesincluded in both the initial and annual option grants made to our non-employee directors. Under these recommendations, upon first becoming a board member,each non-employee director would receive an option to purchase 20,000 shares of our common stock. These options would vest monthly over the first year ofservice such that 50% of the options would be vested upon the first anniversary of the director’s commencement of service. The remaining options would thenvest monthly over the following two years. Each non-employee director (other than new directors receiving the 20,000 share grant upon first becoming a boardmember) would receive an annual grant of an option to purchase 5,000 shares of our common stock. Each non-employee director would also receive an annualoption grant to purchase 1,000 shares of our common stock for serving on a standing board committee and an additional option grant to purchase 1,000 sharesof our common stock for serving as chair of a standing board committee. Annual option grants and options in connection with board committee service maynot exceed 10,000 shares of our common stock per year, regardless of the number of committees served on or chaired. All options described in the foregoingwould vest fully upon a change of control. We expect that these recommendations will be considered at the next regularly scheduled meeting of our board ofdirectors.In April 2007, we entered into a consulting agreement with Dr. Adler, which was also amended in April 2007. Under the consulting agreement, we haveengaged Dr. Adler to provide consulting services and marketing support and Dr. Adler is entitled to receive maximum consulting fees of $149,100 per year,payable at the beginning of each quarter beginning on April 1, 2007. This agreement as amended has a132term of two years and will renew for successive one year periods, unless 30 days’ written notice of termination is provided by either party prior to theexpiration of each one year period. We paid Dr. Adler $178,025, $204,750, $246,000 pursuant to his prior consulting agreements during the fiscal yearsended June 30, 2007, 2006 and 2005, respectively. Additionally Dr. Adler had entered into a consulting agreement with the CyberKnife Society in April 2006,which the CyberKnife Society decided not to renew, issuing a notice of non-renewal to Dr. Adler in February of 2007. For further information about theCyberKnife Society see section titled “The CyberKnife Society” in Part III, Item 13 of this Annual Report.Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe following table presents information as to the beneficial ownership of our common stock as of August 17, 2007 by:· each of our named executive officers;· each of our directors;· all of our directors and executive officers as a group; and· each stockholder known by us to be the beneficial owner of more than 5% of our common stock.Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to allshares beneficially owned, subject to community property laws where applicable. Shares of our common stock subject to options or warrants that arecurrently exercisable or exercisable within 60 days of August 17, 2007 are deemed to be outstanding and to be beneficially owned by the person holding theoptions or warrants for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing thepercentage ownership of any other person.133Unless otherwise indicated, the address for each of the stockholders in the table below is c/o Accuray Incorporated, 1310 Chesapeake Terrace,Sunnyvale, California 94089.This table lists applicable percentage ownership based on 53,851,781 shares of common stock outstanding as of August 17, 2007.Beneficial OwnershipName and Address of Beneficial OwnerSharesPercent (%)5% StockholdersPresident (BVI) International Investment Holdings Ltd.(1)9,668,92118.0Marubeni Corporation(2)3,350,9396.2Gilder Gagnon Howe & Co. LLC(3)3,072,8245.7Executive Officers and DirectorsEuan S. Thomson, Ph.D.(4)1,473,0412.7Robert E. McNamara(5)463,5421.0Chris A. Raanes(6)557,7511.0Eric P. Lindquist(7)251,897*Wade B. Hampton(8)67,708*Christopher D. Mitchell—*Theresa L. Dadone—*Wayne Wu(9)774,5301.4John R. Adler, Jr., M.D(10)1,645,0043.1Ted T.C. Tu(1)(11)9,668,92118.0Robert S. Weiss(12)38,250*Li Yu(13)125,625*All executive officers and directors as a group (12 persons)15,066,26928.0 (1) President (BVI) International Investment Holdings Ltd., or PIIH, is a wholly-owned subsidiary of President International Development Corporation, orPIDC, which is a 61% owned subsidiary of Uni-President Enterprises Corp., or Uni-President, a Republic of China company publicly traded on theTaiwan Stock Exchange. The board of directors and supervisors of Uni-President consist of Chin-Yen Kao, chairman of the board of directors; Kao-Huei Cheng and Chang-Sheng Lin, each a managing director; Ping-Chih Wu, Hsiu-Jen Liu, Po-Ming Hou, Ying-Jen Wu, Chung-Ho Wu and Ching-Chien Hou Su, each a director; and Kao-Keng Chen, Peng-Chih Kuo and Joe J.T. Teng, each a supervisor. Mr. Tu, one of our directors, is the Presidentof PIDC. These individuals may be deemed to share dispositive and voting power over the shares owned by PIIH. Each of these individuals disclaimsbeneficial ownership of such shares, except to the extent of his or her pecuniary interest therein. The address of PIIH and Mr. Tu is 10F-1, No. 560,Sec.4, Chung Hsiao East Road, Taipei 110, Taiwan, R.O.C. The address of Uni-President is No. 301, Jhongjheng Road, Yongkang City, TainanCounty 710, Taiwan, Republic of China. (2) Tohru Tsuji, Nobuo Katsumata, Kazuhiko Sakamoto, Akira Matsuda, Kazuo Ogawa, Ko Mori, Teruo Asada, Mamoru Sekiyama, Koichi Mochizuki,Masaru Funai, Masao Fujii and Takaji Kunimatsu comprise the board of directors of Marubeni Corporation. These individuals may be deemed to sharedispositive and voting power over the shares owned by Marubeni Corporation. Each of these individuals disclaims beneficial ownership of such shares,except to the extent of his or her pecuniary interest therein. The address of Marubeni Corporation is 4-2 Ohtemachi 1-Chome, Chiyoda-Ku, Tokyo,Japan. (3) Based upon a Schedule 13G filed with the SEC on March 12, 2007. (4) Includes 1,473,041 shares of common stock issuable upon the exercise of options exercisable within 60 days of August 17, 2007.134 (5) Includes 463,542 shares of common stock issuable upon the exercise of options exercisable within 60 days of August 17, 2007. (6) Includes 557,751 shares of common stock issuable upon the exercise of options exercisable within 60 days of August 17, 2007. (7) Includes 251,897 shares of common stock issuable upon the exercise of options exercisable within 60 days of August 17, 2007. (8) Includes 67,708 shares of common stock issuable upon the exercise of options exercisable within 60 days of August 17, 2007. (9) Includes 531,075 shares held by Mr. Wu, 148,580 shares held by Mr. Wu’s spouse and 94,875 shares of common stock issuable upon the exercise ofoptions exercisable within 60 days of August 17, 2007. Mr. Wu disclaims beneficial ownership of his spouse’s shares, except to the extent of hispecuniary interest therein.(10) Includes 23,333 shares held by John R. Adler, Jr., Trustee for the Brittany Alder Irrevocable Trust dated 10/30/2000, 23,333 shares held by John R. Adler,Jr., Trustee for the John R. Adler III Irrevocable Trust dated 10/30/2000, 60,000 shares held by John R. Adler Jr. Grantor Retained Annuity Trust, 60,000shared held by the Marilyn B. Adler Grantor Retained Annuity Trust, 618,104 shares held by John R. Adler Jr. and Marilyn B. Adler, Trustees or theirSuccessors in interest under the terms of the Adler Family Revocable Trust dated 11/29/2000 and 860,234 shares of common stock issuable upon theexercise of options exercisable within 60 days of August 17, 2007.(11) Includes 9,668,921 shares held by PIIH.(12) Includes 38,250 shares of common stock issuable upon the exercise of options exercisable within 60 days of August 17, 2007.(13) Includes 125,625 shares of common stock issuable upon the exercise of options exercisable within 60 days of August 17, 2007.Securities Authorized for Issuance under Equity Compensation PlansThe following table sets forth as of June 30, 2007 certain information regarding our equity compensation plans. All of our equity compensation planshave been approved by our security holders.Equity Compensation Plan InformationABCPlan categoryNumber of securities tobe issued uponexerciseof outstanding options,warrants and rightsWeighted-averageexercise price ofoutstandingoptions, warrantsand rightsNumber of securitiesremaining available forfuture issuance underequity compensation plans(excluding securitiesreflected in Column A)(1)Equity compensation plans approved bysecurity holders10,791,875$3.793,588,781Equity compensation plans not approved bysecurity holders———Total10,791,875$3.793,588,781(1) Includes securities to be issued upon vesting of 648,330 restricted stock units at a grant date fair value of $28.16.1351993 Stock Option PlanOur 1993 Stock Option Plan was adopted by our board in 1993. As of June 30, 2007, options to purchase approximately 120,000 shares of ourcommon stock were outstanding under this plan. Effective February 7, 2007, we terminated this plan and only options to purchase shares of our commonstock outstanding as of such date remain under this plan. The following is a description of the material features and provisions of the 1993 Stock OptionPlan as it relates to these outstanding options.Stock OptionsUnder the 1993 Stock Option Plan, we granted incentive stock options intended to qualify for special treatment under Section 422 of the Code and non-qualified stock options. The term of options granted under the 1993 Stock Option Plan may not exceed 10 years, except that in the case of an incentive stockoption granted to an individual who owns more than 10% of our stock, the term of such option may not exceed 5 years. The plan provided that the exerciseprice of incentive stock options granted under the plan may not be less than the fair market value of our common stock at the time of grant, and the exerciseprice of non-qualified stock options may not be less than 85% of the fair market value of our common stock at the time of grant. Options granted to anindividual who owns more than 10% of our stock at the time of grant must have an exercise price not less than 110% of the fair market value of our commonstock at the time of grant. The 1993 Stock Option Plan provided that the vesting and exercisability period of options granted under the plan were to bedetermined by the plan administrator and set forth in the stock option agreement evidencing the option grant. During the lifetime of the optionee, the option isexercisable only by the optionee. Options are not assignable or transferable by the optionee, except by will or by the laws of descent and distribution.AdministrationThe 1993 Stock Option Plan is administered by our board or a duly appointed committee of our board. Our board (or its committee) determines allquestions of interpretation of the plan and any options granted under this plan, and such determinations are final and binding.EligibilityUnder the terms of the 1993 Stock Option Plan, incentive stock options were only granted to our employees (including officers and directors who werealso employees) and employees of qualifying parent or subsidiary corporations. Non-qualified stock options were granted to employees and individuals whorendered services as consultants, advisors or other independent contractors.Adjustments/Change of ControlThe 1993 Stock Option Plan provided that in the event of a stock dividend, stock split, reverse stock split, recapitalization, combination,reclassification or like change in our capital structure, then equitable adjustments may be made to the number of shares and exercise prices of the remainingoutstanding options. In addition, the plan provided that in the case of a transfer of control (as defined in the plan), the plan administrator may, in its solediscretion, provide that any unexercisable and/or unvested portion of the outstanding options will be immediately exercisable and vested as of a date prior to thetransfer of control, or arrange with the surviving, continuing, successor or purchaser corporation (or its parent corporation) for such corporation to eitherassume our rights and obligations under outstanding options or substitute options for such corporation for such outstanding options.136Termination or AmendmentThe 1993 Stock Option Plan provided that our board can terminate or amend this plan at any time, although certain amendments may requirestockholder approval and an amendment cannot adversely affect any rights under an outstanding grant without the grantee’s consent, unless such anamendment is required to enable an option designated as an incentive stock option to qualify as an incentive stock option.1998 Equity Incentive PlanOur 1998 Equity Incentive Plan was originally adopted by our board of directors and approved by our stockholders in 1998. As of June 30, 2007,options to purchase 10,408,986 shares of our common stock were outstanding under this plan. Effective February 7, 2007 we terminated our 1998 EquityIncentive Plan and only options to purchase shares of our common stock outstanding as of such date remain under this plan. The following is a description ofthe material features and provisions of the 1998 Equity Incentive Plan as it relates to these outstanding options.AwardsUnder the 1998 Equity Incentive Plan, we could grant incentive stock options intended to qualify for special tax treatment under Section 422 of theCode, non-qualified stock options, stock grants, stock appreciation rights and stock purchase rights. As of the date of its termination, only stock options hadbeen granted under this plan.Stock Options and Stock Appreciation RightsOptions granted under the 1998 Equity Incentive Plan were designated as incentive stock options or non-qualified stock options. Notwithstandingwhether an option is designated as an incentive stock option, to the extent that the aggregate fair market value of the shares with respect to which suchdesignated incentive stock option is exercisable for the first time by any optionee during any calendar year exceeds $100,000, such excess options will betreated as non-qualified stock options. Subject to the grantee’s continued employment, options and stock appreciation rights generally vest at a rate of at least20% per year over not more than five years from the date of grant, but the plan administrator has the authority to provide that an option may become fullyexercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the plan administrator. Eachoption or stock appreciation right will expire after a term determined at the time of grant. However, in the case of an incentive stock option such term shall notexceed 10 years, and in the case of an option granted to a person who owns more than 10% of our stock on the date of grant, such term shall not exceed5 years. The plan provided that incentive options may not have exercise prices less than the fair market value at the time of grant, and non-qualified stockoptions may not have exercise prices less than 85% of the fair market value at the time of grant. If the grantee owns more than 10% of our stock, the optionmay not have an exercise price less than 110% of the fair market value at the time of grant. Stock appreciation rights will be settled in cash or shares (or somecombination thereof) having a value, at the time of settlement, equal to the difference between the initial value assigned to the stock appreciation right and thefair market value of our shares at the time of settlement.The 1998 Equity Incentive Plan provided that if a grantee’s employment or consulting relationship with us terminates, other than for disability or death,the grantee may, within 90 days after termination (or such other period of time as determined by the plan administrator), exercise his or her option or stockappreciation right to the extent that the option or stock appreciation right has vested by the date of termination. If a grantee’s employment with us terminates dueto death or disability, the grantee (or the grantee’s estate) may, within 12 months thereafter, exercise his or her option or stock appreciation right to the extentthat the option or stock appreciation right has vested by the date of termination of employment137or consulting relationship. Other than by will or other transfer on death, options and stock appreciation rights are not transferable.AdministrationThe 1998 Equity Incentive Plan is administered by our compensation committee. The administrator, whether our board or a committee, has the authorityto determine the fair market value of the common stock for the purposes of making an award, select the eligible persons to whom awards may be granted,make the awards, determine the number of shares to be covered by each award, offer to buy out for cash or shares a granted option or stock appreciation rightand determine the form, terms and conditions of any agreement by which any award is made. The administrator may also determine, among other things,whether an option or stock appreciation right will be paid in cash rather than stock and the restrictions applicable to any stock grants or purchase rights.EligibilityUnder the terms of the 1998 Equity Incentive Plan, non-qualified stock options were granted to our employees, non-employee directors and consultantsof our company and our qualifying parent or subsidiary corporations. Incentive stock options were granted only to our employees (including officers anddirectors who were also employees) and employees of qualifying parent or subsidiary corporations.Foreign ParticipantsIn order to comply with the laws in other countries in which we and our subsidiaries operate or have persons eligible to participate in the plan, the planadministrator has the power to determine which of our subsidiaries will be covered by the plan, determine which of our directors, employees and consultantsoutside the United States are eligible to participate in the plan, modify the terms and conditions of any award granted to such eligible individuals to complywith applicable foreign laws, establish subplans and modify any terms and procedures (with certain exceptions), and take any action that it deems advisablewith respect to local governmental regulatory exemptions or approvals.AdjustmentsIf a stock split, reverse stock split, stock dividend, combination or reclassification of our common stock, or any other increase or decrease in thenumber of issued shares of our common stock occurs without receipt of consideration by us, then our board can make equitable adjustments to the terms ofthe 1998 Equity Incentive Plan. In particular, our board can make an equitable adjustment in the price per share covered by each outstanding option.Change of ControlThe 1998 Equity Incentive Plan includes change of control provisions which may result in the accelerated vesting of outstanding option grants. In theevent of a merger or consolidation of our company with or into another corporation or the sale of all or substantially all of our assets, any outstanding optionswill be assumed or an equivalent option will be substituted by the successor corporation or its parent or subsidiary. In the event that the successor corporationdoes not agree to assume or substitute outstanding options granted under this plan, our board will provide for the participants to have the right to exercise allsuch options previously granted, including those which would not otherwise be exercisable. Such options will be considered assumed if, following the merger,each option confers the right to purchase, or receive the appreciation in fair market value, for each share of stock subject to the option immediately prior to themerger, the consideration received in the merger by our stockholders. However, if the consideration received in the merger is not solely common stock of thesuccessor corporation or its parent, our board may, with the consent of the successor corporation and the plan participants, provide for the consideration to bereceived upon exercise of the option to be solely common stock of the successor corporation or its parent equal in fair market value to the per shareconsideration received by our stockholders.1382007 Incentive Award PlanOur board of directors and our stockholders adopted our 2007 Incentive Award Plan in fiscal year 2007, for the benefit of employees and consultants ofour company and our subsidiaries and members of our board. As of June 30, 2007, options to purchase 262,899 shares of our common stock and 648,330restricted stock units were outstanding under this plan. The following is a description of the material features and provisions of the 2007 Incentive Award Plan.Shares Available for AwardsSubject to certain adjustments set forth in the plan, the maximum number of shares of our common stock that may be issued or awarded under the 2007Incentive Award Plan is 4,500,000 shares. In addition, the number of shares that may be issued or awarded under the plan will be automatically increased onthe first day of each of our fiscal years during the term of the plan, commencing on July 1, 2008, by a number of shares equal to the lessor of: (1) 3% of ouroutstanding capital stock on such date; (2) 1,500,000 shares; or (3) a lesser amount determined by our board of directors. If any shares covered by an awardgranted under the plan are forfeited, or if an award expires or terminates, the shares covered by the award will again be available for grant under the plan. Withrespect to the exercise of stock appreciation rights, only the number of shares actually issued upon such exercise will be counted against the shares availableunder the plan.AwardsThe 2007 Incentive Award Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights,performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units, performance bonus awards, andperformance-based awards to eligible individuals. Except as otherwise provided by the plan administrator, no award granted under the plan may be assigned,transferred or otherwise disposed of by the grantee, except by will or the laws of descent and distribution.The maximum number of shares of our common stock which may be subject to awards granted to any one participant during any calendar year is500,000 and the maximum amount that may be paid to a participant in cash during any calendar year with respect to cash-based awards is $1,000,000.However, these limits will not apply until the earliest of the first material modification of the plan, the issuance of all of the shares reserved for issuance underthe plan, the expiration of the plan, or the first meeting of our stockholders at which directors are to be elected after February of 2010.Stock OptionsStock options, including both nonqualified stock options and incentive stock options, within the meaning of Section 422 of the Code, may be grantedunder the 2007 Incentive Award Plan. The option exercise price of all stock options granted pursuant to the plan will not be less than 100% of the fair marketvalue of our stock on the date of grant. No incentive stock option may be granted to a grantee who owns more than 10% of our stock unless the exercise price isat least 110% of the fair market value at the time of grant. Notwithstanding whether an option is designated as an incentive stock option, to the extent that theaggregate fair market value of the shares with respect to which such option is exercisable for the first time by any optionee during any calendar year exceeds$100,000, such excess will be treated as a nonqualified stock option.Payment of the exercise price of an option may be made in cash or, with the consent of the plan administrator, shares of our stock with a fair marketvalue on the date of delivery equal to the exercise price of the option or exercised portion thereof or other property acceptable to the plan administrator (includingthe delivery of a notice that the participant has placed a market sell order with a broker with139respect to shares then issuable upon exercise of the option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to usin satisfaction of the option exercise price). However, no participant who is a member of our board of directors or an “executive officer” of our company withinthe meaning of Section 13(k) of the Securities Exchange Act of 1934, as amended, or Exchange Act, will be permitted to pay the exercise price of an option inany method which would violate Section 13(k) of the Exchange Act.Stock options may be exercised as determined by the plan administrator, but in no event after the tenth anniversary of the date of grant. However, in thecase of an incentive stock option granted to a person who owns more than 10% of our stock on the date of grant, such term will not exceed 5 years.Restricted StockEligible employees, consultants and directors may be issued restricted stock in such amounts and on such terms and conditions as determined by theplan administrator. Restricted stock will be evidenced by a written restricted stock agreement. The restricted stock agreement will contain restrictions ontransferability and other such restrictions as the plan administrator may determine, including, without limitation, limitations on the right to vote restrictedstock or the right to receive dividends on the restricted stock. These restrictions may lapse separately or in combination at such times, pursuant to suchcircumstances, in such installments, or otherwise, as the plan administrator determines at the time of grant of the award or thereafter.Stock Appreciation RightsA stock appreciation right, or SAR, is the right to receive payment of an amount equal to the excess of the fair market value of a share of our stock on thedate of exercise of the SAR over the fair market value of a share of our stock on the date of grant of the SAR. The plan administrator may issue SARs in suchamounts and on such terms and conditions as it may determine, consistent with the terms of the plan. The plan administrator may elect to pay SARs in cash,in our stock or in a combination of cash and our stock.Other Awards Under the PlanThe 2007 Incentive Award Plan provides that the plan administrator may also grant or issue performance shares, performance stock units, dividendequivalents, stock payments, deferred stock, restricted stock units, performance bonus awards and performance-based awards or any combination thereof toeligible employees, consultants and directors. The term of each such grant or issuance will be set by the plan administrator in its discretion. The planadministrator may establish the exercise price or purchase price, if any, of any such award.Payments with respect to any such award will be made in cash, in our stock or in a combination of cash and our stock, as determined by the planadministrator. Any such award will be subject to such additional terms and conditions as determined by the plan administrator and will be evidenced by awritten award agreement.Performance shares. Awards of performance shares are denominated in a number of shares of our stock and may be linked to any one or moreperformance criteria determined appropriate by the plan administrator, in each case on a specified date or dates or over any period or periods determined by theplan administrator.Performance stock units. Awards of performance stock units are denominated in unit equivalent of shares of our stock and/or units of value,including dollar value of shares of our stock, and may be linked to any one or more performance criteria determined appropriate by the plan administrator, ineach case on a specified date or dates or over any period or periods determined by the plan administrator.140Dividend equivalents. Dividend equivalents are rights to receive the equivalent value (in cash or our stock) of dividends paid on our stock. Theyrepresent the value of the dividends per share paid by us, calculated with reference to the number of shares that are subject to any award held by theparticipant.Stock payments. Stock payments include payments in the form of our stock, options or other rights to purchase our stock made in lieu of all or anyportion of the compensation that would otherwise be paid to the participant. The number of shares will be determined by the plan administrator and may bebased upon specific performance criteria determined appropriate by the plan administrator, determined on the date such stock payment is made or on any datethereafter.Deferred stock. Deferred stock may be awarded to participants and may be linked to any performance criteria determined to be appropriate by the planadministrator. Stock underlying a deferred stock award will not be issued until the deferred stock award has vested, pursuant to a vesting schedule orperformance criteria set by the plan administrator, and unless otherwise provided by the plan administrator, recipients of deferred stock generally will have norights as a stockholder with respect to such deferred stock until the time the vesting conditions are satisfied and the stock underlying the deferred stock awardhas been issued.Restricted stock units. Restricted stock units may be granted to any participant in such amounts and subject to such terms and conditions asdetermined by the plan administrator. At the time of grant, the plan administrator will specify the date or dates on which the restricted stock units will becomefully vested and nonforfeitable, and may specify such conditions to vesting as it deems appropriate. At the time of grant, the plan administrator will specifythe maturity date applicable to each grant of restricted stock units which will be no earlier than the vesting date or dates of the award and may be determined atthe election of the participant. On the maturity date, we will transfer to the participant one unrestricted, fully transferable share of our stock for each restrictedstock unit scheduled to be paid out on such date and not previously forfeited.Performance bonus awards. Any participant selected by the plan administrator may be granted a cash bonus payable upon the attainment ofperformance goals that are established by the plan administrator and relate to any one or more performance criteria determined appropriate by the planadministrator on a specified date or dates or over any period or periods determined by the plan administrator. Any such cash bonus paid to a “coveredemployee” within the meaning of Section 162(m) of the Code may be a performance-based award as described below.Performance-Based AwardsThe plan administrator may grant awards other than options and stock appreciation rights to employees who are or may be “covered employees,” asdefined in Section 162(m) of the Code, that are intended to be performance-based awards within the meaning of Section 162(m) of the Code in order topreserve the deductibility of these awards for federal income tax purposes. Participants are only entitled to receive payment for a performance-based award forany given performance period to the extent that pre-established performance goals set by the plan administrator for the period are satisfied. With regard to aparticular performance period, the plan administrator will have the discretion to select the length of the performance period, the type of performance-basedawards to be granted, and the goals that will be used to measure the performance for the period. In determining the actual size of an individual performance-based award for a performance period, the plan administrator may reduce or eliminate (but not increase) the award. Generally, a participant will have to beemployed by us or any of our qualifying subsidiaries on the date the performance-based award is paid to be eligible for a performance-based award forany period.141AdministrationWith respect to stock option grants and other awards granted to our independent directors, the 2007 Incentive Award Plan will be administered by our fullboard of directors. With respect to all other awards, the plan must be administered by a committee consisting of at least two directors, each of whom qualifiesas a non-employee director pursuant to Rule 16b of the Exchange Act, an “outside director” pursuant to Section 162(m) of the Code and an independentdirector under the rules of the principal securities market on which our shares are traded. This committee is currently our compensation committee. Inaddition, our board may at any time exercise any rights and duties of the committee under the plan except with respect to matters which under Rule 16b-3 under the Exchange Act or Section 162(m) of the Code are required to be determined in the sole discretion of the committee.The plan administrator will have the exclusive authority to administer the plan, including, but not limited to, the power to determine award recipients, thetypes and sizes of awards, the price and timing of awards and the acceleration or waiver of any vesting restriction. Only our employees and employees of ourqualifying corporate subsidiaries are eligible to be granted options that are intended to qualify as “incentive stock options” under Section 422 of the Code.EligibilityPersons eligible to participate in the 2007 Incentive Award Plan include all members of our board of directors and all employees and consultants of ourcompany and our subsidiaries, as determined by the plan administrator.Foreign ParticipantsIn order to comply with the laws in other countries in which we and our subsidiaries operate or have persons eligible to participate in the plan, the planadministrator will have the power to determine which of our subsidiaries will be covered by the plan, determine which of our directors, employees andconsultants outside the United States are eligible to participate in the plan, modify the terms and conditions of any award granted to such eligible individualsto comply with applicable foreign laws, establish subplans and modify any terms and procedures (with certain exceptions), and take any action that it deemsadvisable with respect to local governmental regulatory exemptions or approvals. For example, in May 2007, our board of directors approved subplanspursuant to which options and restricted stock units may be granted to our employees in France. We may adopt additional subplans pursuant to which stockoptions or restricted stock units may be granted to employees in other countriesAdjustmentsIf there is any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off, recapitalization or other distribution (otherthan normal cash dividends) of our assets to stockholders, or any other change affecting the shares of our stock or the share price of our stock, the planadministrator will make proportionate adjustments to any or all of the following in order to reflect such change: (i) the aggregate number and type of shares thatmay be issued under the plan, (ii) the terms and conditions of any outstanding awards (including, without limitation, any applicable performance targets orcriteria with respect thereto), and (iii) the grant or exercise price per share for any outstanding awards under the plan. Any adjustment affecting an awardintended as “qualified performance-based compensation” will be made consistent with the requirements of Section 162(m) of the Code. The plan administratoralso has the authority under the 2007 Incentive Award Plan to take certain other actions with respect to outstanding awards in the event of a corporatetransaction, including provision for the cash-out, termination, assumption or substitution of such awards.142Change of ControlExcept as may otherwise be provided in any written agreement between the participant and us, in the event of a change of control of our company inwhich awards are not converted, assumed, or replaced by the successor, such awards will become fully exercisable and all forfeiture restrictions on suchawards will lapse. Upon, or in anticipation of, a change of control, the plan administrator may cause any and all awards outstanding under the 2007 IncentiveAward Plan to terminate at a specific time in the future and will give each participant the right to exercise such awards during a period of time as the planadministrator, in its sole and absolute discretion, determines.Termination or AmendmentWith the approval of our board of directors, the plan administrator may terminate, amend, or modify the 2007 Incentive Award Plan at any time.However, stockholder approval will be required for any amendment to the extent necessary and desirable to comply with any applicable law, regulation orstock exchange rule, to increase the number of shares available under the plan, to permit the grant of options with an exercise price below fair market value onthe date of grant, or to extend the exercise period for an option beyond ten years from the date of grant. In addition, absent stockholder approval, no option maybe amended to reduce the per share exercise price of the shares subject to such option below the per share exercise price as of the date the option was grantedand, except to the extent permitted by the plan in connection with certain changes in capital structure, no option may be granted in exchange for, or inconnection with, the cancellation or surrender of an option having a higher per share exercise price.2007 Employee Stock Purchase PlanOur board of directors and our stockholders adopted our 2007 Employee Stock Purchase Plan in fiscal year 2007. The following is a description of thematerial features and provisions of the plan.AdministrationThe 2007 Employee Stock Purchase Plan is administered by a committee consisting of at least two members of our board of directors, each of whom is a“non-employee director” for purposes of Rule 16b-3 under the Exchange Act. This committee is currently the compensation committee of our board. Subject tothe terms and conditions of the plan, the committee has the authority to make all determinations and to take all other actions necessary or advisable for theadministration of the plan. The committee is also authorized to adopt, amend and rescind rules relating to the administration of the plan. Our board ofdirectors may at any time exercise the rights and duties of the committee to administer the plan.EligibilityOur employees and the employees of our designated subsidiaries who customarily work more than 20 hours per week and more than five months percalendar year are eligible to participate in the 2007 Employee Stock Purchase Plan. Each eligible employee who is employed by us or any of our designatedsubsidiaries on February 6, 2007 will automatically become a participant in the plan with respect to the first purchase period. Each person who, during thecourse of an purchase period, becomes an eligible employee subsequent to the enrollment date will be eligible to become a participant in the plan on the first dayof the first purchase period following the day on which he or she becomes an eligible employee. However, no employee is eligible to participate in the plan if,immediately after the election to participate, such employee would own stock (including stock such employee may purchase under outstanding rights under theplan) representing 5% or more of the total combined voting power or value of all classes of our stock or the stock of any of our parent or subsidiarycorporations. In addition, no employee is permitted to143participate if the rights of the employee to purchase our common stock under the plan and all similar purchase plans maintained by us or our subsidiarieswould accrue at a rate which exceeds $25,000 of the fair market value of such stock (determined at the time the right is granted) for each calendar year.Shares ReservedSubject to certain adjustments set forth in the plan, the maximum number of shares of our common stock that may be issued under the 2007 EmployeeStock Purchase Plan is 1,000,000 shares. In addition, the number of shares available for issuance under the plan will be automatically increased on the firstday of each of our fiscal years during the term of the plan, commencing on July 1, 2008, by a number of shares equal to the least of: (1) 1% of ouroutstanding capital stock on such date; (2) 1,000,000 shares; or (3) a lesser amount determined by our board of directors.EnrollmentExcept with respect to the first offering period, eligible employees become participants in the 2007 Employee Stock Purchase Plan by executing asubscription agreement and filing it with us 15 days (or such shorter or longer period as may be determined by the plan administrator) prior to the applicableenrollment date. By enrolling in the plan, a participant is deemed to have elected to purchase the maximum number of whole shares of our common stock thatcan be purchased with the compensation withheld during each purchase period for which the participant is enrolled.TermsOfferings; exercise dates. Under the 2007 Employee Stock Purchase Plan, the first purchase period began on February 7, 2007 and will continue untilNovember 30, 2007. After the first purchase period, a new six-month purchase period will begin on each June 1st and December 1st thereafter during the termof the plan, such that there will be two six-month purchase periods each year. Under the plan, purchases will be made once during each purchase period on thelast trading day of such purchase period, and the dates of such purchases will be “exercise dates”. The plan administrator may change the duration andtiming of purchase periods and exercise dates under the plan.Price and payment. Employees electing to participate in the 2007 Employee Stock Purchase Plan will authorize payroll deductions made on each payday during each purchase period until the employee instructs us to stop the deductions or until the employee’s employment is terminated. Participants maycontribute up to 10% of their compensation through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on eachsemi-annual exercise date. Compensation for purposes of the plan means an employee’s base straight time gross earnings and commissions, but excludespayments for overtime, shift premium, incentive compensation, incentive payments, bonuses, expense reimbursements, fringe benefits and othercompensation. The purchase price per share will be equal to 85% of the fair market value of a share of our common stock on the first trading day of theapplicable purchase period or, if lower, 85% of the fair market value of a share of our common stock on the last trading day of the applicable purchaseperiod. No employee is permitted to purchase more than 2,500 shares during each purchase period.The fair market value of a share of our common stock on any date will equal the closing sales price of a share of common stock on NASDAQ for suchdate, or if no sale occurred on such date, the first trading date immediately prior to such date during which a sale occurred, as reported in The Wall StreetJournal or such other source as the plan administrator may deem reliable for such purposes.Termination of participation. Employees may end their participation in an offering at any time during the purchase period, and participation endsautomatically on failure to qualify as an eligible employee for any reason. Upon such termination of the employee’s participation in the 2007 Employee StockPurchase144Plan, such employee’s payroll deductions not already used to purchase stock under the plan will be returned to the employee.AdjustmentsIn the event of a stock split, reverse stock split, stock dividend or similar change in our capitalization, the number of shares available for issuance underthe plan and the purchase price and number of shares covered by options outstanding under the plan will be appropriately adjusted.In the event we merge with or into another corporation or sell all or substantially all of our assets, the outstanding rights under the plan will be assumed oran equivalent right substituted by the successor company or its parent or subsidiary. If the successor company or its parent or subsidiary refuses to assumethe outstanding rights or substitute an equivalent right, then the purchase period then in progress will be shortened by setting a new exercise date prior to theeffective date of the transaction and all outstanding purchase rights will automatically be exercised on the new exercise date. The purchase price will be equal to85% of the fair market value of a share of our common stock on the first trading day of the applicable purchase period in which an acquisition occurs or, iflower, 85% of the fair market value of a share of our common stock on the date the purchase rights are exercised.Termination or AmendmentOur board of directors may at any time and for any reason terminate or amend the 2007 Employee Stock Purchase Plan. Generally, no amendment maymake any change in any option previously granted which adversely affects the rights of any participant without such participant’s consent, provided that anoffering period may be terminated by our board of directors if it determines that the termination of the offering period or the plan is in the best interests of ourcompany and our stockholders. To the extent necessary to comply with Section 423 of the Code, we will obtain stockholder approval of any amendment tothe plan.Without stockholder consent and without regard to whether any participant rights may be considered to have been “adversely affected,” the planadministrator may change the offering periods, limit the frequency and/or number of changes in the amount withheld during an offering period, and establishsuch other limitations or procedures as it determines consistent with the plan. In addition, in the event our board of directors determines that the ongoingoperation of the plan may result in unfavorable financial accounting consequences, our board may, in its discretion and, to the extent necessary or desirable,modify or amend the plan to reduce or eliminate such accounting consequence. Such modifications or amendments will not require stockholder approval or theconsent of any plan participants.Unless earlier terminated by the plan administrator, the 2007 Employee Stock Purchase Plan will terminate on the tenth anniversary of the date of itsinitial adoption by our board.Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEIn addition to the compensation arrangements with directors and the executive officers described above, the following is a description of each transactionduring fiscal year 2007 and each currently proposed transaction in which:· we have been or are to be a participant;· the amount involved exceeds $120,000; and· any of our directors, executive officers or holders of more than 5% of our capital stock, or any immediate family member of or person sharing thehousehold with any of these individuals, had or will have a direct or indirect material interest.145Employment, Change of Control and Severance AgreementsWe have entered into employment letter agreements with our executive officers which contain certain change of control and severance provisions. Seesection titled “Employment, Change of Control and Severance Agreements” in Part III, Item 11 of this Annual Report. In addition to the compensationarrangements and the named executive officers described above, we have certain arrangements with other of our Executive Officers as follows.Christopher D. MitchellEffective as of April 23, 2007, we entered into an employment letter agreement with Mr. Mitchell. Under the agreement, Mr. Mitchell will serve as ourSenior Vice President and General Counsel. The agreement provides that he is entitled to receive an annual base salary of $250,000 and is eligible to participatein our executive bonus plan under which he may earn annual incentive bonuses targeted at 40% of his base salary based upon the attainment of performancecriteria established and evaluated by our compensation committee.Under our letter agreement with Mr. Mitchell, in the event of a termination of his employment by us without “cause” or by Mr. Mitchell for “goodreason,” as each term is defined in the agreement, Mr. Mitchell will be entitled to receive a severance payment in an amount equal to the sum of 8 months of hisannual base salary then in effect, a pro rata portion of his target annual bonus for the year of such termination, plus 66% of his target annual bonus then ineffect. In addition, we will pay for 8 months of COBRA continuation coverage for Mr. Mitchell and his eligible dependents if he elects such coverage uponsuch a termination. If a change in control of our company (as defined in the employment letter) occurs during the term of Mr. Mitchell’s employment and hisemployment is terminated by us without cause or by Mr. Mitchell for good reason, in each case within the 12-month period following the change in control,then in addition to the foregoing severance payments and benefits, all of Mr. Mitchell’s then outstanding stock options to purchase shares of our commonstock and Restricted Stock Units will become fully vested and exercisable immediately prior to the effective time of such termination of employment. Theforegoing benefits and payments may be subject to a delay of up to 6 months as necessary to avoid the imposition of additional tax under Section 409A of theCode. In addition, if any payments or benefits payable to Mr. Mitchell under the employment letter or otherwise would be subject to the excise tax underSection 4999 of the Code, such payments and/or benefits will be reduced to the extent necessary so that no amount will be subject to such excise tax, providedthat such reduction will only occur if Mr. Mitchell will be in a more favorable after-tax position than if no such reduction was made.The employment letter also provides for certain restrictive covenants by Mr. Mitchell, including a confidentiality covenant that will apply during hisemployment with us and thereafter, a non-solicitation covenant for the duration of his employment and one year thereafter, and a non-competition covenant forthe duration of his employment.Theresa DadoneEffective as of July 2, 2007, we entered into an employment letter agreement with Ms. Dadone. Under the agreement, Ms. Dadone will serve as our SeniorVice President, Human Resources. The agreement provides that she is entitled to receive an annual base salary of $235,000 and is eligible to participate in ourexecutive bonus plan under which she may earn annual incentive bonuses targeted at 40% of her base salary based upon the attainment of performance criteriaestablished and evaluated by our company.Under our letter agreement with Ms. Dadone, in the event of a termination of her employment by our company without “cause” or by Ms. Dadone for“good reason,” as each term is defined in the agreement, Ms. Dadone will be entitled to receive a severance payment in an amount equal to the sum of 6 monthsof her annual base salary then in effect, a pro rata portion of her target annual bonus for the year of such146 23termination, plus 50% of her target annual bonus then in effect. In addition, our company will pay for 6 months of COBRA continuation coverage forMs. Dadone and her eligible dependents if she elects such coverage upon such a termination. If a change in control of our company (as defined in theemployment letter) occurs within the first thirty-six (36) months of Ms. Dadone’s commencement of employment and her employment is terminated by ourcompany without cause or by Ms. Dadone for good reason, in each case within the 12-month period following the change in control, then in addition to theforegoing severance payments and benefits, all of Ms. Dadone’s then outstanding stock options to purchase shares of our common stock and Restricted StockUnits will become fully vested and exercisable immediately prior to the effective time of such termination of employment. The foregoing benefits and paymentsmay be subject to a delay of up to 6 months as necessary to avoid the imposition of additional tax under Section 409A of the Code. In addition, if anypayments or benefits payable to Ms. Dadone under the employment letter or otherwise would be subject to the excise tax under Section 4999 of the Code, suchpayments and/or benefits will be reduced to the extent necessary so that no amount will be subject to such excise tax, provided that such reduction will onlyoccur if Ms. Dadone will be in a more favorable after-tax position than if no such reduction was made.The employment letter also provides for certain restrictive covenants by Ms. Dadone, including a confidentiality covenant that will apply during heremployment with our company and thereafter, a non-solicitation covenant for the duration of her employment and one year thereafter, and a non-competitioncovenant for the duration of her employment.The CyberKnife SocietyThe CyberKnife Society was incorporated in December 2002 as a non-profit organization, and has operated with administrative assistance and fundingfrom us. The CyberKnife Society was organized for the purpose of bringing together CyberKnife system users and medical professionals affiliated withradiosurgery worldwide to foster scholarly exchange and the sharing of clinical information relating to the CyberKnife system, as well as to educate patientsabout radiosurgery. The CyberKnife Society offered membership to CyberKnife system users as a means of facilitating communication, as well ascoordinating continuing medical education and other educational events regarding the CyberKnife system and radiosurgery. In November 2006, theCyberKnife Society was dissolved as a separate entity with the intention of reorganizing the CyberKnife Society in the near future. In the interim, theCyberKnife Society is operating as a department of our company, and continues to offer the same benefits and services to its membership.As part of the dissolution of the CyberKnife Society, the Attorney General of California required that the liabilities and obligations of the CyberKnifeSociety be assumed by another entity. We assumed all such liabilities and obligations.Investors’ Rights AgreementOn October 30, 2006, we and certain holders of our capital stock entered into an agreement, pursuant to which these stockholders will have registrationrights with respect to their shares of common stock following our initial public offering. Under the terms of the amended and restated investors’ rightsagreement between us and the holders of these registrable securities, if we propose to register any of our securities under the Securities Act, either for our ownaccount or for the account of other security holders exercising registration rights, these holders are entitled to notice of registration and are entitled to includetheir shares of common stock in the registration. Certain of the holders of the registrable securities are also entitled to specified demand registration rights underwhich the holders of at least 30% of these shares can request that we register all or a portion of their shares. We are required only to file two registrationstatements upon the stockholders’ exercise of these demand registration rights. In addition certain of the holders of registrable securities are entitled to certainpiggyback registration rights. As a result, whenever147we propose to file a registration statement under the Securities Act, other than with respect to a registration related to employee benefit plans, debt securities, orcorporate reorganizations, the holders of registrable securities are entitled to notice of the registration and have the right, subject to limitations that theunderwriters may impose on the number of shares included in the registration, to include their registrable shares in the registration. We will pay the registrationexpenses of the holders of registrable securities for the incidental or piggyback registrations.All of these registration rights are subject to conditions and limitations, among them the right of the underwriters of an offering to limit the number ofshares included in the registration and our right not to effect a requested registration within six months following the initial offering of our securities.As of June 30, 2007, Marubeni Corporation and President (BVI) International Investment Holdings Ltd., or PIIH, are entitled to rights with respect to theregistration under the Securities Act of shares of common stock held by them, which were issued upon the conversion of our preferred stock in connectionwith our initial public offering.Consulting AgreementsWe are a party to a consulting agreement with Dr. Adler, a member of our board of directors. See section titled “Director Compensation” in Part III, Item11 of this Annual Report.Indemnification of Directors and OfficersOur amended and restated certificate of incorporation and bylaws in effect provide that we will indemnify each of our directors and officers to the fullestextent permitted by the Delaware General Corporation Law. Furthermore, we have entered into indemnification agreements with each of our directors andofficers. In addition, certain indemnification provisions are contained in Mr. Lindquist’s employment terms letter. For further information, see section titled“Employment, Change of Control and Severance Agreements” in Part III, Item 11 of this Annual Report.Other ArrangementsDr. Adler, a member of our board of directors, is a Professor of Neurosurgery and Radiation Oncology at Stanford University. During the years endedJune 30, 2007, 2006 and 2005, we recognized revenue of $722,000, $195,000 and $585,000, respectively, relating to services provided to StanfordUniversity. During the years ended June 30, 2007, 2006 and 2005, we recognized revenue of $3,057,000, $0 and $0 relating to the sale of a CyberKnifesystem to Stanford University. Advances and deferred revenue of $231,000, $1,340,000 and $195,000 were recorded at June 30, 2007, 2006, and 2005,respectively, relating to payments made by Stanford University. We also have a license agreement with Stanford University.Director IndependenceSee the information set forth in the section titled “Board Committees” in Part III, Item 10 of this Annual Report.Review, Approval or Ratification of Transactions with Related PartiesDuring fiscal year 2007, we believe that there has not been any transaction or series of similar transactions to which we were or are to be a party in whichthe amount involved exceeds $120,000 and in which any director, executive officer or holder of more than 5% of our common stock, or members of any suchperson’s immediate family, had or will have a direct or indirect material interest, other than as described herein. Any such transactions are required to beapproved by the Audit Committee of the Board148of Directors and we intend that they will be on terms no less favorable to our company than could be obtained from unaffiliated third parties.Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESGrant Thornton LLP was our independent registered public accounting firm for the year ended June 30, 2007. We expect that our audit committee of ourboard of directors will engage Grant Thornton LLP to be the independent registered public accounting firm of Accuray Incorporated and its subsidiaries for thefiscal year ended June 30, 2008.The aggregate fees we paid to Grant Thornton LLP, our independent registered public accounting firm, for professional services provided during the yearended June 30, 2007 and 2006 are as follows:Item20072006Audit fees(1)754,514757,168Other audit fees(2)1,260,209—(1) Audit fees consist of fees for professional services performed for the audit of our consolidated annual financial statements and the reviews of the interimunaudited consolidated financial statements included in quarterly reports and services that are normally provided by Grant Thornton LLP in connectionwith statutory and regulatory filings or engagements for the years ended June 30, 2007 and 2006. (2) Other audit fees consist of fees for professional services performed for assurance and related services that are related to the audit of our consolidatedannual financial statements and are not reported under Audit fees. These fees primarily consist of matters related to our initial public offering.Policy on Audit Committee’s Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting FirmThe Audit Committee pre-approves all audit and permissible non-audit services provided by the independent registered public accounting firm. Theseservices may include audit services, audit-related services and tax services, as well as, to a very limited extent, specifically designated non-audit serviceswhich, in the opinion of the Audit Committee, will not impair the independence of the registered public accounting firm. Pre-approval is detailed as to theparticular service or category of services and is generally subject to a specific budget. The independent registered public accounting firm and management arerequired to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm inaccordance with this pre-approval, including the fees for the services performed to date. In addition, the Audit Committee also may pre-approve particularservices on a case-by-case basis, as required.Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) Financial StatementsThe financial statements of Accuray Incorporated are set forth in Item 8 of this Report.149(b) Financial Statement SchedulesSCHEDULE IIValuation and Qualifying Accounts Charges Beginning(Deductions)EndingBalanceto Operations Write-offs Balance Accounts receivable allowancesYear ended June 30, 2005$10645(106)$45Year ended June 30, 2006$45(21)(4)$20Year ended June 30, 2007$202(2)$20 (c) ExhibitsThe following exhibits are incorporated by reference or filed herewith.2.1Agreement and Plan of Merger of Accuray Incorporated, a Delaware Corporation, and Accuray Incorporated,a California Corporation, dated as of February 3, 2007.(1)3.2Amended and Restated Certificate of Incorporation of Registrant.(1)3.4Amended and Restated Bylaws of Registrant.(1)4.2Investors’ Rights Agreement dated October 30, 2006 by and between Registrant and purchasers of Series APreferred Stock, Series A1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock andcertain holders of common stock.(1)4.3Form of Common Stock Certificate.(1)10.1Industrial Complex Lease dated July 14, 2003 by and between Registrant and MP Caribbean, Inc., asamended by the First Amendment to Industrial Complex Lease effective as of December 9, 2004 and theSecond Amendment to Industrial Complex Lease effective as of September 25, 2006.(1)10.1(a)Third Amendment to Industrial Complex Lease dated January 16, 2007.10.2Standard Industrial Lease effective as of June 30, 2005 by and between Registrant and The Realty AssociatesFund III, L.P.(1)10.3*Accuray Incorporated 1993 Stock Option Plan and forms of agreements relating thereto.(1)10.4*Accuray Incorporated 1998 Equity Incentive Plan and forms of agreements relating thereto.(1)10.5*Accuray Incorporated 2007 Incentive Award Plan and forms of agreements relating thereto.(1)10.6*Accuray Incorporated 2007 Employee Stock Purchase Plan and forms of agreements relating thereto.(1)10.7*Form of Indemnification Agreement by and between Registrant and each of its directors and executiveofficers.(1)10.8*Employment Terms Letter dated November 10, 2006 by and between Registrant and Euan S.Thomson, Ph.D.(1)10.9*Employment Terms Letter dated November 10, 2006 by and between Registrant and Chris A. Raanes.(1)10.10*Employment Terms Letter dated November 10, 2006 by and between Registrant and Robert E.McNamara.(1)10.11Offer Letter dated July 22, 2004 by and between Registrant and John W. Allison, Ph.D.(1)10.12*Employment Terms Letter dated November 10, 2006 by and between Registrant and Eric Lindquist.(1)150 10.13*Employment Terms Letter dated November 10, 2006 by and between Registrant and Wade Hampton.(1)10.16License Agreement effective as of December 12, 2004 by and between Registrant and American Science andEngineering, Inc.(1)10.17Assignment & Assumption of License and Consent by Supplier effective as of January 10, 2005 by andamong Registrant, American Science and Engineering, Inc., Yuri Batygin, and Anatoliy Zapreier.(1)10.18Nonexclusive End-User Software License Agreement dated September 9, 2005 by and between Registrantand The Regents of the University of California.(1)10.19License Agreement effective as of July 9, 1997 by and between Registrant and The Board of Trustees of theLeland Stanford Junior University.(1)10.20Manufacturing License and Technology Transfer Agreement effective as of January 28, 1991 by andbetween Registrant and Schonberg Radiation Corporation, as amended on April 15, 1996 andNovember 11, 2002.(1)10.21Non-Exclusive System Partner Agreement effective as of September 23, 2005 by and between Registrant andKUKA Robotics Corporation.(1)10.22Consulting Agreement effective as of March 11, 2004 by and between Registrant and Forte AutomationSystems, Inc.(1)10.23Amended and Restated International Distributor Agreement effective as of April 1, 2004 by and betweenRegistrant and President Medical Technologies Co., Ltd. Inc.(1)10.24Commission Agreement effective as of August 10, 2006 by and between Registrant and President MedicalTechnologies Co., Ltd. Inc.(1)10.25Assignment Agreement effective as of December 29, 2004 by and between President MedicalTechnologies Co., Ltd. Inc. and Cowealth Medical Science & Biotechnology Incorporated.(1)10.26International Distributor Agreement dated January 21, 2004 by and between Registrant and Chiyoda TechnolCorporation.(1)10.27Form of Training Center Agreement.(1)10.28Form of International Distributor Agreement.(1)10.29Form of Sales Agent Agreement.(1)10.30Form of CyberKnife G4 Purchase Agreement.(1)10.31Form of Diamond Elite Service Agreement.(1)10.32Form of Emerald Elite Service Agreement.(1)10.33Form of Emerald Basic Service Agreement.(1)10.34Form of International Ruby Elite Service Agreement.(1)10.35Form of International Diamond Elite Service Agreement.(1)10.36Form of International Emerald Elite Service Agreement.(1)10.37Form of Platinum Elite Service Agreement.(1)10.38Form of Silver Elite Service Agreement.(1)10.39Form of International Platinum Elite Service Agreement.(1)10.40Form of International Gold Elite Service Agreement.(1)10.41Form of International Silver Elite Service Agreement.(1)151 10.42Form of CyberKnife G4 Shared Ownership Agreement.(1)10.43Form of CyberKnife G4 Placement Agreement.(1)10.44Separation Agreement and Release effective as of April 14, 2006 by and between Registrant and John W.Allison, Ph.D.(1)10.45Asset Purchase Agreement effective as of December 12, 2004 by and between the Registrant and AmericanScience and Engineering, Inc.(1)10.46Exclusive Manufacturing Agreement effective as of November 29, 2006 by and between the Registrant andForte Automation Systems, Inc.(1)10.47Letter Agreement dated May 20, 2003 by and between the Registrant and Meditec Corporation.(1)10.48†CyberKnife Transfer Agreement effective as of March 6, 2006 by and between the Registrant, MarubeniCorporation and Meditec Corporation.(1)10.49†Patent and Trademark License Agreement effective as of November 29, 2006 by and between the Registrantand Forte Automation Systems, Inc.(1)10.50††Distribution and Remarketing Agreement dated April 3, 2007 by and between the Registrant and SiemensMedical Solutions, Oncology Care Systems Group.10.51††License and Development Agreement dated April 27, 2007 by and between the Registrant andCyberHeart, Inc.10.52Independent Contractor Agreement effective as of April 1, 2007 by and between Registrant and John R. Adler,as amended by Amendment One to Independent Contractor Agreement to dated of April 10, 2007.10.53*Employment Terms Letter dated May 3, 2007 by and between Registrant and Christopher Mitchell.10.54*Employment Terms Letter effective as of July 2, 2007 by and between Registrant and Theresa Dadone.21.1List of subsidiaries.23.1Consent of Grant Thornton LLP, independent registered public accounting firm.31.1Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1) Incorporated by reference to the same numbered exhibit to Amendment No. 6 to Registrant’s Registration Statement on Form S-1 filed with the Securitiesand Exchange Commission on February 7, 2007 (No. 333-138622).* Management contract or compensatory plan or arrangement.152† Portions of the exhibit have been omitted pursuant to a request for confidential treatment, which has been granted. The omitted information has been filedseparately with the Securities and Exchange Commission.†† Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The omitted information has been filed separately with theSecurities and Exchange Commission.The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the Securitiesand Exchange Commission and are not to be incorporated by reference into any filing of Accuray Incorporated under the Securities Act of 1933 or theSecurities Exchange Act of 1934, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation languagecontained in such filing.153SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on the 31 day of August 2007.ACCURAY INCORPORATEDBy:/s/ EUAN S. THOMSON, PH.D.Euan S. Thomson, Ph.D.President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following and on the dates indicated.SignatureTitleDate/s/ EUAN S. THOMSON, PH.DPresident and Chief Executive OfficerAugust 31, 2007Euan S. Thomson, Ph.Dand Director (principal executive officer)/s/ ROBERT E. MCNAMARASenior Vice President, Chief FinancialAugust 31, 2007Robert E. McNamaraOfficer (principal financial andaccounting officer)/s/ WAYNE WUChairman of the Board and DirectorAugust 31, 2007Wayne Wu/s/ JOHN R. ADLER, JR., M.D.DirectorAugust 28, 2007John R. Adler, Jr., M.D./s/ TED T.C. TUDirectorAugust 31, 2007Ted T. C. Tu/s/ ROBERT S. WEISSDirectorAugust 31, 2007Robert S. Weiss/s/ LI YUDirectorAugust 29, 2007Li Yu 154stExhibit IndexExhibitNo.2.1Agreement and Plan of Merger of Accuray Incorporated, a Delaware Corporation, and Accuray Incorporated,a California Corporation, dated as of February 3, 2007.(1)3.2Amended and Restated Certificate of Incorporation of Registrant.(1)3.4Amended and Restated Bylaws of Registrant.(1)4.2Investors’ Rights Agreement dated October 30, 2006 by and between Registrant and purchasers of Series APreferred Stock, Series A1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock andcertain holders of common stock.(1)4.3Form of Common Stock Certificate.(1)10.1Industrial Complex Lease dated July 14, 2003 by and between Registrant and MP Caribbean, Inc., asamended by the First Amendment to Industrial Complex Lease effective as of December 9, 2004 and theSecond Amendment to Industrial Complex Lease effective as of September 25, 2006.(1)10.1(a)Third Amendment to Industrial Complex Lease dated January 16, 2007.10.2Standard Industrial Lease effective as of June 30, 2005 by and between Registrant and The Realty AssociatesFund III, L.P.(1)10.3*Accuray Incorporated 1993 Stock Option Plan and forms of agreements relating thereto.(1)10.4*Accuray Incorporated 1998 Equity Incentive Plan and forms of agreements relating thereto.(1)10.5*Accuray Incorporated 2007 Incentive Award Plan and forms of agreements relating thereto.(1)10.6*Accuray Incorporated 2007 Employee Stock Purchase Plan and forms of agreements relating thereto.(1)10.7*Form of Indemnification Agreement by and between Registrant and each of its directors and executiveofficers.(1)10.8*Employment Terms Letter dated November 10, 2006 by and between Registrant and Euan S.Thomson, Ph.D.(1)10.9*Employment Terms Letter dated November 10, 2006 by and between Registrant and Chris A. Raanes.(1)10.10*Employment Terms Letter dated November 10, 2006 by and between Registrant and Robert E.McNamara.(1)10.11Offer Letter dated July 22, 2004 by and between Registrant and John W. Allison, Ph.D.(1)10.12*Employment Terms Letter dated November 10, 2006 by and between Registrant and Eric Lindquist.(1)10.13*Employment Terms Letter dated November 10, 2006 by and between Registrant and Wade Hampton.(1)10.16License Agreement effective as of December 12, 2004 by and between Registrant and American Science andEngineering, Inc.(1)10.17Assignment & Assumption of License and Consent by Supplier effective as of January 10, 2005 by andamong Registrant, American Science and Engineering, Inc., Yuri Batygin, and Anatoliy Zapreier.(1)10.18Nonexclusive End-User Software License Agreement dated September 9, 2005 by and between Registrantand The Regents of the University of California.(1)10.19License Agreement effective as of July 9, 1997 by and between Registrant and The Board of Trustees of theLeland Stanford Junior University.(1) 10.20Manufacturing License and Technology Transfer Agreement effective as of January 28, 1991 by andbetween Registrant and Schonberg Radiation Corporation, as amended on April 15, 1996 andNovember 11, 2002.(1)10.21Non-Exclusive System Partner Agreement effective as of September 23, 2005 by and between Registrant andKUKA Robotics Corporation.(1)10.22Consulting Agreement effective as of March 11, 2004 by and between Registrant and Forte AutomationSystems, Inc.(1)10.23Amended and Restated International Distributor Agreement effective as of April 1, 2004 by and betweenRegistrant and President Medical Technologies Co., Ltd. Inc.(1)10.24Commission Agreement effective as of August 10, 2006 by and between Registrant and President MedicalTechnologies Co., Ltd. Inc.(1)10.25Assignment Agreement effective as of December 29, 2004 by and between President MedicalTechnologies Co., Ltd. Inc. and Cowealth Medical Science & Biotechnology Incorporated.(1)10.26International Distributor Agreement dated January 21, 2004 by and between Registrant and Chiyoda TechnolCorporation.(1)10.27Form of Training Center Agreement.(1)10.28Form of International Distributor Agreement.(1)10.29Form of Sales Agent Agreement.(1)10.30Form of CyberKnife G4 Purchase Agreement.(1)10.31Form of Diamond Elite Service Agreement.(1)10.32Form of Emerald Elite Service Agreement.(1)10.33Form of Emerald Basic Service Agreement.(1)10.34Form of International Ruby Elite Service Agreement.(1)10.35Form of International Diamond Elite Service Agreement.(1)10.36Form of International Emerald Elite Service Agreement.(1)10.37Form of Platinum Elite Service Agreement.(1)10.38Form of Silver Elite Service Agreement.(1)10.39Form of International Platinum Elite Service Agreement.(1)10.40Form of International Gold Elite Service Agreement.(1)10.41Form of International Silver Elite Service Agreement.(1)10.42Form of CyberKnife G4 Shared Ownership Agreement.(1)10.43Form of CyberKnife G4 Placement Agreement.(1)10.44Separation Agreement and Release effective as of April 14, 2006 by and between Registrant and John W.Allison, Ph.D.(1)10.45Asset Purchase Agreement effective as of December 12, 2004 by and between the Registrant and AmericanScience and Engineering, Inc.(1)10.46Exclusive Manufacturing Agreement effective as of November 29, 2006 by and between the Registrant andForte Automation Systems, Inc.(1)10.47Letter Agreement dated May 20, 2003 by and between the Registrant and Meditec Corporation.(1)10.48†CyberKnife Transfer Agreement effective as of March 6, 2006 by and between the Registrant, MarubeniCorporation and Meditec Corporation.(1) 10.49†Patent and Trademark License Agreement effective as of November 29, 2006 by and between the Registrantand Forte Automation Systems, Inc.(1)10.50††Distribution and Remarketing Agreement dated April 3, 2007 by and between the Registrant and SiemensMedical Solutions, Oncology Care Systems Group.10.51††License and Development Agreement dated April 27, 2007 by and between the Registrant andCyberHeart, Inc.10.52Independent Contractor Agreement effective as of April 1, 2007 by and between Registrant and John R. Adler,as amended by Amendment One to Independent Contractor Agreement to dated of April 10, 2007.10.53*Employment Terms Letter dated May 3, 2007 by and between Registrant and Christopher Mitchell.10.54*Employment Terms Letter effective as of July 2, 2007 by and between Registrant and Theresa Dadone.21.1List of subsidiaries.23.1Consent of Grant Thornton LLP, independent registered public accounting firm.31.1Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1) Incorporated by reference to the same numbered exhibit to Amendment No. 6 to Registrant’s Registration Statement on Form S-1 filed with the Securitiesand Exchange Commission on February 7, 2007 (No. 333-138622).* Management contract or compensatory plan or arrangement.† Portions of the exhibit have been omitted pursuant to a request for confidential treatment, which has been granted. The omitted information has been filedseparately with the Securities and Exchange Commission.†† Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The omitted information has been filed separately with theSecurities and Exchange Commission.The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the Securitiesand Exchange Commission and are not to be incorporated by reference into any filing of Accuray Incorporated under the Securities Act of 1933 or theSecurities Exchange Act of 1934, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation languagecontained in such filing.Exhibit 10.1(a)THIRD AMENDMENT TO INDUSTRIAL COMPLEX LEASETHIS THIRD AMENDMENT TO INDUSTRIAL COMPLEX LEASE (this “Amendment”) is made and entered into as of January 16,2007, by and between BRCP CARIBBEAN PORTFOLIO, LLC, a Delaware limited liability company (“Landlord”), and ACCURAYINCORPORATED, a California corporation (“Tenant”).RECITALSA. Landlord (as successor in interest to MP Caribbean, Inc., a Delaware corporation) and Tenant are parties to that certain Industrial Complex Lease,dated July 9, 2003 (the “Original Lease”), which Original Lease has been previously amended by that certain First Amendment to IndustrialComplex Lease, dated December 9, 2004, and that certain Second Amendment to Industrial Complex Lease (the “Second Amendment”), datedSeptember 25, 2006 (collectively, the “Lease”). Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately125,568 rentable square feet (the “Premises”) described as approximately 40,000 rentable square feet of space in that certain building located at 1310Chesapeake Terrace, Sunnyvale, California, approximately 32,576 rentable square feet of space in that certain building located at 1314 ChesapeakeTerrace, Sunnyvale, California and approximately 52,992 rentable square feet of space in that certain building located at 1315 Chesapeake Terrace,Sunnyvale, California (each of the foregoing a “Building” and together, collectively, the “Buildings”), which are a part of the approximately 253,540rentable square foot industrial complex commonly known as Caribbean Corporate Center (the “Industrial Complex”).B. Tenant and Landlord mutually desire that the Lease be amended on and subject to the following terms and conditions.NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, thereceipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:1. Amendment. Effective as of the date hereof (unless different effective date(s) is/are specifically referenced in this Section), Landlord and Tenantagree that the Lease shall be amended in accordance with the following terms and conditions:1.1 Expansion Space Improvements.1.1.1 Tenant hereby acknowledges and agrees that on December 19, 2006, Landlord delivered to Tenant at that portion of the Premiseslocated in the Building at 1315 Chesapeake Terrace, Sunnyvale, California (the “Carpet Delivery Date”) the new carpetingdescribed in Section 1 of Exhibit B to the Second Amendment (the “Carpeting”). Notwithstanding anything in the SecondAmendment to the contrary, Landlord shall have no obligation to install the Carpeting at the Premises nor to provide anyallowance or other incentive in connection with the same, except as expressly provided below. On or before June 1, 2007, Tenantshall install the Carpeting at the Premises in accordance with the terms and conditions hereof and otherwise in accordance with theterms of the Lease. Landlord shall have the right to approve the contractor to be retained by Tenant to install the Carpeting in thePremises. Tenant shall be responsible for all elements of the1installation of the Carpeting at the Premises. Landlord’s approval of the contractors to install the Carpeting shall not beunreasonably withheld.Provided Tenant is not in default under the Lease, as amended hereby, beyond any applicable notice and cure periods, Landlordagrees to contribute up to $37,992.00 (“Landlord’s Contribution”) toward the cost of installing the Carpeting in the Premises. Landlord’s Contribution shall be paid to Tenant within thirty (30) days following receipt by Landlord of (a) receipted billscovering all labor expended in connection with the installation of the Carpeting in the Premises; (b) a sworn contractor’s affidavitfrom the contractor and a request to disburse from Tenant containing an approval by Tenant of the work done; (c) full and finalwaivers of lien; and (d) the certification of Tenant and its contractor that the Carpeting has been installed in a good andworkmanlike manner and in accordance with applicable laws, codes and ordinances. Landlord’s Contribution shall bedisbursed in the amount reflected on the receipted bills meeting the requirements above. Notwithstanding anything herein to thecontrary, Landlord shall not be obligated to disburse any portion of Landlord’s Contribution during the continuance of anuncured default under the Lease, as amended hereby, and Landlord’s obligation to disburse shall only resume when and if suchdefault is cured.Tenant is solely responsible for the condition and repair of the Carpeting and any damage caused to the Carpeting. None of theIndemnities (as defined in Article 21 of the Original Lease) shall be liable and Tenant hereby waives all claims against them forany damage to the Carpeting (except to the extent the same is caused by the gross negligence or willful misconduct of Landlord)and/or injury caused by the presence of such Carpeting in the Premises. Tenant shall protect, indemnify and hold the Indemniteesharmless from and against any and all loss, claims, liability or costs (including court costs and attorney’s fees) incurred byreason of any damage to the Carpeting (excluding any damage caused by the gross negligence or willful misconduct of Landlord)and/or any injury caused by the presence of the Carpeting in the Premises. The foregoing provisions of this Section 1.1 shallsurvive the termination of the Lease, as amended hereby, with respect to any claims or liability accruing prior to such termination.1.1.2 Notwithstanding anything herein or in the Second Amendment to the contrary, Tenant hereby acknowledges and agrees that(a) except with respect to the performance of any restoration or repairs on the base Building systems in the Expansion Spacerequired of Landlord pursuant to Section 9 of the Second Amendment (as referenced in Paragraph 3 of Exhibit B to the SecondAmendment) (the foregoing exception referred to herein as the “Exception”), as of the Carpet Delivery Date, Landlord has fullysatisfied Landlord’s obligations with respect to the completion of the Expansion Space Improvements set forth in Exhibit B to theSecond Amendment and Tenant hereby waives any claims against the Indemnitees with respect to any Expansion SpaceImprovements described in Exhibit B to the Second Amendment that were not complete as of the Carpet Delivery Date, and(b) Tenant hereby accepts the Expansion Space in its as-is condition as of the Carpet Delivery Date, except with respect to theException.21.1.3 Landlord and Tenant acknowledge and agree that, notwithstanding anything set forth herein to the contrary, the followingobligation of Landlord pursuant to Paragraph 1 of Exhibit B to the Second Amendment shall remain in full force and effect:Landlord’s obligation to obtain from the appropriate governmental authorities all approvals necessary for the occupancy of thePremises with respect to the Expansion Space Improvements actually performed by Landlord or its contractors in the ExpansionSpace (the fifth sentence of Paragraph 1 of Exhibit B to the Second Amendment).1.2 Expansion Effective Date. Landlord and Tenant hereby acknowledge and confirm that the Expansion Effective Date occurred onNovember 15, 2006, and that as of the Expansion Effective Date, Tenant’s obligation to pay the minimum guaranteed rental with respect tothe Expansion Space set forth in the Second Amendment commenced.2. Miscellaneous.2.1 This Amendment sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been noadditional oral or written representations or agreements. Under no circumstances shall Tenant be entitled to any rent abatement,improvement allowance, leasehold improvements, or other work to the Premises, or any similar economic incentives that may have beenprovided Tenant in connection with entering into the Lease, unless specifically set forth in this Amendment or the Second Amendment.2.2 Except as herein modified or amended, the provisions, conditions and terms of the Lease shall remain unchanged and in full force andeffect.2.3 In the case of any inconsistency between the provisions of the Lease and this Amendment, the provisions of this Amendment shall governand control.2.4 Submission of this Amendment by Landlord is not an offer to enter into this Amendment but rather is a solicitation for such an offer byTenant. Landlord shall not be bound by this Amendment until Landlord has executed and delivered the same to Tenant.2.5 The capitalized terms used in this Amendment shall have the same definitions as set forth in the Lease to the extent that such capitalizedterms are defined therein and not redefined in this Amendment.2.6 Tenant hereby represents to Landlord that Tenant has dealt with no broker in connection with this Amendment. Tenant agrees toindemnify and hold Landlord, its members, principals, beneficiaries, partners, officers, managers, investors, directors, employees,mortgagee(s) and agents, and the respective principals and members of any such agents harmless from all claims of any brokers claimingto have represented Tenant in connection with this Amendment. Landlord hereby represents to Tenant that Landlord has dealt with nobroker in connection with this Amendment. Landlord agrees to indemnify and hold Tenant, its members, principals, beneficiaries,partners, officers, directors, employees, and agents, and the respective principals and members of any such agents harmless from allclaims of any brokers claiming to have represented Landlord in connection with this Amendment.32.7 Each signatory of this Amendment represents hereby that he or she has the authority to execute and deliver the same on behalf of the partyhereto for which such signatory is acting. Tenant hereby represents and warrants that neither Tenant, nor any persons or entities holdingany legal or beneficial interest whatsoever in Tenant, are (i) the target of any sanctions program that is established by Executive Order of thePresident or published by the Office of Foreign Assets Control, U.S. Department of the Treasury (“OFAC”); (ii) designated by thePresident or OFAC pursuant to the Trading with the Enemy Act, 50 U.S.C. App. § 5, the International Emergency Economic Powers Act,50 U.S.C. §§ 1701-06, the Patriot Act, Public Law 107-56, Executive Order 13224 (September 23, 2001) or any Executive Order of thePresident issued pursuant to such statutes; or (iii) named on the following list that is published by OFAC: “List of Specially DesignatedNationals and Blocked Persons.” If the foregoing representation is untrue at any time during the Term, an uncured event of default underthe Lease will be deemed to have occurred, without the necessity of notice to Tenant.2.8 Redress for any claim against Landlord under the Lease and this Amendment shall be limited to and enforceable only against and to theextent of Landlord’s interest in the Building. The obligations of Landlord under the Lease are not intended to and shall not be personallybinding on, nor shall any resort be had to the private properties of, any of its trustees or board of directors and officers, as the case may be,its investment manager, the general partners thereof, or any beneficiaries, stockholders, employees, or agents of Landlord or the investmentmanager.IN WITNESS WHEREOF, Landlord and Tenant have entered into and executed this Amendment as of the date first written above.4LANDLORD: BRCP CARIBBEAN PORTFOLIO, LLC, a Delaware limited liability company By:/s/ Craig Vought Name:Craig Vought Title:Managing Partner TENANT: ACCURAY INCORPORATED, a California corporation By:/s/ Chris A. Raanes Name:Chris A. Raanes Title:COO By:/s/ Darren J. MillikenName:Darren J. Milliken Title:General Counsel 5Exhibit 10.50Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.Distribution and Remarketing AgreementBetweenSiemens Medical Solutions,Oncology Care Systems GroupAndAccuray IncorporatedEffective Date: April 3, 2007 DISTRIBUTION AND REMARKETING AGREEMENT(SIEMENS REVISED 4-03-07)SIEMENS/ACCURAY CONFIDENTIAL 1This Distribution and Remarketing Agreement (hereafter, the “Agreement”) is effective as of April 3, 2007 (“Effective Date”) by and between SiemensMedical Solutions Inc USA, a Delaware corporation acting through its Oncology Care Systems Group, which maintains a place of business at 4040 NelsonDrive, Concord, California, 94520 (hereafter, “OCS”), and Accuray Incorporated, a Delaware corporation with a business address at 1310 ChesapeakeTerrace, Sunnyvale, CA 94089 (hereafter, “Accuray”).WHEREAS, Accuray is interested in a business solution utilizing a CT-on-rails in combination with its CyberKnife® System; andWHEREAS, OCS has developed and is marketing a sliding gantry (CT-on-rails);NOW THEREFORE, the parties agree as follows:1. SCOPE. This Agreement governs OCS’s authorization to Accuray to purchase, license, sell, and sublicense certain OCS Products directly fromOCS, including shipment from OCS directly to Accuray’s end customer, and to resell and sublicense those OCS Products in the Territory under the termsand conditions set forth in this Agreement. “OCS Products” are set out in Exhibit A and “Territory” is set out in Exhibit A-1.2. APPOINTMENT. OCS grants Accuray the right to purchase and license Products from OCS, and to promote, market, lease, resell andsublicense (collectively referred to from time to time as “sell”) the “OCS Products” (“Equipment” and “Software”, if any, listed on Exhibit A) to end users,either directly or through its channels of distribution, in the Territory, and to market the OCS Products in conjunction with its CyberKnife® and/orRoboCouch™ products (“Accuray Products”). Accuray is not authorized to sell OCS Products other than as set forth below.All sales or lease opportunities outside the Territory, either directly or through an integrator or contractor, will be handled on a case-by-case basis.3. ACCURAY’S OBLIGATIONS.a. Promotion of OCS Products. Accuray agrees to use reasonable commercial efforts to promote and sell the OCS Products, including (i) activelyand diligently canvassing and soliciting business in the Territory; (ii) employing salesmen who are familiar with the OCS Products; (iii)providing adequate sales and technical training in accordance with OCS’s recommendations; (iv) doing such advertising as is reasonablyappropriate and necessary; (v) displaying, demonstrating and representing the OCS Products fairly and (vi) not making any representationsconcerning OCS or the OCS Products which are false, misleading, or inconsistent with those representations set forth in the promotionalmaterials, literature and manuals published and supplied by OCS, and (vii) conditioning the sale and sublicense of OCS Products to end userson2acceptance of those terms and conditions as are set forth in Exhibit B, OCS Sales Terms and Conditions, except that Siemens Medical Salesorganizations of each foreign country may have its own unique set of terms and conditions, which will apply to Sales in those countries. Theseterms and conditions shall be reprinted on Accuray’s standard contract forms, and signed by all end users purchasing OCS Products fromAccuray hereunder. Notwithstanding these obligations, Accuray may provide terms and conditions (Accuray Terms and Conditions) thatsupplement those provided in the OCS Sales Terms and Conditions, with Accuray to bear all additional expenses and liability associated withthe Accuray Terms and Conditions, including indemnifying OCS for and against any additional liability arising out of such additional termsand conditions. All such promotion and sales activity by Accuray will be the responsibility of Accuray, without any expense to OCS. OCSagrees that Accuray shall also have the right to continue, at its own expense, promotion and advertising activities to end users in order toencourage sales of the OCS Products.b. License of Internal Code and Software. The purchase of each Product includes a non-exclusive, worldwide, paid up license to sublicense tocustomers, in object code only, the operating software incorporated within or otherwise supplied with or in connection with the specific Productpurchased (“Software”), solely for use as part of the Product combined with CyberKnife or RoboCouch. Such software shall be sublicensed byAccuray only to customers who have duly executed Accuray’s standard end-user license agreement, provided that such end-user licenseagreement contains terms no less protective of OCS than the software license attached hereto as Exhibit B. OCS shall retain ownership of anytitle to all such software and to the trade secrets embodied therein,c. Records, Forecasts and Audit Rights. Accuray agrees, upon written request, to report monthly in writing to OCS regarding the OCS Productsthat Accuray has sold, the names of all end users and locations of OCS Products sold by Accuray, as well as the model and serial numbers ofsuch OCS Products. Accuray agrees that on the Effective Date, it will provide OCS with a non-binding estimate of the amount of OCS Productsto be ordered during the following six-month period. Such estimates shall be furnished to OCS monthly thereafter and shall set forth projectionsfor the following six (6) month period.d. Subcontract of Service Obligations. If a service contract is sold to an end user, then Accuray shall ensure that such service contract alsopermits service to be performed by OCS or its delegate, as a subcontractor. Such service contract shall contain the terms and provisionscontained in the OCS standard service contract, attached hereto as part of Exhibit B, except that the Siemens service organization of each foreigncountry has its own unique service terms and conditions, which will apply to service performed in that country. OCS, or its delegate, hereincommits to provide Accuray and its end users with the opportunity to purchase ongoing service and support for the OCS Products for a periodof up to five (5) years from the installation date of the OCS Products. Notwithstanding the supplemental warranty that Accuray may provide forthe OCS Products under Section 6(i), the service terms and conditions of Exhibit B may be modified, upon written agreement of the parties, forservice in the U.S and3foreign countries.e. Service and Complaint Handling. Accuray will initially receive all customer service related calls. Accuray may then contact OCS asnecessary, depending on the nature of the service required for additional support. For complaints relating to the OCS Products. Accuray willperform an analysis and forward the complaints to OCS. To be clear, OCS will be responsible for all medical device reporting (MDR) andrecalls related to OCS Products.f. Responsibility for Maintaining Solution Compatibility. Accuray agrees that it is responsible for developing and maintaining the integrationand compatibility of the OCS Products in accordance with all applicable laws and regulations.g. Regulatory Clearance. Accuray agrees that it is responsible for obtaining, maintaining, and owning any approvals, permits, and licensesrequired under any applicable law in order to sell, market, and distribute the OCS Products as integrated with the CyberKnife System in theTerritory. Accuray will fully cooperate with OCS and will bear all expenses and manage all paperwork in connection with obtaining suchapprovals, permits and licenses. Upon written request by Accuray, OCS will provide data to support submissions relating to such approvals,permits, and licenses in a timely manner. To be clear, OCS shall be responsible for obtaining the regulatory clearance for OCS Products soldwithout Accuray Products in the Territory.h. Audit Rights. OCS has the right to have an independent certified public accountant or attorney, who executes an appropriate confidentialityagreement, conduct an audit and inspect the books and records of Accuray that involve the sale, license or service of the OCS Products (“AuditRights”). Such audit shall be conducted at mutually agreeable times so as to not interfere with the ordinary conduct of Accuray’s business. SuchAudit Rights shall be for the limited purpose of verifying the obligations of Accuray to OCS hereunder and also to ensure protection of OCS’sproprietary rights. The expenses payable to the auditors shall be the responsibility of OCS, provided however that if any substantive errors areidentified as a result of such audit. Accuray shall reimburse such expenses.4. OCS’S OBLIGATIONS.a. Supply of OCS Products. Subject to reasonable notification regarding delivery issues, OCS agrees to sell OCS Products to Accuray pursuantto the terms set forth in this Agreement. OCS shall have the right to discontinue the sale of any model or type of OCS Products, if, in OCS’s solediscretion and business judgment the production, manufacture or then-current distribution method of such Product becomes economically orotherwise unfeasible. However, in the case of any such discontinuance, OCS agrees to provide Accuray with the earlier of (i) written notice whena decision is made by OCS to discontinue the OCS Products or (ii) at least ninety (90) days’ written notice of such intention to discontinue. If anorder has been accepted prior to such notice of discontinuance, OCS shall fill such order subject to limited rescheduling and4cancellation rights if the OCS Products for any such order have been allocated for OCS and no other division or group of Siemens MedicalSolutions that may also distribute the OCS Products.b. Installation of Equipment. OCS or its delegate agrees to work with Accuray to install all OCS Products sold by Accuray to the end users inthe Territory. Installation charges are included in the cost of the Product.c. Training. OCS agrees to provide Accuray with mutually agreed upon Product training from time to time at the convenience of both parties, at nocharge to Accuray, except that Accuray agrees to pay reasonable transportation and living expenses of OCS personnel in accordance with OCS’spolicies regarding such expenses, which are set forth in Exhibit C, Siemens Medical Solutions Inc. USA Corporate Travel & EntertainmentPolicy.Such training is intended to train Accuray’s sales, training and technical support employees, who will in turn train Accuray’s other employees as needed.Accuray agrees not to use or disclose, either directly or indirectly through any affiliate, the technical training and support provided by OCS and to ensure thateach of its employees are bound by such obligation by signing or have signed a non-disclosure agreement.OCS also agrees to provide Accuray’s end-users with initial applications training on the OCS Products according to standard OCS policy.d. Documentation. Site Documentation. OCS shall provide, at no charge, one (1) set of Site Documentation for each Product purchased for eachend user installation, provided that the End User is identified in the purchase order with respect to said Equipment. “Site Documentation” asused herein means such information as is commonly available and supplied by OCS at that time. OCS reserves the unilateral right to change thecontent of the Site Documentation at any time with notice as required under Section 5(e) (Engineering Changes).Additional Documentation. OCS agrees to provide reasonable quantities of sales materials prepared in English, such as brochures, pressreleases and fact sheets to Accuray without charge therefor.e. Site Survey and Planning. OCS agrees that the technical support personnel at each of its regional or country offices will be available to assistAccuray’s local representatives in site survey and planning with respect to end users who are interested in purchasing or leasing Equipment fromAccuray; provided, however, that the primary responsibility to completing such survey and planning is Accuray’s.f. Regulatory Clearance. OCS agrees that it is responsible for maintaining any approvals, permits, and licenses required under any applicablelaw in order to sell, market, and distribute the OCS Products (without Accuray Products) in the Territory. OCS represents and warrants that asof the Effective Date of this Agreement, it has5obtained all the necessary regulatory clearances for the countries listed in Exhibit A-1 in order for Accuray to sell, market, and distribute theProducts in the Territory.g. MDR and Recalls. OCS agrees that it is responsible for all MDRs and recalls for the OCS Products.5. MUTUAL OBLIGATIONS.a. Confidentiality. Neither OCS nor Accuray shall publicize the terms and conditions of this Agreement except as required by law or as may benecessary in order to assert its rights hereunder in connection with the resolution of a dispute of this Agreement. Each party agrees to obtain theother party’s written approval prior to issuing any press releases or other publicity relating to this Agreement, including the existence thereof. Anyobligation of confidentiality of the parties hereunder with respect to the Confidential Information, exchanged under and in accordance with thisAgreement, shall expire five (5) years after the date of the disclosure of such Confidential Information.In addition, OCS and Accuray agree that they will keep confidential and not disclose or use in any manner whatsoever, except as authorizedherein, any nonpublic information given by one party to the other, including without limitation, information about OCS Products, pricing,technical materials and all trade secrets and other proprietary information furnished to them by the other party which is identified as “topsecurity”, “restricted”, “secret”, “confidential”, “proprietary” or “trade secret” either verbally or in writing (all such items are collectively referredto as “Proprietary Information”).Both parties agree to cause each of their employees, agents, contractors or consultants, whom such party knows or should know has access toany such Proprietary Information, to execute or have executed such agreements as are necessary to assure that such individuals maintain theconfidentiality of the Proprietary Information and not to use the Proprietary Information except in accordance with this Agreement. Theobligations set forth herein shall not apply to any Proprietary Information which (i) was publicly available at the date of receipt; (ii) was in thereceiving party’s possession without obligation of confidentiality before the date of receipt from the disclosing party; (iii) has become publiclyavailable after the date of receipt from the disclosing party, without disclosure through any means by the receiving party; or (iv) has becomelegally available to the receiving party from any third party without an obligation of confidentiality or other similar restriction on disclosure oruse.b. Compliance With Laws. OCS and Accuray each agree to comply with all applicable laws, as such laws may be modified from time to time,and each understand and agree that the continuing rights and obligations of the parties hereunder are specifically conditioned upon compliancewith all such laws. These laws specifically include, without limitation, the following material laws6affecting the distribution of OCS Products hereunder and the grant to Accuray of marketing and other rights: (i) the U.S. anti-boycottregulations, (ii) the U.S. Foreign Corrupt Practices Act (“FCPA”), (iii) the export control laws of the United States of America, (iv) the prevailingregulations which may be issued from time to time by the U.S. Department of Commerce and the Office of Munitions Control and the U.S.Department of State, and (v) Food and Drug Administration, and any export or import laws of the agencies of the Territory or of any countriesinto or through which the OCS Products purchased under this Agreement may be transported. Each party agrees to indemnify the other for anyviolation by the breaching party of the obligations set forth herein. Each party specifically provides the representations and warranties regardingthe FCPA and export control laws.c. Authority of Parties. Each party acknowledges and agrees that neither it nor its employees or representatives are under any circumstances tobe considered to be employees, agents or other representatives of the other party and have no authority or power to bind the other party or contractin the other party’s name or on the other party’s behalf. Each party agrees that it will not make any representation to any third party to thecontrary.d. Indemnity. Each party agrees to indemnify and hold the other party harmless from and against all claims from third parties arising out of anywrongful or negligent acts and/or omissions of its employees or representatives.e. Engineering Changes. OCS agrees to give Accuray one hundred twenty (120) days’ advance written notice of any proposed engineering change(including code changes) that affects the form, fit or function or safety of the OCS Products (each, a “Modification”).f. Integration/Modification.a. Accuray may make modifications to the OCS Products, as necessary for integration with Accuray Products, with prior writtenapproval from OCS. Such approval of requested modifications will be given within 30 days, or if approval of the requestedmodifications is not possible, a written statement of the reason or reasons will be delivered to Accuray within that timeframe. If arequested modification is not possible, OCS will work in good faith with Accuray to complete an approved version of the changes.6. TERMS OF PRODUCT SALES.a. Prices. For sales within the Territory, the prices and volume discounts are listed in Exhibit A. All Equipment shall be sold and shipped FOBOCS’s shipping point.These prices are exclusive of any taxes, duties or governmentally imposed levies or other fees imposed or levied by any jurisdictional authoritybased upon or measured by charges set forth in this Agreement, including sales or license of7OCS Products, their use or services provided in connection therewith (other than taxes assessed on the income of OCS). Accuray agrees that it isresponsible for and will promptly pay any such taxes, duties or levies (or reimburse OCS therefor upon presentation of documentation showingpayment by OCS)The prices listed in Exhibit A are for the configurations and models of OCS Products as specified therein. Accuray agrees that no Product maybe altered in any way to modify the performance characteristics without the prior written permission of OCS.Prices are subject to change on sixty (60) days’ prior written notice and will be deemed effective upon the expiration of the 60 day notice period.Notwithstanding the immediately preceding sentence, orders for OCS Products will be filled at the price in effect at the time of acceptance of suchorders.b. Payment Terms. All payments for OCS Products shall be in U.S. dollars. Invoices will be prepared upon shipment. Accuray agrees to pay allinvoices within thirty (30) days of the date of such invoice.OCS reserves the right to impose interest charges for delinquent payment of any amounts due and owing (except invoices disputed in good faith).Interest will be charged at the rate of one and one-half percent (1.5%) per month (or the maximum permissible legal rate, if lower) on the unpaidand overdue balance and will be added to future statements. OCS may elect to withhold future shipments, regardless of acceptance of orderstherefor and without liability therefor, for failure to make prompt payment of invoices, except for disputed invoices.c. Title and Risk of Loss. Title to OCS Products (except software) as well as the risk of loss, damage or destruction for all OCS Products shallpass to Accuray upon shipment FOB OCS’s or its delegate’s shipping point.d. Purchase Orders. Purchase orders issued by Accuray for the purchase of OCS Products (including software) must allow ninety (90) days forOCS’s production schedule. All purchase orders shall include the following information:1) Model and description of OCS Products;2) Quantity to be purchased;3) Unit price and total order price;4) Requested shipment date(s);5) Delivery instructions, including SHIP TO address;6) Reference to this Agreement;7) Any other special information required by this Agreement or the circumstances of the order;8) Payment information; and9) Any other information reasonably requested in advance by OCS.8All orders placed under this Agreement shall be sent to the Siemens Medical local office in the country where the order is placed, or if specifically directed byOCS, to:Siemens Medical Solutions USA, Inc.Oncology Care Systems GroupAttn: Manager of Order Administration4040 Nelson AvenueConcord, CA 94520Facsimile: (925) 246-8460e. Acceptance of Orders. Orders shall not be considered accepted until the “order acknowledgement”, which may be in the form of a facsimile,has been transmitted from OCS or its delegate to Accuray.The order acknowledgement will state the scheduled shipment date as well as the estimated on-site delivery date. It is agreed that all such ordersshall be governed by the provisions of this Agreement and that none of the provisions of Accuray’s purchase orders or OCS’s acknowledgmentthereof, whether printed, stamped, typed or written, shall be applicable to the purchase.f. Cancellation/Rescheduling/OCS Delay.1) Cancellation. Except as specified below, Accuray may, by written notice, cancel all or any units of Equipment on order upon paymentof the following cancellation charges for the units canceled:Number of days prior to the originally scheduled delivery Cancellation Charges date (or, rescheduled date if as a Percent of Unit due toOCS delay) Purchase Price that notice of cancellation is received by OCS30-over0%10-295%0-9No cancellation. Notwithstanding the table of cancellation charges above, no cancellation will be permitted for any Product which has been shipped inadvance of the originally scheduled delivery date.Any cancellation charges due OCS in accordance with the above cancellation schedule will be separately invoiced.2) ReschedulingDelays. Upon written notice to OCS, Accuray may request OCS to defer delivery of the Equipment for a maximum of sixty (60) days,the delivery9date then being so extended. If notice of an extension of a delivery date is received by OCS less than three (3) weeks before the originallyscheduled date of delivery, Accuray shall pay the costs of insurance and storage to OCS. In the event of a notice from Accuray to delay adelivery of Equipment and then a subsequent cancellation thereof, any cancellation charges due shall be based upon the original deliverydate and the date of the request for the first delay.Moving Forward. (i) Upon Accuray’s written request, OCS agrees to use its reasonable efforts to allow accelerating any scheduled deliveryof Equipment as may be reasonably necessary to meet the needs of any end user, without being liable for any increased costs associatedtherewith. In the event that Accuray requests abnormally short lead time changes which would result in premium expediting charges suchas air freight or overtime, Accuray shall be responsible for those charges; and(ii) upon OCS’s request, and with written authorization from Accuray, OCS may accelerate any scheduled delivery of Equipment as maybe reasonably necessary, without Accuray being liable for any increased costs associated therewith.OCS Delay. If OCS is unable to meet its agreed delivery schedules for any Equipment, Accuray shall have the option of either (i)rescheduling deliveries; or (ii) requiring OCS to ship the Equipment by air freight and having OCS pay the differential between thenormal mode of transportation and air freight.g. Packaging. OCS shall pack Equipment for shipping in conformity with its own then-current standards and any applicable laws or regulations.h. Shipping Costs. All costs of or related to shipping and transportation shall be the responsibility of and shall be borne by Accuray, which shallpay all shipping costs, transportation costs and similar charges directly to the carrier and all others connected with shipping and handling.i. Warranty. Warranties applicable to OCS Products supplied under this Agreement are set forth in Exhibit B. Notwithstanding the obligations ofthis section, Accuray may provide a supplemental warranty for the OCS Products (Accuray Warranty) to its end customer. Accuray will bear alladditional expenses and liability associated with the Accuray Warranty, including indemnifying OCS against any damages arising out ofAccurays breach of such supplemental warranty. In addition to the provisions of Exhibit B, OCS and Accuray agree to work together in goodfaith to ensure a process is established in each territory to address product performance issues in a timely manner.7. Trademarks and Private Labeling. OCS herein licenses to Accuray OCS’s10’Symbols (hereinafter defined) for use only during the term of this Agreement and only in the Territory and only for the purpose of implementing the provisionsof this Agreement. The OCS Products must always be sold or licensed within the Territory under trademarks owned by OCS unless stated otherwise inwriting by OCS. Accuray agrees not to use OCS’s name or any abbreviation thereof, its acronym, logotype or other trademarks or trade name (collectivelyreferred to as “OCS’s Symbols”) without OCS’s prior written approval, nor will Accuray use or be authorized to use OCS’s Symbols, except in connectionwith and directly in furtherance of marketing and servicing the OCS Products.All rights, title and interest in and to said trademarks and trade names shall remain the property of OCS. By using OCS’s Symbols, Accuray does notacquire any proprietary right to such Symbols. OCS agrees that after three years, and if sufficient sales activity warrants, it will grant to Accuray the right tosell OCS Products within the Territory under a private label, and not under any OCS name, logotype, or other trademarks or trade name.OCS further agrees that, without altering any Siemens markings or labeling, Accuray may place its logo on the CT Gantry cover, with the location and size tobe mutually agreed between OCS and Accuray. Accuray may, at its own expense, paint the OCS Products for a consistent look and feel with AccurayProducts. The painting of OCS Products under this section will not void any warranty provided by OCS for the OCS Products.8. INTELLECTUAL PROPERTY INDEMNITY. OCS agrees to defend any legal proceeding brought against Accuray in the Territory to the extentthat it is based on a claim that the use of any OCS Products sold or licensed hereunder infringes a copyright or a patent issued in the Territory ormisappropriates any trade secret and will pay all damages and costs awarded by a court of final appeal attributable to such claim, or incurred in the settlementthereof; provided that OCS is promptly informed and furnished a copy of each written communication, notice or other action relating to the allegedinfringement and is given all control, authority, information and assistance (at OCS’s expense) necessary to defend or settle such legal proceeding. Accuraywill not be bound by any settlement or compromise that OCS enters into without Accuray’s express prior written consent. However, if Accuray declines to bebound by any such settlement or compromise, this indemnity is rescinded, and Accuray must defend itself at its own cost.OCS will not be obligated to defend or be liable for any costs and damages to the extent any such infringement arises (i) out of compliance with Accuray’sspecifications or designs, or those of an end user or other purchasers or licensees of Accuray (ii) from a combination with or in addition to devices notsupplied by OCS to the extent that the infringement arises solely as a result of such combination or addition; (iii) from a modification of the OCS Products byany person other than OCS; or (iv) from the use of an allegedly infringing version of any OCS Products, if such alleged infringement could be avoided by theuse of a different version having similar functionality and made available by OCS.11If any claim which OCS is obligated to defend hereunder has occurred, or in OCS’s opinion is likely to occur, OCS shall provide written notice to Accuray ofsuch claim. Furthermore, Accuray agrees to permit OCS, at OCS’s sole option and expense, either to procure for Accuray the right to continue using the OCSProducts or to modify the OCS Products so that it becomes non-infringing, or to replace the OCS Products with a product of substantially equivalentfunctionality (including assisting Accuray in migrating its data to the replacement product at no charge). If none of the foregoing alternatives is reasonablyavailable, then Accuray agrees to return the OCS Products, on written request by OCS, and OCS agrees to refund the purchase price for any such OCSProducts, less a deduction for depreciation equal to .0167 of the purchase price for each month or part of a month since the date of purchase (based upon a 5-year depreciable product life).In addition, to the extent that the infringing OCS Products render unusable any other OCS Products that are dependent upon the infringing OCS Product foroperation, then OCS shall also, upon Accuray’s written request, refund the purchase price for such unusable OCS Products, less a deduction for depreciationequal to .0167 of the purchase price for each month or part of a month since the date of purchase (based upon a 5-year depreciable product life).THE FOREGOING STATES THE SOLE AND EXCLUSIVE REMEDY OF ACCURAY AND THE TOTAL LIABILITY ANDRESPONSIBILITY OF OCS WITH RESPECT TO INFRINGEMENT OF ANY THIRD PARTY INTELLECTUAL PROPERTY RIGHTS BYOCS PRODUCTS.8.a. PRODUCTS LIABILITY. OCS will defend or settle, indemnify and hold Accuray harmless from any liability, damages, and expensesfor any action brought against Accuray to the extent that it is based upon a third-party claim that the OCS Products, as provided by OCS to Accuray underthis Agreement is unsafe when used according to OCS’s written product specifications for its intended use, and will pay any costs and damages made insettlement or awarded against Accuray in final judgment resulting from any such claim, provided that Accuray: (i) gives OCS prompt notice of any suchclaim; (ii) gives OCS sole control of the defense and any related settlement of any such claim; and (iii) gives OCS, at OCS’s expense, all reasonableinformation, assistance and authority in connection with the foregoing.Accuray will not be bound by any settlement or compromise that OCS enters into without Accuray’s express prior written consent. However, if Accuraydeclines to be bound by any such settlement or compromise, this indemnity is rescinded, and Accuray must defend itself at its own cost.9. TERM AND TERMINATION.a. Term. The term of this Agreement begins on the Effective Date and expires three (3) years from the Effective date, unless the Agreement hasotherwise12expired, or been canceled or terminated.b. Termination. This Agreement will immediately terminate upon expiration of the term without notice. In addition, this Agreement may beterminated at any time by either upon ninety (90) days’ prior written notice.c. Effect of Termination. Each party must still fulfill any obligations, including but not limited to pending purchase orders, accrued on or beforethe effective date of such termination.10. LIMITATION OF LIABILITY AND DISCLAIMER OF WARRANTY. Neither party’s liability in any given instance from any causewhatsoever, and regardless of the form of action, whether in contract, warranty, tort (including negligence) or any other theory of liability, will exceed:a. for any breaches related to OCS Products, the greater of (i) fifty percent (50%) of the previous year’s revenue to OCS earned in respect of thepurchase and/or license by Accuray of the OCS Products under this Agreement (or, after termination of the Agreement, fifty percent (50%) of thelast full calendar year’s revenue prior to such termination related to such OCS Products); or (ii) the purchase price for the specific OCS Productsthat are the subject matter of or is directly related to the cause of action; andb. for other breaches hereunder, a maximum of fifty percent (50%) of the previous year’s revenue to OCS earned in respect of the purchase and/orlicense by Accuray of the OCS Products under this Agreement (or, after termination of the Agreement, fifty percent (50%) of the last full calendaryear’s revenue prior to such termination related to such breaches)The foregoing limitations will not apply to claims for either personal injury or damage to tangible property. In the case of intellectual property indemnification,OCS’s liability shall be limited to the exclusive remedies provided in Article 8 (Intellectual Property Indemnity).IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY INDIRECT, PUNITIVE, SPECIAL, INCIDENTAL OR CONSEQUENTIALDAMAGES (INCLUDING LOST PROFITS, TERMINATION INDEMNITIES, ADVERTISING OR PROMOTIONAL COSTS,TERMINATION OF EMPLOYEES, SALARIES OF EMPLOYEES OR SEVERANCE PAYMENTS, CREATION OF CUSTOMER BASE, ORFUTURE EXPECTATIONS, LOST DATA, OR OTHER ECONOMIC ADVANTAGE), HOWSOEVER ARISING AND REGARDLESS OFTHE FORM OF ACTION, WHETHER IN CONTRACT, WARRANTY, TORT (INCLUDING NEGLIGENCE) OR ANY OTHER THEORY OFLIABILITY, EVEN IF SUCH PARTY HAS BEEN PREVIOUSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.EXCEPT AS SPECIFIED IN THIS AGREEMENT, ALL EXPRESS OR IMPLIED13REPRESENTATIONS AND WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR APARTICULAR PURPOSE OR NONINFRINGEMENT, ARE HEREBY DISCLAIMED AND EXCLUDED.11. GENERAL PROVISIONS.a. This Agreement is the sole and complete statement of the rights and obligations of the parties as to the sale and purchase of the OCS Productsand supersedes all previous understandings, negotiations, proposals, conversations, writings, and Agreements with respect to any such sale andpurchase.b. Except as otherwise permitted herein, this Agreement may not be altered, amended or modified except in writing and signed by duly authorizedrepresentatives of OCS and Accuray. For Accuray, a duly authorized representative must be any of the following: CEO, CFO, COO, or GeneralCounsel.c. This Agreement is governed by and construed in accordance with the laws of the State of California.d. In the event any provisions of this Agreement are declared unenforceable by a duly authorized court or arbitrator having jurisdiction, then thisAgreement, with respect to the remaining enforceable provisions, shall continue in full force and effect provided that this Agreement continues topreserve and express the general intent of the parties.e. Neither party will be liable for delays in manufacturing, shipping or delivery, or failure to manufacture, ship or deliver OCS Products, or tootherwise perform any obligation under this Agreement due to any cause beyond their reasonable control including, but not limited to, acts ofGod, acts of civil or military authority, labor disputes, fire, riots, civil commotions, sabotage, war, embargo, blockage, floods, epidemics,power shortages, or when due to governmental restrictions, provided the party gives prompt written notice and makes all reasonable efforts toperform. In no event, however, will this provision affect any Accuray obligation to make payments due to OCS at the time of any such delay forOCS Products received, including without limitation payments for continuing periodic charges.f. Except as specified otherwise, notices and other communications made or required under this Agreement by a party to this Agreement must begiven in writing by mail, postage prepaid, first class certified mail, return receipt requested, and shall be deemed to have been given five (5)days after deposit with the US Postal Service, and addressed to the parties at their respective addresses as set forth below:14Siemens:Attention: VP Finance and Administration4040 Nelson AvenueConcord, CA 94520with cc to: VP Business AdministrationAccuray Incorporated:Attention: Chief Operating Officer1310 Chesapeake TerraceSunnyvale, CA 94089with cc to: General Counselg. Either party may assign this Agreement with the written consent of the other party, which consent shall not be unreasonably withheld.h. A waiver by either party of its rights under this Agreement with respect to a breach of the other party’s obligations hereunder will not beconstrued to be a continuing waiver or as a waiver with respect to other breaches of the same or of other provisions of this Agreement.i. Progressive Dispute Negotiation Process. This Section will govern any dispute between the parties arising from or related to the subject matter ofthis Agreement that is not resolved by agreement between the respective personnel of the parties responsible for day-to-day administration andperformance of this Agreement.1) Prior to the filing of any suit with respect to such a dispute (other than a suit seeking injunctive relief with respect to Intellectual PropertyRights) the party believing itself aggrieved (the “Invoking Party”) will call for progressive management involvement in the disputenegotiation by written notice to the other party. Such a written notice will be without prejudice to the Invoking Party’s right to any otherremedy permitted by this Agreement.2) The parties will use their best efforts to arrange personal meetings or telephone conferences as needed, at mutually convenient times andplaces, between negotiators for the parties at the following successive management levels, each of which will have a period of allotted timeas specified below in which to attempt to resolve the dispute.LevelAccurayLevel OCSAllotted Time 1stProduct MgrProduct Mgr.10 Bus. Days2ndDivision VPBusiness Dir.10 Bus. Days3rdCorporate Off.Division VP.30 Cal. Days 15The allotted time for the first level negotiator will begin on the effective date of the Invoking Party’s notice. If a resolution is not achievedby negotiators at any given management level at the end of their allotted time, then the allotted time for the negotiations at the nextmanagement level, if any, will begin immediately. If resolution is not achieved by negotiators at the final management level within theallotted time then the parties agree within twenty (20) days to select a form of alternative dispute resolution “ADR” (either informal, non-binding arbitration, private judging, mini trial, summary jury trial, moderated settlement conference, mediation or some other format),and negotiate an ADR Agreement for an ADR process. The ADR Agreement shall at least include provisions governing the ADR procedure,rules, discovery, timing and cost allocations. In no event will such ADR process result in the imposition of any element of punitivedamages to either party in the event of any award.If the ADR Agreement is not agreed to by the parties within the time as set forth above, then either party may bring suit to resolve thedispute in any court of competent jurisdiction.3) Injunctive Relief. Notwithstanding the above provisions relating to arbitration, the parties agree that in respect of a violation of anyprovision of this Agreement, including without limitation violation of any proprietary of Confidential Information, for which an award ofdamages is an inadequate remedy to protect the injured party, the injured party is entitled to seek injunctive relief, including a preliminaryinjunction, in a court of competent jurisdiction, in addition to any other relief available to it under the arbitration procedures specifiedabove in this Section[Signature Page Follows]Remainder of page Intentionally left blank.16IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives, effective as of the Effective Date.ACCURAY INCORPORATED By/s/ Chris A. RaanesName:Chris A. RaanesTitle:SVP, Chief Operating OfficerDate:4/3/7 By/s/ Darren J. MillikenName:Darren J. MillikenTitle:General CounselDate:4-3-2007 SIEMENS MEDICAL SOLUTIONS USA, INC. By/s/ Holger SchmidtTitle:PRESIDENT MED OCSDate:03 APRIL 2007 By /s/ Terrence E. MooreTitle: VICE PRESIDENT BUSINESS DEVELOPMENTDate: April 3, 2007 17Exhibit ADistribution and remarketing AgreementProducts and PricingEmotion 6S OpenS Open (Z-sharp) USLP********* LEVEL A (Qty *** Units)Net Accuray Price*********Net Discount********* LEVEL B (Qty *** Units)Net Accuray Price*********Net Discount********* LEVEL C (Qty *** Units)Net Accuray Price*********Net Discount********* Notes:Annual Fiscal year October 1st - Sept 30th Volume based on Sales in any FY Volume discount Reconcialliation at end of fiscal period.Level B to be implemented on a transactional basis. Over/Under achievement to be paid at end of fiscal period by either party.Volume quantities based on Orders and condition that shipment happens max 6 months after closing period.Special Program Through 9/30/07:Level C Discount will apply to all units ordered and installed prior to 9/30/07, providing at *** units are ordered and installed during that period.Special Engineering Package Price:*Qty (1) Sensation Open (Z-Sharp) - Full functionalityQty (2) Sensation Open (Shells)Limited Functionality Total Price = *** IncludingInstallation and Full Warranty * A separate Quotation with complete specifications will be submitted to AccurayConfidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.18Distribution and remarketing AgreementProducts and Pricing[Attachment Follows]Remainder of page intentionally left blank.19Accuray (Service Value-added Reseller)CustomerList PriceCustomerRealizedPriceAccurayPriceEmotion 6******25,000 Scan Sec Tube Coverage******Extended PCP (1 4 Hr. Block)******Total********* Sensation 40******100,000 Scan Sec Tube Coverage******Extended PCP (1 4 Hr. Block)******Total********* OptionsChiller (24 x 7) coverage*********syngo Multimodality WorkSpace*********Power Supply********* Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.20Exhibit A-1Distribution and remarketing AgreementTerritory:Stage I:******************Stage II: (Implementation date to be mutually agreed)******Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.21Exhibit B-1Distribution and remarketing AgreementOCS Contract Terms and Conditions for End Users[Attachment Follows]Remainder of page intentionally left blank.22Quote Siemens Medical Solutions USA, Inc.Siemens Medical SolutionsSiemens Medical Solutions 51 Valley Stream Parkway, Malvern PA 19355Health Services CorporationUltrasound Division Terms and Conditions of Sale1. GENERAL1.1 Contract Terms. These terms and conditions constitute an integral part of any contract between the Seller identified on the first page hereof to sellproducts (“Products”) and Purchaser and shall govern the sale of the Products. Seller shall not be bound by, and specifically objects to, any term, condition orother provisions which are different from or in addition to the provisions of this Agreement (whether or not it would materially alter this Agreement) which isproffered by Purchaser in any purchase order, receipt, acceptance, confirmation, correspondence or otherwise, unless Seller specifically agrees to any suchprovision in a writing signed by Seller. Products may contain used, reworked or refurbished parts and components that comply with performance andreliability specifications. Purchaser acknowledges that this is a commercial and not a consumer transaction.1.2 Acceptance. An order shall be binding on Seller only after a credit approval and an order confirmation have been issued by Seller. Acceptance isexpressly made conditional on Purchaser’s acceptance of these terms and conditions. Purchaser shall be deemed to have assented to, and waived any objectionto, this Agreement upon the earliest to occur of any of the following: Purchaser’s completion or execution of this Agreement; Purchaser’s acceptance of all orany part of the Products subject to this Agreement; Purchaser’s issuance of a purchase order for any Products identified on Seller’s quotation or proposal; ordelivery of the Products to the common carrier for shipment pursuant hereto.1.3 Third Party Products. If this Agreement includes the sale of third party products not manufactured by Seller, then Purchaser agrees andacknowledges that (a) Purchaser has made the selection of these products on its own, (b) the products are being acquired by Seller solely at the request of andfor the benefit of Purchaser, in order to eliminate the need for Purchaser to issue a separate purchase order to the manufacturer of the products, (c) norepresentation, warranty or guarantee has been made by Seller with respect to the products, (d) the obligation of Purchaser to pay Seller for the products isabsolute and unconditional, (f) Purchaser will assert no claim whatsoever against the Seller with respect to the products, and will look solely to themanufacturer regarding any such claims, and (g) Purchaser will indemnify and hold Seller harmless from and against any and all claims, regardless of theform of action, related to, resulting from or caused by the products or any work or service provided by the manufacturer of the products or any other party.2. PRICES2.1 Quotations. Unless otherwise agreed to in writing or set forth in the quotation, all prices quoted by Seller are based on U.S. dollars, and includestandard and customary packaging. F.O.B. terms are set forth in Section 6.2 hereof. Domestic prices apply only to purchasers located in, and who will usethe Products in, the U.S. International prices apply to all purchasers located outside of, or who will use or ship or facilitate shipment of the Products outsideof, the U.S. Unless otherwise stated, the quotation shall only be valid for forty-five (45) days from the date of the quotation.2.2 Delay in Acceptance of Delivery. Should the agreed delivery date be postponed by Purchaser, Seller shall have the right to deliver to storage atPurchaser’s risk and expense, and payments due upon delivery shall become due when Seller is ready to deliver.2.3 Escalation. Unless otherwise agreed to in writing, except as to goods to be delivered within six (6) months of Seller’s acceptance of Purchaser’sorder, Seller reserves the right to increase its prices to those in effect at the time of shipment.3. TAXES3.1 Any sales, use or manufacturer’s tax which may be imposed upon the sale or use of Products, or any property tax levied after readiness to ship, orany excise tax, license or similar fee required under this transaction, shall be in addition to the quoted prices and shall be paid by Purchaser.4. TERMS OF PAYMENT; DEFAULT4.1 Due Date. Unless otherwise set forth in the quotation, Seller’s payment terms are as follows: an initial deposit of 10% of the purchase price foreach Product is due upon submission of the purchase order, an additional 80% of the purchase price is due upon delivery of each Product, and the final 10%of the purchase price is due upon completion of installation. Unless otherwise agreed, all payments other than the initial deposit are due net thirty (30) daysfrom the date of invoice. All amounts payable pursuant to this Agreement are denominated in United States dollars, and Purchaser shall pay all such amountin lawful money of the United States. Partial shipments shall be billed as made, and payments for such shipments will be made in accordance with theforegoing payment terms.4.2 Late Payment. A service charge of 1½% per month, not to exceed the maximum rate allowed by law, shall be made on any portion of Purchaser’soutstanding balance which is not paid within thirty (30) days after invoice date, which charge shall be determined and compounded on a daily basis from thedue date until the date paid. Payment of such service charge shall not excuse or cure Purchaser’s breach or default for late payment. In addition, in the eventthat Purchaser fails to make any payment to Seller within this thirty (30) day period, including but not limited to any payment under any service contract,promissory note or other agreement with Seller, then Seller shall have no obligation to continue performance under any agreement with Purchaser.4.3 Payment of Lesser Amount. If Purchaser pays, or Seller otherwise receives, a lesser amount than the full amount provided for under thisAgreement, such payment or receipt shall not constitute or be construed other than as on account of the earliest amount due Seller. Seller may accept any checkor payment in any amount without prejudice to Seller’s right to recover the balance of the amount due to or pursue any other right or remedy. No endorsementor statement on any check or payment or in any letter accompanying a check or payment or elsewhere shall constitute or be construed as an accord orsatisfaction.4.4 Where Payment Upon Installation or Completion. Should any special terms of payment provide for either full or partial payment uponinstallation or completion of installation or thereafter, and the installation or completion is delayed for any reason for which Seller is not responsible, theProducts shall be deemed installed upon delivery and, if no other terms were agreed upon in writing signed by the parties, the balance of payments shall be dueno later than thirty (30) days from delivery regardless of the actual installation date.4.5 Default. Each of the following shall constitute an event of default under this Agreement: (i) a failure by Purchaser to make any payment due Sellerwithin ten (10) days of receipt of notice of non-payment from Seller; (ii) a failure by Purchaser to perform any other obligation under this Agreement withinthirty (30) days of receipt of notice from Seller; (iii) a default by Purchaser or any affiliate of Purchaser under any other obligation to or agreement with Seller,Siemens Financial Services, Inc. or Siemens Medical Solutions Health Services Corporation, or any assignee of the foregoing (including, but not limited to, apromissory note, lease, rental agreement, license agreement or purchase contract); or (iv) the commencement of any insolvency, bankruptcy or similarproceedings by or against the Purchaser (including any assignment by Purchaser for the benefit of creditors). Upon the occurrence of any event of default, atSeller’s election: (a) the entire amount of any indebtedness and obligation due Seller under this Agreement and interest thereon shall become immediately dueand payable without notice, demand, or period of grace; (b) Seller may suspend the performance of any of Seller’s obligations hereunder, including, but notlimited to, obligations relating to delivery, installation and warranty services; (c) Purchaser shall put Seller in possession of the Products upon demand; (d)Seller may enter any premises where the Products are located and take possession of the Products without notice or demand and without legal proceedings; (e)at the request of Seller, Purchaser shall assemble the Products and make them available to Seller at a place designated by Seller which is reasonable andconvenient to all parties; (f) Seller may sell or otherwise dispose of all or any part of the Products and apply the proceeds thereof against any indebtedness orobligation of Purchaser under this Agreement (Purchaser agrees that a period of 10 days from the time notice is sent to Purchaser shall be a reasonable period ofnotification of sale or other disposition of the Products by or for Seller); (g) if this Agreement or any indebtedness or obligation of Purchaser under thisAgreement is referred to an attorney for collection or realization, Purchaser shall pay to Seller all costs of collection and realization (including, withoutlimitation, a reasonable sum for attorneys’ fees, expenses of title search, all court costs and other legal expenses) incurred thereby; and (h) Purchaser shall payany deficiency remaining after collection of or realization by Seller on the Products.5. EXPORT TERMS5.1 Unless other arrangements have been made, payment on export orders shall be made by irrevocable confirmed letter of credit, payable in U.S.dollars against Seller’s invoice and standard shipping documents. Such letter of credit shall be in an amount equal to the full purchase price of the Productsand shall be established in a U.S. bank acceptable to Seller. Purchaser shall procure all necessary permits and licenses for shipment and compliance with anygovernmental regulations concerning control of final destination of Products.5.2 Purchaser shall not, directly or indirectly, violate any U.S. law, regulation or treaty, or any other international treaty or agreement, relating to theexport or reexport of any Product or associated technical data, to which the U.S. adheres or with which the U.S. complies. Purchaser shall defend, indemnifyand hold Seller harmless from any claim, damage, liability or expense (including but not limited to reasonable attorney’s fees) arising out of or in connectionwith any violation of the preceding sentence. If Purchaser purchases a Product at the domestic price and exports such Product, or transfers such Product to athird party for export, outside of the U.S., Purchaser shall pay to Seller the difference between the domestic price and the international retail price of suchProduct pursuant to the payment terms set forth herein. Purchaser shall deliver to Seller, upon Seller’s request, written assurance regarding compliance withthis section in form and content acceptable to Seller.6. DELIVERY, RISK OF LOSS6.1 Delivery Date. Delivery and completion schedules are approximate only and are based on conditions at the time of acceptance of Purchaser’s orderby Seller. Seller shall make every reasonable effort to meet the delivery date(s) quoted or acknowledged, but shall not be liable for any failure to meet suchdate(s). Partial shipments may be made.6.2 Risk of Loss; Title Transfer. Unless otherwise agreed to in writing, the following shall apply:(a) For Products that do not require installation by Seller or its authorized agent or subcontractor, and for options and add-on productspurchased subsequent to delivery and installation of Products purchased under this Agreement, delivery shall be complete upon transfer of possession tocommon carrier, F.O.B. Shipping Point, whereupon title to and all risk of loss, damage to or destruction of the Products shall pass to Purchaser.(b) For Products that require installation by Seller or its authorized agent or subcontractor, delivery shall be complete upon delivery of theProducts to Purchaser’s designated site, F.O.B. Destination; title to and all risk of loss, damage to or destruction of such Products shall pass to Purchaserupon completion of the installation by Seller or its authorized agent or subcontractor.(c) All freight charges and other transportation, packing and insurance costs, license fees, custom duties and other similar charges shall be thesole responsibility of the Purchaser unless otherwise agreed to in writing by Seller. In the event of any loss or damage to any of the Products during shipment.Seller and Purchaser shall cooperate in making a claim against the carrier.7. SECURITY INTEREST/FILING7.1 From the F.O.B. point, Seller shall have a purchase money security interest in the Products (and all accessories and replacements thereto and allproceeds thereof) until payment in full by Purchaser and satisfaction of all other obligations of Purchaser hereunder. Purchaser hereby (i) authorizes Seller tofile (and Purchaser shall promptly execute, if requested by Seller) and (ii) irrevocably appoints Seller its agent and attorney-in-fact to execute in the name ofPurchaser and file, with such authorities and at such locations as Seller may deem appropriate, any Uniform Commercial Code financing statements withrespect to the Products and/or this Agreement. Purchaser also agrees that an original or a photocopy of this Agreement (including any addenda, attachments andamendments hereto) may be filed by Seller as a Uniform Commercial Code financing statement. Purchaser further represents and covenants that (a) it willkeep the Products in good order and repair until the purchase price has been paid in full, (b) it will promptly pay all taxes and assessments upon the Productsor the use thereof, (c) it will not attempt to transfer any interest in the Products until the purchase price has been paid in full, and (d) it is solvent andfinancially capable of paying the full purchase price for the Products.8. CHANGES, CANCELLATION, AND RETURN8.1 Orders accepted by Seller are not subject to change except upon written agreement.8.2 Orders accepted by Seller are noncancellable by Purchaser except upon Seller’s written consent and payment by Purchaser of Seller’s reasonablecancellation charges not to exceed 25% of the price of the affected Products, plus any shipping, insurance, inspection and refurbishment charges. In no eventcan an order be cancelled by Purchaser or Products be returned to Seller after shipment has been made.8.3 Seller shall have the right to change the manufacture and/or design of its Products if, in the judgment of Seller, such change does not alter thegeneral function of the Products.9. FORCE MAJEURE9.1 Seller will make every effort to complete shipment, and installation where indicated, but shall not be liable for any loss or damage for delay indelivery, inability to install or any other failure to perform due to causes beyond its reasonable control including, but not limited to, acts of government orcompliance with any governmental rules or regulations, acts of God or the public, war, civil commotion, blockades, embargoes, calamities, floods, fires,earthquakes, explosions, storms, strikes, lockouts, labor disputes, or unavailability of labor, raw materials, power or supplies. Should such a delay occur,Seller may reasonably extend delivery or production schedules or, at its option, cancel the order in whole or part without liability other than to return anyunearned deposit or prepayment.10. WARRANTY10.1 Seller warrants that the Products manufactured by Seller and sold hereunder shall be free from defects in material or workmanship under normaluse and service for the warranty period. Unless otherwise set forth in the quotation or in a separate Warranty Statement covering the Products to be providedby Seller, the warranty period shall commence on the date that the Products have been installed in accordance with 12.6 hereof, which date shall be confirmedin writing by Seller, and shall continue for 12 consecutive months. Seller makes no warranty for any Products made by persons other than Seller or itsaffiliates, and Purchaser’s sole warranty therefor, if any, is the original manufacturer’s warranty, which Seller agrees to pass on to Purchaser, as applicable.ACCEPTANCE ON FIRST PAGE INCLUDES ALL FOLLOWING PAGES AS SPECIFIED ABOVE23Terms and Conditions of Sale10.2 No warranty extended by Seller shall apply to any Products which have been damaged by accident, misuse, abuse, negligence, improperapplication or alteration or by a force majeure occurrence as described in Section 9 hereof or by the Purchaser’s failure to operate the Products in accordancewith the manufacturer’s instructions or to maintain the recommended operating environment and line conditions; which are defective due to unauthorizedattempts to repair, relocate, maintain, service, add to or modify the Products by the Purchaser or any third party or due to the attachment and/or use of non-Seller supplied equipment without Seller’s prior written approval; which failed due to causes from within non-Seller supplied equipment;; which have beendamaged from the use of operating supplies or consumable parts not approved by Seller. In addition, no warranty extended by Seller shall apply to anytransducer failure due to events such as cracking from high impact drops, cable rupture from rolling equipment over the cable, or delamination from cleaningwith inappropriate solutions. Seller’s obligation under this warranty is limited to the repair or replacement, at Seller’s option, of defective parts. Seller mayeffectuate such repair at Purchaser’s facility, and Purchaser shall furnish Seller safe and sufficient access for such repair. Repair or replacement may be withparts or products that are new, used or refurbished. Repairs or replacements shall not interrupt, extend or prolong the term of the warranty. Purchaser shall,upon Seller’s request, return the noncomplying Product or part to Seller with all transportation charges prepaid, but shall not return any Product or part toSeller without Seller’s prior written authorization. Purchaser shall pay Seller its normal charges for service and parts for any inspection, repair or replacementthat is not, in Seller’s sole judgement, required by noncompliance with the warranty set forth in Section 10.1. Seller’s warranty does not apply to consumablematerials, except as specifically stated in writing, nor to products or parts thereof supplied by Purchaser.10.3 This warranty is made on condition that immediate written notice of any noncompliance be given to Seller and Seller’s inspection reveals that thePurchaser’s claim is valid under the terms of the warranty (i.e., that the noncompliance is due to traceable defects in original materials and/or workmanship).10.4 Warranty service will be provided without charge during Seller’s regular working hours (8:30-5:00), Monday through Friday, except Seller’srecognized holidays. If Purchaser requires that service be performed other than during these times, such service can be made available at an additional charge,at Seller’s then current rates. SELLER MAKES NO WARRANTY OTHER THAN THE ONE SET FORTH HEREIN OR THAT WHICH MAYBE PROVIDED IN A SEPARATE WARRANTY COVERING THE APPLICABLE PRODUCT CATEGORY. SUCH WARRANTY IS IN LIEUOF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY EXPRESS OR IMPLIEDWARRANTY OF MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSES, AND SUCH CONSTITUTES THE ONLYWARRANTY MADE WITH RESPECT TO THE PRODUCTS AND ANY DEFECT, DEFICIENCY OR NONCONFORMITY IN ANYPRODUCT, SERVICE OR OTHER ITEM FURNISHED UNDER THIS AGREEMENT.11. LIMITATION OF LIABILITY11.1 In no event shall Seller’s liability hereunder exceed the actual loss or damage sustained by Purchaser, up to the purchase price of the Products.11.2 SELLER SHALL NOT BE LIABLE FOR ANY LOSS OF USE, REVENUE OR ANTICIPATED PROFITS, LOSS OF STORED,TRANSMITTED OR RECORDED DATA, OR FOR ANY INCIDENTAL, UNFORESEEN, SPECIAL, PUNITIVE OR CONSEQUENTIALDAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR THE SALE OR USE OF THE PRODUCTS. Thisprovision does not affect third party claims for personal injury arising as a result of Seller’s negligence or product defect. THE FOREGOING IS ASEPARATE, ESSENTIAL TERM OF THIS AGREEMENT AND SHALL BE EFFECTIVE UPON THE FAILURE OF ANY REMEDY,EXCLUSIVE OR NOT.12. INSTALLATION-ADDITIONAL CHARGES12.1 General. Unless otherwise expressly stipulated in writing, the Products covered hereby shall be installed by and at the expense of Seller except forrigging charges which shall be the responsibility of Purchaser.12.2 Installation by Seller. If Seller specifies it will install the Products, the following applies: subject to fulfillment of the obligations set forth in12.4 below, Seller shall install the Products covered hereby and connect same to the requisite safety switches and power lines to be installed by Purchaser.Except as otherwise specified below, if such installation and connection are performed by Seller technical personnel, prices shown include the cost thereof,provided that the installation and connection can be performed within the Continental United States or Puerto Rico and during normal business hours. Anyovertime charges or other special expenses shall be additional charges to the prices shown.12.3 Trade Unions. If a trade union, or unions, prevents Seller from performing the above work, the Purchaser shall make all required arrangementswith the trade union, or unions, to permit Seller completion of said work. Moreover, any additional cost related to such labor disputes shall be paid by thePurchaser and Seller’s obligations under such circumstances will be limited to providing engineering supervision of installation and connection of Sellerequipment to existing wiring.12.4 Purchaser’s Obligations. Purchaser shall, at its expense, provide all proper and necessary labor and materials for plumbing service, carpentrywork, conduit wiring, and other preparations required for such installation and connection. All such labor and materials shall be completed and available atthe time of delivery of the Products by Seller. Additionally, the Purchaser shall provide free access to the premises of installation and, if necessary, safe andsecure space thereon for storage of Products and equipment prior to installation by Seller. If any special work of any type must be performed in order tocomply with requirements of any governmental authority, including procurement of special certificates, permits and approvals, the same shall be performed orprocured by Purchaser at Purchaser’s expense. Purchaser shall provide a suitable environment for the Products and shall ensure, at its sole cost and expense,that its premises are free of asbestos, hazardous conditions and any concealed dangerous conditions and that all site requirements are met. In the event thatSeller is requested to supervise the installation of the Products, it remains the Purchaser’s responsibility to comply with local regulations. Seller is not anarchitect and all drawings furnished by Seller are not construction drawings.12.5 Regulatory Reporting. In the event that any regulatory activity is performed by other than Seller authorized personnel, Purchaser shall beresponsible for fulfilling any and all reporting requirements.12.6 Completion of Installation. Installation shall be complete upon the conclusion of final calibration and checkout under Seller standardprocedures to verify that the Products meet applicable written performance specifications. Notwithstanding the foregoing, first use of the Products byPurchaser, its agents or employees for any purpose after delivery shall constitute completion of installation.13. PATENT, TRADEMARK AND OTHER INFRINGEMENT CLAIMS13.1 Infringement by Seller. Seller warrants that the Products manufactured by Seller and sold hereunder do not infringe any U.S. patent orcopyright. If Purchaser receives a claim that any such Product, or parts thereof, infringe upon the rights of others under any U.S. patent or copyright,Purchaser shall notify Seller immediately in writing. As to all infringement claims relating to Products or parts manufactured by Seller or one of its affiliates:(a) Purchaser shall give Seller information, assistance and exclusive authority to evaluate, defend and settle such claims.(b) Seller shall then, at its own expense, defend or settle such claims, procure for the Purchaser the right to use the Products, or remove ormodify them to avoid infringement. If none of these alternatives is available on terms reasonable to Seller, then Purchaser shall return the Products to Seller andSeller shall refund to Purchaser the purchase price paid by the Purchaser less reasonable depreciation for Purchaser’s use of the Products.13.2 Infringement by Purchaser. If some or all of the Products sold hereunder are made by Seller pursuant to drawings or specifications furnishedby the Purchaser, or if Purchaser modifies or combines, operates or uses the Products other than as specified by Seller or with any product, data, software,apparatus or program not provided or approved by Seller, then the indemnity obligation of Seller under Section 13.1 shall be null and void and should a claimbe made that such Products infringe the rights of any third party under patent, trademark or otherwise, then Purchaser shall indemnify and hold Sellerharmless against any liability or expense, including reasonable attorneys’ fees, incurred by Seller in connection therewith.14. DESIGNS AND TRADE SECRETS/LICENSE14.1 Any drawings, data, designs, software programs or other technical information supplied by Seller to Purchaser in connection with the sale of theProducts are not included in the sale of the Products to Purchaser, shall remain Seller’s property and shall at all times be held in confidence by Purchaser.Such information shall not be reproduced or disclosed to others without Seller’s prior written consent.14.2 For all goods purchased hereunder which utilize software for their operation, such “Applications Software” shall be licensed to Purchaser underthe terms of Seller’s Software License Schedule as attached hereto.14.3 Diagnostic/Maintenance Software is not included under 14.2 above, is available only as a special option under a separate Diagnostic MaterialsLicense Agreement and may be subject to a separate licensing fee.15. ENGINEERING CHANGES15.1 Seller makes no representation that engineering changes which may be announced in the future will be suitable for use on, or in connection with,the Products.16. ASSIGNMENT16.1 Neither party may assign any rights or obligations under this Agreement without the written consent of the other and any attempt to do so shall bevoid, except that Seller may assign this Agreement without consent to any subsidiary or affiliated company. This Agreement shall inure to and be bindingupon the parties and their respective successors, permitted assigns and legal representatives.17. DAMAGES, COSTS AND FEES17.1 In the event that any dispute or difference is brought arising from or relating to this Agreement or the breach, termination or validity thereof, theprevailing party shall NOT be entitled to recover from the other party any punitive damages. The prevailing party shall be entitled to recover from the otherparty all reasonable attorneys’ fees incurred, together with such other expenses, costs and disbursements as may be allowed by law.18. MODIFICATION18.1 This Agreement may not be changed, modified or amended except in writing signed by duly authorized representatives of the parties.19. GOVERNING LAW19.1 This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania.20. INTEGRATION20.1 These terms and conditions, including any attachments or other documents incorporated by reference herein, constitute the entire agreement andthe complete and exclusive statement of agreement with respect to the subject matter hereof, and supersede any and all prior agreements, understandings andcommunications between the parties with respect to the Products.21. SEVERAB1LITY; HEADINGS21.1 No provision of this Agreement which may be deemed unenforceable will in any way invalidate any other portion or provision of this Agreement.Section headings are for convenience only and will have no substantive effect.22. WAIVER22.1 No failure and no delay in exercising, on the part of any party, any right under this Agreement will operate as a waiver thereof, nor will any singleor partial exercise of any right preclude the further exercise of any other right.23. NOTICES23.1 Any notice or other communication under this Agreement shall be deemed properly given if given in writing and delivered in person or mailed,properly addressed and stamped with the required postage, to the intended recipient at its address specified on the face hereof. Either party may from time totime change such address by giving the other party notice of such change in accordance with this section.24. RIGHTS CUMULATIVE24.1 The rights and remedies afforded to Seller under this Agreement are in addition to, and do not in anyway limit, any other rights or remediesafforded to Seller by any other agreement, by law or otherwise.25. END USER CERTIFICATION25.1 Purchaser represents, warrants and covenants that it is acquiring the Products for its own end use and not for reselling, leasing or transferring to athird party (except for lease-back financings). 08/05 Rev.ACCEPTANCE ON FIRST PAGE INCLUDES ALL FOLLOWING PAGES AS SPECIFIED ABOVE24Software License Schedule To The Siemens Medical Solutions USA, Inc.Terms and Conditions of Sale1. DEFINITIONS: The following definitions apply to this Schedule: “Agreement” shall mean the attached (i) Quotation for Products and/or Servicesincluding the Terms and Conditions of Sale and applicable schedules; and/or (ii) Software License Agreement describing the software licensed herein and thespecific system for which the license is issued.“Licensor” shall mean Siemens Medical Solutions USA, Inc.“Licensee” shall mean the end-user to whom Licensor provides Software or Documentation for its internal use under the Agreement. “Software” shall meanthe software described in the attached Agreement, including the following as contained therein: (i) software programs consisting of a series of statements orinstructions to be used directly or indirectly in a programmable controller or computer to bring about a certain result and (ii) databases consisting ofsystemized collections of data to be used or referenced directly or indirectly by a programmed controller or computer. Notwithstanding the foregoing,“Software” does not include “firmware” as such term is conventionally understood. Diagnostic/Maintenance Software also is not included within the scope ofthe Software licensed under this Schedule, and is available only as a special option under a separate Diagnostic Materials License Agreement and may besubject to a separate licensing fee. “Documentation” shall mean the documents and other supporting materials which are intended to support the use of anassociated product, including (but not limited to) instructions, descriptions, flow charts, logic diagrams and listings of the Software, in text or graphic form,on machine readable or printed media.“Designated Unit” shall mean a single control unit or computer identified on the first page of the Agreement, on which Software licensed hereunder may beused by Licensee.2. SCOPE: The following terms and conditions shall apply to all Software and Documentation provided by Licensor to Licensee under the Agreement(whether included with other products listed in the Agreement or listed separately in the Agreement), together with any updates or revisions thereto whichLicensor may provide to Licensee, and all copies thereof, except any Software and/or Documentation licensed directly by Licensor’s supplier under a separateend-user license agreement accompanying the Software or the Documentation, in which case Licensee agrees to be bound by that license agreement as acondition to using the Software and/or Documentation. Except as expressly provided herein, and provided that in no event shall the warranties or otherobligations of Licensor with respect to such Software or Documentation exceed those set forth in this Schedule, this Schedule shall be subject to the liabilitylimitations and exclusions and other terms and conditions set forth in the Agreement. ANY USE OF THE SOFTWARE, INCLUDING BUT NOTLIMITED TO USE ON THE DESIGNATED UNIT, WILL CONSTITUTE LICENSEE’S AGREEMENT TO THIS SOFTWARE LICENSESCHEDULE (OR RATIFICATION OF ANY PREVIOUS CONSENT).3. SOFTWARE AND DOCUMENTATION LICENSE: Subject to the payment of any applicable annual license fee(s), whether stated separately orincluded in the purchase price of another product, and to Licensee’s acceptance of all of the obligations set forth herein and to the fulfillment of thoseobligations, Licensor or, if applicable, its licensor or supplier, hereby grants to Licensee a paid-up, nonexclusive and nontransferable (except as expresslyprovided in this Schedule) limited license to use the Software provided by Licensor under the Agreement solely for Licensee’s own use on the Designated Unitand to use the Documentation in support of Licensee’s authorized use of the Software, for the purpose of operating the Designated Unit in accordance with theinstructions set forth in the user’s manual supplied with the Designated Unit and for no other purpose whatsoever. A separate license is required for eachDesignated Unit on which the Software is to be used. Licensee may obtain from Licensor one copy of the Software licensed hereunder for backup and archivalpurposes only as is necessary to support Licensee’s own authorized use of the Software, provided that Licensee includes on or in all copies (in any form) allcopyright, trade secret or other proprietary notices contained on or in the Software as provided by Licensor. Additional copies of the Documentation may belicensed from Licensor at its then applicable charges. Licensee may make the Software and Documentation (including any copies) available only to itsemployees and other persons on Licensee’s premises to whom such disclosure is necessary to enable Licensee to use the Software or Documentation within thescope of the license provided in this Schedule. If the Software is supplied to any unit or agency of the United States Government other than the Department ofDefense, the Software and Documentation are classified as “restricted computer software’’ and the Government’s rights in the Software and Documentationshall be as provided in paragraph (c) (2) of the Commercial Computer Software-Restricted Rights clause in FAR 52.227-19 and any successor laws, rules orregulations thereto.If the Software is supplied to the United States Department of Defense, the Software is classified as “commercial computer software” and the Government isfurnished the Software and Documentation with “restricted rights” as defined in paragraph (c) (1) of the Rights in Technical Data and Computer Softwareclause in DFARS 252.227-7013 and any successor laws, rules or regulations thereto.4. PROPRIETARY PROTECTION AND CONFIDENTIALITY: Ownership of and title to the Software and Documentation and all copies, in any form,licensed under this Schedule are and will remain in Licensor or its suppliers at all times. Licensee shall not (i) remove any copyright, trade secret or otherproprietary right notices contained on or in the Software or Documentation as provided by Licensor, (ii) reproduce or modify any Software or Documentationor copy thereof, (iii) reverse assemble, reverse engineer or decompile any Software, or copy thereof, in whole or in part (except and only to the extent that suchactivity is expressly permitted by applicable law notwithstanding this limitation), (iv) sell, transfer or otherwise make available to others the Software orDocumentation, or any copy thereof, except as expressly permitted by this Schedule, or (v) apply any techniques to derive any trade secrets embodied in theSoftware or Documentation. Licensee shall take all appropriate actions to ensure that: (i) the Software does not leave the Designated Unit’s equipment locationas set forth above, (ii) the Software is not copied by Licensee or any third parties, and (iii) the Software is not used in any equipment other than the DesignatedUnit. Licensee shall secure and protect the Software and Documentation and copies thereof from disclosure and shall take such actions with its employees andother persons who are permitted access to the Software or Documentation or copies as may be necessary to satisfy Licensee’s obligations hereunder. Prior todisposing of any computer medium, computer memory or data storage apparatus, Licensee shall ensure that all copies of Software and Documentation havebeen erased therefrom or otherwise destroyed. In the event that Licensee becomes aware that any Software or Documentation or copies are being used in amanner not permitted by the license, Licensee shall immediately notify Licensor in writing of such fact and if the person or persons so using the Software orDocumentation are employed or otherwise subject to Licensee’s direction and control, Licensee shall use reasonable efforts to terminate such impermissible use.Licensee will fully cooperate with Licensor so as to enable Licensor to enforce its proprietary and property rights in the Software. Licensee agrees that, subjectto Licensee’s reasonable security procedures, Licensor shall have immediate access to the Software at all times and that Licensor may take immediatepossession thereof upon termination or expiration of the associated license or this Schedule. Licensee’s obligations under this paragraph shall survive anytermination of a license, the Schedule or the Agreement.5. UPDATES AND REVISIONS: During the warranty period or under a separate service contract or software update subscription, revised or updatedversions of the Software licensed under this Schedule may be made available, at Licensor’s option, to Licensee to use or to test while Licensee continues use ofa previous version. Licensee has the right to decide whether to install any such revised or updated versions or to continue use of the previous version aftergiving due regard to the United States Food and Drug Administration rules and regulations. However, Licensee shall pay Licensor for any services necessitatedby any modifications of the Software by Licensee or by Licensee’s failure to utilize the current non-investigational version of the Software provided byLicensor. Software updates that provide new features or capabilities or that require hardware changes will be offered to Licensee at purchase prices establishedby Licensor. Licensor retains the sole right to determine whether an update represents an enhancement of a previously purchased capability or a new capabilityfor which the Licensee will be charged. In addition, some updates may require Applications Training performed by Licensor’s personnel that will be offered atLicensor’s prevailing rates. Licensor retains the sole right to determine whether an update requires such training.6. DELIVERY, RISK OF LOSS AND TITLE: Notwithstanding the provisions of Section 6 of the attached Terms and Conditions of Sale, if any, theSoftware and Documentation licensed hereunder shall be delivered on or about the delivery date stated in the Agreement unless a separate delivery date is agreedupon. If Software or Documentation licensed hereunder is lost or damaged during shipment from Licensor, Licensor will replace it at no charge to Licensee. Ifany Software or Documentation supplied by Licensor and licensed hereunder is lost or damaged while in the possession of Licensee, Licensor will replace it atLicensor’s then current applicable charges, if any, for materials, processing and distribution. Notwithstanding the provisions of Section 6 of the attachedTerms and Conditions of Sale, if any, the Software and Documentation, in any form, and all copies made by Licensee, including partial copies, and allcomputer media provided by Licensor are and remain the property of Licensor or its supplier. Licensee has no right, title or interest in the Software, theDocumentation, or any computer media provided by Licensor, or copies, except as stated herein, and ownership of any such Software, Documentation andcomputer media shall at all times remain with Licensor or its suppliers.7. LICENSE TRANSFER: The Software and Documentation, and the license hereunder, may not be assigned, transferred or sublicensed except ashereinafter provided. Upon the sale or lease of the Designated Unit to a third party, Licensee may transfer to such third party, with Licensor’s written consentand in accordance with Licensor’s then current policies and charges, the license to use the Software and Documentation hereunder, together with the Software,the Documentation, the computer media provided by Licensor, and all copies provided that: (i) Licensee notifies Licensor in writing of the name and addressof such third party; (ii) such third party agrees in a written instrument delivered to Licensor to the terms of this Schedule; and (iii) Licensee does not retainany copies of the Software or Documentation in any form.8. WARRANTIES: Licensor warrants that for the warranty period, provided by Licensor under the attached Terms and Conditions of Sale, if any, theSoftware shall conform in all material respects to Licensor’s published specifications as contained in the applicable supporting Documentation. Thisparagraph replaces Paragraphs 10.1 and 10.4 of any such Terms and Conditions of Sale with respect to the Software and Documentation. SuchDocumentation may be updated by Licensor from time to time and such updates may constitute a change in specification.Licensee acknowledges that the Software is of such complexity that it may have inherent or latent defects. As Licensee’s sole remedy under the warranty.Licensor will provide services, during the warranty period, to correct documented Software errors which Licensor’s analysis indicates are caused by a defect in the unmodified version of the Software as provided by Licensor. Licensor does not warrant that the Software will meet Licensee’s requirements, or willoperate in combinations which may be selected for use by Licensee, or that the operation of the Software will be uninterrupted or error free. Licensee isresponsible for determining the appropriate use of and establishing the limitations of the Software and its associated Documentation as well as the resultsobtained by use thereof.LICENSOR MAKES NO WARRANTY WITH RESPECT TO THE SOFTWARE AND DOCUMENTATION OTHER THAN THOSE SETFORTH IN THIS SECTION. THE WARRANTY HEREIN IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,INCLUDING BUT NOT LIMITED TO ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR APARTICULAR PURPOSE, WHICH ARE HEREBY DISCLAIMED, AND CONSTITUTES THE ONLY WARRANTY MADE WITHRESPECT TO THE SOFTWARE AND DOCUMENTATION.9. LICENSE TERM AND TERMINATION: The license for the Software and Documentation is effective on the shipment date of the Software andDocumentation (F.O.B. shipping point or F.A.S., as the case may be) and continues until Licensee’s possession of the Software and all copies ceases (except inconnection with a transfer of the license as permitted by this Schedule) or until otherwise terminated as provided herein. Licensee may terminate the license forthe Software and Documentation at any time after discontinuance of use of the Software and Documentation and all copies, upon written notice to Licensor. IfLicensee (i) fails to comply with its obligations herein and does not cure such failure within ten (10) days after receipt of notice from Licensor, or (ii) attemptsto assign the Agreement or this Schedule or any rights or obligations hereunder without Licensor’s prior written consent, then Licensor may terminate thelicense hereunder and require the immediate discontinuance of all use of the Software and Documentation and all copies thereof in any form, includingmodified versions and updated works. Within five (5) days after the termination of the license, Licensee shall, at Licensor’s option either. (i) return to Licensorthe Software and Documentation, and all copies, in any form, including updated versions, along with any computer media provided by Licensor, or (ii)destroy the affected Software and Documentation, and all copies, in any form, including updated versions, and certify such return or destruction in writing toLicensor.10. MISCELLANEOUS: Since the unauthorized use of the Software and/or Documentation may leave Licensor without an adequate remedy at law. Licenseeagrees that injunctive or other equitable relief will be appropriate to restrain such use, threatened or actual. Licensee further agrees that to the extent applicable,(i) any of Licensor’s suppliers of Software and/or Documentation is a direct and intended beneficiary of this Schedule and may enforce it directly againstLicensee with respect to the Software and/or Documentation provided by such supplier, and that (ii) NO SUPPLIER OF LICENSOR SHALL BELIABLE FOR ANY GENERAL, SPECIAL, DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR OTHER DAMAGES ARISINGOUT OF ANY SUBLICENSE OF THE SOFTWAREACCEPTANCE ON FIRST PAGE INCLUDES ALL FOLLOWING PAGES AS SPECIFIED ABOVE25 AND/OR DOCUMENTATION. THIS LIMITATION ON LIABILITY SHALL APPLY EVEN IF ANY REMEDY FAILS OF ITS ESSENTIALPURPOSE.11. ADDITIONAL PROVISIONS RELATING TO THIRD-PARTY SOFTWARE: If the Software includes software licensed by Licensor from thirdparties, the following additional provisions shall apply:(a) If Software is provided by Licensor on separate media and labeled “Recovery Media,” Licensee may use the Recovery Media solely to restore or reinstallthe Software and/or Documentation originally installed on the Designated Unit.(b) Licensee is licensed to use the Software to provide only the limited functionality (specific tasks or processes) for which the Designated Unit has beendesigned and marketed by Licensor. This license specifically prohibits any other use of the software programs or functions, or inclusion of additionalsoftware programs or functions that do not directly support the limited functionality, on the Designated Unit. If Licensee uses the Designated Unit to access orutilize the services or functionality of Microsoft Windows Server products (such as Microsoft Windows NT Server 4.0 (all editions) or Microsoft Windows2000 Server (all editions)), or uses the Designated Unit to permit workstation or computing devices to access or utilize the services or functionality ofMicrosoft Windows Server products, Licensee may be required to obtain a Client Access License for the Designated Unit and/or each such workstation orcomputing device. Licensee should refer to the end user license agreement for its Microsoft Windows Server product for additional information.(c) The Software may contain support for programs written in Java. Java technology is not fault tolerant and is not designed, manufactured, or intended foruse or resale as online control equipment in hazardous environments requiring fail-safe performance, such as in the operation of nuclear facilities, aircraftnavigation or communication systems, air traffic control, direct life support machines, or weapons systems, in which the failure of Java technology could leaddirectly to death, personal injury, or severe physical or environmental damage. Sun Microsystems, Inc. has contractually obligated Licensor’s supplier tomake this disclaimer.(d) The Software may permit Licensor, its supplier(s), or their respective affiliates to provide or make available to Licensee Software updates,supplements, add-on components, or Internet-based services components of the Software after the date Licensee obtains its initial copy of the Software(“Supplemental Components”).- If Licensor provides or makes available to Licensee Supplemental Components and no other end-user software licensing agreement terms are providedalong with the Supplemental Components, then the terms of this Software License Schedule shall apply.- If a supplier of Licensor or affiliates of such a supplier make available Supplemental Components, and no other end-user software licensing agreementterms are provided, then the terms of this Schedule shall apply, except that the supplier or affiliate entity providing the Supplemental Component(s) shall bethe licensor of the Supplemental Component(s).Licensor, its supplier(s), and their respective affiliates reserve the right to discontinue any Internet-based services provided to Licensee or made available toLicensee through the use of the Software.(e) The Software and Documentation supplied by Licensor’s suppliers are provided by such suppliers “AS IS” and with all faults. SUCH SUPPLIERSDO NOT BEAR ANY OF THE RISK AS TO SATISFACTORY QUALITY, PERFORMANCE, ACCURACY, OR EFFORT (INCLUDING LACK OFNEGLIGENCE) WITH RESPECT TO SUCH SOFTWARE AND DOCUMENTATION. ALSO, THERE IS NO WARRANTY BY SUCH SUPPLIERSAGAINST INTERFERENCE WITH LICENSEE’S ENJOYMENT OF THE SOFTWARE OR AGAINST INFRINGEMENT. IF LICENSEE HASRECEIVED ANY WARRANTIES REGARDING THE DESIGNATED UNIT OR THE SOFTWARE, THOSE WARRANTIES DO NOT ORIGINATEFROM, AND ARE NOT BINDING ON, LICENSOR’S SUPPLIERS.(f) Licensee acknowledges that portions of the Software are of U.S. origin. Licensee agrees to comply with all applicable international and national laws thatapply to the Software, including the U.S. Export Administration Regulations, as well as applicable end-user, end-use and destination restrictions issued byU.S. and other governments. For additional information on exporting software supplied by Microsoft, see http://www.microsoft.com/exporting/.Revised 03-15-0526CT Warranty InformationProductPeriod of Warranty(1)Coverage CT System (not includingglassware and consumables12 monthFull Warranty (parts & labor)including Straton tube Following parts will include warranty as listed below: Single Tank tube with rotatinganode (non spiral) (Rotanx)Prorated to a maximum of ***scans or 12 month whicheveroccurs firstProrated credit given tocustomer against replacementcostcredit percentage = (***-scans used)/****100 Single Tank tube with rotatinganode (spiral) (Rotanx)Prorated to a maximum of ***scanseconds or 12 monthwhichever occurs firstProrated credit given tocustomer against replacementcostcredit percentage = (***-scansecondsused)/****100 Opti 151 and Opti 157 tubeProrated to a maximum of ***scans or 12 month whicheveroccurs firstProrated credit given tocustomer against replacementcostcredit percentage = (***-scans used)/****100 All other Dura tubes and Opti 131tubeProrated to a maximum of ***scanseconds or 12 monthwhichever occurs firstProrated credit given tocustomer against replacementcostcredit percentage = (***-scansecondsused)/****100 Dura Akron B tubesProrated to a maximum of ***scanseconds or 12 monthwhichever occurs firstProrated credit given tocustomer against replacementcostcredit percentage = (***-scansecondsused)/****100 Dura Akron Q tubesProrated to a maximum of ***scanseconds or 12 monthwhichever occurs firstProrated credit given tocustomer against replacementcostcredit percentage = (***-scansecondsused)/****100 Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.27Control triodes12 monthsProrated credit given tocustomer against replacementcostcredit percentage =(12 – month in use) / 12 month* 100 Cathode-ray tubes (CRT)12 month Detector Somatom Plus**, AR**,HiQ**, DR, DR H,G, CR forsystems delivered after May 1,1987First 12 month Month 13 through 24Prorated credit given tocustomer against replacementcost, parts onlycredit percentage =(12 – month in use) / 12* 100 ConsumablesNot covered Post-Warranty (after expiration of system warranty) – Replacement parts only! Excluded items aboveLike described above, but partsonlyLike described above, but partsonlyLike described above, but parts only StratonProrated to a maximum of ***scanseconds or 12 monthwhichever occurs firstProrated credit given tocustomer against replacementcostcredit percentage =(*** – scanseconds used) / ***100 Spare Parts6 monthParts only Note: Optional extended warranty coverage can be obtained by purchase of a service agreement.(1) Period of warranty commences from the date of first use or completion of installation, whichever occurs first. In the event the completion of installation isdelayed for reasons beyond Siemens’ control, the stated warranty period shall commence 60 days after delivery of equipment.Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.ACCEPTANCE ON FIRST PAGE INCLUDES ALL FOLLOWING PAGES AS SPECIFIED ABOVE28Exhibit B-2Distribution and remarketing AgreementOCS Contract Terms and Conditions for End Users[Attachments Follows]Remainder of page intentionally left blank.29Siemens Medical Solutions USA, Inc. General Terms and Conditions1. ScopeSiemens will provide remedial maintenance service on the equipment described on the preceding pages hereof (the “Equipment”) when requested by theCustomer, as well as planned maintenance inspections, when scheduled, as further described in the Features/Benefits Listing attached hereto, in order to keepthe Equipment operating in accordance with the manufacturer’s specifications. Siemens will make every effort to respond to service calls at a mutually agreedupon arrival time consistent with the provisions cited in paragraph 2.2. Principal Coverage Period (PCP)Service and maintenance will be provided during the principal coverage period as defined on the preceding page(s) hereof, excluding the following holidays:New Years Day, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day, Christmas Day. If one of the foregoing holidays falls on aSaturday, then the holiday will be observed on the previous Friday, and if the holiday falls on a Sunday, the holiday will be observed on the followingMonday. Unless an extended hours coverage option has been selected, labor and travel required outside the principal coverage period will be charged atSiemens’ prevailing per-call rates.3. Replacement PartsSiemens will supply at its own expense, necessary parts, except as indicated in the Features/Benefits Listing, provided replacement of the parts is requiredbecause of normal wear and tear or otherwise deemed necessary by Siemens and further provided that the Siemens-manufactured parts are available from thefactory. All Parts will be new, standard parts, or used, reworked or refurbished parts that comply with applicable performance and reliability specifications.Exchange parts removed from the Equipment shall become the property of Siemens unless such exchange parts constitute “hazardous wastes”, “hazardoussubstances”, “special wastes” or other similar materials, as such terms are defined by any federal, state or local laws, rules or regulations, in which case, atthe option of Siemens, the exchange parts shall remain the property of the Customer and shall be disposed of by the Customer in strict compliance with allapplicable laws, rules and regulations.4. Planned Maintenance (PM)Planned maintenance will be carried out in accordance with the schedule described in the Features/Benefits Listing. This generally includes checking formechanical and electrical safety, lubrication, functional testing and adjusting for optimum performance as specified in the detailed planned maintenance checklist.5. Software MaintenanceWhenever the Equipment covered by this Agreement utilizes Siemens’ operating system software, Siemens will provide all maintenance and updates for suchoperating system software as part of the Agreement. Such updates will solely enhance previously purchased capacities of the Equipment. Operating systemsoftware updates that provide new features or capabilities or that require hardware changes will be offered to Customer at purchase prices established bySiemens. Siemens retains the sole right to determine whether an update represents an enhancement of a previously purchased capability or a new capability forwhich the Customer will be charged. In addition, some updates may require Applications Training performed by Siemens’ personnel that will be offered atprevailing rates. Siemens retains the sole right to determine whether an update requires such training.Nothing in this Agreement shall in any way grant to Customer any right to or license in any diagnostic service software utilized by Siemens in servicing theEquipment. Such service software is and remains the property of Siemens and is available to Customer pursuant to the terms and conditions of a separatediagnostic materials license agreement, which may require payment of a license fee. This service software shall be disabled by Siemens upon cancellation ortermination of the Agreement.6. Equipment; Location; Remote AccessThe Equipment covered under this Agreement is limited to the Siemens furnished Equipment described on the face sheet. The Equipment shall not be moved toanother location unless Customer obtains the prior written consent of Siemens, subject to the following exceptions (i) portable Equipment (e.g., Ultrasoundequipment, but not including any equipment that is housed in a mobile vehicle, van or trailer) may be moved to other locations within the same facility, solong as the Customer informs Siemens of the location of the Equipment when Siemens is scheduled to provide on-site service, (ii) if Equipment is located in atrailer, van or other form of mobile vehicle, the Equipment may be moved from the original Equipment Location identified on the first page of this Agreement,provided, however, that Siemens shall not be required to service such Equipment, and the Response Time and System Performance Guarantees shall notapply, if either (a) the Customer does not notify Siemens at least one (1) month in advance of the Equipment’s mobile route, or (b) the Equipment is movedmore than 25 miles from the original Equipment Location; and (iii) if fixed Equipment is moved to any other location within the Customer’s facility, theneither (a) the Customer will engage Siemens to relocate the Equipment, at Siemens’ then current rates and charges, or (b) if Siemens does not perform theservices necessary to relocate the Equipment, then Siemens may suspend services with respect to such Equipment until Siemens performs an inspection of theEquipment, at the Customer’s cost to determine if any repairs are necessitated as a result of any such relocation (in which case the Customer shall beseparately charged for such repairs, including parts and labor). The Equipment shall be eligible for coverage under this Agreement immediately uponexpiration of the Siemens warranty or an existing Siemens service agreement, provided it is properly installed, remains connected to the original power supplyin its original location (other than portable or mobile Equipment, subject to the qualifications set forth in this paragraph) and is serviced by Siemensauthorized personnel only. Equipment not eligible because of this stipulation is subject to inspection by Siemens to determine if it is in good operatingcondition. Such inspection shall be charged to the Customer at Siemens’ per-call rates and terms then in effect. Any repairs or adjustments deemed necessaryby Siemens during the inspection shall be made at Siemens’ per-call rates and terms then in effect and shall include charges for parts, with all such repairs oradjustments to be completed prior to the commencement of service under this Agreement.Siemens service personnel will be given full and free access to the Equipment to perform inspections and service/maintenance on the Customer’s premises, andwill make specific appointments for such maintenance. If the Equipment is not made available at the appointed time, waiting time beyond a reasonableallowance will be charged at prevailing per-call rates.Customer shall provide Siemens with both on-site and remote access to the Equipment via the network configuration. Remote access will be establishedthrough either Customer-provided VPN IPsec Tunneling (non-client) Peer-to-Peer connection or Customer-provided analog telephone service (POTS) to facilitatethe connection of a Siemens-provided Analog Router/modem solution. In both cases, access through specific inbound and outbound network ports is required.7. Agreement Term; Price; Payment TermsThis Agreement shall be in effect for the period stated on the face of this document.For the basic services to be provided by Siemens under the terms of the Agreement, the Customer agrees to pay the Agreement Price upon the terms set forth onthe first page of this Agreement.All payments to be made by Customer under the Agreement are due not thirty (30) days from the invoice date. Past due payments shall bear interest at the rateof 1½% per month.8. Causes for Exclusion/Separate ChargesThis Agreement specifically excludes labor, parts and expenses necessary to repair Equipment:· damaged by fire, accident, misuse, abuse, negligence, improper application or alteration or by a force majaure occurrence as described in paragraph17 hereof, or by the Customer’s failure to operate the Equipment in accordance with the manufacturer’s instructions or to maintain the recommended operating environment and line conditions:· defective due to unauthorized attempts to repair, relocate, maintain, service, add to or modify the Equipment by the Customer or any third party or dueto the attachment and/or use of non-Siemens supplied equipment without Siemens’ prior written approval;· defective due to any repair or service of the Equipment by the Customer or any third party prior to the commencement of the term of this Agreement;· which failed due to causes from within non-Siemens supplied equipment;· which is worn out and cannot be reasonably repaired due to the unavailability of spare parts from the original equipment manufacturer; or· which is a transducer and which is damaged or defective, or which failed, due to any of the foregoing causes or due to improper cleaning, disinfectingor TEE bile marks.If Siemens is called upon to service or repair Equipment which falls under this paragraph, a separate invoice will be issued for labor, parts and expenses atprevailing per-call rates and prices.9. DefaultIn addition to any and all other remedies available by law, Siemens may cancel this Agreement if the Customer is in default. An event of default includes, butis not limited to: (i) a failure by Customer to make any payment due Siemens within ten (10) days of receipt of notice from Siemens that the payment was notmade within the applicable payment period; (ii) a failure by Customer to perform any other obligation under this Agreement within thirty (30) days of receipt ofnotice from Siemens; (iii) a failure to grant Siemens access to the Equipment as set forth in paragraph 6 of this Agreement; (iv) a default by Customer or anyaffiliate of the Customer under any other obligation to or agreement with Siemens, Siemens Financial Services, Inc. or Siemens Medical Solutions HealthServices Corporation,30or any assignee of the foregoing (including but not limited to, a promissory note, lease, rental agreement, license agreement or purchase contract); or (v) thecommencement of any insolvency, bankruptcy or similar proceedings by or against the Customer (including any assignment by Customer for the benefit ofcreditors). In addition, upon the occurrence of any event of default, Siemens may immediately cease providing services under this Agreement until suchdefault is cured or corrected. Remedies shall be cumulative and there shall be no obligation for Siemens to exercise a particular remedy.10. Limitation of LiabilitySiemens entire liability and Customer’s exclusive remedy for damages from any cause whatsoever, and regardless of the form of action, whether liability incontract or in tort, arising under the Agreement or related hereto, shall not exceed an amount equal to one (1) year’s maintenance charges for the specific item ofEquipment under the Agreement that caused the damage or is the subject matter of, or is directly related to, the cause of action. Such maintenance charges willbe those in effect for the specific item of Equipment when the cause of action arose. The foregoing limitation of liability shall not apply to claims by Customeror third parties for personal injury or damage to real property or tangible personal property caused solely and directly by the gross negligence or willfulmisconduct of Siemens. In addition, Siemens shall have no liability hereunder to Customer to the extent that Customer’s or any third party’s acts or omissionscontributed in any way to any loss it sustained or to the extent that the loss or damage is due to an act of God or other causes beyond the reasonable control ofSiemens.THIS IS A SERVICE AGREEMENT. THERE ARE NO SIEMENS WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO,ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENTWILL SIEMENS BE LIABLE FOR ANY LOST PROFITS, LOST SAVINGS, LOST REVENUES, LOSS OF USE OR DOWNTIME (EXCEPT ASOTHERWISE PROVIDED HEREIN), OR FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES WHETHER BASEDON CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR ANY OTHER THEORY OR FORM OF ACTION, EVEN IFSIEMENS HAS BEEN ADVISED OF THE POSSIBILITY THEREOF, ARISING OUT OF OR IN CONNECTION WITH THE AGREEMENT OR THEUSE OR PERFORMANCE OF THE EQUIPMENT.11. Notices; Non-AssignmentAll notices and changes to this Agreement must be in writing. All notices shall be deemed to have been given on the date of service if personally served, or uponreceipt if sent by certified or registered mail, postage prepaid, to the address set forth on the first page of this Agreement. The Agreement is not assignable exceptthat Siemens may assign without Customer approval to any subsidiary or affiliated company or any of its authorized dealers.12. Governing LawThis Agreement shall be governed by the laws of the Commonwealth of Pennsylvania.13. Government Access ClauseUntil the expiration of four (4) years after the furnishing of any services under this Agreement, Siemens shall make available upon written request of theSecretary of the Department of Health and Human Services, the Comptroller General, or any of their duly authorized representatives, this Agreement and thebooks, documents and records of Siemens which are necessary to certify the nature and extent of costs incurred under this Agreement. If Siemens carries outany of the duties of this Agreement through a subcontract with a value of $10,000 or more over a 12 month period with a related organization, suchsubcontract shall include a clause to the effect that until the expiration or four (4) years after the furnishing of any services under the subcontract, the relatedorganization shall make available upon written request of the Secretary of the Department of Health and Human Services, the Comptroller General, or any oftheir duly authorized representatives, the subcontract and the books, documents and records of the related organization that are necessary to certify the natureand extent of costs incurred under that subcontract.This provision shall apply if and solely to the extent that Section 1861 (v) (1) (I) of the Social Security Act applies to this Agreement.14. Damages, Costs, And FeesIn the event that any dispute or difference is brought arising from or relating to this Agreement or the breach, termination, or validity thereof, the prevailingparty shall not be entitled to recover from the other party punitive damages. The prevailing party shall be entitled to recover from the other party all reasonableattorneys fees incurred, together with such other expenses, costs and disbursements as may be allowed by law.15. Severability; HeadingsNo provision of this Agreement which may be deemed invalid, illegal or unenforceable will in any way invalidate any other portion of provision of thisAgreement. Paragraph headings are for convenience only and will have no substantive affect.16. WaiverNo failure, and no delay in exercising, on the part of any party, any right under this Agreement will operate as a waiver thereof, nor will any single or partialexercise of any right preclude the further exercise of any other right.17. Force MajeureSiemens will not be liable to Customer for any failure to fulfill its obligations under this Agreement due to causes beyond its reasonable control and without itsfault or negligence including, but not limited to, governmental laws and regulations, acts of God or the public, war or other violence, civil commotion,blockades, embargoes, calamities, floods, fires, earthquakes, explosions, accidents, storms, strikes, lockouts, work stoppages, labor disputes, orunavailability of labor, raw materials, power or supplies. In addition, in the event of any determination pursuant to the provisions of a collective bargainingagreement between the Customer and any labor union representing any employees of the Customer preventing or hindering the performance of any of theobligations of Siemens under this Agreement, or determining that the performance of any such obligations violates provisions of that collective bargainingagreement, or in the event a trade union, or unions, representing any of the employees of the Customer otherwise prevents Siemens from performing any suchobligations, then Siemens shall be excused from the performance of such obligations unless the Customer makes all required arrangements with the tradeunion, or unions, to permit Siemens to perform the work. The Customer shall pay any additional costs incurred by Siemens that are related to any labordispute(s) that involve the Customer.18. ExecutionIf the Customer is a corporation or partnership, the person signing this Agreement on its behalf certifies that such person is an officer or partner thereof, thathis or her action was duly authorized by appropriate corporate or partnership action, that such action does not conflict with the corporate charter or bylaws orthe partnership agreement, as the case may be, or any contractual provision binding on such corporation or partnership, and that no consent of anystockholders to his or her action is required.19. HIPAATo the extent required by the provisions of the Health Insurance Portability and Accountability Act (“HIPAA”) and the regulations promulgatedthereunder, Siemens does hereby assure Customer that it will appropriately safeguard protected health information made available to or obtained by Siemenspursuant to this Agreement or any Service Schedule (“PHI”). Without limiting the obligations of Siemens otherwise set forth in this Agreement or imposed byapplicable law, Siemens agrees to comply with applicable requirements of law relating to PHI and with respect to any task or other activity Siemens performson behalf of customer. Specifically, Siemens shall:(a) not use or disclose PHI other than as permitted or required by this Agreement or as required by law;(b) implement administrative, physical and technical safeguards that reasonably and appropriately protect the confidentiality, integrity and availabilityof any electronic PHI that it creates, receives, maintains or transmits on behalf of the Customer and otherwise use appropriate safeguards to prevent use ordisclosure of PHI, other than as provided for by this Agreement;(c) report to Customer any use or disclosure of PHI not provided for by this Agreement, and report any security incident, of which Siemens becomesaware;(d) ensure that any subcontractors or agents to whom Siemens provides PHI received from, or created or received by Siemens on behalf of, Customeragree to essentially the same restrictions and conditions that apply to Siemens with respect to PHI and implement reasonable and appropriate safeguards withrespect to PHI;(e) make PHI available to the Customer in accordance with applicable law;(f) permit Customer to access PHI to make or permit others to make amendments to PHI in accordance with applicable law;(g) make available to Customer the information in its possession required to provide an accounting of Siemens’ disclosures of PHI as required byapplicable law;(h) make Siemens’ internal practices, books, and records relating to the use and disclosure of PHI received from Customer available to the Secretary ofthe United States Health & Human Services for purposes of determining Customer’s compliance with applicable law; and(i) upon expiration or termination of this Agreement, return to Customer or destroy all PHI in its possession as a result of this Agreement and retain nocopies of PHI, if it is feasible to do so. If return or destruction is not feasible, Siemens agrees to extend all protections contained in this Agreement to Siemens’use and/or disclosure of any retained PHI, and to limit further uses and/or disclosures to the purposes that make the return or destruction of the PHI infeasible.Siemens agrees that it will negotiate in good faith an amendment to this Agreement if, and to the extent requited by, the provisions of HIPAA and regulationspromulgated thereunder, in order to assure that this Agreement is consistent therewith.20. Entire AgreementThis Agreement, including all exhibits and addenda attached hereto, constitutes the entire agreement between the parties relating to the subject matter hereof,and supersedes all prior and contemporaneous oral or written representations or communications between the parties. This Agreement may not be modified oramended, except in writing executed by the appropriate designated officers of the parties hereto. Any variation in the terms and conditions contained in this31Agreement (including, but not limited to, the inclusion of Customer’s own terms and conditions in any purchase order or other document issued by Customerin response to and/or referencing Siemens’ quotation for service or this Agreement) shall not be deemed to be a part of this Agreement and shall not be bindingupon Siemens unless set forth in writing and executed by the appropriate designated officer of Siemens. Subject to the limitations expressed herein, thisAgreement will be binding upon and inure to the benefit of the parties hereto, their successors, legal representatives, and permitted assigns.32Exhibit CDistribution and remarketing Agreement: Siemens Medical Solutions USA, Inc. Corporate Travel & Entertainment Policy (as it may be revised by Siemensfrom time to time).Attachment FollowsRemainder of page intentionally left blank.33Exhibit 10.51Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.License and Development AgreementThis License and Development Agreement (the “Agreement”) is entered into as of April 27, 2007, (the “Effective Date”) by and between AccurayIncorporated, a Delaware corporation, with its principal place of business at 1310 Chesapeake Terrace, Sunnyvale, CA 94089 (“Accuray”) andCyberHeart, Inc., a Delaware corporation, with its principal place of business at 707 Menlo Ave, Menlo Park, CA 94025 (“CyberHeart”). In thisAgreement, Accuray and CyberHeart may be referred to each individually as a “Party” or collectively as “Parties.”WHEREAS, Accuray owns or controls certain intellectual property rights and technologies related to stereotactic radiosurgery devices for use in,among other things, cranial tumor and thoracic applications;WHEREAS, CyberHeart desires to obtain, and Accuray is willing to grant, certain licenses to such intellectual property rights and technologies topermit CyberHeart to develop and commercialize new applications for such devices in the field of cardiac disease, including, but not limited to, atrialfibrillation; andWHEREAS, CyberHeart also desires to have the right to engage Accuray, and Accuray agrees, to perform certain development services to create suchnew applications for such devices.NOW THEREFORE, the Parties hereto, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, andintending to be legally bound hereby, agree as follows:1. DEFINITIONS.The following terms, as used in this Agreement, shall have the meanings set forth below:1.1 “Accuray Competitors” means each of the Persons set forth in Exhibit A.1.2 “Accuray Field” means radiation treatments, including without limitation radiotherapy and radiosurgery, but excluding theCyberHeart Field.1.3 “Accuray Improvements” means any Improvement of a CyberKnife System, or of any portion of a CyberKnife System, to theextent that such Improvement (i) is necessary or useful for the manufacture or use of CyberKnife Systems in the Accuray Field and (ii) is first conceived orcreated by or on behalf of CyberHeart or Accuray, either solely or jointly, after the Effective Date during the Development Period. Notwithstanding theforegoing, Accuray Improvements shall exclude (a) the New Software, (b) any Technology to the extent related solely to the CyberHeart Module, and (c) anyTechnology conceived or created by or on behalf of CyberHeart, its Affiliates, or any of their contractors or licensors (other than Accuray) to the extent thatsuch Technology is not an Improvement derived during the Development Period from a CyberKnife System, or a portion of a CyberKnife System, that wasdisclosed byAccuray to CyberHeart prior to the time at which the Improvement was first conceived or created. For clarity, CyberHeart will own, and the AccurayImprovements shall exclude, any Improvements to the CyberHeart Module conceived or created by or on behalf of CyberHeart, and not by Accuray, as setforth in Section 9.1.3.1.4 “Accuray Patents” means (i) the Patents set forth in Exhibit B; (ii) all Patents to which the Patents in Exhibit B claim priority;(iii) all Patents claiming priority to any of the Patents identified in (i) or (ii), above; (iv) any and all other Patents claiming an Accuray Improvement, or portionthereof; (v) any and all other Patents claiming Accuray Technology, CyberKnife Systems, a CyberHeart Improvement (except to the extent the Patent isassigned to CyberHeart by Accuray pursuant to Section 9.1.3), or portion thereof, and (vi) any and all other Patents that are necessary or useful in theCyberHeart Field or for any making, use, sale, offer for sale, importation, or other exploitation or disposition of any CyberHeart Product or portion thereof; ineach case in any country or jurisdiction and, in the case of (iv), (v) and (vi), above, to the extent owned or otherwise controlled by Accuray or its ControlledAffiliates, including without limitation by assignment from CyberHeart under Section 9.1.2 (but other than as a result of any license from CyberHeart), suchthat Accuray or its Controlled Affiliate may grant to CyberHeart the rights and licenses hereunder, on the Effective Date or at any other time after the EffectiveDate and prior to the IP Cutoff Date.1.5 “Accuray Technology” means (i) the Technology set forth in Exhibit B; (ii) any Technology (a) that is owned or controlled byAccuray or any of its Controlled Affiliates on the Effective Date or at any time after the Effective Date and prior to the IP Cutoff Date and (b) that is necessaryor useful for, or contributes in whole or in part to, the practice of the Accuray Patents or the development, regulatory approval, use, promotion, marketing, orsale of CyberHeart Products; (iii) any other Technology disclosed or provided to CyberHeart under this Agreement or any other agreement between the Parties,including without limitation the Deliverables; and (iv) all Intellectual Property Rights related thereto, other than Patents. Notwithstanding the foregoing, theAccuray Technology shall include the Manufacturing Technology solely to the extent that the Manufacturing Technology is required to be disclosed under theterms of this Agreement or any other agreement between the Parties (such as the Manufacture and Supply Agreement) or has actually been disclosed byAccuray to CyberHeart or its designee.1.6 “Affiliate” means, with respect to any Party, any Person that Controls, is Controlled by, or is under common Control with suchParty, only so long as such Control exists. As used in this Section 1.6 and in Section 1.8, “Control” (and its derivatives) means the possession, directly orindirectly, of the power to direct or cause the direction of the management and policies of such entity through ownership of fifty percent (50%) or more of thesecurities entitled to elect the board of directors (or in the case of an entity that is not a corporation, the corresponding managing authority); provided that, for aPerson established in a jurisdiction where a Party cannot, as a matter of law, have such ownership interest, Control shall mean the maximum ownershipinterest permitted by law. “Controlled Affiliate” of a Party means an Affiliate that is Controlled by such Party, directly or indirectly. For clarity, any Affiliateof CyberHeart that is not in existence as a legal entity as of one (1) year before the effective date of2any Change of Control transaction of CyberHeart shall be equally considered an Affiliate and Controlled Affiliate of CyberHeart regardless of whether it iscontrolled by CyberHeart, directly or indirectly.1.7 “Applicable Law” means all laws, ordinances, rules and regulations applicable to the Deliverables, the Development Services, orthis Agreement, or other activities under or pursuant to this Agreement, including without limitation (a) all applicable federal, state, provincial, and local lawsand regulations, (b) regulations and guidelines of the U.S. Food and Drug Administration (“FDA”) and other Regulatory Authorities and the InternationalConference on Harmonization (“ICH”) guidelines and (c) current Good Manufacturing Practices and other regulations promulgated by the FDA, ICH and otherRegulatory Authorities.1.8 “Change of Control” means (i) the sale of all or substantially all of the assets of a Party or (ii) the acquisition of a Party byanother entity in which such other entity obtains Control of such Party by means of merger or consolidation resulting in the exchange of the outstanding sharesof such Party for securities or other consideration issued, or caused to be issued, by the acquiring entity or its subsidiaries (in each case provided that theconsideration to be received by such Party’s stockholders, or other equity holders, consists solely of cash and/or publicly traded securities), unless thestockholders (or other equity holders) of such Party, as constituted immediately prior to such transaction, hold immediately after such transaction a majorityof the voting power of the surviving or resulting entity in such a transaction (or majority voting power in an entity that Controls (as defined in Section 1.6) thesurviving or resulting entity). For clarity, no public offering of stock or other securities shall be considered a Change of Control.1.9 “Confidential Information” has the meaning assigned to such term in Section 14.1.1.10 “CyberHeart Field” means any and all non-tumor applications involving or relating to the heart, the coronary arteries (includingwithout limitation the epicardial coronary arteries), the cardiac veins, the structure or function of any of the foregoing, or related conditions, including withoutlimitation all diseases and conditions of the conduction system, the coronary, arterial and/or venous systems, heart valves or chambers, wall anomaliesaffection, ejection fraction and/or conduction.1.11 “CyberHeart Improvement” means (i) any Improvement of any CyberKnife System or CyberHeart Product, or of any portion ofa CyberKnife System or CyberHeart Product, that (a) is necessary or useful for the manufacture or use of any CyberHeart Product solely in the CyberHeartField and (b) is first conceived or created by or on behalf of CyberHeart or Accuray, either solely or jointly, after the Effective Date during the DevelopmentPeriod; and (ii) the New Software. Notwithstanding the foregoing, CyberHeart Improvements shall exclude (1) any Improvements to the CyberKnife System(other than the New Software) that are useful in the Accuray Field and (2) any Technology (other than the New Software), conceived or created by or on behalfof Accuray, its Affiliates, or any of their contractors or licensors, to the extent that such Technology is not an Improvement derived during the DevelopmentPeriod from a CyberHeart Product, or a portion of a CyberHeart Product that was3disclosed by CyberHeart to Accuray prior to the time at which the Improvement was first conceived or created.1.12 “CyberHeart Liaison” has the meaning assigned to such term under Section 4.2.3.1.13 “CyberHeart Module” means any and all hardware, software, other modifications, and Technology that are added to or usedwith, or that alter, any CyberKnife System—whether or not such hardware, software, other modification, or Technology is an Improvement of a CyberKnifeSystem, or portion thereof, and whether or not it is developed through the exercise of rights granted to CyberHeart in this Agreement—so that such modifiedCyberKnife System, in combination with such hardware, software, other modifications, and Technology, is capable of performing applications solely withinthe CyberHeart Field. For clarity, the CyberHeart Module includes all portions of any CyberHeart System that are within the scope of the foregoing.1.14 “CyberHeart Patents” means (i) the Patents set forth in Exhibit C; (ii) all Patents to which the Patents in (i), above claim priority;(iii) all Patents claiming priority to any of the Patents identified in (i) or (ii), above; (iv) any and all other Patents claiming CyberHeart Technology, CyberHeartProducts, or an Accuray Improvement (except to the extent the Patent is assigned to Accuray pursuant to Section 9.1.2), or any portion thereof; (v) any and allother Patent claims claiming CyberHeart Products (or any portion thereof) that are useful in the Accuray Field; and (vi) any and all other Patents that are usefulin the Accuray Field or for any making, use, sale, offer for sale, importation, or other exploitation or disposition of any CyberKnife System; in each case inany country or jurisdiction and, in the case of (iv), (v) and (vi), above, to the extent owned or otherwise controlled by CyberHeart or its Controlled Affiliates,including without limitation by assignment from Accuray under Section 9.1.3 (but other than as a result of any license from Accuray), such that CyberHeartor its Controlled Affiliate may grant to Accuray the licenses hereunder, on the Effective Date or at any other time prior to the IP Cutoff Date. Notwithstandingthe foregoing, the CyberHeart Patents shall exclude the Accuray Patents.1.15 “CyberHeart Product” means each of the CyberHeart Module and the CyberHeart System.1.16 “CyberHeart Software” has the meaning assigned to such term under Section 2.2.4.1.1.17 “CyberHeart System” means a stereotactic radiosurgery system that is designed or developed by or on behalf of CyberHeart or itsAffiliates (but which may include components purchased or licensed from third party suppliers that are not designed by or on behalf of CyberHeart) solely foruse in applications solely in the CyberHeart Field, including, without limitation, a stereotactic radiosurgery system that is based upon or incorporates aCyberKnife System or Accuray Technology, or is based upon or incorporates any portion or component thereof, or method or process related thereto, solely foruse in applications solely in the CyberHeart Field.41.18 “CyberHeart Technology” means (i) all Technology, including without limitation CyberHeart Improvements, CyberHeartSoftware, and New Software, disclosed or provided to Accuray by CyberHeart under this Agreement or any other agreement between the Parties and (ii) allIntellectual Property Rights related thereto, other than Patents; provided that CyberHeart Technology does not include any Accuray Technology or anyTechnology or Intellectual Property Rights conceived or created by or on behalf of Accuray.1.19 “CyberKnife Component” means a hardware component of a CyberHeart Product that (a) was designed by or on behalf ofAccuray (other than pursuant to the Development Services) and is used in the CyberHeart Product in substantially the same form in which it is used in aCyberKnife System at the time that CyberHeart first seeks any quote, proposal, or terms for supply of such component or CyberHeart Product (an “InitialSolicitation”), (b) is not made generally commercially available by any other party in the form used by Accuray, and (c) is manufactured by or on behalf ofAccuray for incorporation into CyberKnife Systems at the time that CyberHeart makes an Initial Solicitation with respect to such component. Anycomponents that are acquired by Accuray or its Affiliate (such as, without limitation, from a contract manufacturer) for the CyberKnife System pursuant to(a) through (c) above shall be deemed a CyberKnife Component in accordance with the foregoing solely if used in the CyberHeart Product in substantially thesame form as acquired by Accuray or the Affiliate. For clarity, small parts and components that are valued at under one thousand dollars ($1,000), aregenerally commercially available, and used in CyberKnife Systems without modification are not CyberKnife Components and can be purchased directly byCyberHeart from their manufacturers.1.20 “CyberKnife Software” has the meaning assigned to such term under Section 2.2.6.3.1.21 “CyberKnife System” means any stereotactic radiosurgery system designed or developed by or on behalf of Accuray or anyAccuray Affiliate (but which may include components purchased or licensed from third party suppliers that are not designed by or on behalf of Accuray) forany application solely in the Accuray Field.1.22 “Deliverables” means any Technology first conceived or created by Accuray or its Affiliate, or jointly with CyberHeart, pursuantto the Development Services for the development, making, use, importation, marketing, sale, or other exploitation or commercialization of CyberHeartProducts, or for the exploitation of the Accuray Technology or the Accuray Patents in the CyberHeart Field, or other Technology that is incorporated byAccuray in the deliverables under, or otherwise explicitly specified in the applicable Statement of Work.1.23 “Development Period” means the period commencing as of the Effective Date and ending on the later of the fifth (5) anniversaryof the Effective Date or as otherwise described in each Statement of Work under Section 3.3 during which Development Services will be performed by Accurayor its subcontractors.5th1.24 “Development Services” means the design and development services to be performed by Accuray and its Subcontractors forCyberHeart pursuant to a Statement of Work under Section 3.3.1.25 “Fees” means the amounts to be paid by CyberHeart to Accuray under Article 8, Section 6.4, and/or related Exhibits.1.26 “FTE” means the full time equivalent effort of one person who participates directly in the Development Services. For purposesof this Section 1.26, “full time equivalent effort” shall mean one thousand nine hundred (1,900) hours per year.1.27 “JSC” has the meaning assigned to such term under Section 4.1.1.28 “Improvement” means with respect to Technology: (a) for copyrightable or copyrighted Technology (including without limitationany mask works), a work which is based upon one or more pre-existing works, such as a revision, modification, translations, abridgment, condensation,expansion, collection, compilation, or any other form in which such pre-existing works may be recast, transformed, or adapted; (b) for patentable or patentedTechnology, any adaptation, addition, improvement, or combination based on a pre-existing work or Patent; and (c) for Technology subject to trade secretprotection, any new material, information, or data relating to and derived from such existing trade secret material, including without limitation new materialwhich may be protectable by copyright, patent, or other proprietary rights. For the purposes of clarification, an item of Technology shall be considered to be anImprovement of another item of Technology only if it is actually derived from such other item, and not merely because it may have the same or similarfunctionality or use as such other item.1.29 “Intellectual Property Rights” means the U.S. and foreign rights associated with the following: (i) Patents; (ii) copyrights,copyright registrations, and applications therefor (“Copyrights”); (iii) trade-secret rights and all other trade secret or similar proprietary rights in confidentialbusiness or technical information (“Trade Secret Rights”); and (iv) any similar, corresponding or equivalent rights to any of the foregoing anywhere in theworld. For purposes of this Agreement, Intellectual Property Rights excludes any U.S. and foreign rights associated with logos, trademarks, trade names, andsimilar insignia of origin or quality.1.30 “IP Cutoff Date” means the earlier of the tenth (10) anniversary of the Effective Date or termination of this Agreement pursuantto Section 11.2, 11.3, or 11.4. Notwithstanding the foregoing, if Accuray or its Affiliate is supplying product or components, or providing installation orsupport services, on or after the tenth (10) anniversary of the Effective Date, the IP Cutoff Date for purposes of Sections 1.4 and 1.5 shall be two (2) yearsafter the time at which such supply and/or services are last provided by Accuray and its Affiliates or until termination of this Agreement pursuant to Section11.2, 11.3, or 11.4, whichever occurs first.1.31 “Manufacturing and Supply Agreement” has the meaning assigned to such term under Section 6.1.1.6thth1.32 “Manufacturing Technology” means the Technology owned or controlled by Accuray that is used in or is useful for anymanufacturing of a CyberKnife System, CyberKnife Component, or CyberHeart Product, or of any components or portions of a CyberHeart Product. Forclarity, Manufacturing Technology does not include (i) drawings or designs of CyberHeart Products, (ii) software flow-charts or pseudocode that is notconsidered source code or written in any programming language, or (iii) source code for any interface delivered under a Statement of Work or under Section2.1.1.33 “New Software” means all right, title and interest in and to all software, firmware, and other code that is created or developed inconnection with the research, development, or modification of or for any CyberHeart Product, or any portion thereof, including without limitation under thisAgreement and including without limitation all Intellectual Property Rights to the extent embodied in or concerning such software, firmware, and other code. For the avoidance of doubt, New Software shall not include any software developed by Accuray, outside of a Statement of Work, for its CyberKnife System.1.34 “Patents” means any and all (i) pending and issued U.S., foreign, international, and regional patents, patent applications,certificates of invention, patents of addition or substitution, utility model, design registration, and other governmental grants for the protection of inventions,or industrial designs anywhere in the world; (ii) provisional, continuations, continuations-in-part, substitutions divisional, continued prosecution, and otherapplications thereof; (iii) patents issuing on any of the foregoing; (iv) renewal, reissues, re-examinations, and extensions of any such patents or patentapplications; and (v) foreign counterparts or equivalents of any of the foregoing in any country or jurisdiction.1.35 “Per-Click Revenue” means the per-use revenue actually received, earned or deferred, by CyberHeart from an end-user of aCyberHeart Product in consideration for each use of the CyberHeart Product by such end-user; less: sales taxes, duties and other governmental charges(including value added tax), but excluding what is commonly known as income taxes; provided that such amounts are charged separately on the invoice andpaid by such end-user or representative or agent (including, without limitation, financing entities) of such end-user.1.36 “Person” shall be broadly interpreted to include an individual, a partnership, a corporation, a limited liability company, anassociation, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity or any department, agency, or politicalsubdivision thereof.1.37 “Project Manager” has the meaning assigned to such term under Section 4.2.1.1.38 “Reasonable Commercial Efforts” means (i) with respect to the efforts to be expended by any Person—with respect to anyobjective—reasonable, diligent, good faith efforts to accomplish such objective as such Person would use or has used in the ordinary course of business toaccomplish a similar objective under similar circumstances for its own business and (ii) with respect to the efforts to be expended by any Person with respectto research, development, manufacture, supply, installation, service, support, and commercialization of a7product, efforts and resources normally used or which have been used by such Person with respect to a medical device product owned by such Person whichis of similar market potential at a similar stage in the development or life of such product, taking into account issues of safety, efficacy, product profile, thecompetitiveness of the marketplace, the proprietary position of the product, the regulatory structure involved, profitability of the product and other relevantcommercial factors. For clarity, the reasonableness of Accuray’s efforts in performing development, manufacture, and supply for CyberHeart shall beassessed under (i) and (ii) above as if Accuray was performing development for itself and its own product; and the CyberHeart Products shall be deemed to beof similar market potential and profitability as CyberKnife Systems for purposes of the foregoing.1.39 “Regulatory Agency” means any national (e.g., the FDA), supra-national (e.g., the European Commission, the Council of theEuropean Union (“EMEA”)), or other governmental entity with authority over the development, manufacture, use, marketing, sale, or pricing of anyCyberHeart Product or CyberKnife System in any jurisdiction.1.40 “Regulatory Approval” means the national or multinational approval necessary to market, use, or sell a new medical deviceproduct to the public at large in a particular country or multi-national group of countries including without limitation throughout the European Union.1.41 “Regulatory Filing” means any application or notification required to be filed with a Regulatory Agency in order to gainRegulatory Approval in a country, including without limitation a premarket approval application or premarket notification filed under section 515 or section510(k) of the U.S. Federal Food, Drug and Cosmetic Act, 21, U.S.C. §§ 360e, 360(k), respectively, as amended or its supranational equivalent.1.42 “Specifications” means the characteristics, features, standards, and other requirements for each of the Deliverables providedhereunder as (i) set forth in each Statement of Work, (ii) required by Applicable Law, or (iii) otherwise agreed upon by the Parties in writing. For the avoidanceof doubt, either Party may propose specifications to the other Party, but both Parties must agree to such specifications.1.43 “Statement of Work” has the meaning assigned to such term under Section 3.1.1.44 “Technology” means any and all technology, technical information, Confidential Information, software, works of authorship,know-how, inventions, processes, procedures, compositions, methods, formulae, protocols, techniques, designs, drawings, data, and other technical subjectmatter, documents, and materials.1.45 “Term” has the meaning assigned to such term under Section 11.1.82. ACCURAY TECHNOLOGY DELIVERY AND GRANT OF RIGHTS AND LICENSE BACK.2.1 Delivery. Promptly following the Effective Date, Accuray shall deliver to CyberHeart, or otherwise provide sufficient access tomeet its obligations or exercise its rights under this Agreement, the Accuray Technology set forth in Exhibit B in a format and location mutually agreed to bythe Parties, such agreement not to be unreasonably withheld by either Party. In addition to the foregoing, during the period beginning on the Effective Date andending on the IP Cutoff Date, Accuray shall, as soon as practical after CyberHeart’s request, deliver or make available to CyberHeart any other AccurayTechnology and Manufacturing Technology that is reasonably necessary or useful for development being conducted or work being performed by or on behalfof CyberHeart in the CyberHeart Field (but excluding Manufacturing Technology related to CyberKnife Components and other Manufacturing Technology). The Parties agree that the Manufacturing Technology that is necessary or useful for the manufacture of CyberKnife Components and the ManufacturingTechnology not reasonably necessary or useful for development being conducted or work being performed by or on behalf of CyberHeart shall be delivered, ifat all, to CyberHeart solely pursuant to a Manufacturing and Supply Agreement between the Parties. For the avoidance of doubt, no Accuray Technology orDeliverable delivered by Accuray under this Agreement will include any source code of Accuray other than interface source code indicated below in Section2.1.1.2.1.1 Interface. To the extent applicable pursuant to the Development Services or a Manufacturing and SupplyAgreement, the Parties will use Reasonable Commercial Efforts to define and develop an interface between the CyberKnife System and the CyberHeart Module.Such interface will include applicable hardware and software to enable hardware and software communication and compatibility and integration between theCyberKnife System and CyberHeart Module, including as appropriate, Ethernet or other communication protocols. Accuray shall provide any interface sourcecode or object code for the CyberKnife System to CyberHeart that is necessary to enable such integration.2.2 Grant of Rights.2.2.1 Subject to the terms and conditions of this Agreement, Accuray hereby grants to CyberHeart, under the AccurayPatents and Accuray Technology, an exclusive (including as to Accuray, except as otherwise set forth in this Agreement), worldwide, fully paid (except asexpressly set forth in this Agreement), royalty-free (except as expressly set forth in this Agreement) right and license, without the right to authorize or grantsublicenses (except as set forth in Section 2.2.4), (i) to research, develop, have developed, use, sell, offer to sell, market, import, and otherwise exploit andcommercialize (but not the right to manufacture or have manufactured except as set forth in Section 2.2.1(ii), below, and in the Manufacturing and SupplyAgreement) CyberHeart Products solely in the CyberHeart Field; (ii) to make and have made all portions of a CyberHeart Product that are not a CyberKnifeComponent solely for use in the CyberHeart Field; and (iii) to disclose Accuray Technology (subject to obligations of confidentiality and non-use no lessrestrictive than those set forth in Article 14) in all cases solely to parties that are not Accuray Competitors, solely in connection with the grant of a sublicenseunder the foregoing rights pursuant to Section 2.2.4, or engaging contractors pursuant to Section92.2.4.3, in connection with the exercise of the rights granted under this Section 2.2.1 and Section 2.2.2, or to consultants, advisors, investors, potentialacquirers (excluding Accuray Competitors), public accountants, and regulatory authorities. For clarity, the license granted to CyberHeart in this Section 2.2.1and Section 2.2.2 shall not be construed to prohibit or restrict Accuray or its Affiliates in any manner from exploiting the Accuray Patents or AccurayTechnology for any purposes in the Accuray Field.2.2.2 Without limiting the rights and licenses granted to CyberHeart in Section 2.2.1, subject to the terms andconditions of this Agreement, Accuray hereby grants to CyberHeart, under the Accuray Technology, an exclusive right and license, without the right toauthorize or grant sublicenses (except as set forth in Section 2.2.4), (i) to distribute, directly and indirectly, CyberHeart Products, and portions thereof, solelyin the CyberHeart Field, (ii) to use, reproduce, produce derivative works of, transmit, display, perform, and distribute the Accuray Technology (andderivative works thereof, including the New Software and CyberHeart Software) as necessary or useful to research, develop, use, sell, offer to sell, market,import, and otherwise exploit and commercialize (but not the right to manufacture or have manufactured except as set forth in Section 2.2.1(ii) and in theManufacturing and Supply Agreement) CyberHeart Products solely in the CyberHeart Field (subject to obligations of confidentiality and non-use no lessrestrictive than those set forth in Article 14), and (iii) to distribute, reproduce, transmit, publicly display, and publicly perform, sales, marketing, and userdocumentation and materials, in each case solely for purposes in the CyberHeart Field.2.2.3 Subject to the terms and conditions of this Agreement, Accuray hereby grants to CyberHeart an exclusive right andlicense under Accuray’s trademarks, without the right to authorize or grant sublicenses (except as set forth in Section 2.2.4), to distributors and marketing andadvertising partners, to use the trademark “CyberHeart” to market, sell, and promote CyberHeart Products in the CyberHeart Field. For the avoidance ofdoubt, Accuray and its Affiliates shall not oppose any government registration application by CyberHeart for the trademark “CyberHeart” outside the AccurayField.2.2.4 Sublicensing.2.2.4.1 The licenses granted to CyberHeart in Section 2.2.1 and Section 2.2.2 include the right for CyberHeart togrant and authorize sublicenses only to final end-users who are not Accuray Competitors, without Accuray’s consent, to use only (but no other right other thanuse) the object code version of any software, firmware, and other code that is included in any CyberHeart Product (the “CyberHeart Software”) for use of theCyberHeart Software with the CyberHeart Product on commercially reasonable terms. Such sublicense by CyberHeart shall contain prohibitions againstreverse engineering of the CyberHeart Software and hardware that comprises a CyberHeart Product, subject to Applicable Law and obligations ofconfidentiality no less restrictive than those set forth in Article 14 and subject to terms that prohibit (and exclude rights for) use of the CyberHeart Product inthe Accuray Field.2.2.4.2 Except as set forth in Section 2.2.4.1, CyberHeart shall have the right to grant non-sublicenseablesublicenses (including, without limitation, subliceness of object code to non end-users) under Section 2.2.1 and Section 2.2.2 only upon prior written10consent of Accuray, which consent shall not be unreasonably withheld, delayed, or conditioned; provided that in no event shall CyberHeart grant or authorizeany sublicenses to any Accuray Competitor or to any party Accuray reasonably determines may become a competitor of Accuray in the future. Accuray agreesthat it shall not withhold, delay, or condition any consent upon additional fees or payments (e.g., additional license fees or royalties) being provided. CyberHeart shall provide Accuray a copy of each sublicense under this Section 2.2.4.2 not less than thirty (30) days prior to execution of such sublicense,each such sublicense shall require the sublicensee to agree in writing to be bound by terms and conditions materially as protective of Accuray as of theprovisions of this Agreement, and all sublicenses under this Section 2.2.4.2 shall terminate upon termination or expiration of this Agreement except to the extentotherwise agreed by the Parties in writing. Notwithstanding this Section 2.2.4.2, above, but without limiting CyberHeart’s manufacture and havemanufactured rights pursuant to Section 2.2, Section 6.1, or the Manufacturing and Supply Agreement, CyberHeart may grant sublicenses of the object codeform of Accuray’s software without permission from, or review of the sublicense by, Accuray solely to contractors and may use contractors to develophardware and software (without providing access to any source code form of any Accuray software), in each case provided that such use of contractorsotherwise complies with Section 2.2.4.3. If a third party to which a sublicense has been properly granted under this Section 2.2.4.2 becomes an AccurayCompetitor after the granting of such sublicense, such sublicense shall terminate immediately at the time such third party becomes an Accuray Competitor.2.2.4.3 Without granting to CyberHeart the right to manufacture or have manufactured CyberKnife Components,and subject to Section 2.2.4.2, CyberHeart has the right to use contractors to exercise its rights under this Agreement (including without limitation underSection 2.2.1 and 2.2.2), provided that the contractor is not an Accuray Competitor or potential Accuray Competitor, as reasonably determined by Accuray,and is bound by terms and conditions as protective of Accuray, Accuray’s Intellectual Property Rights, and Accuray’s Confidential Information, as the termsand conditions of this Agreement. Notwithstanding the foregoing, CyberHeart shall not be required to obtain ownership of Accuray Improvements for Accurayfrom any contractors so long as (i) CyberHeart attempts in good faith to obtain such ownership; and (ii) if CyberHeart does not obtain ownership, thenAccuray Improvements conceived or created by the contractor are licensed by such contractors to CyberHeart and deemed CyberHeart Technology licensed toAccuray under Section 2.2.6.2.2.5 Development Services License. Subject to the terms and conditions of this Agreement, CyberHeart hereby grantsto Accuray a worldwide, non-exclusive, non-sublicenseable (without limiting Accuray’s rights to use subcontractors as set forth in Section 3.9), limited,internal right and license under CyberHeart’s Intellectual Property Rights to (i) perform the Development Services on behalf of CyberHeart during theDevelopment Period as contemplated in this Agreement and in a mutually agreed Statement of Work that is then in effect; and (ii) to create the Deliverables inthe performance of the Development Services during the Development Period as contemplated in this Agreement and such Statement of Work and to deliversuch Deliverables to CyberHeart. In no event shall Accuray use any of CyberHeart’s Confidential Information or other Intellectual Property Rights inconnection with any engagement, services, or otherwise, of or for any third party or after the termination or11expiration of the Development Period, except as expressly provided in Section 2.2.6 of this Agreement, or in the performance of Development Services forCyberHeart after the end of the Development Period as set forth in the relevant Statement of Work in connection with which such CyberHeart ConfidentialInformation was furnished or disclosed.2.2.6 License Back.2.2.6.1 Subject to the terms and conditions of this Agreement, CyberHeart hereby grants to Accuray, under theCyberHeart Patents and CyberHeart Technology, an exclusive (even as to CyberHeart), worldwide right and license, without the right to grant or authorizesublicenses (except as set forth in Section 2.2.6.3 and Section 2.2.6.4), (i) to use, make, have made, sell, offer for sale, import, and otherwise exploit andcommercialize CyberKnife Systems in the Accuray Field and (ii) to disclose (subject to obligations of confidentiality and non-use no less restrictive than thoseset forth in Article 14) the CyberHeart Technology solely in connection with the grant of a sublicense under the foregoing rights pursuant to Section 2.2.6.3 and2.2.6.4, or engaging contractors, in connection with the exercise of the rights granted under this Section 2.2.6.1 and Section 2.2.6.2. For clarity, the licensegranted to Accuray in this Section 2.2.6.1 and Section 2.2.6.2 shall not be construed to prohibit or restrict CyberHeart or its Affiliates in any manner fromexploiting the CyberHeart Patents or CyberHeart Technology for any purposes outside the Accuray Field.2.2.6.2 Without limiting the rights and licenses granted to Accuray in Section 2.2.6.1, subject to the terms andconditions of this Agreement, CyberHeart hereby grants to Accuray, under the CyberHeart Technology, an exclusive right and license, without the right toauthorize or grant sublicenses (except as set forth in Section 2.2.6.3 and Section 2.2.6.4), (i) to distribute, directly and indirectly, CyberKnife Systems, andportions thereof, in the Accuray Field, (ii) to use, reproduce, produce derivative works of, transmit, display, perform, and distribute the CyberHeartTechnology (and derivative works thereof, including without limitation the Accuray Software) as necessary or useful to research, develop, use, sell, offer tosell, market, import, and otherwise exploit and commercialize CyberKnife Systems solely in the Accuray Field (subject to obligations of confidentiality andnon-use no less restrictive than those set forth in Article 14), and (iii) to distribute, reproduce, transmit, publicly display, and publicly perform, sales,marketing, and user documentation and materials for purposes in the Accuray Field.2.2.6.3 The licenses granted to Accuray in Sections 2.2.6.1 and 2.2.6.2 include the right for Accuray to grant andauthorize sublicenses only to final end-users, without CyberHeart’s consent, of the object code version of any software, firmware, and other code that isincluded in any CyberKnife System (the “CyberKnife Software”) for use of the CyberKnife Software with the CyberKnife System, on commerciallyreasonable terms. Such license shall include prohibitions against reverse engineering of the CyberKnife Software, subject to Applicable Law.2.2.6.4 Accuray shall have the right to grant and authorize sublicenses (including without limitation subliceness ofobject code to non end-users) of the rights granted to Accuray in this Section 2.2.6 only upon the prior written consent of CyberHeart,12which consent shall not be unreasonably withheld, delayed, or conditioned. CyberHeart agrees that it shall not withhold, delay, or condition any consent uponadditional fees or payments (e.g., additional license fees or royalties) being provided. Each such sublicense shall require the sublicensee to agree in writing to bebound by terms and conditions materially as protective of CyberHeart as of the provisions of this Agreement, and no sublicense under this Section 2.2.6.4shall terminate upon termination or expiration of this Agreement except to the extent otherwise agreed by the Parties in writing, such agreement not to beunreasonably withheld, delayed, or conditioned.2.2.7 Retained Rights; No Other Rights.2.2.7.1 Accuray expressly reserves and retains all right, title, and interest in, to, and under Accuray’sIntellectual Property Rights outside the CyberHeart Field and all rights of Accuray not expressly granted to CyberHeart by Accuray under thisAgreement. Similarly, CyberHeart expressly reserves and retains all right, title, and interest in, to, and under CyberHeart’s Intellectual PropertyRights outside the Accuray Field and all rights of CyberHeart not expressly granted to Accuray by CyberHeart under this Agreement. No otherrights, licenses, or interest are granted by a Party to the other Party by implication, estoppel, or otherwise, under such Party’s Intellectual PropertyRights other than as expressly granted by this Agreement. CyberHeart agrees and acknowledges that it shall not exercise or practice any of Accuray’sIntellectual Property Rights to develop or commercialize any product in the Accuray Field. For clarity, the licenses granted to CyberHeart under thisAgreement shall not be construed to prohibit or restrict Accuray or its Affiliates in any manner from exploiting the Accuray Patents or AccurayTechnology for any purposes outside the CyberHeart Field.2.2.7.2 Additionally, Accuray retains: (i) a non-exclusive right in the CyberHeart Field only (a) to perform theDevelopment Services in accordance with Statement(s) of Work under this Agreement for the benefit of CyberHeart during the Development Periodand (b) to manufacture and sell to CyberHeart components of CyberHeart Products that are not a CyberKnife Component, but only to the extentmutually agreed by the Parties in the Manufacturing and Supply Agreement entered into pursuant to Section 6.1 or otherwise agreed in a subsequentwriting; and (ii) an exclusive right to manufacture and have manufactured (a) any CyberKnife Components that are sold by Accuray to CyberHeartunder a Manufacturing and Supply Agreement, subject to CyberHeart’s backup rights to manufacture and have manufactured such CyberKnifeComponents which shall be granted to CyberHeart in the Manufacturing and Supply Agreement and (b) any components of CyberKnife Systems orAccuray Improvements in the Accuray Field, even if such components are also components of a CyberHeart Product.2.2.8 Exclusivity.2.2.8.1 If CyberHeart or its designee develops a CyberHeart Product that does not contain Accuray Technology andthat is not covered by (for at least one of13manufacture, use, or otherwise) Accuray Patents, but CyberHeart or its designee has commenced development of a CyberHeart Product that does containAccuray Technology and/or is covered by Accuray Patents prior to such development, Accuray shall have the right to convert any exclusive license granted byAccuray to CyberHeart, or retained by CyberHeart in the CyberHeart Field, pursuant to this Agreement immediately to a co-exclusive (with Accuray) license. Notwithstanding anything to the contrary, the terms of this Section 2.2.8.1 above shall not apply or be triggered based upon any CyberHeart Module that doesnot use Accuray Technology and is not covered by Accuray Patents, provided that such CyberHeart Module is used with CyberKnife Systems. Additionally,any conversion to a co-exclusive license pursuant to this Section 2.2.8.1 shall be subject to cure, and the dispute resolution mechanism, described in Section11.2 in the same manner as a breach of this Agreement before such conversion takes effect.2.2.8.2 If CyberHeart or its designee develops and/or markets a CyberHeart Product that does not contain AccurayTechnology and is not covered by Accuray Patents, and does not develop or does not market a product that does contain Accuray Technology or is covered byAccuray Patents (for at least one of manufacture, use, or otherwise), Accuray may terminate this Agreement pursuant to Section 11.3.2. Notwithstandinganything to the contrary, the terms of this Section 2.2.8.2 above shall not apply or be triggered based upon any CyberHeart Module that does not use AccurayTechnology and is not covered by Accuray Patents, provided that such CyberHeart Module is used with CyberKnife Systems or CyberHeart Systems thatderive from CyberKnife Systems and use Accuray Technology or are covered by Accuray Patents.2.2.8.3 Notwithstanding anything to the contrary, CyberHeart shall have no right to enter into any agreement withAccuray Competitor (i) for any purpose in connection with the activities conducted under this Agreement during the Term or under any surviving provisionsafter the Term, (ii) for the research, development and/or commercialization of any CyberHeart Product at any time during the Term, and/or (iii) for theresearch, development and/or commercialization of any CyberHeart Product that was developed, or that derives from a CyberHeart Product that wasdeveloped, using Accuray Technology, for a period of two (2) years following the Term if this Agreement is terminated pursuant to (a) Section 11.2 for causefor any reason, (b) Section 11.3, or (c) Section 11.4.2.2.8.4 Notwithstanding anything to the contrary, and provided Section 2.2.8.3(iii) applies following the Term,Accuray shall not sell, or enter into any agreement with a third party to sell, any stereotactic radiosurgery product in the CyberHeart Field for a period of one(1) year following the Term if this Agreement is terminated pursuant to (i) Section 11.2 for cause and Accuray’s licenses to CyberHeart do not survive suchtermination pursuant to Section 11.5.1.3 or (ii) Section 11.3.3. DEVELOPMENT.3.1 Development Engagement. It is the intent of the Parties that CyberHeart shall have sole discretion with respect to the development ofCyberHeart Products. Accordingly,14CyberHeart has the right to engage third party contractors to perform any and all development work in CyberHeart’s sole discretion; provided that CyberHearthas no right to engage Accuray Competitors for such purpose. The Parties acknowledge that (i) it is in the interest of both Parties that the trade secrets of bothParties be protected from disclosure to third parties and (ii) that, in light of Accuray’s development of the CyberKnife System, Accuray is particularlyqualified to develop some parts of the CyberHeart Module and CyberHeart System. Consequently, Accuray agrees that it will provide Development Services toCyberHeart to the extent set forth in Section 3.2 and agreed by Accuray. Subject to the terms and conditions of this Agreement, CyberHeart has the right, butnot the obligation, to request Accuray to perform Development Services and, if Accuray agrees to such request, then Accuray shall: (a) perform theDevelopment Services during the Development Period; and (b) provide Deliverables in accordance with Specifications, schedules, and milestones, in each caseas set forth in a statement of work prepared by mutual agreement of the Parties (the “Statement of Work”). For clarity, the term Statement of Work does notmean statements of work between CyberHeart and third parties. A form of Statement of Work is set forth in Exhibit D. Except for the restriction with respectto Accuray Competitors, nothing in this Agreement shall prevent CyberHeart from using any third party contractors to perform any development in its solediscretion. Additionally, CyberHeart shall have no obligation to engage or use Accuray to perform any Development Services and Accuray shall have noobligation to agree to any request of CyberHeart to perform any Development Services, except as set forth in Section 2.1.1 and subject to Section 3.2.2.3.2 Contemplated Development Services.3.2.1 Initial Development. The Parties agree that the initial Development Services shall commence upon written agreementby Accuray and CyberHeart to a Statement of Work that defines the Development Services to be performed by Accuray using Reasonable Commercial Efforts. Each Statement of Work shall, to the extent requested by CyberHeart, provide for Deliverables (including without limitation by way of CyberHeartImprovements) as described therein.3.2.2 Subsequent Development. In addition to the initial Development Services contemplated in Section 3.2.1, Accurayagrees that it shall, to the extent reasonably requested by CyberHeart and agreed to by Accuray, provide subsequent Development Services during theDevelopment Period under mutually agreed Statements of Work that shall enable CyberHeart to complete development of the CyberHeart Modules andCyberHeart Systems for applications in the CyberHeart Field. Accuray shall use Reasonable Commercial Efforts to accommodate CyberHeart’s requestsduring the Development Period for Development Services, including without limitation using Reasonable Commercial Efforts to accommodate anyspecifications and requirements requested by CyberHeart.3.3 Statement of Work. Each Statement of Work shall (i) be attached and deemed incorporated into this Agreement, (ii) have aunique title, and (iii) be consecutively numbered (Statement of Work D-1, D-2, D-3, etc.). This Agreement may cover more than one Statement of Work at anyone time, provided that each Statement of Work that has been signed by both Parties shall be deemed a separate engagement of Development Services fromAccuray. Each Statement of Work shall also specify the price, including without limitation number and15type of FTEs, the term of Development Services to be performed thereunder, and schedule of or milestones required to be completed for payments. Anypayments that are specified in connection with a milestone shall become due and payable only if the milestone has been successfully completed by Accuray,unless clearly stated to the contrary in the applicable Statement of Work. In the event of any conflict between this Agreement and a Statement of Work, theterms and conditions of this Agreement shall control in all respects.3.4 Performance of Development Services. Upon agreement to a Statement of Work, CyberHeart shall issue a purchase order toAccuray for the Development Services in accordance with the Statement of Work, which, subject to the terms and conditions of this Agreement, shall bedeemed authorizations to commence the Development Services referenced in such Statement of Work. Commencing upon issuance of such purchase orderafter Accuray has signed the Statement of Work, Accuray shall use Reasonable Commercial Efforts to perform and complete the Development Services, anddeliver all Deliverables to CyberHeart, in a professional and workmanlike manner in accordance with each Statement of Work and Applicable Law, includingwithout limitation using Reasonable Commercial Efforts to meet all timelines and Specifications. Without limiting the foregoing, Accuray shall dedicate andutilize adequate manpower, and in particular a dedicated project team, in order to perform the Development Services in accordance with the Statements ofWork in a timely manner, and all individuals performing the Development Services shall be reasonably qualified to perform the work assigned to them. Accuray shall use Reasonable Commercial Efforts not to reallocate any individuals in a manner that is disruptive of the Development Services. Accuray shallreasonably solicit CyberHeart’s feedback regarding the Development Services, including without limitation with respect to all decisions that may significantlyaffect the progress or results. Subject to compliance with the foregoing and the other terms of this Agreement, the manner and means by which Accuraychooses to complete its responsibilities in performing the Development Services are in Accuray’s sole discretion and control. The Deliverables shall materiallyconform to the requirements set forth in the Statement of Work, including without limitation the Specifications, and Accuray shall notify CyberHeart inwriting, concurrent with delivery of each Deliverable, of any non-compliance known to Accuray, its Affiliates, or contractors at such time. Except for theparticular Development Services requested under any purchase order, no terms or conditions in such purchase order, nor any of the terms of anyacknowledgement or other document of Accuray, shall be deemed to vary any of the terms of this Agreement which shall control in all respects. All suchadditional terms and conditions are hereby rejected and excluded. All obligations based upon purchase orders for Development Services shall be solely under,and as expressly set forth in, this Agreement and the applicable Statement of Work.3.5 Technical Assistance. Until the later of completion and acceptance of all Deliverables under any Statement of Work and Accurayproviding information, materials, and assistance that are sufficient to enable CyberHeart to reasonably understand, use, and otherwise exploit suchDeliverables in CyberHeart Products in the CyberHeart Field, Accuray shall make reasonably available to CyberHeart during normal business hours, atCyberHeart’s request and without charge, ongoing technical assistance with respect to any Deliverable provided by Accuray to CyberHeart in connection withthis Agreement. After such time, Accuray shall not16unreasonably refuse CyberHeart’s requests for additional technical assistance with respect thereto.3.6 Acceptance of Deliverables. Upon delivery of each Deliverable to CyberHeart, CyberHeart shall assess whether the Deliverablesmaterially conform to the applicable part of the Specifications and the Statement of Work. CyberHeart shall have a period of thirty (30) business days toaccept or reject each Deliverable after delivery, or such longer period as is reasonable under the circumstances. If written notice of rejection is not received byAccuray within such thirty (30) business days after delivery of the applicable Deliverable (or such longer time as is reasonable under the circumstances), theDeliverable shall be deemed accepted. Notwithstanding the foregoing, if more time is needed to complete any reasonable evaluation and/or testing of theDeliverables (such as in the case of CyberHeart performing field trials and/or testing), and CyberHeart provides Accuray with notice during such thirty (30)business day period of the need for additional time, then such time period for acceptance or rejection shall be reasonably extended sufficient to allowcompletion of the desired evaluations and testing. In the event that a Deliverable does not materially conform to the Specifications or Statement of Work (suchnonconformance shall be referred to as “Deficiencies”), CyberHeart may reject the Deliverable and provide written notice to Accuray which notice shall providea reasonable description of why CyberHeart believes that the Deliverable did not comply with the Specification or Statement of Work. Accuray shall reviewsuch description within five (5) business days after receipt of such notice. If Accuray disagrees with CyberHeart’s reason(s) for such rejection, the mattershall be submitted for resolution in accordance with the procedures set forth in Article 16. If Accuray agrees with CyberHeart’s reason(s) for such rejection,Accuray shall, within twenty (20) business days after receiving each report regarding Deficiencies, or if the Parties agree in writing to a different time period,upon such time as has been agreed to by the Parties, correct the Deficiencies so that the Deliverable materially conforms to the applicable part of theSpecifications or Statement of Work. CyberHeart agrees to cooperate reasonably with Accuray in Accuray’s efforts to diagnose and correct any Deficiencies. The procedure in this Section 3.6 shall be repeated with respect to a revised Deliverable to determine whether it is acceptable to CyberHeart, unless and untilCyberHeart expressly indicates in its Deficiency notice that it is issuing final rejection of the revised Deliverable after rejecting the Deliverable on at least two (2)prior occasions or otherwise terminates the Development Services under the Statement of Work. If CyberHeart issues a final rejection of the revised Deliverablepursuant to this Section 3.6, Accuray shall return any and all compensation previously paid by CyberHeart to Accuray for the nonconforming Deliverable(s)and for the applicable Statement of Work. Notwithstanding the above, Accuray shall not be required to return any payments for previously acceptedDeliverables, or to the extent that the Statement of Work identifies separate payments for conforming components of rejected Deliverables, for such conformingcomponents.3.7 Changes. CyberHeart shall have the right to propose changes (“Changes”) to any Statement of Work by submitting a changerequest (“Change Request”) to Accuray as described in this Section 3.7. Each Change Request shall identify the relevant Statement of Work to which theChange applies. Upon receipt of any Change Request, Accuray shall, within fifteen (15) days after its receipt thereof, deliver a written response setting forththe effect of any such Change to the relevant Statement of Work, including without limitation (i) the Fees payable17by CyberHeart to undertake the Change, (ii) the time required to effect such Change, and (iii) any additional information reasonably requested by Accurayfrom CyberHeart to undertake such Change (“Change Request Response”). Accuray shall use Reasonable Commercial Efforts to minimize any increase inFees and the delay of any schedule based on any Change Request and shall only propose in good faith the effect of any Change on the agreed to schedule andFees. Upon receipt of Accuray’s Change Request Response, CyberHeart shall, at its sole option and in its sole discretion, either (a) accept such ChangeRequest Response, in which case, the Parties shall amend the relevant Statement of Work accordingly; (b) provide Accuray with a revised Change Request (“Modified Change Request”) as a counteroffer to Accuray; or (c) opt not to effect the Change. In the event CyberHeart delivers a Modified Change Request toAccuray, the Parties shall repeat the process set forth above until Accuray has accepted such Modified Change Request or CyberHeart opts not to undertake therelevant Change, but if no agreement between the Parties as to the Change has been reached, the proposed Change shall not be adopted. Notwithstanding theforegoing, Accuray shall use Reasonable Commercial Efforts to accommodate the Changes requested by CyberHeart.3.8 Development Term. Accuray shall be responsible for completing any Development Services in accordance with this Agreementthat are commenced during the Development Period unless such Development Services are terminated in accordance with the terms of this Agreement. CyberHeart shall have the right to terminate the Development Services being provided under each Statement of Work at any time for any reason by providingnotice of such termination to Accuray; provided that CyberHeart will pay Accuray for all work set forth in the Statement of Work that is completed in thecourse of such Development Services (i) to the extent payments have become due in accordance with the applicable Statement of Work, (ii) provided that thetermination was not for Accuray’s breach, for the work that was performed, including, without limitation, for uncompleted Deliverables, and (iii) providedthat the termination was not for Accuray’s breach, to cover a reasonable wind down of Development Services, taking into account Accuray’s cost to reallocatehuman and capital resources committed to Development Services. No termination of Development Services shall be considered, or result in, a termination ofthis Agreement.3.9 Affiliates and Subcontractors. During the Term, Accuray shall have the right to perform its obligations with respect toDevelopment Services hereunder through one or more of its Affiliates and independent contractors and similar third party developers (“Subcontractors”),subject to the following. Any use of any Affiliates and Subcontractors by or under the authority of Accuray to perform Development Services or exercise therights or licenses to Accuray shall be pursuant to a written agreement that is as protective of CyberHeart, its Intellectual Property Rights, and its rights andlicenses under this Agreement, in all material respects as the terms of this Agreement, including without limitation Articles 2, 9, 13, 14, and 15, and Accurayshall use Reasonable Commercial Efforts to make CyberHeart a third party beneficiary of each such agreement concerning the Development Services with fullpower and authority to enforce its terms (“Sub-Agreement”). Without limiting the generality of the foregoing, or any other obligation of Accuray under thisAgreement, Accuray shall be responsible under this Agreement for the acts and omissions of Affiliates and Subcontractors pursuant to Sub-Agreements as ifby Accuray. In particular, in any circumstance where Accuray18uses a Subcontractor to perform Development Services, both Accuray and such Subcontractor shall be responsible under this Agreement for performing theobligations of Accuray related to such Development Services, and Accuray shall be responsible under this Agreement for any failure of the Subcontractor to doso. Accuray shall also use Reasonable Commercial Efforts to obtain ownership of all Technology and Intellectual Property Rights conceived, created, or usedunder each such Sub-Agreement and under all other agreements with contractors by or under authority of Accuray (including without limitation all Technologyand Intellectual Property Rights embodied in any Deliverables, or the making or use thereof) sufficient for Accuray to grant the rights and licenses toCyberHeart under such Technology and Intellectual Property Rights of the scope contemplated in this Agreement (and sufficient to grant the backupmanufacturing rights to be granted in the Manufacturing and Supply Agreement), including without limitation to exercise all such rights based upon and usingthe Deliverables. To the extent that Accuray is unable to obtain such ownership, then it shall obtain sufficient rights for Accuray to grant to CyberHeart underall such Technology and Intellectual Property Rights the rights and licenses to CyberHeart of the scope contemplated in this Agreement. To the extent applicableas set forth above, CyberHeart may, in its sole discretion, bring any action for the enforcement of, or claim under, this Agreement or Sub-Agreement, againsteither or both of Accuray or any Affiliate or Subcontractor. Accuray shall be directly liable to CyberHeart for any act or omission of any Affiliate orSubcontractor that would give rise to a breach of this Agreement if by Accuray, and Accuray and any such Affiliate and Subcontractor shall be jointly andseverally liable for any breach of any Sub-Agreement or any such breach of this Agreement and with respect to any liability of Accuray or any Affiliate orSubcontractor with respect thereto, solely to the extent of CyberHeart’s damages resulting from the breach. Notwithstanding the foregoing, Accuray shall beunder no obligation to renegotiate or amend any agreement entered into or effective prior to the Effective Date. However, any such prior agreement under whichDevelopment Services are performed for CyberHeart must enable Accuray to grant the rights and licenses to CyberHeart of the scope contemplated in thisAgreement under the Technology and Intellectual Property Rights developed pursuant to such Development Services.3.10 Records. Accuray shall keep reasonable records of all work conducted and results achieved in performing work under thisAgreement, including without limitation all agreed upon documentation, procedures, processes, protocols, equipment and materials employed in conductingthe work, and all inventions and Technology developed or used. Additionally, if Development Services are being paid for on a time and/or materials basis,Accuray shall include in such records the time at which the work was conducted and the name of each individual conducting the work. Accuray shallprovide a copy of such records to CyberHeart upon reasonable request.194. MANAGEMENT.4.1 Joint Steering Committee.4.1.1 The Parties shall establish a Joint Steering Committee (“JSC”), which shall provide a forum for enabling andfacilitating coordination of the Parties’ activities hereunder and have the additional responsibilities allocated to it in this Article 4.4.1.2 Membership. Each Party shall designate two (2) senior executives with appropriate expertise to serve as membersof the JSC, who shall include the CyberHeart CEO and the Accuray CEO or an executive designated by the respective Party’s CEO. Subject to the foregoing,each Party may replace its JSC representatives at any time upon written notice to the other Party.4.1.3 Meetings. The JSC shall hold meetings at times and locations as it elects to do so, but in no event shall suchmeetings be held less frequently than once every calendar quarter.4.1.4 Decision Making. Each Party’s designees on the JSC shall collectively have one (1) vote on all matters broughtbefore the JSC and decisions by the JSC on all such matters shall be made only by a unanimous vote of the JSC. Any disagreement between the designees ofthe Parties on the JSC as to matters brought before it shall be reasonably discussed within the JSC, provided that such discussions shall occur no later thanthirty (30) days after either Party’s initial request and subject to the following. If any dispute regarding the interpretation of or breach of a term or condition ofthis Agreement, or the reasonableness of any term or condition of a Manufacturing and Supply Agreement or of any term or condition of any Installation orService Agreement (as defined in Section 6.2), (each, a “Contract Dispute”) has not been resolved by the JSC for any reason within thirty (30) days after eitherParty’s request, upon either Party’s good faith election, such Contract Disputes shall be subject to the dispute resolution provisions of Section 16.1 (only forattempted resolution by the CEOs or independent board members within the sixty (60) day period specified in Section 16.1) and Section 16.2. Subject to anyfinal arbitration decision concerning a Contract Dispute that has been issued pursuant to Section 16.2, all decisions of the JSC shall be for advisory purposesonly and shall not be binding upon either Party, unless set forth in a writing that is signed by both Parties. For clarity, subject to CyberHeart’s compliancewith its obligations in Articles 5, 7, and 8, and subject to Section 6.1, the manner and means by which the CyberHeart Products are designed, developed,manufactured, and commercialized shall be in CyberHeart’s sole discretion and control, and CyberHeart shall have exclusive decision making authority withrespect to all such design, development, manufacture, and commercialization. For clarity, nothing in this Section 4.1.4 shall be construed as requiringarbitration of any topics other than Contract Disputes. Nothing in this Agreement shall be construed to give Accuray, the JSC, or any arbitrator, decisionmaking authority with respect to, and the consent and/or agreement of Accuray, the JSC, or any arbitrator shall not be required for, any research,development, design, marketing, pricing, commercialization, or other decisions related to CyberHeart Products. Notwithstanding anything to the contrary, theJSC shall have no authority or power to amend or alter any of the terms and conditions of, or to amend or waive compliance with, this Agreement.204.1.5 Meeting Agendas. Each Party shall disclose to the other Party the proposed agenda items along with appropriateinformation at least three (3) business days in advance of each meeting of the JSC; provided that, under exigent circumstances requiring JSC input, a Partymay provide its agenda items to the other Party within a lesser period of time in advance of the meeting, or may propose that there not be a specific agenda for aparticular meeting, so long as such other Party consents to such later addition of such agenda items or the absence of a specific agenda for such JSC meeting. The JSC shall consider and comment on all matters reasonably identified by either Party. The JSC shall remain in effect after the end of the DevelopmentPeriod only to the extent desired by both Parties.4.1.6 Responsibilities. In addition to establishing a forum for communication regarding the Development Services, whilethe JSC is in place, the JSC may, as requested by either Party hereto:4.1.6.1 Review and comment on all proposed Statements of Work.4.1.6.2 Review and comment on the conduct of the Development Services.4.1.6.3 Review and comment on the performance of any Subcontractors performing any portion of theDevelopment Services on behalf of CyberHeart.4.1.6.4 Provide feedback to the Project Manager.4.1.6.5 Review, evaluate, and comment on all reports required by this Agreement or the applicable Statement ofWork pursuant to the Development Services.4.1.6.6 Review and comment on the conduct and results of pre-clinical studies and clinical trials.4.1.6.7 Review and comment on the Regulatory Filings by CyberHeart and Accuray.4.2 Development Staffing.4.2.1 Project Manager. Except to the extent otherwise authorized or requested by CyberHeart, each Statement of Workshall identify, and Accuray shall dedicate, an employee of Accuray to act as the Development Services project manager (the “Project Manager”), who shall besufficiently senior and experienced to properly manage the exchange of information and materials between the Parties and to properly manage and undertake theDevelopment Services and deliver the applicable Deliverables. For clarity, a single Project Manager may be responsible for more than one project to the extentreasonable based upon the time commitment required for each project. CyberHeart shall fund such Project Manager only as expressly set forth in theapplicable Statement of Work during the period in which the Development Services under the Statement of Work are being performed, and such Project21Manager shall report directly to the JSC and the CyberHeart Liaison. Any and all communication from and to Accuray with respect to the DevelopmentServices shall be channeled through such Project Manager. Unless otherwise agreed to by CyberHeart, each Project Manager shall be dedicated solely to theDevelopment Services under the relevant Statement of Work.4.2.2 Accuray Project Team. Accuray shall provide sufficient resources, including without limitation FTEs, to useReasonable Commercial Efforts to perform the Development Services and create the Deliverables as set forth in each Statement of Work. Each member ofAccuray’s personnel assigned to perform Development Services shall be the same level of experience and expertise that Accuray would assign to development ofits own Technology of a similar nature and importance as the Deliverables under the relevant Statement of Work and in all cases properly trained andcompetent in their respective technical areas.4.2.3 CyberHeart Representative. Each Statement of Work shall identify one employee of CyberHeart to act asCyberHeart’s liaison with respect to the Development Services (“CyberHeart Liaison”). The CyberHeart Liaison shall be sufficiently senior and experienced toundertake and participate in the Development Services. Accuray shall use Reasonable Commercial Efforts to ensure that each Project Manager shall be staffedunder each Statement of Work to work closely with the CyberHeart Liaison during the period that Development Services are performed. Any and allcommunication from and to CyberHeart with respect to Development Services under each Statement of Work shall be channeled through the relevantCyberHeart Liaison.4.3 Reports and Access. Unless otherwise indicated on the applicable Statement of Work or agreed by CyberHeart, approximatelyonce each week, the Project Manager shall arrange a meeting with the CyberHeart Liaison, either in person or by telephone, for a formal progress presentation,describing in detail the status of the Development Services, including without limitation results achieved, projections for time of completion, issues anddifficulties that have arisen or are anticipated, steps necessary to return to the schedule in case of any delay, and discussion of possible resolution of anyproblems that have arisen. Additionally, Accuray shall provide CyberHeart with written reports regarding the progress of the Development Services asreasonably requested by CyberHeart. Without limiting the foregoing, Accuray shall notify CyberHeart as soon as possible of any issues that arise that mayresult in delay or inability to meet goals. Additionally, Accuray agrees that it shall make its technical personnel and consultants reasonably available to theemployees and consultants of CyberHeart to discuss the Development Services work, and the results of such work, in detail and to provide reasonableinformation and feedback with respect to other development activities for CyberHeart Products, as reasonably requested by CyberHeart from time to time.5. CLINICAL TRIALS AND REGULATORY MATTERS.5.1 Accuray Pre-Clinical Studies and Clinical Trials. As between the Parties, Accuray shall be solely responsible, at its expense, forany and all pre-clinical studies and clinical trials, and have the exclusive right to communicate with Regulatory Agencies and seek22and obtain Regulatory Approvals, with respect to CyberKnife Systems in the Accuray Field in any and all jurisdictions. Accuray agrees that it shall keepCyberHeart reasonably informed regarding its pre-clinical studies and clinical trials of such CyberKnife Systems, and cooperate reasonably with CyberHeartin order to coordinate its studies and trials reasonably with that of CyberHeart. Accuray also shall design and conduct pre-clinical studies and clinical trialsfor CyberKnife Systems reasonably considering feedback and information provided by CyberHeart.5.2 CyberHeart Pre-Clinical Studies and Clinical Trials.5.2.1 CyberHeart shall establish a committee, consisting either of three (3) or of five (5) advisors, which shall reviewCyberHeart’s clinical trial protocols and CyberHeart’s pre-clinical test results relating to CyberHeart Products, prior to CyberHeart commencing clinical trialsfor CyberHeart Products (the “Clinical Advisory Committee”). The role of the Clinical Advisory Committee shall be to confirm to CyberHeart that it is notunreasonable for CyberHeart to move forward with clinical trials in light of CyberHeart’s clinical trial protocols and pre-clinical test results. The ClinicalAdvisory Committee shall also review informed consent forms for all clinical trials of CyberHeart Products to confirm that such forms are reasonable. TheClinical Advisory Committee shall make all such confirmation decisions by majority decision. The Clinical Advisory Committee shall have no otherauthority or control. CyberHeart shall be entitled to appoint all Clinical Advisory Committee members in its discretion, provided that the members arereputable and reasonable and Accuray shall have the right to disqualify without cause up to two (2) Clinical Advisory Committee members and challenge, inaccordance with Article 16, the reasonableness of any additional Clinical Advisory Committee member designated by CyberHeart.5.2.2 Subject to Section 5.2.1, CyberHeart shall be responsible, at its expense, for any and all pre-clinical studies andclinical trials, and have the exclusive right to communicate with Regulatory Agencies and seek and obtain Regulatory Approvals, with respect to CyberHeartProducts in the CyberHeart Field in any and all jurisdictions. CyberHeart agrees that it shall keep Accuray reasonably informed regarding its pre-clinicalstudies and clinical trials of such CyberHeart Products, and cooperate reasonably with Accuray in order to coordinate its studies and trials reasonably withthat of Accuray. CyberHeart also shall design and conduct pre-clinical studies and clinical trials for CyberHeart Products considering feedback andinformation provided by Accuray. Accuray shall make reasonably available to CyberHeart, at no charge, one (1) CyberKnife System solely for use inconducting each such pre-clinical and clinical trials. CyberHeart may enter into an agreement with an Accuray customer for pre-clinical or clinical studies,provided any activities between CyberHeart and such customer will not negatively impact any revenue of Accuray under its shared ownership or placementprograms for its CyberKnife product.5.3 Regulatory Matters. CyberHeart shall have the exclusive right to prepare, file, prosecute, and maintain all Regulatory Filingsnecessary for commercialization of any CyberHeart Product. Accuray shall have the exclusive right to prepare, file, prosecute, and maintain all RegulatoryFilings necessary for commercialization of any CyberKnife System in the Accuray Field. Each Party shall provide reasonable assistance to the other Party insuch efforts, including without limitation, at no charge, allowing the other Party to reference such23Party’s own Regulatory Filings or incorporate sections of such Party’s Regulatory Filings with the other Party’s Regulatory Filings, provided, however, thateach Party shall provide the other with copies of all correspondence with FDA and other Regulatory Agencies, in advance, where possible; provided, further,that each Party shall have the right to comment in a timely fashion on any Regulatory Filings where such Party’s own Regulatory Filings are referenced orincorporated with the other’s Regulatory Filings.6. MANUFACTURING, SUPPLY, AND COMMERCIALIZATION.6.1 Manufacturing and Supply.6.1.1 As of the Effective Date, the Parties shall execute the Manufacturing and Supply Agreement set forth in ExhibitE. Any amendment of the Manufacturing and Supply Agreement will be upon both Parties mutual agreement and not subject to Dispute Resolution provisionsunder Article 16.6.1.2 If CyberHeart desires to have a CyberHeart Product, CyberKnife Component, or other component of aCyberHeart Product (a “Requested Item(s)”) manufactured and supplied by Accuray, CyberHeart shall provide Accuray with notice of such desire, togetherwith written proposed specifications (as such specifications will be defined in the Manufacturing and Supply Agreement) that are desired by CyberHeart forthe Requested Items, which may include updates and modifications of CyberHeart Products currently being supplied by Accuray. Accuray shall notifyCyberHeart within thirty (30) days after receipt of such notice whether or not such specifications are acceptable and whether Accuray will supply suchRequested Items to CyberHeart in accordance with the terms and conditions of the Manufacturing and Supply Agreement. Upon Accuray notifyingCyberHeart that it will supply such Requested Items, CyberHeart shall be entitled to provide Accuray with its first forecast for such Requested Items and theterms and conditions in the Manufacturing and Supply Agreement shall apply to require Accuray to supply such Requested Items to CyberHeart. Providedthat any specifications provided by CyberHeart to Accuray are reasonable, unless Accuray notifies CyberHeart that it will supply such Requested Items toCyberHeart within thirty (30) days after CyberHeart’s request, CyberHeart’s manufacture and have manufactured rights that are granted in Section 2.2.1 shallbe deemed to extend to the Requested Item that was identified in CyberHeart’s notice and not otherwise already licensed to CyberHeart under Section 2.2.1,including without limitation modifications, enhancements, and updates thereof. For clarity, Accuray will have no right to manufacture any Requested Item forCyberHeart after manufacturing rights have been granted to CyberHeart pursuant to this Section 6.1.2.6.2 Installation and Service. The Parties shall cooperate on installation and conduct it pursuant to the terms and conditions inExhibit F (the “Installation Agreement”). The Parties shall cooperate on service of CyberHeart Producs and conduct it pursuant to the terms and conditions inExhibit G (the “Service Agreement”).6.3 Commercialization. CyberHeart has the exclusive right (including as to Accuray) to market and commercialize CyberHeartProducts. Commercialization of CyberHeart24products can be through per-use (per-click) revenue generated from CyberHeart Products that are not sold or from the outright sale of CyberHeart Products,provided that, in any given calendar year, CyberHeart shall not be permitted to sell a number of CyberHeart Systems or CyberHeart Modules greater than tenpercent (10%) of the CyberHeart Systems or CyberHeart Modules, respectively, supplied to CyberHeart in such calendar year.6.4 Revenue Share.6.4.1 Per-Click Revenue: Within thirty (30) days after the end of each calendar quarter, CyberHeart shall pay to Accuray apercentage of Per-Click Revenue as follows:6.4.1.1 *** of Per-Click Revenue from use of CyberHeart Modules.6.4.1.2 *** Per-Click Revenue from use of CyberHeart Systems.All Per-Click Revenue shall be collected in compliance with all federal fraud and abuse laws.6.4.1.3 The royalty rates above in Sections 6.4.1.1 and Section 6.4.1.2 shall also apply to any other revenuereceived, earned, or deferred, by CyberHeart (including without limitation fees and other payments) from end-users, their representatives or agents (including,without limitation, financing entities) for CyberHeart Products that are delivered, but not sold, to end-users. Notwithstanding the above in this Section 6.4.1.3,no royalty will be due for any revenue that is unrelated to treatment of patients using a CyberHeart Product and that is not in lieu of revenue for any suchtreatment. For example, no royalties will be due for revenue received for consulting services concerning billing systems and treatment protocols, provided thatany fees charged for such services are reasonable and customary for such services in the medical device industry.6.4.2 Sales Revenue: CyberHeart shall pay to Accuray an amount equal to *** of gross revenues collected, received, earned,or deferred, by CyberHeart on sales of CyberHeart Products or buy-outs, whether full or partial (which are subject to Section 6.4.3 below), of CyberHeartProducts subject to Per-Click Revenue arrangements.6.4.3 Partial Sale: In such cases where a portion of less than one-hundred percent (100%) of a CyberHeart Product is sold, theabove rates in Section 6.4.2 will apply as to the portion sold and the above rates in Section 6.4.1 will apply as to the portion subject to Per-Click Revenue.6.5 Further to that specified in Section 2.2.7, the Parties agree and understand that this Agreement is intended to enable CyberHeartto sell CyberHeart Products solely for applications in the CyberHeart Field, and CyberHeart shall have no right under the licenses granted in this Agreement tosell, install, or service CyberKnife Systems or to sell, install, or service CyberHeart Products outside the CyberHeart Field. In addition to other rights retainedConfidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.25by Accuray under this Agreement, Accuray shall retain the sole and exclusive right under its Intellectual Property Rights to market and sell, install, and serviceCyberKnife Systems. Similarly, however, except as otherwise agreed by the Parties under this Agreement or in a separate writing, Accuray and its Affiliatesshall not, and shall not license or otherwise authorize any other Person to, directly or indirectly, install, service, support, develop, market, promote, sell,import, or otherwise commercialize any stereotactic radiosurgery product that is used in the CyberHeart Field in any country, whether or not there are AccurayPatents or whether or not there is Accuray Technology in such country. Accuray shall include, and shall cause its Affiliates to include, such a covenant in alllicenses and other authorizations by Accuray or its Affiliates under the Accuray Patents and/or Accuray Technology. Additionally, except as otherwise agreedby the Parties under this Agreement or in a separate writing, CyberHeart and its Affiliates shall not, and shall not license or otherwise authorize any otherPerson to, directly or indirectly, install, service, support, develop, market, promote, sell, import, or otherwise commercialize in any country any CyberKnifeSystem that is used in the Accuray Field. CyberHeart shall include, and shall cause its Affiliates to include, such a covenant in all agreements grantinglicenses for CyberKnife Systems entered into by CyberHeart or its Affiliates.6.6 Audit Rights.6.6.1 Accuray Audits. CyberHeart shall keep or cause to be kept such records, including, without limitation, those obtainedpursuant to Section 6.6.2, as are required to determine, in a manner consistent with Generally Accepted Accounting Principals (GAAP) and this Agreement,the sums due under this Agreement, including, but not limited to, Per-Click Revenue and sales of CyberHeart Products. At the request (and expense) ofAccuray, CyberHeart and its Affiliates and sublicensees shall permit an independent certified public accountant appointed by Accuray and reasonablyacceptable to CyberHeart, at reasonable times and upon reasonable notice, to examine only those records as may be necessary to determine, with respect to anycalendar year ending not more than three (3) calendar years prior to the beginning of the calendar year in which such audit occurs, for records to be kept asprovided in this Section 6.6.1 prior to Accuray’s request, the correctness or completeness of any report or payment made under this Agreement. Results ofany such examination shall be (a) limited to information relating to CyberHeart Products, (b) made available to both Parties, and (c) deemed the ConfidentialInformation of CyberHeart subject to Article 14. Accuray shall bear the full cost of the performance of any such audit, unless such audit discloses a varianceto the detriment of Accuray of more than five percent (5%) of the amount of the original report, royalty or payment calculation. In such case, CyberHeart shallbear the full cost of the performance of such audit.6.6.2 CyberHeart Audits of Third Parties. CyberHeart shall require each third party into which a CyberHeart Product isinstalled to keep or cause to be kept such records as are required to determine, in a manner consistent with GAAP, the sums due to CyberHeart under itsagreements with such third party. CyberHeart, or its designated independent certified public accountant, shall audit at least twenty percent (20%) of suchthird parties per calendar year during the Term, in order to examine those records as may be necessary to determine, with respect to any calendar year endingnot more than three (3) calendar years prior to the beginning26of the calendar year in which such audit occurs, for records to be kept as provided in this Section 6.6.2, the correctness or completeness of any report orpayment made by such third parties to CyberHeart. As between the Parties, CyberHeart shall bear the full cost of the performance of any such audit.7. DILIGENCE.7.1 CyberHeart shall use Reasonable Commercial Efforts to develop and file Regulatory Filings to obtain Regulatory Approval for atleast one (1) CyberHeart Product for at least one (1) indication in the CyberHeart Field.7.2 CyberHeart shall use Reasonable Commercial Efforts to achieve agreed commercialization milestones within the agreed period oftime. For clarity, CyberHeart shall not be considered to have failed to meet its diligence obligation under this Section 7.2 due to any failure to meet suchmilestones so long as CyberHeart has used Reasonable Commercial Efforts to meet the milestone.7.3 Any failure of CyberHeart to use Reasonable Commercial Efforts to meet the diligence obligations under this Article 7 shall be amaterial breach of this Agreement by CyberHeart. Notwithstanding anything to the contrary, CyberHeart shall be deemed to have used the ReasonableCommercial Efforts required in Sections 7.1 and 7.2 and 11.3.3, and to have met its diligence obligations under this Article 7 and 11.3.3, if the total aggregatecosts, expenses, and other payments incurred by CyberHeart, its Affiliates, and sub-licensees (if authorized by Accuray) in connection with the research,development, filings, making, marketing, and other commercialization of CyberHeart Product(s) are at least (i) *** during the twelve (12) months after theEffective Date and (ii) an aggregate of *** from the Effective Date until twenty-four (24) months after the Effective Date.7.4 CyberHeart shall use Reasonable Commercial Efforts to operate in good standing with local, state, and federal governmentagencies, including without limitation the FDA, and will not knowingly materially violate any local, state, or federal law or knowingly continue any suchviolation previously unknown that as a consequence of such violation, may harm the goodwill and reputation of Accuray.8. COMPENSATION AND PAYMENT TERMS.8.1 Fees.8.1.1 Development Services Fees. In consideration of Accuray’s performance of the Development Services hereunder,CyberHeart shall pay to Accuray the amounts indicated, and at the times set forth, in each Statement of Work.8.2 Payment.Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.278.2.1 Development Services Fees. For Development Services performed on a fixed price basis, Accuray may invoiceCyberHeart upon acceptance by CyberHeart of the applicable milestone and Deliverables as indicated in the Statement of Work and Section 3.6. If theStatement of Work indicates that Development Services are to be performed on a time and materials basis, Accuray shall invoice CyberHeart on a calendarmonthly basis for time reasonably expended in performing the Development Services and materials expenses authorized in the Statement of Work, or otherwiseauthorized by CyberHeart in advance in writing, and actually incurred during the prior calendar month. Under no circumstances shall CyberHeart beresponsible for paying any amounts in excess of any budget set forth in a Statement of Work, and under no circumstances shall CyberHeart be responsible forreimbursing Accuray for any out of pocket costs or expenses except to the extent approved by CyberHeart in advance in writing and documented toCyberHeart’s reasonable satisfaction. The rates charged to CyberHeart for Accuray’s time shall be equal to direct labor costs plus forty percent (40%).Notwithstanding the foregoing, all payments under this Section 8.2.1 that become due or payable prior to CyberHeart obtaining more than One Million U.S.dollars ($1,000,000) of investment financing shall be deferred until, and shall not be due or payable until thirty (30) days after such time as CyberHeart hascompleted investments totaling such amount.8.3 Payment Terms. All amounts paid hereunder shall be in U.S. dollars. CyberHeart shall pay all Fees that have become due andpayable hereunder within thirty (30) days of receipt of Accuray’s invoice in accordance with this Agreement. If CyberHeart fails to make any paymentrequired under this Agreement within thirty (30) days after the date on which such payment becomes due and payable, then Accuray may, at its option andsole discretion and in addition to any other remedies it may have at law or equity, assess a late fee in the amount equal to one percent (1%) of the unpaidbalance for each month after payment is due until the invoice is paid in full, or if less, the maximum allowable by law.8.4 Taxes. In addition to the payment of Fees and other amounts described above, CyberHeart shall pay all taxes, including withoutlimitation sales and use tax, but excluding any tax based upon the net income of Accuray, if imposed by any government as a result of payments made toAccuray under this Agreement. CyberHeart may withhold from, and reduce the amount of, payment to Accuray under this Agreement for any taxes requiredto be withheld by CyberHeart under the applicable laws of the United States or any other country. Such amount shall be paid to the appropriate taxingauthorities, and CyberHeart shall provide Accuray with official receipts issued by said taxing authority or such other evidence as is reasonably available toestablish that such taxes have been paid. CyberHeart shall cooperate with Accuray and take all actions reasonably necessary, that do not result in any cost,expense, or detriment to CyberHeart, in order to secure any reasonably available reduction or elimination of withholding taxes pursuant to any income taxtreaty between the United States and any other country.8.5 CyberHeart Board of Directors Observation Right. As part of the consideration from CyberHeart to Accuray under thisAgreement, CyberHeart shall provide reasonable board observation rights to an individual designated by Accuray to which CyberHeart28has no reasonable objection. This Section 8.5 shall not survive any termination or expiration of this Agreement, notwithstanding anything to the contrary.8.6 The Fees are Accuray’s sole remuneration for all rights and licenses granted, and services provided, under this Agreement.9. INTELLECTUAL PROPERTY OWNERSHIP.9.1 Ownership.9.1.1 Existing Rights. Except as specified otherwise in this Agreement, including without limitation any exclusivity inthis Agreement, (i) each Party shall retain and own all right, title, and interest in and to all Intellectual Property Rights conceived or created solely by suchParty, (ii) the Parties shall jointly own all right, title, and interest in and to all Intellectual Property Rights conceived or created jointly by the Parties, andneither Party shall have any duty to account or obtain the consent of the other Party in order to exploit or license such Intellectual Property Rights, and (iii)inventorship and authorship of any invention or work of authorship conceived or created by either Party, or jointly by the Parties, shall follow the rules of theU.S. Patent and Trademark Office and the laws of the United States (without reference to any conflict of law principles).9.1.2 Accuray. Without assigning or otherwise transferring to Accuray any right, title, or interest in, to, or under anyother Intellectual Property Rights or Technology, Accuray shall own all Accuray Improvements. In connection with the foregoing, CyberHeart hereby assignsand agrees to assign, subject to Section 9.2, all of its right, title, and interest in and to any such Accuray Improvements and any Intellectual Property Rightsrelated to Accuray Improvements, subject to the following. Notwithstanding the foregoing, this Section 9.1.2 shall not require the assignment to Accuray of (i)any Patent claims that concern an invention that is not an Accuray Improvement or concern an invention that was conceived before the Effective Date or afterthe end of the Development Period; (ii) any other Patent right except to the extent that the Patent claims, and is entitled to (determined on a claim by claimbasis), priority to a Patent that is owned by Accuray; and (iii) any non-Patent Intellectual Property Right except to the extent that such non-Patent IntellectualProperty Right embodies an Accuray Improvement.9.1.3 CyberHeart. Without assigning or otherwise transferring to Accuray any right, title, or interest in, to, or under anyother Intellectual Property Rights or Technology, CyberHeart shall own all CyberHeart Improvements. In connection with the foregoing, Accuray herebyassigns and agrees to assign, subject to Section 9.2, all of its right, title, and interest in and to any such CyberHeart Improvements and any IntellectualProperty Rights related to CyberHeart Improvements, subject to the following. This Section 9.1.3 shall not require the assignment to CyberHeart of (i) anyPatent claims that concern an invention that is not a CyberHeart Improvement or concern an invention that was conceived before the Effective Date or after theend of the Development Period; (ii) any other Patent right except to the extent that the Patent claims, and is entitled to (determined on a claim by claim basis),29priority to a Patent that is owned by CyberHeart; and (iii) any non-Patent Intellectual Property Rights except to the extent that such non-Patent IntellectualProperty Right embodies a CyberHeart Improvement. Additionally, CyberHeart will own, and Accuray Improvements shall exclude, any Improvements to theCyberHeart Module conceived or created by or on behalf of CyberHeart, and not by Accuray.9.1.4 Further Assurances. Each Party (the “Assignor”) shall assist the other (the “Assignee”), or the Assignee’s designee,at the Assignee’s expense, reasonably to secure in any and all countries the Assignee’s rights in and to the Intellectual Property Rights that the Assignee is toown in accordance with this Section 9.1, including without limitation reasonable disclosure to the Assignee of information and data reasonably necessary topursue Patent applications filed by the Assignor that are to be assigned to the Assignee in accordance with the foregoing, the execution of all applications,specifications, oaths, assignments, and all other instruments reasonably necessary in order to apply for and obtain such rights and in order to assign andconvey to the Assignee, and its successors, assigns, and nominees, the sole and exclusive right, title, and interest therein and thereto to the extent contemplatedin this Section 9.1. The Assignor also agrees that its obligation to execute or cause to be executed any such instrument or papers shall continue after thetermination of this Agreement. This Section 9.1.4 shall not be construed to require the disclosure of any Technology to the Assignee except to the extent it isincluded in a Patent filed by the Assignor that is to be assigned to the Assignee.9.1.5 Attorney-in-Fact. The Assignor (as defined in Section 9.1.4) agrees that, if the Assignee (as defined in Section9.1.4) is unable because of the Assignor’s unavailability, dissolution, mental or physical incapacity, or for any other reason, to secure the Assignor’s signaturefor the purpose of applying for or pursuing any application for any U.S. or foreign Patent or copyright registrations covering any Intellectual Property Rightsor Technology to be assigned to the Assignee under this Section 9.1, then the Assignor hereby irrevocably designates and appoints the Assignee and its dulyauthorized officers and agents as the Assignee’s agent and attorney-in-fact, to act for and on the Assignor’s behalf to execute and file any such applications andto do all other lawfully permitted acts that are reasonably necessary for the prosecution and issuance of Patent and copyright registrations to be owned by theAssignee under this Section 9.1 with the same legal force and effect as if executed by the Assignor. The foregoing appointment shall be deemed coupled withan interest of the Assignee in and to the Intellectual Property Rights and Technology to be assigned to the Assignee under this Section 9.1.9.2 Third Party Technology.9.2.1 Unless mutually agreed to by the Parties through the JSC or otherwise in a separate signed writing, Accuray, itsAffiliates, and its contractors shall not use any product, software, program materials, trade secrets, information, or other Technology in performing theDevelopment Services or in any Deliverable in a manner that would require, for the exercise of any of CyberHeart’s rights pursuant to this Agreement using orbased upon the Deliverables, a license that is not granted to CyberHeart in this Agreement (or in the case of Intellectual Property to the extent used tomanufacture CyberKnife Components, in the Manufacturing and Supply Agreement), except to the extent such Technology has been expressly30identified in the Statement of Work that has been agreed upon by the Parties in advance of the particular Development Services as Intellectual Property Rightsfor which a license will be needed. Unless otherwise stated in the Statement of Work, Accuray shall be and remain fully responsible for obtaining allnecessary rights and licenses to include such Technology in the Deliverables and to the extent necessary to authorize CyberHeart to exercise all of its rights andlicenses of the scope set forth in this Agreement under the Intellectual Property Rights concerning such Technology incorporated or used in the Deliverables, orin the making or use of such Technology. Unless otherwise agreed to by the Parties, CyberHeart shall not be obligated to pay, and Accuray shall beresponsible for, any royalties and license fees in connection with such Technology and the terms of any license with any such party shall provide thatCyberHeart shall not be responsible to Accuray or any third party for any breach by Accuray of such third party licenses.9.2.2 Except as otherwise provided in Section 9.2.1, if a Party (the “Grantor”) is to grant a sublicense or other right tothe other Party (the “Grantee”) under this Agreement or the Manufacturing and Supply Agreement under Intellectual Property Rights in-licensed by the Grantorfrom a non-Affiliate third party after the Effective Date that is subject to royalty or other payment obligations to such third party (“Third Party Technology”),then the grant of such rights to the Grantee under this Agreement shall be subject to the Grantee agreeing in writing to pay the Grantor (i) any and all royaltiespayable to the third party with respect to such Third Party Technology that become payable by reason of Grantee’s exercise of such rights hereunder and (ii)that portion of any upfront license fees, milestone payments and other similar (non-royalty) amounts reasonably allocated to the rights granted to the Granteehereunder (taking into consideration the benefits of such rights under such Third Party Technology to each Party). Upon request of the Grantee, the Grantorshall disclose to the Grantee a true, complete, and correct written description of such payment obligations. Any failure to agree upon an allocation shall besettled under Article 16.9.3 The Parties intend that this Agreement, all work in the performance of the Development Services, and all other development of theCyberHeart Products shall qualify for the benefits of the Cooperative Research and Technology Enhancement Act (35 U.S.C. § 103(c)) (the “CREATE Act”). Accordingly, to the extent mutually agreed and desired by the Parties, the Parties shall take such lawful and just acts that may be or become necessary forevidencing, maintaining, recording, and perfecting the benefits of the CREATE Act.10. PATENT PROSECUTION & ENFORCEMENT.10.1 Patent Prosecution. Except as otherwise expressly provided in this Section 10.1, each Party shall have the exclusive right toprepare, file, prosecute, and maintain Patents that are solely owned by such Party. For purposes of this Section 10.1, Patents that are jointly owned by theParties shall be filed, prosecuted, and maintained as if the Patent is either an Accuray Patent or a CyberHeart Patent, as agreed by the Parties.10.1.1 Accuray Patents. Accuray shall, at its sole expense, diligently file, prosecute, and maintain the Accuray Patents,including without limitation Patents with31claims covering any of the Deliverables, and including without limitation timely payment of all maintenance fees in connection with any issued Patents, thatare part of or become part of the Accuray Patents, including without limitation using diligent efforts to obtain issuance of claims within such Accuray Patentsthat provide a reasonable scope of protection for CyberHeart in the CyberHeart Field or are reasonably necessary or useful for any future CyberHeart Productsor other stereotactic radiosurgery devices in the CyberHeart Field. Accuray shall reasonably take CyberHeart’s comments into account in filing andprosecuting the Accuray Patents that relate to the CyberHeart Field or any CyberHeart Product. Accuray shall keep CyberHeart reasonably informed regardingthe status, preparation, filing, prosecution, and maintenance of all such Accuray Patents (including without limitation inventions for which CyberHeart maydesire to have a Patent application filed), and shall give CyberHeart a reasonable opportunity to provide comments on such preparation, filing, prosecution,and maintenance efforts that relate to the CyberHeart Field or any CyberHeart Product, to the extent desired by CyberHeart. Notwithstanding the foregoing,Accuray shall have the right, in its reasonable discretion, to abandon any such Patent application and/or cease payment of maintenance fees on any suchissued Patent; provided that Accuray has first advised CyberHeart in writing of such intention at least ninety (90) days prior to the intended abandonment orcessation date. In such event, CyberHeart, at its sole expense, shall have the right to assume the prosecution of any such Patent application and may continueto pay to maintain such issued Patent, in each case, that is within the Accuray Patents and relates to the CyberHeart Field or any CyberHeart Product.10.1.2 CyberHeart Patents. CyberHeart shall, at its sole expense, have the right, but not the obligation, to file, prosecute,and maintain the CyberHeart Patents, including without limitation Patents with claims covering any of the CyberHeart Improvements, and to pay allmaintenance fees in connection with any issued Patents that are part of or become part of the CyberHeart Patents including without limitation using diligentefforts to obtain issuance of claims within such CyberHeart Patents that provide a reasonable scope of protection for Accuray in the Accuray Field. CyberHeart shall reasonably take Accuray’s comments into account in filing and prosecuting the CyberHeart Patents to the extent the CyberHeart Patentconcerns CyberKnife Systems in the Accuray Field. CyberHeart shall keep Accuray reasonably informed regarding the status, preparation, filing,prosecution and maintenance of all CyberHeart Patents (including without limitation CyberHeart Improvements for which Accuray may desire to have a Patentapplication filed) to the extent the CyberHeart Patent concerns CyberKnife Systems in the Accuray Field, and shall give Accuray a reasonable opportunity toprovide comments on such preparation, filing, prosecution, and maintenance efforts for CyberHeart Patents, to the extent desired by Accuray. Notwithstanding the foregoing, CyberHeart shall have the right, in its reasonable discretion, to abandon any such Patent applications and/or cease payment ofmaintenance fees on any such issued Patents; but only if CyberHeart has first advised Accuray in writing of such intention at least ninety (90) days prior tothe intended abandonment or cessation date. In such event, Accuray, at its sole expense, shall have the right to assume the prosecution of any such Patentapplication and/or may continue to pay to maintain such issued Patent in each case that is within the CyberHeart Patents and relates to the Accuray Field orany CyberKnife System.3210.1.3 Assistance. Each Party agrees to (i) reasonably cooperate with the other Party in preparing, filing, prosecuting,and maintaining any Accuray Patents or CyberHeart Patents, as the case may be, and (ii) execute any documents as shall be necessary or desirable for suchpurpose.10.2 Enforcement of Intellectual Property Rights.10.2.1 Notification. Each Party shall promptly notify the other Party in writing (and provide a reasonable description) ofany suspected infringement by a third party of any Accuray Patent or CyberHeart Patent (a “Third-Party Infringement”).10.2.2 Enforcement of Accuray Patents.10.2.2.1 by Accuray. Subject to Section 10.2.2.2, Accuray shall have the first right, but not the obligation, tofile and pursue any suit or action for any Third-Party Infringement of the Accuray Patents, including without limitation in the CyberHeart Field, and Accurayshall not, absent CyberHeart’s prior written permission not to be withheld unreasonably, enter into any settlement or other arrangement that grants a license orfreedom to operate (including without limitation by way of a covenant not to sue) to any third party under the Accuray Patents that would infringe upon orviolate CyberHeart’s exclusivity under this Agreement or that otherwise is for any activities in or for the CyberHeart Field. Accuray shall bear the reasonableexpenses incurred by CyberHeart in providing assistance and cooperation pursuant to this Section 10.2.2.1 as requested by Accuray. Unless Accuray andCyberHeart otherwise agree, any amount recovered in any such suit or action, whether by judgment or settlement, shall be paid to and retained by Accuray,unless the Third-Party Infringement was in the CyberHeart Field. For Third-Party Infringements in the CyberHeart Field, Accuray shall be reimbursed out ofAccuray’s own recovery Accuray’s reasonable expenses (including without limitation attorney’s fees) and for any payments made to CyberHeart for anyreasonable expenses incurred by CyberHeart in providing any assistance and cooperation requested by and provided to Accuray in connection with such suitor action. Any remaining amount shall be allocated twenty percent (20%) to Accuray and eighty percent (80%) to CyberHeart.10.2.2.2 by CyberHeart. In the event Accuray (i) has not filed a suit or action to enforce the Accuray Patents withrespect to a Third-Party Infringement of Accuray Patents in the CyberHeart Field within ninety (90) days of learning of such Third-Party Infringement, (ii)ceases to use Reasonable Commercial Efforts with respect to such suit or action, or (iii) provides written notice to CyberHeart of its refusal to file or pursuesuch suit or action, then, upon CyberHeart’s prior written notice, CyberHeart shall have the right, but not the obligation, to bring any appropriate suit oraction to enforce any such Accuray Patents. Notwithstanding the foregoing, CyberHeart shall not have such right even if Accuray does not file or pursue asuit or action under all patent claims that may be infringed, (i) if Accuray has filed during such ninety (90) day period, and continues to use ReasonableCommercial Efforts to pursue a suit or action to enforce the Accuray Patents, under some of such patent claims, that is reasonably anticipated by Accuray toterminate such Third-Party Infringement, or (ii) if Accuray reasonably determines filing a suit or action would materially harm its business. If CyberHeartundertakes such a suit or action, Accuray shall reasonably join as a party to such suit or action,33take such other actions as are necessary for standing or to otherwise bring or pursue such action, and reasonably cooperate with CyberHeart, includingwithout limitation executing all papers, causing its employees to testify when requested, making available relevant records, papers, information, samples,specimens, and the like, and performing such other acts as may be reasonably requested by CyberHeart. CyberHeart shall bear the reasonable expensesincurred by Accuray in providing assistance and cooperation pursuant to this Section 10.2.2.2 as requested by CyberHeart. Accuray may, at its expense, berepresented by counsel of its choice. Unless Accuray and CyberHeart otherwise agree, any amount recovered in such suit or action, whether by judgment orsettlement, after deducting CyberHeart’s reasonable expenses (including without limitation any attorneys’ fees) and subject to payment to Accuray of anyreasonable expenses incurred by Accuray in providing assistance and cooperation as requested by CyberHeart, shall be paid to or retained entirely byCyberHeart. This Section 10.2.2.2 shall not give CyberHeart the right to enforce the Accuray Patents against any Third-Party Infringement outside theCyberHeart Field.10.2.3 Enforcement of CyberHeart Patents.10.2.3.1 by CyberHeart. Subject to Section 10.2.3.2, CyberHeart shall have the first right, but not theobligation, to file and pursue any suit or action for any Third-Party Infringement of the CyberHeart Patents, including without limitation in the Accuray Field,and CyberHeart shall not, absent Accuray’s prior written permission, enter into any settlement or other arrangement which grants a license or freedom tooperate (including without limitation by way of a covenant not to sue) to any third party under the CyberHeart Patents which would infringe upon or violateAccuray’s exclusivity under this Agreement or that otherwise is for any activities in or for the Accuray Field. Unless Accuray and CyberHeart otherwiseagree, any amount recovered in any such suit or action, whether by judgment or settlement, shall be paid to and retained by CyberHeart, unless the Third-Party Infringement was in the Accuray Field. For Third-Party Infringements in the Accuray Field, CyberHeart shall be reimbursed out of CyberHeart’s ownrecovery CyberHeart’s reasonable expenses (including without limitation attorney’s fees) and for any payments made to Accuray for any reasonable expensesincurred by Accuray in providing any assistance and cooperation requested by and provided to CyberHeart in connection with such suit or action. Anyremaining amount shall be allocated fifty percent (50%) to CyberHeart and fifty percent (50%) to Accuray.10.2.3.2 by Accuray. In the event CyberHeart (i) has not filed a suit or action with respect to a Third-PartyInfringement of CyberHeart Patents in the Accuray Field within ninety (90) days of learning of such Third-Party Infringement, (ii) ceases to use diligent effortswith respect to such suit or action, or (iii) provides written notice to Accuray of its refusal to file or pursue such suit or action, then, upon Accuray’s priorwritten notice, Accuray shall have the right, but not the obligation, to bring any appropriate suit or action to enforce any such CyberHeart Patents.Notwithstanding the foregoing, Accuray shall not have such right even if CyberHeart does not file or pursue a suit or action under all patent claims that maybe infringed, (i) if CyberHeart has filed during such ninety (90) day period, and continues to use Reasonable Commercial Efforts to pursue a suit or action toenforce the CyberHeart Patents, under some of such patent claims, that is reasonably anticipated by CyberHeart to terminate such34Third-Party Infringement, or (ii) if CyberHeart reasonably determines filing a suit or action would materially harm its business. If Accuray undertakes such asuit or action, CyberHeart shall reasonably join as a party to such suit or action, take such other actions as are necessary for standing or to otherwise bring orpursue such action, and CyberHeart shall reasonably cooperate with Accuray, including without limitation executing all papers, causing its employees totestify when requested, making available relevant records, papers, information, samples, specimens, and the like, and performing such other acts as may bereasonably requested by Accuray. Accuray shall bear the reasonable expenses incurred by CyberHeart in providing assistance and cooperation pursuant tothis Section 10.2.3.2 as requested by Accuray. CyberHeart may, at its expense, be represented by counsel of its choice. Unless Accuray and CyberHeartotherwise agree, any amount recovered in such suit or action, whether by judgment or settlement, after deducting Accuray’s reasonable expenses (includingwithout limitation any attorneys’ fees) and subject to payment to CyberHeart of any reasonable expenses incurred by CyberHeart in providing assistance andcooperation as requested by Accuray, shall be paid to or retained entirely by Accuray. This Section 10.2.3.2 shall not give Accuray the right to enforce anyCyberHeart Patent against any Third-Party Infringement in the CyberHeart Field.11. TERM AND TERMINATION.11.1 Term. This Agreement shall become effective on the Effective Date and shall remain in effect until the last to expire of theAccuray Patents unless earlier terminated in accordance with Section 11.2, Section 11.3, or Section 11.4 (the “Term”). This Agreement shall not beterminated, except in accordance with Section 11.2, Section 11.3, or Section 11.4.11.2 Termination for Cause. In the event of a material breach of this Agreement, the non-breaching Party shall be entitled to terminatethis Agreement by written notice to the breaching Party, if such breach is not cured within ninety (90) days after written notice is given by the non-breachingParty to the breaching Party specifying the breach. However, if the Party alleged to be in breach of this Agreement disputes such breach and submits suchdispute for dispute resolution pursuant to Article 16 within such ninety (90) day period, the non-breaching Party shall not have the right to terminate thisAgreement unless the dispute resolution provisions of Article 16 result in a determination that this Agreement was materially breached by the other Party, andthe breaching Party fails to cure such breach within ninety (90) days after such determination.11.3 Accuray’s Right to Terminate. All terminations under this Section 11.3 shall be subject to dispute resolution prior to terminationin the same manner as terminations for breach, as set forth in the last sentence of Section 11.2.11.3.1 For CyberHeart’s Failure to Receive Funding. Accuray shall have the right to terminate this Agreement upon ninety (90)days’ prior written notice in the event CyberHeart has not received a total of *** in financing by the second (2) anniversary of the Effective Date.Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.35nd11.3.2 For CyberHeart’s Failure to Include Accuray Technology in CyberHeart Products. Accuray shall have the right toterminate this Agreement immediately if CyberHeart or its designee as described in Section 2.2.8.2, (A) develops and/or markets a CyberHeart Product thatdoes not contain Accuray Technology and that is not covered by an Accuray Patent or (B) does not develop and does not market a product that (i) does containAccuray Technology, (ii) is covered by an Accuray Patent (iii) is for use with a CyberKnife System, or (iv) is for use with a CyberHeart System that derivesfrom a CyberKnife System and uses Accuray Technology or is covered by an Accuray Patent.11.3.3 For CyberHeart’s Failure to use Reasonable Commercial Efforts to Develop and Sell CyberHeart Products. IfCyberHeart (including, for clarity, any successor or assignee of CyberHeart in connection with a Change of Control) fails to use Reasonable CommercialEfforts to develop and/or sell CyberHeart Products that (i) incorporate Accuray Technology, (ii) are covered by Accuray Patents or (iii) are for use withCyberKnife Systems, Accuray may terminate this Agreement upon sixty (60) days’ prior written notice.11.4 Termination for Convenience by CyberHeart. CyberHeart shall have the right to terminate this Agreement, in whole or in part, forconvenience upon thirty (30) days’ prior written notice to Accuray.11.5 Effect of Termination or Expiration.11.5.1 Generally. In the event of termination of this Agreement by either Party pursuant to Section 11.2, Section 11.3, orSection 11.4 or expiration of this Agreement pursuant to Section 11.1, all rights and licenses granted by one Party to the other pursuant to Article 2, shallcontinue in full force and effect, provided that:11.5.1.1 no rights or licenses to CyberHeart shall survive, or have further force or effect, if the Agreement isterminated by CyberHeart under Section 11.4;11.5.1.2 no rights or licenses to CyberHeart shall survive, or have further force or effect, if the Agreement isterminated by Accuray under Section 11.3;11.5.1.3 no rights or licenses to CyberHeart shall survive, or have further force or effect, if the Agreement isterminated by Accuray (A) under Section 11.2 due to CyberHeart’s (i) material and negligent or willful breach of any provision in Article 2, (ii) breach forfailure to meet its diligence obligations under Article 7, (iii) negligent or willful breach of its obligations under Section 9.1.2, (iv) material and negligent orwillful breach of it obligations under Article 14, (v) material breach of its obligations under Section 15.3, (vi) breach of its obligations under Section 17.2, , or(vii) for breach of Section 11.7 if CyberHeart commences discussions through the exchange of Confidential Information with an Accuray Competitor or entersinto a Change of Control transaction with an Accuray Competitor or (B) for cause under the Manufacturing and Supply Agreement. Notwithstanding theforegoing, with respect to termination for any non-willful breach of any of Articles 2 and 14, Sections 9.1.2 and 17.2, or the Manufacturing and SupplyAgreement, this Section 11.5.1.3 shall only apply if36Accuray has no adequate and reasonable remedy in the absence of termination of this Agreement.11.5.1.4 subject to Section 11.5.1.3, if the Agreement is terminated by Accuray, CyberHeart’s licenses underArticle 2, to the extent any such rights survive, shall not include any license to any Accuray Technology (or any Intellectual Property Rights) that areconceived or created by Accuray after the effective date of such termination.11.5.1.5 if the Agreement is terminated by CyberHeart pursuant to Section 11.2, Accuray’s rights and licensesunder this Agreement shall not include any right or license to any CyberHeart Technology (or any Intellectual Property Rights) that are conceived or createdafter the effective date of termination; and, for any material breach that is due to Accuray’s negligent or willful conduct, and for which CyberHeart has noother adequate and reasonable remedy, Accuray’s license in Section 2.2.6 shall terminate in its entirety.11.5.1.6 Notwithstanding the foregoing, all of CyberHeart’s rights, licenses, and exclusivity in this Agreementshall survive with respect to all Accuray Improvements, and Intellectual Property Rights that CyberHeart has agreed to assign to Accuray pursuant to Section9.1.2, regardless of the reason for termination or expiration.11.5.1.7 In addition, each Party shall be entitled to retain, and shall be deemed to have a right and license tocontinue to use and disclose in accordance with this Agreement, to the same extent then existing, any Confidential Information of the other Party disclosedduring the Term to the extent such Party’s rights and licenses under the Accuray Technology (in the case of rights and licenses to CyberHeart) or under theCyberHeart Technology (in the case of rights and licenses to Accuray) survive. Upon each Party’s decision to terminate use and disclosure of suchConfidential Information of the other Party, such Party shall return, or at the instruction of the disclosing Party, destroy, the disclosing Party’s retainedConfidential Information.11.5.1.8 For avoidance of doubt, no termination or expiration of this Agreement shall be deemed to terminate orotherwise extinguish any rights of any customers of a CyberKnife System under their then current contracts for use of such CyberKnife System, and notermination or expiration of this Agreement shall terminate or otherwise affect or extinguish the rights or licenses of any customer for any CyberHeart Products. If a customer of a CyberHeart Product materially breaches its user agreement with CyberHeart, or any agreement with Accuray related to such CyberHeartProduct, through no fault of CyberHeart, whether by inducement or otherwise, then any licenses to CyberHeart under this Agreement shall not be extinguisheddue to such customer breach.11.5.1.9 No termination by any Party or the expiration of this Agreement shall relieve either Party of any liabilityaccrued hereunder prior to its termination.11.5.2 Development Services. Unless otherwise instructed by CyberHeart, upon the termination of this Agreement orany relevant Statement of Work, Accuray shall:3711.5.2.1 immediately cease all performance of the terminated Development Services and furnish to CyberHeartall Deliverables and work in progress; and11.5.2.2 within thirty (30) days, provide to CyberHeart a full accounting itemizing all Development Servicesperformed prior to termination, for which Accuray has not yet received payment and is entitled to receive payment.11.5.2.3 In the event CyberHeart instructs Accuray to continue to perform any Development Services pursuant toany outstanding purchase order under any Statement of Work, all relevant provisions applicable to such performance shall continue to survive as necessaryfor Accuray to fulfill such obligations.11.5.3 Termination Pursuant to Section 11.4. If CyberHeart terminates this Agreement pursuant to Section 11.4,CyberHeart shall compensate Accuray for all costs incurred to wind down any ongoing activities (including without limitation any Development Services ormanufacturing, installation, or maintenance services) being performed by Accuray as of the effective date of such termination and reasonably incurred byAccuray thereafter, and CyberHeart shall have no right to enter into agreements or arrangements with Accuray Competitors for a period of two (2) yearsfollowing such termination.11.6 Survival. The following provisions shall survive any termination or expiration of this Agreement: (i) Articles 1, 5 (only withrespect to activities occurring or commenced during the Term), 8 (solely for amounts owed during the Term but not paid), 9, 10 (but only to the extent rightsand licenses under Article 2 survive pursuant to Section 11.5), 12, 13, 14, 16, and 17, (ii) Sections 2.2.7.1 (if any of CyberHeart’s licenses under Article 2survive pursuant to Section 11.5), 3.5 (but only upon termination by CyberHeart under Section 11.2), 3.9 (for contractors used in the exercise of any ofAccuray’s surviving rights), 3.10 (for a period of five years after termination or expiration, or such longer period as such records are required for a governmentfiling), 4.3 (for a final report); 6.1, 6.2 and 6.4 (but, as to Sections 6.1, 6.2, and 6.4, only if any of CyberHeart’s license rights under Article 2 survivepursuant to Section 11.5, other than any rights that survive under Section 11.5.1.6), 6.5 and 6.6 (if any of CyberHeart’s licenses under Article 2 survivepursuant to Section 11.5, other than any rights that survive under Section 11.5.1.6), 11.5, 11.6, 15.1 (but only to the extent licenses under Article 2 survivepursuant to Section 11.5), 15.2, 15.3, 15.4, 15.5, and 15.6 (but only to the extent CyberHeart’s licenses under Article 2 survive pursuant to Section 11.5)and (iii) the Manufacturing and Supply Agreement (but only to the extent CyberHeart’s licenses under Article 2 survive pursuant to Section 11.5). For theavoidance of doubt, in any case where the only surviving rights of CyberHeart under this Agreement are those set forth in Section 11.5.1.6, theManufacturing and Supply Agreement will terminate in its entirety. Except as set forth in Section 11.5 and 11.6, all other terms and conditions of thisAgreement shall terminate and have no further force or effect, upon any termination or expiration of this Agreement.11.7 Change of Control. In the event of a proposed Change of Control of CyberHeart, whether initiated by CyberHeart or a thirdparty, CyberHeart shall notify Accuray that CyberHeart is considering a Change of Control at any time prior to closing of the Change of Control.Notwithstanding the above or anything else in this Agreement, CyberHeart shall not38commence (defined as the exchange of Confidential Information) or enter into any Change of Control transaction with any Accuray Competitor.12. BANKRUPTCY.12.1 Bankruptcy. All rights and licenses granted to each Party pursuant to this Agreement are, and shall otherwise be deemed to be,for purposes of Section 365(n) of Title 11 of the U.S. Code (the “Bankruptcy Code”), licenses to rights of “intellectual property” as such term is usedthereunder. Notwithstanding any provision contained herein to the contrary, if either Party is under any proceeding under the Bankruptcy Code and the trusteein bankruptcy of such Party, or such Party as a debtor in possession, rightfully elects to reject this Agreement, the other may, pursuant to Sections 365(n)(1)and (2) of the Bankruptcy Code, retain any and all of their respective rights hereunder, to the maximum extent permitted by law, subject to making thepayments specified herein, if any.13. LIMITATION OF LIABILITY.13.1 EXCEPT FOR EITHER PARTY’S BREACH OF THE REPRESENTATIONS AND WARRANTIES UNDER SECTION15.1, BREACH OF CONFIDENTIALITY OBLIGATIONS, IN NO EVENT SHALL EITHER PARTY HAVE ANY LIABILITY FOR ANY INDIRECT,INCIDENTAL, SPECIAL, CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES, HOWEVER CAUSED, AND ON ANY THEORY OFLIABILITY, WHETHER FOR BREACH OF CONTRACT, TORT (INCLUDING WITHOUT LIMITATION NEGLIGENCE) OR OTHERWISE,ARISING OUT OF OR RELATED TO THIS AGREEMENT, INCLUDING WITHOUT LIMITATION LOSS OF ANTICIPATED PROFITS, EVEN IFSUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. NOTWITHSTANDING THIS ARTICLE 13, NOTHING INTHIS AGREEMENT SHALL EXCLUDE LIABILITY TO THE EXTENT THAT SUCH LIABILITY MAY NOT BE EXCLUDED OR LIMITED BYAPPLICABLE LAW.14. CONFIDENTIALITY.14.1 Confidential Information. “Confidential Information” shall mean any trade secrets, confidential data or other confidentialinformation that is disclosed by one Party (“Disclosing Party”) to the other Party (“Receiving Party”), which (i) if disclosed in writing, is marked“Confidential,” “Proprietary,” or in some other manner to indicate its confidential nature, (ii) if disclosed orally, is designated as confidential at the time ofdisclosure and confirmed in writing as confidential within thirty (30) days after its oral disclosure, which confirmation is marked in a manner to indicate itsconfidential nature and delivered to the Receiving Party within such thirty (30) day period, or (iii) given the contents thereof or circumstances surrounding itsdisclosure, would reasonably be considered by an objective third party to be the other Party’s Confidential Information.3914.2 Exclusions. Notwithstanding the foregoing, Confidential Information shall not include any information which the ReceivingParty can establish (i) was publicly known or made available in the public domain prior to the time of disclosure by the Disclosing Party; (ii) becomespublicly known or made available after disclosure to the Receiving Party through no action or inaction of the Receiving Party; (iii) is in the possession of theReceiving Party, without confidentiality restrictions, at the time of disclosure by the Disclosing Party as shown by the Receiving Party’s files and recordsimmediately prior to the time of disclosure; (iv) disclosed to the Receiving Party without restriction by a third party who had a right to disclose and was notunder an obligation of confidence to the Disclosing Party; or (v) is independently developed by the Receiving Party without use of or reference to theConfidential Information of the Disclosing Party.14.3 Non-Use and Non-Disclosure. Each Party agrees to use the Confidential Information of the other Party solely for the purposes ofexercising its rights or performing its obligations under this Agreement. Each Party further agrees not to disclose any Confidential Information of the otherParty to any third parties other than those third parties who are bound, prior to receiving any Confidential Information, by confidentiality obligations at leastas protective as those in this Agreement.14.4 Maintenance of Confidentiality. Each Party agrees that it shall take reasonable measures to protect the secrecy of and avoidunauthorized disclosure and unauthorized use of the Confidential Information of the other Party. Without limiting the foregoing, each Party shall take at leastthose measures that such Party takes to protect its own confidential information of a similar nature, but in no event less than reasonable measures. Each Partyshall reproduce the other Party’s proprietary rights notices on all copies, in the same manner in which such notices were set forth in or on the original. EachParty shall immediately notify the other Party in the event of any unauthorized use or disclosure of the Confidential Information of the Disclosing Party.14.5 Non-Disclosure of Terms. Each Party agrees not to disclose to any third party the terms of this Agreement (including withoutlimitation all Exhibits) without the prior written consent of the other Party, except to such Party’s attorneys, advisors, investors, potential investors, and otherson a need to know basis under circumstances that reasonably ensure the confidentiality thereof, or in connection with financing activities, securities filings,mergers, acquisitions, or the like.14.6 Permitted Disclosures. Nothing in this Agreement shall be deemed to prohibit the Receiving Party from disclosing anyConfidential Information to the extent (i) required by law or (ii) pursuant to the written consent of the Disclosing Party; provided, however, that in the event ofsuch requirement, prior to disclosing any Confidential Information, the Receiving Party shall notify the Disclosing Party of the scope and source of such legalrequirement and shall, to the extent reasonably possible, give the Disclosing Party the opportunity to challenge the need to disclose and/or limit the scope ofdisclosed information.4015. REPRESENTATIONS, WARRANTIES, INDEMNIFICATION, AND INSURANCE.15.1 Representations and Warranties.15.1.1 General. Each Party hereby represents and warrants that it has the full right and authority to enter into thisAgreement; that the consummation of the transactions contemplated hereunder do not violate or breach the terms of any other agreement with any third party;and it has not previously made, and during the Term shall not make, any commitment or grant or authorization of rights which are in conflict in any materialway with the rights, licenses, or exclusivity granted to the other Party herein.15.1.2 Intellectual Property Rights. Accuray hereby represents and warrants that (i) it is the sole and exclusive owner ofthe Technology set forth in Exhibit B and the Patents set forth in Exhibit B, and has the right with respect thereto to grant the exclusivity, rights, and licensesthereto to CyberHeart as set forth herein; (ii) it has not received any written notice from any third party that the CyberKnife System, component thereof, ormethod of making or manufacturing any of the foregoing infringes or misappropriates the rights of any third party; (iii) it is not aware of any facts orcircumstances providing the basis for any third party making any offer or delivering any infringement notice under (ii), above; (iv) upon execution of thisAgreement by both Parties, to its actual knowledge, the rights and licenses granted by Accuray to CyberHeart in this Agreement shall be fully valid andenforceable in accordance with their terms, including without limitation with respect to the Intellectual Property Rights listed in Exhibit B; (v) it shall notdeliver any Technology to CyberHeart under this Agreement unless, to its actual knowledge, it has the right and license to authorize CyberHeart to exercise itsrights and licenses using such Technology; and (vi) it is not aware of any Patents that are necessary or useful for CyberHeart Products or CyberKnifeComponents in the CyberHeart Field that are owned by Accuray, its Affiliates, other licensees, or contractors, that are not licensed to CyberHeart as AccurayPatents under this Agreement.15.2 Accuray Indemnification.15.2.1 Scope. Accuray shall: (i) at its sole option and expense, defend CyberHeart, its Affiliates, and their respectiveagents, employees, and officers (each, a “CyberHeart Indemnitee”) against, or settle, any suit, complaint, demand, or action by a third party against anyCyberHeart Indemnitee arising out of (a) a claim by a third party that (1) the Development Services performed by Accuray, (2) the use, disclosure or otherexploitation by or under authority of either Party of the Deliverables or Technology delivered by Accuray hereunder (including without limitation as part of anyCyberHeart Product), or (3) any use, disclosure or exploitation of any CyberHeart Patents or CyberHeart Technology, by Accuray or any party receiving rightsthereunder directly or indirectly from Accuray, other than as necessary to perform the Development Services on behalf of CyberHeart in accordance with aStatement of Work then in effect, violate, infringe, or otherwise misappropriate the Intellectual Property Rights of a third party (each of (a)(1)–(3), an “AccurayInfringement Claim”), (b) any breach of its representations and warranties under Section 15.1 or under the Manufacture and Supply Agreement, (c) the actsor omissions of any Affiliate or Subcontractor used to exercise Accuray’s rights or fulfill its obligations hereunder or under the Manufacturing and Supply41Agreement or any negligent or reckless acts or omissions, or willful misconduct, of Accuray or its Affiliates, or (d) any disclosure, use or exploitation of anyCyberHeart Technology or CyberHeart Patents by Accuray or any party receiving rights or access thereto directly or indirectly (only to the extent authorized inwriting) from Accuray, other than as necessary to perform the Development Services on behalf of CyberHeart under this Agreement in accordance with aStatement of Work then in effect (other than Infringement Claims) ((b), (c), and (d) referred to as an “Accuray General Claim,” and, together with an AccurayInfringement Claim, each an “Accuray Claim”) and (ii) indemnify each CyberHeart Indemnitee against any and all damages, cost, expenses, losses, andliabilities, including without limitation reasonable attorneys’ fees, which are awarded in connection with, or which are included in any settlement amounts of,any such Accuray Claim; provided, however, that Accuray indemnification obligations shall not apply to the extent that (1) such Accuray Claim arises out ofany breach by CyberHeart of any of its representations, warranties, or covenants in this Agreement, or (2) such Accuray Claim arises out of the negligence,recklessness or willful misconduct of CyberHeart or its Affiliate.15.2.2 Requirements. Accuray’s indemnity obligations above shall be relieved to the extent that CyberHeart fails to(i) give Accuray written notice thereof and such failure prejudices Accuray’s ability to defend the Accuray Claim or (ii) provide Accuray, at Accuray’s expense,with necessary information, cooperation, and assistance in connection with such Accuray Claim. CyberHeart shall have the right to participate, at its optionand at its own expense, in any such Accuray Claim. No settlement of an Accuray Infringement Claim that involves a remedy other than payment of money byAccuray shall be agreed to and entered into without the consent of CyberHeart, whose consent shall not be unreasonably withheld or delayed. Accuray shallnot be responsible under this Section 15.2 for any cost, expenses, or settlements incurred without Accuray’s prior written consent, such consent not to beunreasonably withheld or delayed.15.2.3 Remedies. Without limiting the indemnification obligation set forth in Section 15.2.1, if it is determined, or ifAccuray reasonably believes, that the Deliverables or any Accuray Technology, or any portion thereof, infringes any third party Intellectual Property Rights,then Accuray shall, at its option and expense: (i) procure for CyberHeart the right to continue using such Deliverable or Accuray Technology, or portionthereof, in accordance with this Agreement; (ii) replace the relevant Deliverable or Accuray Technology or portion thereof with a substantially similar non-infringing alternative; or (iii) modify such Deliverable or Accuray Technology with an at least functionally equivalent modification so that CyberHeart’s usebecomes non-infringing.15.2.4 Exclusions. Except for Accuray Claims arising out of the use, disclosure, or other exploitation of CyberHeartPatents or CyberHeart Technology other than as necessary to perform the Development Services on behalf of CyberHeart under this Agreement in accordancewith a Statement of Work then in effect, Accuray shall have no liability under Section 15.2.1 for any Accuray Claim to the extent the Accuray Claim is solelyand exclusively based on (i) any Technology invented by CyberHeart, and not by Accuray or its Affiliates, that is incorporated in any Deliverable or used inperformance of the relevant Development Services or42(ii) any portion of any Technology invented by CyberHeart, and not by Accuray or its Affiliates, that is not based on, and which does not incorporate, anyDeliverable or Accuray Technology, or any portion thereof.15.3 CyberHeart Indemnification.15.3.1 Scope. CyberHeart shall: (i) at its sole option and expense, defend Accuray, its Affiliates, and their respectiveagents, employees, and officers (each an “Accuray Indemnitee”) against, or settle, any suit, complaint, demand, or action by a third party (a “Claim”) againstany Accuray Indemnitee arising out of (a) a claim by a third party that any Technology conceived or created by CyberHeart, or on behalf of CyberHeart byAccuray or its Affiliates, and not Accuray Technology conceived or created by Accuray or its Affiliates, and incorporated in any Deliverable or used inperformance of the relevant Development Services, or any portion of any such Technology not based on, and which does not incorporate any AccurayTechnology, as delivered to Accuray hereunder violates, infringes or otherwise misappropriates the Intellectual Property Rights of a third party (“CyberHeartInfringement Claim”), (b) the disclosure, use, or exploitation of any Accuray Technology or Accuray Patents outside of the CyberHeart Field by CyberHeartor any party receiving rights thereunder directly or indirectly from CyberHeart, (c) any use of a CyberHeart Product in the CyberHeart Field, or (d) any breachof its representations and warranties under Section 15.1 or the negligence, recklessness, or willful misconduct of CyberHeart or its Affiliate (each of (a), (b),(c), and (d), a “CyberHeart Claim”) and (ii) indemnify each Accuray Indemnitee against any and all damages, cost, expenses, losses, and liabilities,including without limitation reasonable attorneys’ fees, which are awarded in connection with, or which are included in any settlement amounts of, any suchCyberHeart Claim; provided, however, that CyberHeart’s indemnification obligations shall not apply to the extent that (1) such CyberHeart Claim arises outof any breach by Accuray of any of its representations, warranties, or covenants in this Agreement or the Manufacturing and Supply Agreement, or (2) suchCyberHeart Claim arises out of the negligence, recklessness or willful misconduct of Accuray, its Affiliates, or otherwise out of the acts or omissions ofAffiliates and contractors for which Accuray is responsible in Section 15.1.15.3.2 Requirements. CyberHeart’s indemnity obligations above shall be relieved to the extent that any AccurayIndemnitee fails to (i) give CyberHeart written notice thereof and such failure prejudices CyberHeart’s ability to defend the CyberHeart Claim; or (ii) provideCyberHeart, at CyberHeart’s expense, with information, cooperation, and assistance in connection with such CyberHeart Claim. Any Accuray Indemniteeshall have the right to participate, at its option and at its own expense, in any such CyberHeart Claim. No settlement of a CyberHeart Infringement Claim thatinvolves a remedy other than payment of money by CyberHeart shall be agreed to and entered into without the consent of Accuray, whose consent shall not beunreasonably withheld or delayed. CyberHeart shall not be responsible under this Section 15.3 for any cost, expenses, or settlements incurred withoutCyberHeart’s prior written consent, such consent not to be unreasonably withheld or delayed.15.3.3 Remedies. Without limiting the indemnification obligation set forth in Section 15.3, if it is determined, or ifCyberHeart reasonably believes, that any CyberHeart Technology, or any portion thereof, infringes any third party Intellectual Property43Rights, then CyberHeart shall have the right, at its option and expense: (i) to procure for Accuray the right to continue using such CyberHeart Technology, orportion thereof, sufficient to perform the Development Services under this Agreement; (ii) replace the relevant CyberHeart Technology or portion thereof with asubstantially similar non-infringing alternative sufficient to perform the Development Services; or (iii) modify such CyberHeart Technology with an at leastfunctionally equivalent modification so that Accuray’s use in performing the Development Services becomes non-infringing.15.3.4 Exclusions. CyberHeart shall have no liability under Section 15.3.1 for any CyberHeart Claim to the extent thatthe CyberHeart Claim is (i) a CyberHeart Infringement Claim against the CyberHeart Technology that is not required in order to perform the DevelopmentServices on behalf of CyberHeart under this Agreement in accordance with a Statement of Work then in effect and incorporated thereby by Accuray withoutrequest from CyberHeart, unless CyberHeart accepts such incorporation, whether passively or actively, in which case this Section 15.3.4 will not apply;(ii) results from any portion of any Technology to the extent conceived or created by or on behalf of Accuray or its Affiliates and not by CyberHeart or itsAffiliates; or (iii) results from any grossly negligent or willful material failure of Accuray or its Affiliates, or their contractors or suppliers, to comply with theterms of this Agreement or the Manufacturing and Supply Agreement, any manufacture or supply by or under authority of Accuray not in accordance withApplicable Law or any regulatory approval, or any negligent or reckless acts or omissions, or willful misconduct, of Accuray or its Affiliate or theircontractors or suppliers.15.4 SOLE REMEDY. SECTIONS 15.2 AND 15.3 STATE EACH PARTY’S SOLE AND EXCLUSIVE OBLIGATION ANDEACH PARTY’S SOLE AND EXCLUSIVE REMEDY FOR ANY ACCURAY CLAIMS THAT ARE THE SUBJECT OF SECTION 15.2 OR ANYCYBERHEART CLAIMS THAT ARE THE SUBJECT OF SECTION 15.3.15.5 Insurance. CyberHeart shall procure and maintain insurance, including without limitation product liability and otherappropriate insurance, adequate to cover its obligations hereunder in a manner which is consistent with normal business practices of prudent companiessimilarly situated at all times during which any CyberHeart Product is being clinically tested in human subjects or commercially distributed or sold. Forclarity, such insurance shall not be construed to create a limit of CyberHeart’s liability with respect to its indemnification obligations under this Article 15. CyberHeart shall provide Accuray with written evidence of such insurance upon request. CyberHeart shall provide Accuray with written notice at least thirty(30) days prior to the cancellation, non-renewal or material change in such insurance or self-insurance which materially adversely affects the rights of Accurayhereunder.15.6 WARRANTY DISCLAIMER. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTHIN THIS AGREEMENT AND THE MANUFACTURE AND SUPPLY AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATIONS,WARRANTIES OR CONDITIONS, EXPRESS OR IMPLIED, BY STATUTE, OR OTHERWISE, IN CONNECTION WITH THIS AGREEMENT ANDTHE MANUFACTURE AND SUPPLY AGREEMENT, AND EACH PARTY SPECIFICALLY DISCLAIMS ALL OTHER REPRESENTATIONS AND44WARRANTIES, INCLUDING WITHOUT LIMITATION ALL IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE,MERCHANTABILITY, AND NONINFRINGEMENT.16. DISPUTE RESOLUTION.16.1 Any dispute between the Parties regarding interpretation of or breach of a term or condition of this Agreement shall first bediscussed between the parties, either among the JSC (as provided in Section 4.1.4) or by the Project Manger and the CyberHeart Liaison in good faith in aneffort to achieve a reasonable resolution. If the dispute is not resolved within thirty (30) days by the JSC or Project Manager and CyberHeart Liaison, as thecase may be, then upon either Party’s election, shall be submitted to the CEOs of both Parties for resolution. If one or both CEOs of the Parties are on the JSC,or if thirty (30) days after submission of a dispute to the CEOs, no resolution has been made, then such dispute (i.e., a dispute within the scope of this Section16.1) shall be submitted to a committee of equal independent board members of each Party for resolution. If no resolution is reached within sixty (60) daysafter either Party notified the other of a dispute, then each Party shall have the right to have the matter resolved in accordance with Section 16.2.16.2 With respect to disputes regarding interpretation of or breach of a term or condition of this Agreement only, or the reasonablenessof any term or condition of a Manufacturing and Supply Agreement or of any term or condition of an Installation Agreement or Service Agreement upon failureto resolve any such dispute under Section 16.1, either Party may thereafter seek to resolve the dispute through binding arbitration in accordance with the Rulesof Arbitration of the American Arbitration Association (“AAA”) by one (1) arbitrator jointly selected by the Parties and qualified to settle disputes in themedical device industry and appointed in accordance with such rules and applying a Reasonable Commercial Efforts standard. If the arbitrator has not beenagreed upon by the parties within ten (10) business days after either Party’s request for arbitration, the arbitrator shall be selected in accordance with the Rulesof the AAA (or if the Rules to not provide selection procedures, by the chief executive of the AAA located in New York). The place of arbitration shall be SantaClara County, California. Any decision by the arbitrator shall be final and binding upon the Parties and may be entered as a final judgment in any court ofcompetent jurisdiction. The costs of such arbitration shall be shared equally by the Parties, and each Party shall bear its own expenses in connection with thearbitration.16.3 For clarity, this Article 16 shall not apply with respect to any research, development, design, marketing, pricing,commercialization, or other decision making concerning CyberKnife Systems or CyberHeart Products.17. GENERAL PROVISIONS.17.1 Notices. All notices called for under this Agreement shall be made in writing and shall be sent by personal delivery, reputableovernight courier service, or registered45or certified mail, return receipt requested, addressed to the other Party at the address set forth in the first paragraph of this Agreement. The date of such noticeshall be deemed to be the day it is delivered, if hand delivered, or five (5) days after deposit, if mailed.17.2 Assignment. This Agreement, and the rights and obligations hereunder, shall not be assigned or transferred in whole by eitherParty without the prior written consent of the other Party, which consent shall not be unreasonably withheld, provided that either Party may assign thisagreement in whole to any Affiliate or to any successor in interest (other than to an Accuray Competitor as to CyberHeart) to all or substantially all of thebusiness or assets of such Party to which this Agreement pertains, whether by operation of law, merger, purchase, or otherwise. Any attempted assignment inviolation of the foregoing shall be null and void and of no effect. Subject to the foregoing, this Agreement shall be binding and inure to the benefit of therespective Parties and their successors and permitted assigns, and the name of the Party appearing herein shall be deemed to change to the names of suchParty’s successors and permitted assigns upon such a transfer.17.3 Non-Solicitation. Neither Party shall solicit during the Term and until the IP Cutoff Date any of the employees of the other Partyto this Agreement without the prior consent of the President or Chief Executive Officer of the other Party. Notwithstanding anything in this 17.3 to thecontrary, the Parties hereby acknowledge and agree that each Party shall not be restricted from hiring any employee of the other Party if such employee seeksemployment and was not initially solicited or induced.17.4 Governing Law. This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State ofCalifornia, without reference to any principles of conflicts of law that would result in the application of the laws of any State other than the State ofCalifornia. Except as set forth in Article 16, any and all disputes arising under or in connection with this Agreement shall be submitted exclusively in the stateor federal courts located in Santa Clara County, California, the personal jurisdiction of which each of the Parties hereby irrevocably submits.17.5 Severability. If any term of this Agreement is held to be invalid or unenforceable for any reason, the remainder of the provisionsshall continue in full force and effect, and the Parties shall substitute a valid provision with the same intent and economic effect as nearly as possible.17.6 Non-Waiver. The failure of either Party at any time to require performance by the other Party of any provision hereof shall notaffect in any way, or act as a waiver of, the right to require the other Party to perform in accordance with this Agreement at any other time, nor shall the waiverof either Party of a breach of a provision of this Agreement be held or taken to be a waiver of the provision itself.17.7 Relationship of Parties. Nothing in this Agreement shall be construed to create a relationship of employer and employee,principal and agent, joint venture, partnership or association between the Parties, and neither Party shall have the power to obligate or bind the other in anymanner whatsoever.4617.8 Interpretation. This Agreement is to be deemed to have been drafted jointly by the Parties and any uncertainty or ambiguity shallnot be construed for or against either Party based on attribution of drafting to either Party. The captions and headings to this Agreement are for convenienceonly, and are to be of no force or effect in construing or interpreting any of the provisions of this Agreement. Unless specified to the contrary, references toArticles, Sections or Exhibits mean the particular Articles, Sections or Exhibits to this Agreement and references to this Agreement include all Exhibits hereto. Unless context otherwise clearly requires, whenever used in this Agreement, the words “include” or “including” shall be construed as incorporating, also, “butnot limited to” or “without limitation.”17.9 Headings. The paragraph headings appearing in this Agreement are inserted only as a matter of convenience and in no waydefine, limit, construe or describe the scope or extent of such paragraph, or in any way affect such agreements.17.10 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be consideredan original, but all of which together shall constitute one and the same instrument. Faxed signatures shall have the same legal effect as original signatures.17.11 Entire Agreement. This Agreement contains the Parties’ entire understanding with respect to the matters contained herein andsupersedes all prior oral or written understandings with respect to the subject matter hereof. There are no promises, covenants or undertakings other than thoseset forth herein, and neither Party is relying upon any representations or warranties except as set forth herein. This Agreement may not be modified except by awriting signed by both Parties.IN WITNESS WHEREOF, the Parties hereto have caused their duly authorized representatives to execute this Agreement.[Signature Page Follows]47ACCURAY, INC.CYBERHEART, INC. By:/s/ Euan S. ThomsonBy:/s/ Patrick J. Maguire Name: Euan S. ThomsonName: Patrick J. Maguire Title: President and CEOTitle: President and CEO By:/s/ Darren J. Milliken Name: Darren J. Milliken Title: Associate General Counsel 48Exhibit AAccuray CompetitorsBrainLAB AG and AffiliatesElekta AB and AffiliatesIBA and AffiliatesIntegra Radionics, Integra LifeSciences Corporation, Radionics and AffiliatesMitsubishi Heavy Industries and AffiliatesNorth American Scientific and AffiliatesNucletron and AffiliatesPhilips and AffiliatesSiemens AG and AffiliatesStill River Systems and AffiliatesTomoTherapy Incorporated and AffiliatesToshiba and AffiliatesVarian, Varian Medical Systems, and AffiliatesView Ray and AffiliatesAccuray Competitors shall include (i) any company or other entity that has an implied or actual contractual relationship with any of the entities listedin this Exhibit A above for the development, manufacturing, or sale of radiosurgery or radiotherapy devices in the Accuray Field, (ii) any entity that, after theEffective Date, sells any products that constitute substitute or otherwise competitive products of Accuray in the Accuray Field, and (iii) any entity that, afterthe Effective Date, falls under the definition in (i) above, including with entities that fall under the definition of (ii) above.A-1Exhibit BAccuray Patents and Accuray TechnologyAccurayReferenceTitlePatentNo.StatusP021APPARATUS FOR AND METHOD OF PERFORMING STEREOTAXICSURGERY5,207,223IssuedP030APPARATUS FOR AND METHOD OF CARRYING OUTSTEREOTAXIC RADIOSURGERY AND RADIOTHERAPY5,427,097IssuedP032APPARATUS AND METHOD FOR COMPENSATING FORRESPIRATORY AND PATIENT MOTION DURING TREATMENT6,144,875IssuedP032XFRAMELESS RADIOSURGERY TREATMENT SYSTEM ANDMETHOD6,778,850IssuedP032X2APPARATUS AND METHOD FOR COMPENSATING FORRESPIRATORY AND PATIENT MOTION DURING TREATMENT6,501,981IssuedP043APPARATUS AND METHOD FOR RADIOSURGERY7,171,257Issued********************************************* Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.B-1AccurayReferenceTitlePatentNo.Status *************************** A. Accuray Technology:Accuray technology includes technology used in connection with treatment planning and image guided radiosurgery and precisionradiotherapy for lesions, tumors, and conditions anywhere in the body when radiation treatment is indicated.B.Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.B-2Exhibit CCyberHeart Patents[Intentionally Omitted]C-1Exhibit DStatement of WorkTBD after the Effecitve DateD-1Exhibit EManufacturing and Supply AgreementThis Manufacturing and Supply Agreement (the “Manufacturing and Supply Agreement”) is entered into as of April 16, 2007 (the “Effective Date”)by and between Accuray Incorporated, a Delaware corporation, with its principal place of business at 1310 Chesapeake Terrace, Sunnyvale, CA 94089 (“Accuray”) and CyberHeart, Inc., a Delaware corporation, with its principal place of business at 707 Menlo Ave, Menlo Park, CA 94025 (“CyberHeart”). In this Manufacturing and Supply Agreement, Accuray and CyberHeart may be referred to each individually as a “Party” or collectively as “Parties.”WHEREAS, concurrently, on April 16, 2007, the Parties entered into a License and Development Agreement (the “License Agreement”) under whicheach Party granted the other certain rights and licenses to such Party’s technology and intellectual property and under which Accuray agreed to providedevelopment services to CyberHeart; andWHEREAS, the License Agreement contemplates that Accuray and CyberHeart will concurrently enter into this Manufacturing and SupplyAgreement to set forth the terms and conditions under which Accuray will supply CyberHeart Products (as defined in the License Agreement), or componentsthereof, to CyberHeart.NOW THEREFORE, the Parties hereto, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, andintending to be legally bound hereby, agree as follows:A. Definitions.1. All terms defined in the License Agreement shall have the same meaning when used in this Manufacturing and Supply Agreement, unlessexpressly indicated to the contrary.2. “Backup Manufacturing License” shall have the meaning set forth in Section D.1, below.3. “Purchase Order” shall have the meaning set forth in Section C.1, below.4. “Release Notice” shall mean a notification provided by Accuray to CyberHeart or by CyberHeart to Accuray, in accordance with SectionD.1, below.5. “Rolling Requirement Forecast” shall have the meaning set forth in Section C.2, below.6. “Site Readiness Guide” shall mean Accuray’s then current checklist for qualification of a customer end-user site before any CyberHeartProduct can be installed at such site. Such checklist shall include Accuray’s requirements for qualification of a site for a CyberKnife System.E-17. “Specifications” shall mean, with respect to a CyberHeart Product or CyberKnife Component: (i) the written specification mutually agreedto by the Parties and attached as of the Effective Date to this Manufacturing and Supply Agreement as Schedule 1, as amended from time to time; and (ii)other specifications that have been agreed upon by the Parties in writing.B. Exclusivity. The Parties agree that Accuray shall be the exclusive supplier of CyberKnife Components; provided, however, that CyberHeart maymanufacture or have manufactured CyberKnife Components solely to the extent permitted under (i) Section 6.1.2 of the License Agreement in cases whereAccuray does not agree to manufacture a CyberKnife Component, or (ii) a Backup Manufacturing License granted by Accuray to CyberHeart pursuant toSection D.1, below.C. Manufacture and Supply by Accuray.1. Terms and Conditions. If CyberHeart requests that Accuray manufacture a CyberHeart Product or CyberKnife Component pursuant toSection 6.1.2 of the License Agreement and Accuray agrees to such request, then Accuray shall be (i) obligated to supply CyberHeart with such CyberHeartProduct and (ii) manufacture and supply such CyberHeart Product using the same level of manufacture and supply scheduling priorities that it uses for themanufacture and supply of CyberKnife Systems. All supply of CyberHeart Products and CyberKnife Components by Accuray to CyberHeart shall besubject to the terms and conditions of this Manufacturing and Supply Agreement and any purchase order issued by CyberHeart will be identical to thatattached hereto as Schedule 2 (the “Purchase Order”). ANY TERMS OR CONDITIONS OF A PURCHASE ORDER OTHER THAN THOSECONTAINED IN SCHEDULE 2 OR ACKNOWLEDGMENT GIVEN OR RECEIVED SHALL HAVE NO EFFECT AND SUCH TERMS ANDCONDITIONS ARE HEREBY EXCLUDED AND REJECTED.2. Purchase Orders and Rolling Requirement Forecasts. At least four (4) months prior to the beginning of CyberHeart’s fiscal year, whichcommences on January of every calendar year, during the term of this Manufacturing and Supply Agreement, CyberHeart shall provide Accuray with awritten Purchase Order specifying CyberHeart’s expected requirements, plus or minus twenty percent (20%), for CyberHeart Products, or components thereof,and CyberKnife Components, as the case may be, during such annual period. Notwithstanding anything to the contrary, Accuray shall not be required toprovide more than ten (10) CyberHeart Modules during the first annual period. In addition to such annual Purchase Order, at least ten (10) days prior to thebeginning of each calendar month (M1) during the term of this Manufacturing and Supply Agreement, CyberHeart shall provide Accuray with a writtenforecast of CyberHeart’s expected requirements for CyberHeart Products, or components thereof, and CyberKnife Components during the following twelve(12) months broken down by months (M1–M12), which shall include projected order dates, quantities, and shipping dates (“Rolling Requirement Forecast”). In each Rolling Requirement Forecast, the terms set forth for (i) the first four (4) months (months M1–M4) shall be firm orders binding, subject to SectionC.3, below, on CyberHeart and (ii) the subsequent eight (8) months (months M5–M12) shall be nonbinding estimates. In the event CyberHeart requestsadditional quantity of CyberHeart Products, or components thereof, or CyberKnife Components, in excess of the amount set forth for the first four (4) monthsof the Rolling Requirement Forecast, Accuray shall use ReasonableE-2Commercial Efforts to deliver such quantities and shall promptly provide CyberHeart written notice in the event that Accuray shall not be able to deliver suchquantities. Notwithstanding anything to the contrary, the quantity of CyberHeart Products, or components thereof, and CyberKnife Components ordered forany annual Purchase Order by CyberHeart pursuant to this Manufacturing and Supply Agreement shall not increase or decrease by more than twenty percent(20%) of the quantity specified in the then-current Rolling Requirement Forecast. For components manufactured by Accuray during the prior calendar year,Accuray shall be required to accept any such forecast that is within such twenty percent (20%). In addition, if CyberHeart’s actual requirements for a givencalendar year are greater than or less than the expected requirements specified in the Purchase Order by greater than twenty percent (20%), then CyberHeartshall pay a penalty of Two-percent (2%).3. Pricing. Pricing shall be on a cost-plus *** basis where costs are based on direct costs plus overhead costs as determined using GenerallyAccepted Accounting Principals (GAAP) and based on twelve (12) month costs, unless adjusted by the Parties, such adjustment not to exceed once every six(6) months. Pricing will be quoted prior to each purchase order based on actual gross margin of CyberKnife Products over the previous six (6) months. Notwithstanding anything to the contrary, CyberHeart shall pay all amounts due and payable in connection with binding firm orders. All payments shall bemade in accordance with Section C.5, below.4. Site Qualification, Delivery, Packaging, and Labeling.a. Site Qualification. Accuray shall deliver CyberHeart Products and CyberKnife Components only (i) upon written request fromCyberHeart, and (ii) with respect to CyberHeart Products to be delivered to a customer end-user, upon written confirmation by Accuray that the end-user site,where such CyberHeart Product is to be installed, complies with all requirements of the Site Readiness Guide. If a CyberHeart Product is ready for deliveryand Accuray cannot deliver such CyberHeart Product due to failure of the customer end-user site to comply with the requirements of the Site Readiness Guide,then any inventory holding costs and costs to maintain such CyberHeart Product within Specifications that are incurred by Accuray will be at CyberHeart’sexpense and added to the invoice described in Section C.5 below. Any delays caused by failure of a customer end-user site to comply with the Site ReadinessGuide shall not be deemed to be a delay by Accuray or a failure by Accuray to meet any agreed upon shipment date from the applicable Purchase Order.b. Delivery. Accuray agrees to ship CyberHeart Products and CyberKnife Components to CyberHeart or other designateddestination on the agreed upon shipment dates committed to in the applicable Purchase Order. Accuray shall notify CyberHeart, in writing, of any potentialdelay in shipment date at the earliest possible time, including any delay due to failure of a customer end-user site to meet the requirements of the Site ReadinessGuide as described in Section C.4(a) above. Within seventy-two (72) hours of notification, Accuray shall (i) provide a plan for minimizing such delay, or (ii)where such delay is caused by failure to meet the Site Readiness Guide, a written description of such failure. Deliveries scheduled within one-hundred twenty(120) days cannot be rescheduled by CyberHeart. All CyberHeart Products and CyberKnife Components shipped to CyberHeart or its designated locationshall be delivered in accordance with the applicable Specifications and Purchase Order, and as amended through ECOConfidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.E-3procedures. Accuray will procure and add on charges for all shipping materials necessary to conform to the applicable Specifications and will not beresponsible for any damage or loss due to adherence to the applicable Specifications. Delivery terms are FCA Destination (Incoterms 2000), freight prepaidand added to invoice. Title to the CyberHeart Products and CyberKnife Components and risk of loss pass to CyberHeart on the date of receipt. All freight,insurance, and other shipping expenses from the point of shipment shall be borne by CyberHeart. The carrier shall be selected by CyberHeart, provided thatin the event no carrier is specified in the applicable Purchase Order or otherwise prior to shipment, Accuray shall select the carrier.c. Packaging, and Labeling All CyberHeart Products and CyberKnife Components shipped to CyberHeart or its designee shall befully packaged and labeled as specified in the applicable Specifications.5. Invoicing. Accuray shall submit invoices to CyberHeart no earlier than shipment by Accuray. All invoices shall be sent to CyberHeart inaccordance with Section 17.1 of the License Agreement, and each such invoice shall state CyberHeart’s price based on Section C.3, above, for the CyberHeartProducts, or portions thereof, and CyberKnife Components, and shall separately itemize any insurance, taxes, or other costs to be borne by CyberHeart.6. Warranties.a. Quality and Quality Control Warranty. Accuray agrees to maintain an ISO-13485 certified quality system and will maintainquality control procedures in compliance with applicable FDA Quality System Regulations (QSR). Accuray will notify CyberHeart of any proposed materialchanges in the CyberHeart Products or CyberKnife Components so that CyberHeart may determine whether such changes may affect the quality of suchCyberHeart Products or CyberKnife Components. The Parties shall cooperate on a timely basis on issues affecting product quality, including items such ascustomer complaints, reliability improvement, and field issues.b. Product Warranty. Accuray hereby represents and warrants that the CyberHeart Products or CyberKnife Components deliveredto CyberHeart by Accuray under this Manufacturing and Supply Agreement will be free of defects in workmanship and materials for a period of the earlier of(i) eighteen (18) months from the date of delivery to CyberHeart or (ii) twelve (12) months from the date of delivery to an end-user by or on behalf ofCyberHeart (“Warranty Period”). CyberHeart’s exclusive remedy and Accuray’s sole liability under this Section C.6(b) shall be for Accuray, at its option,either to repair or replace the CyberHeart Products or CyberKnife Components found to have a material manufacturing defect, if such defect is reported to theAccuray within the Warranty Period and CyberHeart, at Accuray’s request, provides Accuray with sufficient information to reproduce the defect in question. If Accuray determines that it cannot remedy such defect, it no longer has the equipment necessary to repair the defect, or it has no replacement CyberHeartProducts or CyberKnife Components, Accuray may, at its option, refund the purchase price paid to it by CyberHeart for such CyberHeart Products orCyberKnife Components. Accuray’s warranty hereunder shall be void if the CyberHeart Products or CyberKnife Components have been subjected to abuse,misuse, accident, alteration, neglect, extended storage by CyberHeart prior to installation, operationE-4inconsistent with the product documentation, or unauthorized repair, installation, or alteration by anyone other than Accuray.c. LIMITATION OF LIABILITY. EXCEPT AS PROVIDED IN SECTIONS C.6(A) AND (B), ABOVE, ACCURAY MAKESNO REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, UNDER OR RELATED TOTHIS MANUFACTURING AND SUPPLY AGREEMENT OR WITH RESPECT TO THE CYBERHEART PRODUCTS OR CYBERKNIFECOMPONENTS OR ANY SERVICES UNDER THIS MANUFACTURING AND SUPPLY AGREEMENT, INCLUDING WITHOUT LIMITATIONANY IMPLIED WARRANTY OF MERCHANTABILITY, WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, OR WARRANTY OF NON-INFRINGEMENT, AND ALL SUCH WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED. IN NO EVENT SHALL ACCURAY BE LIABLEUNDER, AND CYBERHEART COVENANTS NOT TO BRING, ANY CLAIM OR CLAIMS FOR DAMAGES ARISING FROM THISMANUFACTURING AND SUPPLY AGREEMENT IN EXCESS OF THE AMOUNTS PAID TO ACCURAY BY CYBERHEART UNDER THISMANUFACTURING AND SUPPLY AGREEMENT, OR FOR SPECIAL, CONSEQUENTIAL, INDIRECT, EXEMPLARY, OR PUNITIVEDAMAGES, WHETHER OR NOT SUCH DAMAGES WERE FORESEEABLE AND EVEN IF ADVISED OF THE POSSIBILITY OF THE SAME.7. Shortage of Supply. Accuray shall notify CyberHeart as soon as possible if Accuray has any reason to believe that it may be unable todeliver CyberHeart Products or CyberKnife Components in accordance with CyberHeart’s Purchase Orders, including if Accuray is experiencingmanufacturing difficulties that it believes create a reasonable possibility of disrupting supply in the future. In such event, the Parties shall meet and cooperatereasonably in order to formulate a plan in an effort to avoid any disruption of supply to CyberHeart. With respect to CyberKnife Components which aresupplied to Accuray by a single source supplier, Accuray will have discretion to qualify and engage a second source supplier within nine (9) months of theearlier of the date of (i) its decision to seek a second source for such CyberKnife Component or (ii) actual failure to supply or loss of such sole supplier ofsuch CyberKnife Component. During such nine (9) month period (A) CyberHeart shall have the right to identify and otherwise qualify a second sourcesupplier, but not the right to engage such second source supplier and (B) Accuray shall not be obligated to transfer any Manufacturing Technology to suchsecond source supplier. After (but not during) such nine (9) month period, to the extent applicable, Section D.1 shall apply and Accuray shall be obligated tointegrate any such second source supplier qualified and identified under such Section.8. Third Party Contractors. If Accuray uses any third party contractor in connection with performing its obligations under thisManufacturing and Supply Agreement, Accuray shall remain responsible for compliance with its obligations and shall be responsible for the actions andinactions of such contractor in connection therewith as if by Accuray.9. Process Changes. Accuray agrees that any material changes, contemplated by Accuray and, to the extent communicated to Accuray itscontractors, to processes, methods, equipment, raw materials, components, suppliers, or otherwise, related to manufacturing, testing, or quality control, ofthe CyberHeart Products or CyberKnife Components to be supplied byE-5Accuray to CyberHeart, shall be submitted to CyberHeart ninety (90) days in advance to allow CyberHeart an opportunity to evaluate such changes,including by inspecting, for no more than one (1) business day on reasonable advance notice, the applicable facilities. Accuray agrees to discuss suchchanges with CyberHeart in good faith if such changes would materially impact a CyberHeart Product.10. Sourced Components. If CyberHeart decides to source any small components of CyberHeart Products that are not CyberKnifeComponents directly from a third party supplier, it shall first notify Accuray in good faith in writing in advance of any initial purchase order for anyparticular component to obtain any such components from such third party. Accuray shall have sixty (60) days from the date of receipt of such notice to useReasonable Commercial Efforts to qualify such components for use with the CyberHeart Products to which they relate, which qualification shall not beunreasonably withheld. Upon qualification by Accuray of such components, Accuray shall be obligated to integrate such components into the manufacturingof the CyberHeart Product to which they relate and contractually source any such components from such third party supplier. Upon request by Accuray,CyberHeart shall assist Accuray in obtaining any such components directly as a source of component supply for CyberKnife Systems. Unless Accuraysources such small components from such third party for CyberKnife Systems, any delay or failure to supply by Accuray that is due to a delay or failure tosupply of components sourced under this Section C.10 shall not be deemed a delay by Accuray or failure to supply by Accuray under Section D below andany costs associated with such delays shall be paid by CyberHeart.D. Failure to Supply.1. Backup Manufacturing License.a. Release Notice by Accuray. Accuray shall within thirty (30) days deliver a Release Notice to CyberHeart if: (a) Accuray becomesinsolvent, (b) bankruptcy or insolvency proceedings are instituted against Accuray, (c) Accuray terminates the License Agreement pursuant to Section 11.2 ofthe License Agreement, but not due to any breach described in Section 11.5.1.3 of the License Agreement, or (d) Accuray determines, after expiration orexhaustion of any cure period or other remedy provisions of this Manufacturing and Supply Agreement with respect to a CyberKnife Component, that it isunable to manufacture or have manufactured within the applicable Specifications such CyberKnife Component. For clarity, no Release Notice shall beprovided unless the rights and licenses of CyberHeart under Article 2 of the License Agreement, survive pursuant to Article 11 of such agreement.b. Release Notice by CyberHeart. CyberHeart shall within thirty (30) days deliver a Release Notice to Accuray if after expiration orexhaustion of any cure period (including, without limitation, the second source qualification period under Section C.7 above) or other remedy provisions ofthis Manufacturing and Supply Agreement with respect to a CyberKnife Component, CyberHeart notifies Accuray, and Accuray confirms, that Accuray hassupplied less than seventy-five percent (75%) of the amount of such CyberKnife Component set forth in the portion of a Rolling Requirement Forecast that isbinding on Accuray for two (2) consecutive calendar quarters. For the avoidance of doubt, any delay due to failure of a customerE-6end-user site to meet the Site Readiness Guide requirements will not be counted under this Section D.1(b).c. License to Manufacture. Concurrent with delivery of a Release Notice, subject to the terms and conditions of this Manufacturingand Supply Agreement, Accuray hereby grants as of the date of such delivery of a Release Notice, to CyberHeart a non-exclusive right and license under theAccuray Patents, the Accuray Technology, and the Manufacturing Technology, without the right to grant or authorize sublicenses, to make and have made(solely as set forth in this Section D.1 and excluding Accuray Competitors) such CyberKnife Component, including the right to practice any method orprocess in connection with the foregoing (the “Backup Manufacturing License”). CyberHeart shall not enter into any agreement with any third partymanufacturer that (A) has a term of longer than twelve (12) months and/or (B) is less restrictive with respect to its manufacture for the benefit of CyberHeartthan the terms and conditions of this Manufacturing and Supply Agreement, and any failure by such third party manufacturer to comply with such termsand conditions of this Manufacturing and Supply Agreement shall be considered a breach of this Manufacturing and Supply Agreement by CyberHeart. Anysuch Backup Manufacturing License shall have a renewable term of no more than twelve (12) months. The above twelve (12) month restriction will not applyto any willful refusal by Accuray to supply CyberHeart with a CyberKnife Component consisting of the a linear accelerator that Accuray is otherwisecontinuing to manufacture for the CyberKnife.2. Manufacturing Technology and Assistance. If Accuray has not deposited into escrow the Manufacturing Technology pursuant to D.3below, Accuray shall deliver to CyberHeart within sixty (60) days after the delivery of a Release Notice the Manufacturing Technology necessary for themanufacture of the CyberKnife Component(s) for which such Release Notice was delivered, including all instructions, specifications, and otherManufacturing Technology and materials describing or used in the design or manufacture of such CyberKnife Component(s), a description of the suppliers,raw materials, components, processes, equipment, instructions, and instruments used for such manufacture, and other information and materials, all insufficient detail to reasonably enable CyberHeart and its contractors to manufacture and test (including quality control and testing), without need for furtherinformation, such CyberKnife Component(s) in the same manner as such manufacture is performed by or for Accuray. Without limiting the foregoing,Accuray shall use Reasonable Commercial Efforts to enable CyberHeart, and its contract manufacturer (for clarity, such other contract manufacturer shall notinclude an Accuray Competitor), if any, to use the materials that Accuray is required to disclose to manufacture such CyberKnife Component(s)in the samemanner as performed by Accuray or its contractor. CyberHeart and such contract manufacturers shall agree to obligations of confidentiality no less restrictivethan those contained in the License Agreement with respect to the Manufacturing Technology prior to disclosure of such Manufacturing Technology toCyberHeart and such contract manufacturers, respectively.3. Escrow. At any time after the Effective Date of the License Agreement, CyberHeart shall have the right to request that Accuray place inescrow a copy, and reasonable description, of the Manufacturing Technology that Accuray is required to disclose under Section D.2, above, for eachCyberKnife Component that may be subject to a Release Notice. Such deposit shall be made by Accuray as soon as reasonably possible, but no later thanone-hundred-eighty (180) days, after CyberHeart’s request. Such deposit shall be made under an escrowE-7agreement reasonably acceptable to both Parties, agreement not to be unreasonably withheld or delayed, or if the Parties have failed to agree upon an escrowagreement within thirty (30) days after CyberHeart’s request for deposit, the standard escrow agreement used by a nationally (or internationally) known andreputable escrow agent reasonably selected by CyberHeart. Any escrow agreement used pursuant to the forgoing must contain release conditions identical tothose provided under this Manufacturing and Supply Agreement. Any contrary release conditions will be null and void. Accuray shall update theManufacturing Technology deposited in escrow regularly, but no less often than once (1) each calendar year, to reflect changes to the ManufacturingTechnology and maintain the deposited materials consistent with the deposit requirements in Section D.2, above. CyberHeart shall have the right to have atechnical auditor inspect the materials that have been deposited to evaluate the sufficiency thereof. All costs related to such escrow agreement, including set upand maintenance, will be the sole responsibility of CyberHeart.4. Reversion of Supply to Accuray. Notwithstanding anything to the contrary, if, following the delivery of Manufacturing Technology withrespect to a CyberKnife Component pursuant to Section D.2, above, Accuray is able to manufacture such CyberKnife Component, and is able to reasonablydemonstrate that it can so manufacture, then at Accuray’s discretion, it can regain the right to manufacture such CyberKnife Component under the same termsand conditions as in this Manufacturing and Supply Agreement, and the Backup Manufacturing License with respect to such CyberKnife Component shallterminate. Accuray shall pay reasonable costs directly incurred by CyberHeart in connection with the termination of a contract entered into by and betweenCyberHeart and a third party manufacturer pursuant to Section D.1, above, if Accuray requests that CyberHeart terminate such contract prior to its term (forclarity, such term shall not be longer than twelve (12) months). Additionally, the Parties shall discuss in good faith whether any resumption of manufactureand supply by Accuray shall be made over the course of a phase-in period, of no more than three (3) consecutive calendar months, in which supply byAccuray of the CyberKnife Component is ramped up concurrent with a wind-down by CyberHeart in the manufacture of the CyberKnife Component by itscontract manufacturer, reasonably established and implemented in a manner that avoids disruptions in supply to CyberHeart and its customers, and at theend of which the Backup Manufacturing License with respect to such CyberKnife Component shall terminate. Upon resumption of manufacturing byAccuray, this Section D.1 shall again apply.E. Regulatory Matters.1. The terms and conditions in Article 5 of the License Agreement shall apply to this Manufacturing and Supply Agreement in the samemanner as they apply to the License Agreement as if fully set forth in this Section E.1; provided that each Party, its Affiliates, and its Subcontractors shallreasonably cooperate, as requested by the other Party and at such other Party’s expense, in regulatory activities, qualifications, and approvals to the extentrelated to the facilities, suppliers, raw materials, equipment, and the like used in connection with the supply of the CyberHeart Products and/or CyberKnifeComponents, including by allowing applicable Regulatory Agencies to inspect such facilities as such Regulatory Agencies request at such other Party’sexpense. With respect to non-routine inspections, each Party shall be entitled to be present each time any Regulatory Agency is present at such facilities, andsuch shall notify the other Party immediately upon receiving any communication from any Regulatory Agency that isE-8related to a CyberHeart Product or CyberKnife Component that is or was supplied under this Manufacturing and Supply Agreement. Each Party shall remedyany issues identified by any Regulatory Agency or the other Party as soon as possible and shall keep such other Party fully informed of all actions taken to doso, and the results of such actions.2. Audit Rights. Upon thirty (30) days notice (forty-five (45) days for suppliers), each Party will permit the other Party reasonable auditrights to inspect manufacture of CyberHeart Products or CyberKnife Components, or portions thereof, by such other Party or its suppliers, to the extentpermitted by such other Party’s supplier agreements.3. Medical Device Reporting. Pursuant to the FDA’s Medical Device Reporting (MDR) Regulations, and corresponding regulations ofregulatory authorities outside the United States, each Party may be required to report to regulatory authorities information that reasonably suggests that aCyberHeart Product or CyberKnife Component may have caused or contributed to the death or serious injury or has malfunctioned and would be likely tocause or contribute to a death or serious injury if the malfunction were to recur. Accordingly, each Party agrees to supply to the other Party all suchinformation, promptly after becoming aware of it, sufficient to enable such other Party to comply with all Applicable Laws, including governmental reportingrequirements. Each Party shall cooperate as reasonably requested by the other Party to establish processes and procedures with respect to such reporting, anddelivery of information relating to, such issues, and each Party shall comply with the procedures established.4. Potential Hazards. Each Party shall inform the other Party as soon as possible, but no later than forty-eight (48) hours, after its receipt ofany information that (i) indicates or suggests a potential material liability for either Party arising in connection with any CyberHeart Product or CyberKnifeComponent; (ii) any concern or issue that is reasonably likely to lead to a recall or market withdrawal of a CyberHeart Product or CyberKnife Component;and (iii) all ongoing and potential FDA and other Regulatory Agency investigations, inspections, detentions, seizures, or injunctions involving a CyberHeartProduct or CyberKnife Component of which such Party becomes aware. Without limiting the foregoing, each Party shall immediately notify the other Party inwriting of any material concerns and issues of which it becomes aware that may present a substantial safety issue and result in a failure to comply with andare therefore reportable under any applicable law or regulation.5. Recalls.a. By CyberHeart. If CyberHeart believes that a voluntary or involuntary recall or market withdrawal of any CyberHeart Productis necessary as a result of any failure of a CyberHeart Product to comply with the applicable Specifications, CyberHeart shall notify Accuray, and CyberHeartshall be responsible for initiating and managing the recall, and Accuray shall reasonably cooperate with CyberHeart with respect to such recall. As between theParties, CyberHeart shall be responsible for paying the costs of such recalls and market withdrawals, including in jurisdictions outside the United States. IfCyberHeart believes that a voluntary or involuntary recall or market withdrawal of any CyberHeart Product is necessary as a result of any failure of aCyberHeart Product to comply with the applicable Specifications due solely to failure of a CyberKnife Component to comply with the applicableSpecifications, CyberHeart shall notify Accuray, and, as between the Parties, CyberHeart andE-9Accuray shall discuss in good faith allocation of responsibility for paying the costs of such recalls and market withdrawals, including in jurisdictions outsidethe United States. Each Party shall keep the other Party fully informed with respect to any of its activities in connection with a recall and shall provide suchother Party with reasonable opportunities to comment with respect to the activities associated therewith.b. By Accuray. If Accuray believes that a voluntary or involuntary recall or market withdrawal of any CyberKnife Componentis necessary, Accuray shall notify CyberHeart, and the Parties shall cooperate with respect to initiating and managing the recall with respect to CyberHeartProduct. As between the Parties, Accuray shall be responsible for paying the costs of such recalls and market withdrawals relating solely to such CyberKnifeComponents including in jurisdictions outside the United States, or where such costs are difficult to determine, the Parties shall cooperate to allocate suchcosts reasonably. Each Party shall keep the other Party fully informed with respect to any of its activities in connection with a recall and shall provide suchother Party with reasonable opportunities to comment with respect to the activities associated therewith.F. Representations, Warranties, and Indemnities. Article 15 of the License Agreement shall apply to this Manufacturing and SupplyAgreement in the same manner as it applies to the License Agreement as if fully set forth in this Section F.G. Confidentiality. All confidential information exchanged in connection with this Manufacturing and Supply Agreement shall be governedby the confidentiality terms and restrictions in the License Agreement, including Article 14 of the License Agreement.H. Dispute Resolution. Article 16 of the License Agreement shall apply with respect to this Manufacturing and Supply Agreement, in thesame manner as it applies with respect to the License Agreement, as if fully set forth in this Section H.I. Payment Terms. CyberHeart shall pay, in U.S. dollars, to Accuray all amounts set forth in an invoice within thirty (30) days afterdelivery of such invoice in accordance with Section 17.1 of the License Agreement. Any payments or portions thereof due hereunder that are not paid on thedate such payments are due under this Manufacturing and Supply Agreement shall bear interest at a per annum rate equal to the lesser of (i) the prime rate aspublished in The Wall Street Journal, Western Edition, on the first day of each calendar quarter in which such payments are overdue, plus two (2)percentage points, calculated on the number of days such payment is delinquent, compounded monthly, or (ii) the maximum rate permitted by ApplicableLaw. Additionally, Section 8.4 of the License Agreement shall apply to this Manufacturing and Supply Agreement, in the same manner as it applies to theLicense Agreement, as if fully set forth herein.J. Term and Termination.a. Term. This Agreement shall become effective on the Effective Date and shall remain in effect until CyberHeart’s rights andlicenses pursuant to Article 2 of the License Agreement expire or are terminated as provided therein and notwithstanding any survival of CyberHeart’s rightspursuant to Section 11.5.1.6 of the License Agreement (the “Term”).E-10b. Termination for Cause. In the event of a material breach of this Manufacturing and Supply Agreement, the non-breaching Partyshall be entitled to terminate this Manufacturing and Supply Agreement by written notice to the breaching Party, if such breach is not cured within ninety (90)days after written notice is given by the non-breaching Party to the breaching Party specifying the breach. However, if the Party alleged to be in breach of thisManufacturing and Supply Agreement disputes such breach and submits such dispute for dispute resolution pursuant to Section 16.1 of the LicenseAgreement within such ninety (90) day period, the non-breaching Party shall not have the right to terminate this Manufacturing and Supply Agreement unlessthe dispute resolution provisions of Article 16 in the License Agreement result in a determination that this Agreement was materially breached by the otherParty, and the breaching Party fails to comply with its obligations hereunder within ninety (90) days after such determination.c. Survival. The following provisions shall survive any termination or expiration of this Manufacturing and Supply Agreement: Articles A, E (to the extent CyberHeart’s licenses under Article 2 of the License Agreement remain in effect other than pursuant to Section 11.5.1.6 of theLicense Agreement), G, H, I, J (as to Article I, to the extent payments are due as of the date of termination or expiration), J, K, and L and Section E.1, E.3, E.4and E.5 (in each case only to the extent CyberHeart’s licenses under Article 2 of the License Agreement remain in effect other than pursuant to Section 11.5.1.6of the License Agreement ).K. Bankruptcy. Article 12 of the License Agreement shall apply with respect to this Manufacturing and Supply Agreement, in the samemanner as it applies with respect to the License Agreement, as if fully set forth in this Section K.L. General Provisions. Article 17 of the License Agreement shall apply with respect to this Manufacturing and Supply Agreement, in thesame manner as it applies with respect to the License Agreement, as if fully set forth in this Section L.E-11Schedule 1SPECIFICATIONTo be added by the Parties after the Effective DateE-12Schedule 2FORM OF PURCHASE ORDERWill be added after the Effective DateE-13Exhibit FInstallationAccuray shall be obligated to install (inclusive of site qualification and planning) CyberHeart Products on the terms and conditions attached below inthis Exhibit F (“CyberHeart Installation Agreement”). If CyberHeart engages any third party to manufacture a component or components of a CyberHeartProduct pursuant to Exhibit E, then, to the extent necessary, CyberHeart shall obligate such third party to use Reasonable Commercial Efforts to providereasonable training to Accuray with respect to the installation of such component or components.CyberHeart shall provide Accuray with no less than one hundred eighty (180) days notice of a request for installation and Accuray will agree toinstall a CyberHeart Product within thirty (30) days before or after such date. Such installation date will be subject to and conditioned upon the customer end-user site meeting all the requirements of the Site Readiness Guide. Any material delay of installation beyond thirty (30) days after such installation date that iscaused by CyberHeart or that is due to a customer end-user site not meeting the requirements of the Site Readiness Guide shall result in a delay fee to be paid toAccuray by CyberHeart of ten percent (10%) of the transfer price for such CyberHeart Product.Accuray’s obligations under such installation agreement shall be subject to CyberHeart remaining current with all payments therein. Upon anydefault by CyberHeart due to failure to make payments, Accuray will have the right, but not the obligation, to contract directly with the end-user forinstallation services.CYBERHEART INSTALLATION AGREEMENT SEE BELOW F-1CyberHeart Installation Agreement1. Scope of Agreement.1.1. Scope. This Installation Agreement (“Agreement”) is made by and between ACCURAY INCORPORATED (“Accuray”), a Delawarecorporation, with its principal place of business at 1310 Chesapeake Terrace, Sunnyvale, CA 94089, and CYBERHEARTINCORPORATED (“CyberHeart”), a Delaware corporation, with its principal place of business at 3270 Alpine Road, Portola Valley, CA, forAccuray to install the CyberHeart System at ’S (“Customer”) site at (“System”).1.2. CyberHeart Obligation. Accuray’s obligations under this Agreement are contingent on CyberHeart’s performance under its installation contractwith Customer. As such, Accuray expects and CyberHeart agrees that CyberHeart will provide Customer with the same or greater service as isoffered by Accuray under this Agreement; provided, however, that Accuray shall perform the actual installation of the CyberHeart System.2. Terms of Payment.2.1. Installation Price; Payment Schedule. The Installation Price for the CyberHeart System is $125,000.00. The installation price is valid only forthe System specified above in Section 1. The Installation Price is exclusive of all taxes (including, but not limited to, any sales tax, use tax, orvalue-added tax or other similar tax), license fees, customs fees, duties, and similar charges. CyberHeart shall pay for installation of theCyberHeart System fifty percent (50%) upon delivery of the CyberHeart System and fifty percent (50%) upon Acceptance.2.2. Invoices; Late Payments. If CyberHeart’s or Customer’s internal payment processing procedure requires CyberHeart to receive an invoicebefore paying amounts due hereunder, CyberHeart shall request such invoice sufficiently in advance to make the payment in accordance withthe payment schedule set forth in Section 2.1 above. Past due balances shall bear interest at the rate of 1% per month or, if lower, themaximum amount permitted by applicable law. Accuray may suspend its performance under this Agreement if payments are not made inaccordance with the payment schedule set forth in Section 2.1 above. CyberHeart shall pay Accuray’s reasonable costs of collecting amountsdue hereunder that are more than 30 days past due.3. Installation.3.1. Installation by Accuray. Accuray will notify CyberHeart approximately 90 calendar days prior to the scheduled delivery of the CyberHeartSystem to coordinate installation details. Installation will be performed by Accuray. Accuray will assemble and test the CyberHeart System. Operation of the CyberHeart System by Accuray, as necessary for completion of installation or acceptance tests, is subject to Customerproviding adequate radiation shielding protection and other site preparations required for the safety and protection of personnel and theCyberHeart System. Upon completion of the installation, Accuray’s representatives will demonstrate proper machine operation by performingAccuray’s acceptance test procedure. For clarity, Accuray is not responsible for any commissioning of the CyberHeart System, including, butnot limited to, any calibration or radiation surveys. Such commissioning shall be the sole responsibility of Customer.3.2. Site Preparation. Customer will be responsible for having the building, utilities, lighting, ventilation, air conditioning, mounting facilities, allnecessary radiation shielding, patient positioning lasers, closed-caption TV system, intercom, and access to the room completed on theestimated delivery date and ready for installation of the CyberHeart System. Accuray will have no responsibility for any matter affecting orrelated to the adequacy of architectural design, utility service design, the radiation protection walls and barriers, patient viewing devices, orfacility personnel safety devices atF-2Customer’s site. Architectural design, radiation protection walls and barriers and other safety devices must be approved by an expert in theradiation field and shall be Customer’s responsibility.3.3. Rigging and Unloading. Accuray will locate and contract with a rigger or local licensed contractor to provide labor and rigging servicesnecessary to unload the sub-base frame and the rest of the CyberHeart System from the transport vehicle and move the entire CyberHeartSystem to its final position under Accuray’s supervision. Accuray shall be responsible for all standard rigging costs and expenses. AnAccuray representative will monitor the movement, final positioning and connection of the CyberHeart System.3.4. Customer Representative. CyberHeart shall require that Customer provide a representative who shall be present at all times during theinstallation and be capable of assisting where necessary. When no representative is present and assistance from Customer is not availablewhen required, Accuray may suspend the installation until an appropriate Customer representative is made available consistently.4. Calibration and Local Requirements.4.1. Calibration. Customer shall be solely responsible for all CyberHeart System commissioning and calibration. The dose rate and integrateddose measured by the accelerator transmission ionization chamber and dosimetry electronics must be calibrated by a qualified radiologicalphysicist prior to use of the CyberHeart System for patient treatment. Customer shall be responsible for quality assurance testing andcalibrating the CyberHeart System regularly. Customer also shall be responsible for radiation surveys which may be required by applicablelaw or regulation or which may be necessary to establish that radiation does not exceed safe levels. Accuray has no responsibility for any suchcommissioning, quality assurance testing, calibration or radiation surveys.4.2. Local Requirements. Customer shall be responsible for obtaining all permits and for meeting all requirements relating to state and local codes,registration, regulations and ordinances applicable to Customer’s use of the CyberHeart System. Accuray has no responsibility for complianceby the CyberHeart System with such requirements.5. Acceptance. “Acceptance” of the CyberHeart System shall occur upon the earlier of (i) completion by Accuray of its acceptance test procedure thatdemonstrates that the CyberHeart System substantially conforms to the Specifications or (ii) execution of Accuray’s acceptance form by Customer. Inno event shall CyberHeart, Customer or its agents use the CyberHeart System (or any portion thereof) for any purpose before Acceptance thereofwithout the express written approval of Accuray. CyberHeart and/or Customer shall indemnify and hold Accuray harmless from any such use.6. Mutual Indemnity. If it is determined by a court in accordance with applicable law that the negligence of a party (the “Responsible Party”), itsemployees or agents causes damage or injury to a third party, the Responsible Party shall pay the other party for any damages awarded by a court oragreed to by the Responsible Party in a settlement arising from such claims to the extent such damages reflect the Responsible Party’s relative faulttherefor. Notwithstanding the foregoing, Accuray shall have no responsibility whatsoever for, and CyberHeart shall indemnify and hold Accurayharmless from, all damage or injury to third parties which (i) results from the use, operation or service of the CyberHeart System by other thanAccuray personnel prior to Acceptance and completion of the radiation survey by Customer, (ii) results from or relates to any service of the CyberHeartSystem by a party not authorized to perform such service by Accuray, or (iii) any use by CyberHeart, Customer or their agents of the CyberHeartSystem contrary to any written warning or instruction given by Accuray.7. Limitation of Liability and Warranty7.1. Accuray’s liability arising under this Agreement shall be limited to an amount not to exceed the payment(s) received by Accuray for the thencurrent Agreement year. In addition, Accuray shall not be liable to CyberHeart in the event that CyberHeart’s, Customer’s or any third party’sacts orF-3omissions contributed in any way to any loss it sustained or the loss or damage is due to an act of God or other causes beyond its reasonablecontrol.7.2. This is a service agreement. THERE ARE NO INCLUDED OR IMPLIED ACCURAY WARRANTIES OF PRODUCT FITNESS FOR APARTICULAR PURPOSE OR MERCHANTABILITY.8. Damages. IN NO EVENT SHALL ACCURAY BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES ARISINGFROM OR RELATED TO THIS AGREEMENT EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. ACCURAY’SAGGREGATE LIABILITY ARISING FROM OR RELATED TO THIS AGREEMENT SHALL NOT EXCEED THE PAYMENT RECEIVED BYACCURAY FOR THE INSTALLATION OF THE CYBERHEART SYSTEM RESULTING IN THE LOSS OR DAMAGE CLAIMED.9. Confidentiality. All drawings, designs, specifications, manuals and software and other non-public information furnished to CyberHeart or Customerby Accuray hereunder shall remain the confidential and proprietary property of Accuray (“Confidential Information”). All such information, except asmay be found in the public domain, shall be held in confidence by CyberHeart and shall not be disclosed by CyberHeart to any third parties or usedby CyberHeart other than in its operation of the CyberHeart System in accordance with the Specifications. CyberHeart shall require that Customeragree in writing to similar confidentiality obligations.10. Assignment. Neither party may assign this Agreement without the other party’s prior written consent, except that Accuray may assign this Agreementwithout CyberHeart’s consent to an affiliate and either party may assign this Agreement without the other party’s consent to a successor or acquirer inconnection with a merger or acquisition, or the sale of all or substantially all of such party’s assets or the sale of that portion of such party’s businessto which this Agreement relates, upon written notice; provided that any party to which CyberHeart proposes assigning this Agreement must meetAccuray’s standard creditworthiness requirements. Subject to the foregoing, this Agreement will bind and inure to the benefit of the parties’ permittedsuccessors and assigns. Any attempted assignment in violation of this Section 10 shall be null and void.11. Dispute Resolution. Any dispute between Accuray and CyberHeart arising from or related to this Agreement, excluding disputes regarding paymentor CyberHeart’s unauthorized use or disclosure of Accuray Confidential Information or intellectual property, shall be settled as follows. The partyinitiating the dispute shall provide written notification to the other party identifying in detail the nature of the dispute. The other party shall respond inwriting to the notification within 30 calendar days from the date of receipt of the notification. The party initiating the dispute shall have an additional30 calendar days after the receipt of the response to either accept the resolution offered by the other party or escalate the matter. If the dispute is notresolved within the foregoing 30-day period, the parties shall escalate the claim to the President of Accuray and the Chief Executive Officer ofCyberHeart. Each shall negotiate in good faith and use his or her best efforts to resolve such dispute or claim. If the dispute is not resolved within 15calendar days after escalation to the President and Chief Executive Officer as described above, then either party may pursue resolution by any meansavailable at law or equity.12. Governing Law. The rights and obligations of the parties under this Agreement shall be governed in all respects by the laws of the United States andthe State of California without regard to conflicts of laws principles that would require the application of the laws of any other jurisdiction. No action,regardless of form, arising out of or related to the CyberHeart System may be brought by CyberHeart more than 1 year after CyberHeart has or shouldhave become aware of the cause of action.13. Notices. All notices required or permitted under this Agreement shall be in writing and if delivered in person, effective immediately, if delivered byreputable national or international overnight delivery service, effective 2 business days after deposit with carrier, or if delivered by registered or certifiedmail, postage prepaid with return receipt requested, effective 5 business days after deposit with carrier. AllF-4communications will be sent to the addresses set forth below or to such other address as may be specified by either party in accordance with thissection. To Accuray:To CyberHeart: Accuray Incorporated Attention: Chief Financial Officer 1310 Chesapeake Terrace Sunnyvale, CA 94089 Copy to: General Counsel 14. Force Majeure. Neither party will be responsible for any failure or delay in its performance under this Agreement (except for the payment of money)due to causes beyond its reasonable control, including, but not limited to, labor disputes, strike, lockout, riot, war, fire, acts of God, accident, failureor breakdown of components necessary for order completion; subcontractor or supplier caused delays; curtailment of or failure to obtain sufficientelectrical or other energy, raw materials or supplies; or compliance with any law, regulation or order, whether valid or invalid.15. Waiver. The waiver of any breach or default of any provision of this Agreement will not constitute a waiver of any other right hereunder or of anysubsequent breach or default.16. Severability. If any provision of this Agreement is held invalid or unenforceable by a court of competent jurisdiction, the remaining provisions ofthis Agreement will remain in full force and effect, and the provision affected will be construed so as to be enforceable to the maximum extentpermissible by law.17. Amendments. Any amendment or modification of this Agreement must be made in writing and signed by duly authorized representatives of eachparty. For Accuray, a duly authorized representative must be any of the following: CEO, CFO, or General Counsel.18. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together will constituteone and the same instrument.19. Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes allprior understandings, representations and warranties, written and oral. In the event of a conflict or inconsistency between the terms stated in apurchase order or other similar document and this Agreement, the terms of this Agreement shall govern.SIGNATURE PAGE FOLLOWSF-5IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date set forth below by their duly authorizedrepresentatives. The parties acknowledge and agree that this Agreement does not become effective until it has been signed by all parties indicated below.ACCURAY INCORPORATEDCYBERHEART By:By: Print NamePrint Name: TitleTitle: Date:Date: The undersigned acknowledges that the terms and conditions of this Agreement meet the policies and procedures of Accuray.Signed: Dated: General Counsel, Accuray Incorporated SIGNATURE PAGE TO INSTALLATION AGREEMENTF-6Exhibit GServiceAccuray shall be obligated to service, either directly or through a third party, and provide technical support, for CyberHeart Products pursuant to theterms and conditions below in this Exhibit G (“CyberHeart Service Agreement”). If CyberHeart engages any third party to manufacture a component orcomponents of a CyberHeart Product pursuant to Exhibit E, then, to the extent necessary, CyberHeart shall obligate such third party to use ReasonableCommercial Efforts to provide reasonable training to Accuray with respect to the service and support of such component or components.Accuray’s obligations to provide service and support shall apply solely to the versions of the CyberKnife System and CyberKnife Componentsinstalled at the time Accuray installs the relevant CyberHeart Product. The foregoing obligations shall terminate with respect to a version of the CyberKnifeSystem or CyberKnife Component, as applicable, four (4) years after the date on which Accuray updates such version.Accuray’s obligations under the CyberHeart Service Agreement shall be subject to CyberHeart remaining current with all payments therein. Uponany default by CyberHeart due to failure to make payments, Accuray will have the right, but not the obligation, to contract directly with the end-user forinstallation services.Pricing.The annual fee for the CyberHeart Service Agreement will be the price for Accuray’s then-current full-service, no upgrade service agreement. As of the date ofthis Agreement, that offering is Accuray’s “Emerald Elite Service Agreement” and the list price is *** per year.Volume Discount.In the event that multiple CyberHeart Service Agreements are purchased in a one (1) year period beginning with the Effective Date of this Agreement, Accuraywill offer a volume discount as follows: Number of CyberHeart ServiceAgreements Purchased% Discount offList Price****************** Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.G-1CyberHeart Service Agreement1. Scope of Service. This Service Agreement (“Agreement”) is made by and between ACCURAY INCORPORATED (“Accuray”), a Delawarecorporation, with its principal place of business at 1310 Chesapeake Terrace, Sunnyvale, CA 94089, and CYBERHEART INCORPORATED(“CyberHeart”), a Delaware corporation, with its principal place of business at 3270 Alpine Road, Portola Valley, CA, for Accuray to provide plannedmaintenance service when scheduled by Accuray and corrective maintenance service when requested by CyberHeart to maintain the CyberHeartSystem installed at ’S (“Customer”) site at (“System”) so that it performssubstantially in accordance with the Specifications (User Manuals and Reference Guides) defined for the System revision as installed and/or upgraded.1.1. Effective Date. This Agreement shall be effective as of demonstration of acceptance testing by Accuray as described in the CyberHeartInstallation Agreement dated , 200 and signed by the parties, or the expiration of any prior service or warranty agreement, ifapplicable.1.2. CyberHeart Obligation. Accuray’s obligations under this Agreement are contingent on CyberHeart’s performance under its service contractwith Customer. As such, Accuray expects and CyberHeart agrees that CyberHeart will provide Customer with the same or greater service as isoffered by Accuray under this Agreement.1.3. Definitions:1.3.1. Bug Fix means an error correction or minor change in the existing software and/or hardware configuration that is required in order toenable the existing software and/or hardware configuration to perform to the existing functional specification(s).1.3.2. Update means a release of the software or a change to the existing hardware containing substantially only error corrections, minor newfeatures, functionality and/or performance improvements, but that would not be required for the existing software and/or hardwareconfiguration to perform to the existing functional specification(s) of that particular product. Such Update would not necessarilyreplace or extend the life of the existing software and/or hardware configuration of the product. For example, an Update of softwarewould be indicated where the version number is changed by incrementing the numeric digits to the right of the decimal point, e.g.,versions 1.1, 1.2, 1.3, and 1.4 would each be Updates of the software.1.3.3. Upgrade means a release of the software or a change to the existing hardware containing major new features, functionality and/or performanceimprovements that would enable the existing software and/or hardware configuration to perform to the level of the next version of the software and/orhardware configuration and designed to replace the older software and/or hardware version of the same product and/or extend the useful life of thatproduct. For example, an Upgrade of software would be indicated where the version number is changed by incrementing the numeric digits to the leftof the decimal point, e.g., versions 1.0, 2.0, 3.0, and 4.0 would each be Upgrades of the software.1.3.4. New Version/New Product means a release of the software or a change to the hardware that may or may not work with the existing software and/orhardware configuration, but that in its totality requires, in Accuray’s sole opinion, enough change to the software and/or hardware configuration to beconsidered a New Version or New Product.1.3.5. Consumables means items that are not necessarily part of the CyberHeart System, but are consumed as part of the operation of theCyberHeart System, for example fiducials.2. Service Period.2.1. The Agreement Term shall be for an initial period of four (4) years (years 1, 2, 3, & 4) from the Effective Date of this Agreement, includingthe warranty year, with an optional fifth year. There is no payment required under this Agreement in the first year (“Year 1”or the “WarrantyYear”).G-2CyberHeart may elect to receive an additional optional fifth year (the “Optional Year 5”). CyberHeart may exercise the option for Optional Year5 by letter sent to Accuray, in accordance with the Notice provision set forth below, at any time up to ten (10) days before the Optional Year 5commences. If CyberHeart does not exercise the option, there will be no charge to CyberHeart, and Accuray will not provide coverage forOptional Year 5. If CyberHeart exercises the option, Accuray is obligated to provide coverage on same terms as the previous Agreement years. Billing will commence on the day following the anniversary of the Effective Date of this Agreement.2.2. The Agreement Price shall be one of the following, at CyberHeart’s option (indicate preferred option by checking a box, if no selection is madeCustomer will be billed on an annual basis). The Agreement Price shall cover the Base CyberHeart System, up to two (2) Multiplan Systems(including the MultiPlan System in the Base CyberHeart System), and up to three (3) InView Workstations. If Customer has more than two(2) MultiPlan Systems or three (3) InView Workstations installed, then an additional charge of *** per year per MultiPlan and *** per year perInView, as applicable, will be added by Accuray to the Agreement Price set forth below.oo ANNUAL: *** per year, paid yearly in advance, for years 2, 3, 4 and Optional Year 5.oo QUARTERLY: *** per quarter, paid at the beginning of each quarter, for years 2, 3, 4 and Optional Year 5.oo MONTHLY: *** per month, paid at the beginning of each month, for years 2, 3, 4 and Optional Year 5.3. Equipment To Be Covered3.1. This Agreement is available only for equipment that was purchased directly from Accuray, installed by Accuray or CyberHeart engineers andhas not been moved from its original installation location or disconnected from its original power supply without written permission ordirection from Accuray or CyberHeart. This Agreement must immediately commence at the expiration of the factory warranty period or priorservice agreement. In the event of lapse of service, CyberHeart shall have the right to reinstate such service by payment of the current servicefee for the then-current service period in addition to the reasonable costs for Accuray to inspect, repair, and return the System to the state atwhich the System would have been had a service agreement been in force continuously since the expiration of the System factory warranty.4. Software Maintenance (Bug Fixes and Updates)4.1. For the duration of the Agreement Term, Accuray will provide software Updates and Bug Fixes for software that is included as a part of theCyberHeart System. These Updates and Bug Fixes may be transmitted electronically to CyberHeart for subsequent installation by CyberHeartor Customer technicians. Corrections of significant complexity, however, may be installed by Accuray service engineers. Softwaremaintenance will be included only for those product features that were originally purchased with the System or subsequently purchasedseparately by CyberHeart from Accuray or taken under this Agreement as a System Upgrade.4.2. CyberHeart shall be responsible for installing Bug Fixes and Updates under Accuray’s direction, as necessary.4.3. CyberHeart is not entitled to any Upgrades or New Versions/New Products under this Agreement. CyberHeart may purchase Upgrades andNew Versions/New Products separately, and such Upgrades or New Versions/New Products will then be maintained in accordance with theterms of this Agreement.4.4. During the Agreement Term, Accuray shall provide CyberHeart with any and all applicable product notices regarding maintenance, support,Upgrades, Updates and Bug Fixes generally circulated byConfidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request.Omissions are designated as [***]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.G-3Accuray to Accuray Customers with CyberHeart installations. CyberHeart shall ensure that all such notices are provided to Customer in atimely manner.4.5. All such Updates and Bug Fixes, when made by Accuray or according to Accuray instructions or the product notice, shall be considered to bedone by and under the direction of Accuray.5. System Quality Assurance Testing5.1. The maintenance and support services provided by Accuray and/or CyberHeart under this Agreement do not include any System QualityAssurance Testing (“QA”). System commissioning and QA are the sole responsibility of Customer, and Customer is advised to perform QAon a regular and ongoing basis. In addition, Customer is required to maintain up-to-date QA logs. If Customer fails to perform the appropriateQA of the System, and to record such QA in the appropriate logs, Accuray and/or CyberHeart, upon giving Notice to Customer in accordancewith Section 16 (Notices) of this Agreement, reserves the right to terminate this Agreement.5.2. Prior to performing any scheduled service or Preventive Maintenance on the System, Accuray and/or CyberHeart will review Customer’s QAlogs, and if such logs are not up-to-date, Accuray and/or CyberHeart may refuse to service the System. In the event that the requested service isnecessary to bring the System to a point where QA can be performed, Accuray and/or CyberHeart will proceed with the service only afterCustomer signs a written acknowledgement that QA is Customer’s sole responsibility and that appropriate QA will be performed prior toconducting any patient treatments.6. First Line Field Service6.1. CyberHeart is to provide to Customer, remotely and on-site when needed, routine maintenance and service and timely response to specialrequests for service, including transmission and/or installation of software Bug Fixes and Updates (“First Line Field Service”).6.1.1. The First Line Field Service Coverage Period will be the hours of at least 8:00 AM to 9:00 PM local (to Customer’s installation location) time Mondaythrough Saturday (excluding local legal holidays).6.1.2. CyberHeart shall provide Customer with contact points to request service on a 24-hours-a-day, 7-days-a-week (“24/7”) basis.6.1.3. CyberHeart, directly or remotely as the situation requires, either with CyberHeart’s own personnel or through contractors, shall initially respond withinone (1) hour of receipt of a call for service. The initial response shall include telephone support, including (as applicable) consultations, diagnosticassistance and advice on the use and maintenance of the System.6.2. If CyberHeart does not make available the number of adequately trained engineers and is unable to provide First Line Field Service under thisAgreement, which results in Accuray providing support beyond what would otherwise be required, Accuray will be entitled to charge its then-current hourly service rates for that additional support. In addition, if Accuray personnel are unreasonably delayed in carrying out theirresponsibilities under this Agreement by either CyberHeart or Customer, Accuray will be entitled to charge its then-current hourly service ratesfor the duration of the delay period.7. Escalated Service7.1. Once CyberHeart has fulfilled its obligation to provide First Line Field Service without successfully resolving the problem, Accuray willprovide “Escalated Service”, which shall include any service beyond that defined as First Line Field Service.7.2. CyberHeart will promptly notify Accuray, by calling Accuray’s Customer Support Line at 1-877-668-8667, of any problem or defect withthe System which requires Escalated Service and, at no charge, will ensure Accuray service engineers access to the System and use of adequatefacilities and equipment as necessary for Accuray to perform the service. CyberHeart shall have as many serviceG-4calls as are reasonably needed to maintain the System so that it performs substantially in accordance with the Specifications during the periodof this Agreement.7.3. Use of Customer facility CT scanner may be required for testing purposes and shall be scheduled to allow as expeditious completion of serviceas is reasonably possible. CyberHeart will ensure that Customer facility staff will operate the CT scanner. If service is unreasonably delayedand Accuray service engineers are required to remain on site, Accuray may choose to charge the current hourly service rates for the duration ofthe delay period.8. Escalated Service Coverage Period8.1. The Escalated Service Coverage Period will be the hours of 8:00 AM to 9:00 PM local time Monday through Saturday (excluding legalholidays). CyberHeart has the option to request service during non-normal hours, in which case CyberHeart shall pay the overtime premiumportion of the non-normal hours worked. (Non-normal hourly rate minus normal hourly rate.)8.2. Accuray shall provide CyberHeart with contact points to request service on a 24-hours-a-day, 7-days-a-week (“24/7”) basis. Accuray, directlyor remotely as the situation requires, either with its own personnel or through contractors, shall initially respond by telephone within twenty-four (24) hours of receipt of a call for Escalated Service. The initial response shall include telephone support, including (as applicable)consultations, diagnostic assistance and advice on the use and maintenance of the System.9. Preventive Maintenance. Accuray will perform Preventive System Maintenance as prescribed in the current System maintenance manuals. Preventiveservice will be scheduled at least two (2) weeks in advance and will be performed at a mutually agreed upon time. Upon completion of a service orpreventive maintenance call, Accuray shall leave Customer a copy of a service report describing the service or maintenance performed.10. Replacement Parts10.1. Accuray shall make a commercially reasonable effort to supply at the time of need or stock with Accuray’s regional service engineers all tools,equipment, replacement parts and Consumables as would reasonably be required by Accuray to perform the required repairs and return theSystem to good working order. Accuray shall make a commercially reasonable effort to maintain at its factory or service center(s) a stock ofspare parts, including, in particular, long-procurement-lead-time parts.10.2. Replacement parts used under this Agreement may be either new manufacture or factory refurbished at Accuray’s choice. All replacement partsand assemblies provided will be manufactured in accordance with Accuray’s quality system, and any applicable laws and regulations. Partsreplaced under this Agreement become the property of Accuray and/or CyberHeart and will be disposed of by Accuray Field Service engineers. Notwithstanding the foregoing, all parts that are considered by local regulation to be “hazardous” or “contaminated” waste, or material thatrequires “special handling” will be disposed of or retained by Customer at Customer’s facility.11. Exceptions11.1. All obligations of Accuray under this Agreement shall be suspended and/or cease in the event of:11.1.1. Damage from fire, accident, abuse, floods, lightning, natural disasters or other calamities commonly defined as “Acts of God”.11.1.2. The intentional abuse of the System or negligence by CyberHeart or Customer.11.1.3. System hardware or software alterations not authorized by Accuray including any move of the System from its installation site (otherthan by or at the express written direction of Accuray and/or CyberHeart).G-511.1.4. Use of the System for other than its intended and authorized purposes, or in a manner not consistent with Accuray’s User Manuals,including maintenance of the necessary operating environment and line current conditions, and the failure of CyberHeart or Customerto cure such matter within thirty (30) days of actual written notice thereof from Accuray.11.1.5. Failure to make payments in accordance with the payment schedule set forth above in Section 2.2.11.2. If corrective action or adjustment of the System is performed by Customer’s staff at the direction of Accuray and/or CyberHeart, such actionor adjustment shall not reduce Accuray’s responsibility under this Agreement or liability for the performance of the System.12. Cancellation. CyberHeart shall have the right to cancel and terminate this Agreement, with or without cause, at any time upon thirty (30) days’ priorwritten notice to Accuray. There shall be no penalty for such cancellation and termination.13. Breach. Either party reserves the right to cancel this Agreement by written notice upon the breach of the other. An event of breach may include, but isnot limited to, failure to make payment due under this Agreement, failure to provide access as required to execute the services contemplated by thisAgreement, failure to perform and log QA, or the filing of notice under bankruptcy or equivalent laws. If the breaching party is unable or unwilling tocure or make a good faith effort to cure such breach within thirty (30) days of actual written notice the other party shall be relieved of all obligationsunder this Agreement and may terminate. Termination shall not be the terminating party’s exclusive remedy, and the terminating party shall retain allother available legal and equitable remedies.14. Limitation of Liability and Warranty14.1. If it is determined in accordance with applicable law that any fault or neglect of either party, its employees or agents, substantially contributesto damage or injury to third parties, such party shall be responsible in such proportion as reflects its relative fault therefore, and shall hold theother party harmless from any liability or damages arising out of such fault or neglect. Accuray’s liability arising under this Agreement shallbe limited to an amount not to exceed the payment(s) received by Accuray for the then current Agreement year. In addition, Accuray shall not beliable to CyberHeart or Customer in the event that CyberHeart’s, Customer’s or any third party’s acts or omissions contributed in any way toany loss it sustained or the loss or damage is due to an act of God or other causes beyond its reasonable control. IN NO EVENT WILLACCURAY BE LIABLE TO CYBERHEART OR CUSTOMER FOR ANY LOST PROFITS, LOST SAVINGS, LOST REVENUES,SPECIAL, INDIRECT, INCIDENTAL DAMAGES OR OTHER CONSEQUENTIAL DAMAGES ARISING OUT OF OR INCONNECTION WITH THE AGREEMENT, DOWNTIME OR THE USE OR PERFORMANCE OF THE CYBERHEART SYSTEM.14.2. This is a service agreement. THERE ARE NO INCLUDED OR IMPLIED ACCURAY WARRANTIES OF PRODUCT FITNESS FOR APARTICULAR PURPOSE OR MERCHANTABILITY.15. Patient Information.15.1. In performing the services hereunder, Accuray may receive from Customer, or create or receive on behalf of Customer, patient healthcare,billing, or other confidential patient information (“Patient Information”). Patient Information, as the term is used herein, includes all “ProtectedHealth Information,” as that term is defined in 45 CFR 164.501. Accuray shall use Patient Information only as necessary to provide theservices to Customer as set forth in this Agreement. Accuray shall comply with all federal laws, rules and regulations relating to theconfidentiality of Patient Information, including the applicable provisions of the privacy regulations promulgated pursuant to Health InsurancePortability and Accountability Act of 1996 (“HIPAA”).15.2. Customer shall provide Accuray with only de-identified Protected Health Information, in accordance with the requirements of 45 CFR164.514. Any information provided to or shared with Accuray in connection with this Agreement shall have all identifying patient informationremoved, including, but not limited to, names, addresses, zip codes, telephone numbers, social security numbers, medicalG-6record numbers and health plan numbers, and shall be assigned a de-identified record code in accordance with 45 CFR 164.514(c).16. Assignment. Neither party may assign this Agreement without the other party’s prior written consent, except that Accuray may assign thisAgreement, without CyberHeart’s consent, to an affiliate or to a successor or acquirer, as the case may be, in connection with a merger or acquisition,or the sale of all or substantially all of Accuray’s assets or the sale of that portion of Accuray’s business to which this Agreement relates. Subject to theforegoing, this Agreement will bind and inure to the benefit of the parties’ permitted successors and assigns.17. Disputes and Governing Laws17.1. In the event that a dispute arises between Accuray and CyberHeart with respect to any subject matter governed by this Agreement, suchdispute shall be settled as follows. If either party shall have any dispute with respect to this Agreement, that party shall provide writtennotification to the other party in the form of a claim identifying the issue or amount disputed including a detailed reason for the claim. Theparty against whom the claim is made shall respond in writing to the claim within 30 days from the date of receipt of the claim document. Theparty filing the claim shall have an additional 30 days after the receipt of the response to either accept the resolution offered by the other party orescalate the matter. If the dispute is not resolved, either party may notify the other in writing of their desire to elevate the claim to the Presidentof Accuray and the Chief Executive Officer of CyberHeart. Each shall negotiate in good faith and use his or her best efforts to resolve suchdispute or claim. The location, format, frequency, duration and conclusion of these elevated discussions shall be left to the discretion of therepresentatives involved. If the negotiations do not lead to resolution of the underlying dispute or claim to the satisfaction of either partyinvolved, then either party may pursue resolution by the courts as follows.17.2. All disputes arising out of or relating to this Agreement not otherwise resolved between Accuray and CyberHeart shall be resolved in a court ofcompetent jurisdiction, in Santa Clara County, State of California, and in no other place, provided that, in Accuray’s sole discretion, suchaction may be heard in some other place designated by Accuray (if necessary to acquire jurisdiction over third persons), so that the dispute canbe resolved in one action. CyberHeart hereby consents to the jurisdiction of such court or courts and agrees to appear in any such action uponwritten notice thereof. No action, regardless of form, arising out of, or in any way connected with this Agreement may be brought byCyberHeart more than one (1) year after the cause of action has occurred.18. Notices. All notices required or permitted under this Agreement will be in writing and delivered in person, effective immediately, by overnight deliveryservice, effective two (2) business days after deposit with carrier, or by registered or certified mail, postage prepaid with return receipt requested,effective five (5) business days after deposit with carrier. All communications will be sent to the addresses set forth below or to such other address asmay be specified by either party in writing to the other party in accordance with this Section. To Accuray:To CyberHeart: Accuray Incorporated Attention: Chief Financial Officer 1310 Chesapeake Terrace Sunnyvale, CA 94089 with cc to: General Counsel G-719. Trademarks. Accuray is the owner of the trademark CyberKnife, and related trademarks in the U.S. and around the world. If CyberHeart orCustomer wishes to use the CyberKnife or other Accuray trademarks in association with a business name, Accuray requires that CyberHeart orCustomer, respectively, execute Accuray’s standard royalty-free Trademark License Agreement specifying the requirements for and the nature of theacceptable use. Without the necessary license, neither CyberHeart nor Customer is not entitled to use the Accuray marks with a business name or tootherwise use language which would suggest a license with Accuray.20. Waiver. The waiver of any breach or default of any provision of this Agreement will not constitute a waiver of any other right hereunder or of anysubsequent breach or default.21. Severability. If any provision of this Agreement is held invalid or unenforceable by a court of competent jurisdiction, the remaining provisions of theAgreement will remain in full force and effect, and the provision affected will be construed so as to be enforceable to the maximum extent permissibleby law.22. Force Majeure. Neither party will be responsible for any failure or delay in its performance under this Agreement (except for the payment of money)due to causes beyond its reasonable control, including, but not limited to, labor disputes, strike, lockout, riot, war, fire, act of God, accident, failureor breakdown of components necessary to order completion; subcontractor, supplier or customer caused delays; inability to obtain or substantial risesin the prices of labor, materials or manufacturing facilities; curtailment of or failure to obtain sufficient electrical or other energy, raw materials orsupplies; or compliance with any law, regulation or order, whether valid or invalid.23. Amendments. Any amendment or modification of this Agreement must be made in writing and signed by duly authorized representatives of eachparty. For Accuray, a duly authorized representative must be any of the following: CEO, CFO, or General Counsel.24. Entire Agreement. This Agreement contains the entire Agreement of the parties hereto with respect to the subject matter hereof, and supersedes all priorunderstandings, representations and warranties, written and oral. If any part of the terms and conditions stated herein are held void or unenforceable,such part will be treated as severable, leaving valid the remainder of the terms and conditions.25. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together will constitute oneand the same instrument.SIGNATURE PAGE FOLLOWSG-8®IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date set forth below by their duly authorizedrepresentatives. The parties acknowledge and agree that this Agreement does not become effective until it has been signed by all parties indicated below.ACCURAY INCORPORATEDCYBERHEART INCORPORATED By:By: Print NamePrint Name Title:Title: Date:Date: PLEASE MAKE CERTAIN THAT YOUHAVESELECTED A PAYMENT OPTION IN ACCORDANCEWITH SECTION 2.2, ABOVE The undersigned acknowledges that the terms and conditions of this Agreement meet the policies and procedures of Accuray.Signed:Dated: General Counsel, Accuray Incorporated SIGNATURE PAGE TO SERVICE AGREEMENTG-9Exhibit 10.52 Initials: Contractor Accuray /s/ D.M. INDEPENDENT CONTRACTOR AGREEMENTThis Independent Contractor Agreement (“Agreement”) is made effective as of April 1, 2007 by and between Accuray Inc., a Californiacorporation (the “Company”), and John Adler, M.D. (“Contractor” and, together with the Company, the “Parties”). The Company desires to retain Contractoras an independent contractor to perform certain services for the Company and Contractor is willing to perform such services, on terms set forth more fullybelow. In consideration of the mutual promises contained herein, the Parties agree as follows:1. Services.During the term of this agreement, Contractor will provide services (the “Services”) to the Company as described on Exhibit A attached tothis Agreement. Contractor shall use his best efforts to perform the Services to the satisfaction of the Company and by the completion dates specified by theCompany. Contractor shall not perform any Services for the Company other than as specifically authorized in Exhibit A.2. Independent Contractor Status.It is the Parties’ intent that Contractor at all times, and with respect to all Services covered by this Agreement function as and remain an independentcontractor, and not an employee or officer of the Company, and neither Party shall represent to third parties that Contractor is an employee or officer of theCompany.(a) Contractor shall be responsible for the payment of all taxes on amounts received from the Company for the Services. TheCompany will regularly report amounts paid to Contractor by filing Form 1099-MISC with the Internal Revenue service, as required by law. No part ofContractor’s fees will be subject to withholding by the Company for payment of any social security, federal, state or other employee payroll taxes. Contractoragrees to indemnify and hold the Company harmless from any liability for, or assessment of, any such taxes imposed on the Company by relevant taxingauthorities.(b) Contractor shall retain the right to perform services for others during the term of this Agreement.(c) Contractor will determine the method, details, and means of performing the Services. The Company shall have no right to, andshall not control, the manner or determine theINDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07  Initials: Contractor Accuray /s/ D.M. method of accomplishment of the Services, though it may define the Services to be performed. Such Services may be amended, from time-to-time, by theParties by written agreement, signed by the Contractor and the Company.(d) Contractor may, at Contractor’s own expense, employ such assistants as the Contractor may deem necessary to perform theServices. The Company shall not control, direct or supervise the work of Contractor’s assistants or employees in the performance of Services. TheContractor assumes full and sole responsibility for the quality of Services provided by the Contractor’s assistants or employees, for the payment of allcompensation and expenses of these assistants and employees, for state and federal income taxes and other applicable payroll taxes and withholding that maybe required with respect to such assistants or employees, and for the provision of all benefits and insurance, including without limitation, Worker’sCompensation Insurance, to such assistants or employees. Contractor shall furnish the Company with proof of Worker’s Compensation Insurance coveragefor all persons who provide Services pursuant to this Agreement.(e) Contractor shall be responsible for all expenses incurred in the execution of Contractor’s responsibilities pursuant to thisAgreement, including, without limitation, all travel (including airfare and lodging), entertainment and dining expenses. No fines, taxes, bonds or fees imposedagainst Contractor, or costs of Contractor doing business, shall be reimbursable by the Company.(f) Contractor shall not be eligible to participate in any fringe benefit program or any benefit plan of the Company.(g) Contractor will have no authority to enter into contracts that bind the Company or to create obligations on the part of theCompany without the prior written authorization of the Company.(h) Contractor shall receive no office or administrative support from Company.3. Fees.As consideration for the Services to be provided by Contractor, the Company will compensate Contractor as described in Exhibit B to thisAgreement. Company will pay Contractor Contractor’s annual compensation in quarterly installments of $37,275, such quarterly installments to be paid inadvance of each quarter beginning on the date on which this Agreement is signed by both Parties and thereafter on the first business day of each quarter. Compensation for Contractor’sINDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 2 Initials: Contractor Accuray /s/ D.M. Services shall be conditioned on the actual performance by Contractor of Services and the Company’s receipt and approval of accurate and detailed quarterlyinvoices, including records of time spent and Services performed, from Contractor in the form attached hereto as Exhibit D. Contractor shall submit suchquarterly invoices for all Services performed by Contractor during the applicable quarter two (2) weeks prior to the end of such quarter (for example, for thefirst quarterly period of this Agreement, January 1, 2007 to March 31, 2007, Contractor’s first quarterly invoice will be due to Company no later thanMarch 17, 2007). If for any quarter, Contractor has not provided the level of Services required to earn the full quarterly installment for such quarter, then thequarterly installment for Contractor for the following quarter will be reduced in an amount equal to the amount that Contractor was overcompensated for thepreceding quarter. If at the end of the term of this Agreement, Contractor has never performed certain services, and Contractor’s failure to perform suchservices has not been offset against any subsequent quarter’s installment, then Contractor will reimburse Company the corresponding amount for the servicesnot performed within thirty (30) calendar days. The Parties acknowledge that payment for the Services provided hereunder is consistent with the fair marketvalue of such Services and is not conditioned in any way on the volume or value of any business (i) between the Company and any other party, or (ii)resulting, directly or indirectly, from any of Contractor’s activities hereunder.4. Confidentiality.(a) Confidential Information. “Confidential Information” means Company proprietary information, technical data, trade secretsor know-how, including, but not limited to, research, product plans, product specifications, services, customers, customer lists, pipeline documents,marketing plans and strategies, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, hardware configurationinformation, circuit board designs, logic designs for filters and/or circuit boards, Company financials or other business information disclosed by theCompany either directly or indirectly in writing, orally, or by drawings or inspection of parts or equipment. Confidential Information also includes any otherinformation designated by the Company as such upon its disclosure to the Contractor.(b) Disclosure. Contractor will not, during or subsequent to the term of this Agreement, use the Company’s ConfidentialInformation for any purpose whatsoever other than the performance of the Services on behalf of the Company. Contractor will not disclose the Company’sConfidential Information to any third party, and understands that said Confidential Information shall remain the sole property of the Company. Contractorfurther agrees to take all reasonable precautions to prevent any unauthorized disclosure of such Confidential Information including, but not limited to, havingeach employee of Contractor, if any, with access to any ConfidentialINDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 3 Initials: Contractor Accuray /s/ D.M. Information, execute a nondisclosure agreement containing provisions in the Company’s favor substantially similar to Sections 4, 5 and 6 of this Agreement. Confidential Information does not include information which, upon disclosure to Contractor is part of the public domain; can be established by writtenevidence to have been in the possession of Contractor at the time of disclosure; is received by Contractor from a third party without restriction and withoutbreach of this Agreement; or has become publicly known and made generally available through no wrongful act of Contractor. If Contractor is required todisclose Confidential Information by lawfully issued subpoena or by an authorized order of a government agency, Contractor will immediately so inform theCompany, and will use best efforts to minimize the disclosure of such Confidential Information and will consult with and assist the Company in seeking aprotective order prior to such disclosure.(c) Indemnity. Contractor agrees that Contractor will not, during the term of this Agreement, improperly use or disclose to theCompany or any of its employees any proprietary information or trade secrets of any former or current employer or other person or entity with whichContractor has an agreement, or to which Contractor has a duty, to keep in confidence information acquired by Contractor, and that Contractor will not bringonto the premises of the Company any unpublished document, proprietary information, or trade secret belonging to such employer, person or entity unlessconsented to in writing by such employer, person or entity. Contractor will indemnify the Company and hold it harmless from and against all claims,liabilities, damages and expenses, including reasonable attorneys’ fees and costs of suit, arising out of or in connection with any violation or claimed violationof a third party’s rights resulting in whole or in part from the Services provided by Contractor under this Agreement.(d) Third Parties. Contractor recognizes that the Company has received and in the future will receive from third parties theirconfidential or proprietary information or trade secrets subject to a duty on the Company’s part to maintain the confidentiality of such information and to useit only for certain limited purposes. Contractor agrees that Contractor owes the Company and such third parties, during the term of this Agreement andthereafter, a duty to hold all such confidential or proprietary information or trade secrets in the strictest confidence and not to disclose it to any person, firm orcorporation or to use it except as necessary in carrying out the Services for the Company consistent with the Company’s agreement with such third party.(e) Return of Confidential Information. Upon the termination of this Agreement, or upon the Company’s earlier request,Contractor will deliver to the Company all of the Company’s property and all Confidential Information in tangible form that Contractor may have inContractor’s possession or control.INDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 4 Initials: Contractor Accuray /s/ D.M. 5. Ownership.(a) Inventions. Contractor agrees that all copyrightable material, notes, records, drawings, designs, inventions, improvements,developments, discoveries and trade secrets (collectively, “Inventions”) conceived, made or discovered by Contractor, solely or in collaboration with others,during the period of this Agreement which relate in any manner to the business of the Company that Contractor may be directed to undertake, investigate orexperiment with, or which Contractor may become associated with as a result of work, investigation or experimentation in the line of business of Company inperforming the Sales and Marketing Services hereunder, are the sole property of the Company. Contractor further agrees to assign (or cause to be assigned)and does hereby assign fully to the Company all such Inventions and any copyrights, patents, mask work rights or other intellectual property rights relatingthereto.(b) Assistance. Contractor agrees to assist Company, or its designee, at the Company’s expense, in every proper way to secure theCompany’s rights in the Inventions and any copyrights, patents, mask work rights or other intellectual property rights relating thereto in any and allcountries, including the disclosure to the Company of all pertinent information and data with respect thereto, the execution of all applications, specifications,oaths, assignments and all other instruments which the Company shall deem necessary in order to apply for and obtain such rights and in order to assign andconvey to the Company, its successors, assigns and nominees the sole and exclusive rights, title and interest in and to such Inventions, and any copyrights,patents, mask work rights or other intellectual property rights relating thereto. Contractor further agrees that Contractor’s obligation to execute or cause to beexecuted, when it is in Contractor’s power to do so, any such instrument or papers shall continue after the termination of this Agreement.(c) Deleted.(d) Agent. Contractor agrees that if the Company is unable because of Contractor’s unavailability for any reason to secureContractor’s signature to apply for or to pursue any application for any United States or foreign patents or mask work or copyright registrations covering theInventions assigned to the Company above, then Contractor hereby irrevocably designates and appoints the Company and its duly authorized officers andagents as Contractor’sINDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 5 Initials: Contractor Accuray /s/ D.M. agent and attorney-in-fact, to act for and in Contractor’s behalf and stead to execute and file any such applications and to do all other lawfully permitted acts tofurther the prosecution and issuance of patents, copyright and mask work registrations thereon with the same legal force and effect as if executed byContractor.6. Originality and Noninfringement.Contractor represents and warrants that all materials and Services provided hereunder will be original with Contractor and that the usethereof by the Company or its customers, representatives, distributors or dealers will not infringe any patent, copyright, trade secret or other intellectualproperty right of any third party. Contractor agrees to indemnify and hold the Company harmless against any liability, loss, cost, damage, claims, demandsor expenses (including reasonable attorneys’ fees) of the Company or its customers, representatives, distributors or dealers arising out of any infringement orclaim of infringement with respect to any materials or Services provided by Contractor.7. Reports.Contractor agrees that Contractor will, from time-to-time during the term of this Agreement, keep the Company informed as to Contractor’sprogress in performing the Services hereunder and that Contractor will, as requested by the Company, prepare written reports with respect thereto. The Partiesunderstand that the time required in the preparation of such written reports shall be considered time devoted to the performance of Contractor’s Services.8. Conflicting Obligations.(a) Performance. Contractor acknowledges that Contractor will be available to perform the Services in a timely and responsiblemanner, except for the occasional circumstance in which a pre-existing clinical responsibility on the part of Contractor may conflict with a new commitmentrequested by the Company, subject to the requirements of the schedule of Services arranged by Company and Contractor pursuant to Section 1 of Exhibit Ahereto. Failure to perform in a timely and responsible manner shall be a breach of this Agreement.(b) No Conflicts. Contractor represents and warrants that Contractor has no outstanding agreement or obligation that is in conflictwith any provision of this Agreement, or that would preclude Contractor from complying with the provisions hereof, except as disclosed inINDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 6 Initials: Contractor Accuray /s/ D.M. Exhibit C hereto. Contractor further represents and warrants that Contractor will not enter into any such conflicting Agreement during the term of thisAgreement.9. Term and Termination.(a) Commencement. This Agreement will commence on the date first above written and will continue for a period of one year (the“Initial Term”). Unless 30 days’ written notice of termination is given by either Party prior to the expiration of the Initial Term, or any subsequent Term, thisAgreement shall renew for successive one-year periods. (b) Termination. This Agreement may be terminated as follows:(i) Either Party may terminate this Agreement with 30 days’ prior written notice to the other. Any such notice shall be addressedto such Party at the address shown below or such other address as such Party shall provide to the other, and shall be deemed given upon delivery if personallydelivered, on the next business day if sent via overnight courier, or three days after deposit in the United States mail, postage prepaid, registered or certifiedmail, return receipt requested.(ii) The Parties shall attempt to amend this Agreement upon receipt of any Governmental Action in order to comply with suchGovernmental Action. If the Parties, acting in good faith, are unable to make the amendments necessary to comply with such Governmental Action, or,alternatively, if either Party determines in good faith that compliance with the Governmental Action is impossible or infeasible, this Agreement shall terminate10 days after one Party notifies the other of such fact. For purposes of this Section 9(b)(ii), the term “Governmental Action” shall mean any legislation,regulation, rule or procedure passed, adopted or implemented by any federal, state or local government or legislative body or any private agency, or any noticeof a decision, finding, interpretation or action by any governmental or private agency, court or other third party which, in the opinion of counsel to theCompany, because of the arrangement between the Parties pursuant to this Agreement, if or when implemented, would: (A) constitute a violation of anyfederal, state or local law; or (B) subject either Party, or any of their respective employees or agents, to civil or criminal liability or prosecution on the basis oftheir participation in executing this Agreement or performing their respective obligations under this Agreement.(iii) If this Agreement is terminated for any reason within one-year of the date first above written, the Parties shall not enter into thesame or substantially the same arrangementINDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 7 Initials: Contractor Accuray /s/ D.M. contemplated by this Agreement during the period which is one-year following the date first above written.(c) Survival. Upon such termination, all rights and duties of the Parties toward each other shall cease except:(i) that the Company shall be obliged to pay, within 30 days of receipt of the Contractor’s invoice, all amounts owing toContractor for unpaid Services through the termination date; and(ii) Sections 4, 5, 6, 9 and 11 shall survive termination of this Agreement.10. Assignment.Neither this Agreement nor any right hereunder or interest herein may be assigned or transferred by the Company or the Contractor withoutthe written consent of the other.11. Arbitration and Equitable Relief.(a) Arbitration. Except as provided in Section 11(b) below, the Company and Contractor agree that any dispute or controversyarising out of or relating to any interpretation, construction, performance or breach of this Agreement shall be settled by arbitration to be held in Santa ClaraCounty, California before a single, neutral arbitrator associated with the Judicial Arbitration and Mediation Service (“JAMS”). The arbitrator shall be selectedby the Parties or, if the Parties are unable to agree, by JAMS, in accordance with its selection practices. The arbitrator may grant injunctions or other relief insuch dispute or controversy. The decision of the arbitrator shall be final, conclusive, and binding on the Parties to the arbitration. Judgment may be enteredon the arbitrator’s decision in any court of competent jurisdiction. Unless otherwise required to preserve the enforceability of this arbitration clause, theCompany and Contractor shall each pay one-half of the costs and expenses of such arbitration.(b) Equitable Relief. Contractor agrees that it would be impossible or inadequate to measure and calculate the Company’s damagesfrom any breach of the covenants set forth in Section 4 or 5 herein. Accordingly, Contractor agrees that if Contractor breaches Sections 4 or 5, the Companywill have available, in addition to any other right or remedy available, the right to obtain from any court of competent jurisdiction an injunction restrainingsuch breach or threatened breach and specific performance of any such provision. Contractor further agrees that no bond or otherINDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 8 Initials: Contractor Accuray /s/ D.M. security shall be required in obtaining such equitable relief and Contractor hereby consents to the issuances of such injunction and to the ordering of suchspecific performance.12. Miscellaneous.(a) Amendments and Waivers. Any term of this Agreement may be amended or waived only with the written consent of theParties.(b) Entire Agreement. This Agreement, including the Exhibits hereto, constitutes the entire agreement of the Parties and supersedesand replaces all oral negotiations and prior writings with respect to the subject matter hereof.(c) Notices. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon receipt,when delivered personally or by courier or overnight delivery service, or three days after being deposited in the regular United States mail as certified orregistered mail (airmail if sent internationally) with postage prepaid, if such notice is addressed to the party to be notified at such party’s address or facsimilenumber as set forth below, or as subsequently modified by written notice.(d) Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws ofthe State of California, without giving effect to its principles of conflict of laws.(e) Legal Fees. If any dispute arises between the Parties with respect to matters covered by this Agreement which leads to aproceeding, pursuant to Section 11, to resolve such dispute, the prevailing party in any such proceeding shall be entitled to receive its reasonable attorneys’fees, expert witness fees and out-of-pocket costs incurred in connection with such proceeding, in addition to any other relief to which it may be entitled.(f) Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, then suchunenforceable provision shall be deemed modified so as to be enforceable (or if not subject to modification then eliminated herefrom) for the purpose of thoseprocedures to the extent necessary to permit the remaining provisions to be enforced.(g) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of whichtogether will constitute one and the same instrument.INDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 9 Initials: Contractor Accuray /s/ D.M. (h) Advice of Counsel. EACH PARTY ACKNOWLEDGES THAT, IN EXECUTING THIS AGREEMENT, SUCH PARTYHAS HAD THE OPPORTUNITY TO SEEK THE ADVICE OF INDEPENDENT LEGAL COUNSEL, AND HAS READ AND UNDERSTOOD ALLOF THE TERMS AND PROVISIONS OF THIS AGREEMENT. THIS AGREEMENT SHALL NOT BE CONSTRUED AGAINST ANY PARTY BYREASON OF THE DRAFTING OR PREPARATION HEREOF.(i) Compliance with Laws. The Parties agree to abide by the Company’s compliance policies and all federal, state or local laws,regulations, ordinances or other legal requirements in connection with the performance of the Services hereunder. In addition, at all times during thisAgreement, Contractor shall have in effect all licenses, permits and authorizations for all local, state, federal and foreign governmental agencies to the extent thesame are necessary to the performance of the Services hereunder and will verify all such licenses, permits and authorizations are in place before performingany Services under this Agreement. Consultant shall not perform any Services under this Agreement for which he does not hold all necessary licenses,permits and authorizations and will hold the Company harmless in all respects for any claims or actions resulting from Contractor’s violation of thisprovision.[SIGNATURE PAGE FOLLOWS]INDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 10 Initials: Contractor Accuray /s/ D.M. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the day and year first written above.JOHN ADLER, M.D.ACCURAY, INC. Signature:/s/ John AdlerSignature:/s/ WadeHampton Name:John Adler, M.D.Name:Wade Hampton Title:ContractorTitle:SVP, Worldwide Sales Address: 894 Tolman DriveAddress:1310ChesapeakeTerrace Stanford, CASunnyvale, CA94089 Telephone:(650) 852-9626Telephone: Date:March 27, 2007Date:3/28/07 Signature:/s/ DarrenMilliken Name:Darren Milliken Title:General Counsel Address:1310ChesapeakeTerrace Sunnyvale, CA94089 Telephone:408-716-4648 Date:3/27/07 INDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 11 Initials: Contractor Accuray /s/ D.M. EXHIBIT ASERVICES1. Description of Services. Contractor will be present at and participate in VIP visits arranged by Company at Stanford University MedicalCenter (“SUMC”). In addition, Contractor will travel to and participate in both domestic and international sales visits as requested byCompany. Finally, Contractor will travel to and participate in certain domestic tradeshows or symposiums which Company requests thatContractor attend. As soon as practicable following the execution of this Agreement, Contractor and the Company shall meet to schedule thespecific Services to be performed during the first calendar quarter that this Agreement is in effect. Thereafter, Contractor and the Companyshall meet at least thirty (30) days in advance of the end of each calendar quarter to schedule the Services to be performed during the subsequentcalendar quarter.2. VIP Visits. Contractor’s duties and deliverables in connection with Contractor’s participation in Company’s VIP visits to SUMC (up to two(2) visits per month with a maximum of 7 visits per year) will include:2.1. Case Observation: Contractor will participate in the observation of a case being treated in the CyberKnife Suite at SUMC.2.2. Question and Answer Sessions: Contractor will participate in a thirty (30) minute question “Question and Answer” session followingthe observation in the CyberKnife suite for each VIP visit.2.3. Lunches/Dinners: Contractor will attend a lunch or dinner meeting, as applicable, following the VIP visit.3. Sales Visits/Tradeshows/Symposiums. Contractor’s duties and deliverables in connection with Contractor’s travel to and participation insales visits and tradeshows will include:3.1. Domestic Sales Visits/Tradeshows/Symposiums: Contractor will travel to and attend domestic sales visits, tradeshows, andsymposiums as requested by Company, up to four (4) trips per year, with two (2) trips lasting two (2) days and two (2) trips lastingone (1) day.INDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 12 Initials: Contractor Accuray /s/ D.M. 3.2. Mexican and Canadian Sales Visits: One (1) trip per year to Canada or Mexico lasting for two (2) full days with customer.3.3. Europe and Emerging Market Sales Visits: Contractor will travel to and attend sales visits in Europe and other international emergingmarkets (for example, Canada, Mexico, Asia, and Latin America, or other miscellaneous emerging markets) as requested byCompany. At Company’s option, these sales visits shall consist of:3.3.1. Two (2) trips per year to Europe:3.3.1.1. One trip lasting for four (4) days (two (2) full days with customer, the remaining days as travel);3.3.1.2. One trip lasting five (5) days (three (3) full days with customer, the remaining days as travel).3.3.2. Two (2) trips per year to Asia lasting five (5) days (three (3) full days with customer, the remaining days as travel).3.3.3. One (1) trip per year to Latin America lasting five (5) days (three (3) full days with customer, the remaining days as travel).3.4. Notice: To the extent possible, Company shall use commercially reasonable efforts to provide Contractor with at least three (3) weeksprior notice of any travel required in connection with sales visits and attendance at trade shows and symposiums.INDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 13 Initials: Contractor Accuray /s/ D.M. EXHIBIT BCOMPENSATION1. Compensation. Contractor shall be compensated for Services performed according to this Agreement as follows:1.1. Compensation for VIP Visits:1.1.1.Case Observation:$500 per observation 1.1.2.Q & A Session:$500 per Q&A session 1.1.3.Lunch or Dinner:$500 per Lunch or Dinner 1.1.4.Maximum Compensation:$1,500 1.1.5.Maximum Annual Compensation:$10,500 per year 1.1.6.Maximum annual compensation for VIP Visits is based on seven (7) VIP visits per year withparticipation in case observation, Q&A Session and Lunch or Dinner at each VIP Visit. 1.2. Compensation for Attending Domestic Sales/Tradeshow/Symposium Visits: 1.2.1.One day Domestic Sales Visit/Tradeshow:$4,300 per visit 1.2.2.Two day Domestic Sales Visit/Tradeshow:$7,600 per visit 1.2.3.Maximum Annual Compensation:$23,800 per year 1.2.4.Maximum annual compensation for domestic sales visits, tradeshows, and symposiums is basedon the maximum of two (2) one-day visits and two (2) two-day visits per year, such visits to beselected by the company. INDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 14 Initials: Contractor Accuray /s/ D.M. 1.3. Compensation for Mexico and Canada Visits:1.3.1.Two-day Sales Visit:$8,600 per visit 1.3.2.Maximum Annual Compensation:$8,600 per year 1.3.3.Maximum annual compensation for Mexican or Canadian visits is based on themaximum of one (1) two-day visit, such visit to be selected by the company. 1.4. Compensation for Attending Europe and Emerging Market Sales Visits:1.4.1.Four-day Sales Visit:$18,600 per visit 1.4.2.Five-day Sales Visit:$21,900 per visit 1.4.3.Maximum Annual Compensation:$106,200 per year 1.4.4.Maximum annual compensation for Europe and Emerging Markets Sales Visits isbased on the maximum of one (1) trip lasting for four (4) days to Europe, one triplasting five (5) days to Europe, two (2) trips lasting five (5) days to Asia, one (1) triplasting five (5) days to Latin America, as set forth in §3.3 of Exhibit A. 1.5. Total Compensation/Payment. As indicated above, Contractor’s maximum possible annual compensation from Company under thisAgreement is $149,100 to be paid quarterly in advance, in four (4) equal installments of $37,275 per quarter beginning on the day thatthis Agreement is signed by both Parties and thereafter on the first business day of each quarter. Should Contractor not perform certain ofthe above objectives, then future quarterly payments to Contractor may be offset by the corresponding amount of the Services notperformed. If at the end of the term of this Agreement, certain Services were not performed, and Contractor’s failure to perform suchservices has not been offset against any subsequent quarter’s installment, then Contractor shall reimburse Company for the correspondingamount of the services not performed within thirty (30) calendar days.INDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 15 Initials: Contractor Accuray /s/ D.M. EXHIBIT CLIST OF POTENTIAL CONFLICTS[None — Left Blank]INDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 16 Initials: Contractor Accuray /s/ D.M. EXHIBIT DCONTRACTOR TIME RECORDContractor: ___________________________ DateDescription of Services PerformedLocations of Services PerformedNumber ofDays/Visits This record is a complete and accurate description of the Services I performed and the time spent in connection therewith on behalf ofAccuray, Inc. on the dates specified above. ContractorDate INDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 3.22.07 17Initials: Contractor /s/ J.A.Accuray /s/ D.M. AMENDMENT ONE TO INDEPENDENT CONTRACTOR AGREEMENTThis Amendment One (“Amendment”) to the Independent Contractor Agreement (“Agreement”) by and between Accuray Incorporated (“Accuray”), a DelawareCorporation with offices located 1310 Chesapeake Terrace, Sunnyvale, Ca 94089 and John Adler, M.D. (“Contractor”) is made effective as ofApril 10, 2007 (“Effective Date”).In consideration for the mutual promises contained in this Amendment, the parties want to amend the Agreement on the terms and conditions set forth herein.1. The Agreement, Section 2 of Exhibit B on page 12, which read as follows:2. VIP Visits. Contractor’s duties and deliverables in connection with Contractor’s participation in Company’s VIP visits to SUMC (up totwo (2) visits per month with a maximum of 7 visits per year) will include:2.1 Case Observation: Contractor will participate in the observation of a case being treated in the CyberKnife Suite atSUMC.2.2 Question and Answer Sessions: Contractor will participate in a thirty (30) minute question “Question and Answer” sessionfollowing the observation in the CyberKnife suite for each VIP visit.2.3 Lunches/Dinners: Contractor will attend a lunch or dinner meeting, as applicable, following the VIP visit.shall be replaced with the following:2. VIP Visits. Contractor’s duties and deliverables in connection with Contractor’s participation in Company’s VIP visits at Accuray (up totwo (2) visits per month with a maximum of 7 visits per year) will include:2.1 Question and Answer Sessions: Contractor will participate in a thirty (30) minute question “Question and Answer” sessionduring the VIP visit at Accuray.2.2 Lunches/Dinners: Contractor will attend a lunch or dinner meeting, as applicable, following the VIP visit.2. A new Section 1.3.4 shall be added to Exhibit B to the Agreement (for Services performed by Contractor pursuant to the Agreement), which reads asfollows:1.3.4 Notwithstanding the forgoing, in the event Accuray requests that Contractor travel to and attend an Mexican or Canadian sales visit,tradeshow, or symposium without at least 30 days prior notice, then Accuray shall pay contractor an additional $1,000 in addition to theapplicable compensation set forth in this Section.3. A new Section 1.4.5 shall be added to Exhibit B to the Agreement (for Services performed by Contractor pursuant to the Agreement), which reads asfollows:1.4.5 Notwithstanding the forgoing, in the event Accuray requests that Contractor travel to and attend a European or Emerging Market salesvisit, tradeshow, or symposium without at least 30 days priorAMENDMENT ONE TO INDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 04.26.07  Initials: Contractor /s/ J.A.Accuray /s/ D.M. notice, then Accuray shall pay contractor an additional $1,000 in addition to the applicable compensation set forth in this Section.4. The total annual compensation listed in Section 3 of the Agreement and Section 1.5 of Exhibit B of the Agreement may therefore be increased by theamounts provided in Sections 1 and 2 of this Amendment.5. The Agreement, Section 9(b)(i) on page 7, which read as follows:Either Party may terminate this Agreement with 30 days’ prior written notice to the other. Any such notice shall beaddressed to such Party at the address shown below or such other address as such Party shall provide to the other, andshall be deemed given upon delivery if personally delivered, on the next business day if sent via overnight courier, orthree days after deposit in the United States mail, postage prepaid, registered or certified mail, return receipt requested.shall be replaced with the following:Either Party may terminate this Agreement with 90 days’ prior written notice to the other. Any such notice shall beaddressed to such Party at the address shown below or such other address as such Party shall provide to the other, andshall be deemed given upon delivery if personally delivered, on the next business day if sent via overnight courier, orthree days after deposit in the United States mail, postage prepaid, registered or certified mail, return receipt requested.6. All provisions of the Agreement, except as expressly modified by this Amendment, will remain in full force and effect and are hereby ratified andreaffirmed. In the case of direct conflict or conflict by reason of interpretation between any provision of this Amendment and the Agreement, thisAmendment shall control and supersede the terms of the Agreement.7. This Amendment in combination with the Agreement contains the entire agreement of the Parties hereto with respect to the subject matter hereof, andsupersedes all prior understandings, representations and warranties, written and oral.[SIGNATURE PAGE FOLLOWS]AMENDMENT ONE TO INDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 04.26.07 2 Initials: Contractor /s/ J.A.Accuray /s/ D.M. IN WITNESS WHEREOF, the parties have caused this Amendment to be executed as of the Effective Date by their duly authorized representatives. Theparties acknowledge and agree that this Amendment does not become effective until it has been signed by all parties indicated below.JOHN ADLER, M.D.ACCURAY INCORPORATED Signature:/s/ John AdlerSignature: /s/ DarrenMilliken Name:John Adler, M.D.Name:Darren Milliken Title:ContractorTitle:Associate General Counsel Address:894 Tolman DriveAddress:1310ChesapeakeTerrace Stanford, CASunnyvale, CA94089 Telephone:(650) 852-9626Telephone: Date:4/27/07Date:4/30/07 AMENDMENT ONE TO INDEPENDENT CONTRACTOR AGREEMENTACCURAY CONFIDENTIALJohn Adler, M.D. – 04.26.07 3Exhibit 10.53May 3, 2007Mr. Christopher MitchellRe: EMPLOYMENT TERMSDear Christopher:Accuray Incorporated (the “Company”) is pleased to offer to continue your employment as Senior Vice President, General Counsel of theCompany on the terms and conditions set forth in this letter, effective as of April 23, 2007 (the “Effective Date”).1. TERM. The employment relationship between you and the Company will be at-will. You and the Company will have the right to terminate theemployment relationship at any time and for any reason whatsoever, with or without cause, and without any liability or obligation except as may be expresslyprovided herein.2. POSITION, DUTIES AND RESPONSIBILITIES. During the period of the employment relationship between you and the Company (the“Term”), the Company will employ you, and you agree to be employed by the Company, as Senior Vice President, General Counsel of the Company. In thecapacity of Senior Vice President, General Counsel, you will have such duties and responsibilities as are normally associated with such position and willdevote your full business time and attention serving the Company in such position. Your duties may be changed from time to time by the Company,consistent with your position. You will dual line report to the Chief Executive Officer of the Company (the “CEO”) and the Chief Financial Officer (the“CFO”), and will work full-time at our principal offices located at 1310 Chesapeake Terrace, Sunnyvale, California 94089 (or such other location in thegreater Sunnyvale area as the Company may utilize as its principal offices), except for travel to other locations as may be necessary to fulfill yourresponsibilities.3. BASE COMPENSATION. During the Term, the Company will pay you a base salary of $250,000 per year, less payroll deductions and allrequired withholdings, payable in accordance with the Company’s normal payroll practices and prorated for any partial month of employment. Your basesalary may be subject to increase pursuant to the Company’s policies as in effect from time to time.4. ANNUAL BONUS. In addition to the base salary set forth above, during the Term, you will be eligible to participate in the Company’sexecutive bonus plan applicable to similarly situated executives of the Company. The amount of your annual bonus will be based on the attainment ofperformance criteria established and evaluated by the Company in accordance with the terms of such bonus plan as in effect from time to time, provided that,subject to the terms of such bonus plan, your target (but not necessarily maximum) annual bonus shall be 40% of your base salary actually paid for suchyear.5. STOCK OPTIONS. As an added incentive, we will recommend to the Compensation Committee of the Board of Directors that you be grantedan option (the “Option”) to purchase 90,000 shares of Accuray common stock at a per share exercise price equal to the fair market value of a share of ourcommon stock on the date of the grant, as determined in accordance with the Accuray Incorporated 2007 Incentive Award Plan (the “Incentive Plan”). Thegrant of the Option is subject to and conditioned on approval of the grant and its terms by the Compensation Committee, and will be made as soon aspracticable following your Start Date. Subject to your continued employment, the Option would vest with respect to 25% of the shares subject thereto on thefirst anniversary of your Start Date, and with respect to an additional 1/48th of the shares subject thereto on each monthly anniversary thereafter, such that theentire Option would be vested on the fourth anniversary of your Start Date. The Option will be subject to the terms and conditions of the Incentive Plan and astock option agreement in a form prescribed by Accuray, which you will be required to sign as a condition to receiving the Option (the “Option Agreement”).6. RESTRICTED STOCK UNITS. We will recommend to the Compensation Committee of the Board of Directors that you be granted 10,000restricted stock units (“RSUs”) under the Accuray 2007 Incentive Award Plan. The grant of the RSUs is subject to and conditioned on approval of the grantand its terms by the Compensation Committee, and will be made as soon as practicable following your Start Date. Subject to the your continued service as anEmployee through the applicable vesting date, twenty-five percent (25%) of the RSUs shall vest on the first anniversary of the Grant Date and an additionaltwenty-five percent (25%) of the RSUs shall vest on each of the second, third and fourth anniversaries of the Grant Date.Payment in respect of any RSUs that vest in accordance with the grant agreement will be made to you in whole shares of our common stock as soon aspracticable after the applicable vesting date, but in no event later than 60 days after such vesting date. The RSUs will be subject to the terms and conditionsof the Incentive Plan and a restricted stock unit grant agreement in a form prescribed by Accuray, which you will be required to sign as a condition to receivingthe RSUs (the “RSU Agreement”).7. BENEFITS AND PAID TIME OFF. During the Term, you will be eligible to participate in all incentive, savings and retirement plans,practices, policies and programs maintained or sponsored by the Company from time to time which are applicable to other similarly situated executives of theCompany, subject to the terms and conditions thereof. During the Term, you will also be eligible for standard benefits, such as medical, vision and dentalinsurance, paid time off, and holidays to the extent applicable generally to other similarly situated executives of the Company, subject to the terms andconditions of the applicable Company plans or policies. The benefits described in this Section 5 will be subject to change from time to time as deemedappropriate and necessary by the Company.28. TERMINATION OF EMPLOYMENT.(a) In the event of a termination of your employment by the Company without Cause or by you for Good Reason (each as defined below), then,in addition to any other accrued amounts payable to you through the date of termination of your employment (including any earned but unpaid bonus), (1) theCompany will no later than the date that is six (6) months and one (1) day after the date of your termination of employment, or the last day of such shorterperiod upon such termination of employment that is sufficient to avoid the imposition of additional tax under Section 409A(a)(l)(B) of the Internal RevenueCode of 1986, as amended (the “Code”), or any other taxes or penalties imposed under Section 409A of the Code, pay you a lump-sum severance payment(the “Severance Payment”) in an amount equal to the sum of (x) eight (8) months of your annual base salary as in effect on the date of termination plus (y) apro rata portion of your target annual bonus for the fiscal year of the Company in which such termination occurs, calculated based on the number of dayselapsed in such fiscal year through the date of termination plus (z) 66-2/3% of your target annual bonus for the fiscal year of the Company in which suchtermination occurs, and (2) provided that you properly elect COBRA continuation coverage, the Company will pay the COBRA premium for health carecoverage for you and your spouse and children, as applicable and to the extent eligible (the “Severance Benefits”), for the eight (8) month period immediatelyfollowing the date of such termination of your employment. Such payments for the Severance Benefits will begin no later than the date that is six (6) monthsand one (1) day after the date of your termination of employment, or the last day of such shorter period upon such termination of employment that is sufficientto avoid the imposition of additional tax under Section 409A(a)(l)(B) of the Code or any other taxes or penalties imposed under Section 409A of the Code (the“Deferred COBRA Payment Date”), and on the Deferred COBRA Payment Date, the Company will pay you an amount equal to the Severance Benefits forthe period beginning on the date of your termination of employment and ending on the Deferred COBRA Payment Date.(b) If a Change in Control (as defined in Exhibit A hereto) occurs during the Term and your employment with the Company is terminated bythe Company without Cause or by you for Good Reason, in each case within the twelve (12) month period immediately following the effective date of theChange in Control, then, in addition to the amounts payable to you pursuant to paragraph (a) of this Section 6, each of your then outstanding stock optionsand Restricted Stock Units (“RSUs”) to purchase shares and units of the Company’s common stock and RSUs shall become fully vested and exercisableimmediately prior to the effective time of the termination of your employment.(c) Notwithstanding the foregoing, your right to receive the payments and benefits set forth in this Section 6 is conditioned on and subject toyour execution and non-revocation of a general release of claims against the Company and its affiliates, in a form prescribed by the Company. In no eventshall you or your estate or beneficiaries be entitled to any of the payments or benefits set forth in this Section 6 upon any termination of your employment byreason of your total and permanent disability or your death.3(d) For purposes of this letter:(A) “Cause” shall mean (i) your commission of a felony, (ii) your commission of a crime involving moral turpitude or your commissionof any other act or omission involving dishonesty, disloyalty, breach of fiduciary duty or fraud with respect to the Company or any of its subsidiaries or anyof their customers or suppliers, or (iii) your failure to perform the normal and customary duties of your position with the Company as reasonably directed bythe CEO, provided, that any of the acts or omissions described in the foregoing clauses (i), (ii) or (iii) are not cured to the Company’s reasonable satisfactionwithin thirty (30) days after written notice thereof is given to you; and(B) “Good Reason” shall mean the occurrence of any one or more of the following events without your prior written consent, unless theCompany fully corrects the circumstances constituting Good Reason within 30 days after notice from you that Good Reason exists: (i) a material reduction ofyour duties and responsibilities hereunder; (ii) a relocation of your principal workplace more than 35 miles outside the Company’s Sunnyvale corporateheadquarters; or (iii) the Company’s reduction of your annual base salary or bonus opportunity, each as in effect on the date hereof or as the same may beincreased from time to time; provided that written notice of your resignation for Good Reason must be delivered to the Company within 30 days after the dateyou first know or should reasonably know of the occurrence of any such event in order for your resignation with Good Reason to be effective hereunder.9. CODE SECTION 280G.(a) In the event it shall be determined that any payment or distribution to you or for your benefit which is in the nature of compensation and iscontingent on a change in the ownership or effective control of the Company or the ownership of a substantial portion of the assets of the Company (within themeaning of Section 280G(b)(2) of the Code), whether paid or payable pursuant to this letter or otherwise (a “Payment”), would constitute a “parachutepayment” under Section 280G(b)(2) of the Code and would be subject to the excise tax imposed by Section 4999 of the Code (together with any interest orpenalties imposed with respect to such excise tax, the “Excise Tax”), then the Payments shall be reduced to the extent necessary so that no portion thereof shallbe subject to the excise tax imposed by Section 4999 of the Code but only if, by reason of such reduction, the net after-tax benefit received by you shall exceedthe net after-tax benefit received by you if no such reduction was made. For purposes of this Section 7(a), “net after-tax benefit” shall mean (i) the Paymentswhich you receive or are then entitled to receive from the Company that would constitute “parachute payments” within the meaning of Section 280G of theCode, less (ii) the amount of all federal, state and local income taxes payable with respect to the Payments calculated at the maximum marginal income tax ratefor each year in which the Payments shall be paid to you (based on the rate in effect for such year as set forth in the Code as in effect at the time of the firstpayment of the foregoing), less (iii) the amount of Excise Taxes imposed with respect to the Payments.(b) All determinations required to be made under this Section 7 shall be made by such nationally recognized accounting firm as may beselected by the Audit Committee of the Board of Directors of the Company as constituted immediately prior to the change in control4transaction (the “Accounting Firm”), provided, that the Accounting Firm’s determination shall be made based upon “substantial authority” within themeaning of Section 6662 of the Code. The Accounting Firm shall provide its determination, together with detailed supporting calculations anddocumentation, to you and the Company within 15 business days following the date of termination of your employment, if applicable, or such other time asrequested by you (provided that you reasonably believe that any of the Payments may be subject to the Excise Tax) or the Company. All fees and expenses ofthe Accounting Firm shall be borne solely by the Company.10. RESTRICTIVE COVENANTS.(a) As a condition of your employment with the Company, you agree that during the Term and thereafter, you will not directly orindirectly disclose or appropriate to your own use, or the use of any third party, any trade secret or confidential information concerning the Company or itssubsidiaries or affiliates (collectively, the “Company Group”) or their businesses, whether or not developed by you, except as it is required in connectionwith your services rendered for the Company. You further agree that, upon termination of your employment, you will not receive or remove from the files oroffices of the Company Group any originals or copies of documents or other materials maintained in the ordinary course of business of the Company Group,and that you will return any such documents or materials otherwise in your possession. You further agree that, upon termination of your employment, youwill maintain in strict confidence the projects in which any member of the Company Group is involved or contemplating.(b) You further agree that during the Term and continuing through the first anniversary of the date of termination of youremployment, you will not directly or indirectly solicit, induce, or encourage any employee, consultant, agent, customer, vendor, or other parties doingbusiness with any member of the Company Group to terminate their employment, agency, or other relationship with the Company Group or such member orto render services for or transfer their business from the Company Group or such member and you will not initiate discussion with any such person for anysuch purpose or authorize or knowingly cooperate with the taking of any such actions by any other individual or entity.(c) While employed by the Company, you agree that you will not engage in any business activity in competition with any member ofthe Company Group nor make preparations to do so.(d) Upon the termination of your relationship with the Company, you agree that you will promptly return to the Company, and willnot take with you or use, all items of any nature that belong to the Company, and all materials (in any form, format, or medium) containing or relating to theCompany’s business.(e) In recognition of the facts that irreparable injury will result to the Company in the event of a breach by you of your obligationsunder Sections 8(a), (b), (c) or (d) above, that monetary damages for such breach would not be readily calculable, and that the Company would not have anadequate remedy at law therefore, you acknowledge, consent and5agree that in the event of such breach, or the threat thereof, the Company shall be entitled, in addition to any other legal remedies and damages available, tospecific performance thereof and to temporary and permanent injunctive relief (without the necessity of posting a bond) to restrain the violation or threatenedviolation of such obligations by you.11. COMPANY RULES AND REGULATIONS. As an employee of the Company, you agree to abide by Company policies, procedures, rulesand regulations as set forth in the Company’s Employee Handbook or as otherwise promulgated. In addition, as a condition of your employment, youacknowledge that you and the Company have entered into that certain Employee Confidentiality and Inventions Agreement dated as of April 23, 2007, and youhereby agree to abide by the terms of that certain Employee Confidentiality and Inventions Agreement dated as of April 23, 2007, by and between you and theCompany.12. WITHHOLDING. The Company may withhold from any amounts payable under this letter such federal, state, local or foreign taxes as shallbe required to be withheld pursuant to any applicable law or regulation.13. ARBITRATION. Except as set forth in Section 8(e) above, any disagreement, dispute, controversy or claim arising out of or relating to thisletter or the interpretation of this letter or any arrangements relating to this letter or contemplated in this letter or the breach, termination or invalidity thereofshall be settled by final and binding arbitration administered by JAMS/Endispute in Santa Clara County, California in accordance with the then existingJAMS/Endispute Arbitration Rules and Procedures for Employment Disputes. Except as provided herein, the Federal Arbitration Act shall govern theinterpretation, enforcement and all proceedings. The arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the state ofCalifornia, or federal law, or both, as applicable, and the arbitrator is without jurisdiction to apply any different substantive law. The arbitrator shall have theauthority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions underthe Federal Rules of Civil Procedure. Judgment upon the award may be entered in any court having jurisdiction thereof. Each party shall pay his or its ownattorneys’ fees and expenses associated with such arbitration to the extent permitted by applicable law.14. ENTIRE AGREEMENT. As of the Effective Date, this letter constitutes the final, complete and exclusive agreement between you and theCompany with respect to the subject matter hereof and replaces and supersedes any and all other agreements, offers or promises, whether oral or written, madeto you by any member of the Company Group (including, without limitation, the Original Employment Letter).15. SEVERABILITY. Whenever possible, each provision of this letter will be interpreted in such manner as to be effective and valid underapplicable law, but if any provision of this letter is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in anyjurisdiction, such invalidity, illegality or unenforceability will not affect any other provision of this letter, but such invalid, illegal or unenforceable provisionwill be reformed, construed and enforced so as to render it valid, legal, and enforceable consistent with the intent of the parties insofar as possible.616. ACKNOWLEDGEMENT. You hereby acknowledge (a) that you have consulted with or have had the opportunity to consult withindependent counsel of your own choice concerning this letter, and have been advised to do so by the Company, and (b) that you have read and understandthis letter, are fully aware of its legal effect, and have entered into it freely based on your own judgment.17. SECTION 409A OF THE CODE. To the extent that any payments or benefits under this letter are deemed to be subject to Section 409A of theCode, this letter will be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issuedthere under in order to (a) preserve the intended tax treatment of the benefits provided with respect to such payments and (b) comply with the requirements ofSection 409A of the Code.[SIGNATURE PAGE FOLLOWS]7Please confirm your agreement to the foregoing by signing and dating the enclosed duplicate original of this letter in the space provided below for yoursignature and returning it to Euan Thomson, Ph.D., Chief Executive Officer of the Company. Please retain one fully-executed original for your files.Sincerely,ACCURAY INCORPORATED,a California corporation /s/ Euan Thomson /s/ Robert E. McNamaraEuan Thomson, Ph.D.Robert E. McNamaraChief Executive OfficerChief Financial Officer Accepted and Agreed,as of this 23 day of April 2007. /s/ Christopher Mitchell 8EXHIBIT AFor purposes of this letter, “Change in Control” means and includes each of the following:(a) A transaction or series of transactions (other than an offering of the Company’s common stock to the general public through a registrationstatement filed with the Securities and Exchange Commission) whereby any “person” or related “group” of “persons” (as such terms are used in Sections13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (other than the Company, any of its subsidiaries, an employeebenefit plan maintained by the Company or any of its subsidiaries or a “person” that, prior to such transaction, directly or indirectly controls, is controlledby, or is under common control with, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the ExchangeAct) of securities of the Company possessing more than 50% of the total combined voting power of the Company’s securities outstanding immediately aftersuch acquisition; or(b) During any period of two consecutive years, individuals who, at the beginning of such period, constitute the Board of Directors of theCompany together with any new director(s) (other than a director designated by a person who shall have entered into an agreement with the Company to effect atransaction described in clause (a) or clause (c) hereof) whose election by the Board of Directors of the Company or nomination for election by the Company’sstockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period orwhose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or(c) The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or moreintermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of theCompany’s assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock of another entity, in each case other than atransaction:(i) Which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (eitherby remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly orindirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business of the Company(the Company or such person, the “Successor Entity”)) directly or indirectly, at least a majority of the combined voting power of the Successor Entity’soutstanding voting securities immediately after the transaction, and(ii) After which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of theSuccessor Entity; provided, however, that no person or group shall be treated for purposes of this clause (c)(ii) as beneficially owning 50% or more ofcombined voting power of the Successor9Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or(d) The Company’s stockholders approve a liquidation or dissolution of the Company.10Exhibit 10.54August 30, 2007Theresa L. DadoneRE: EMPLOYMENT TERMS AND OFFER OF EMPLOYMENTDear Theresa,1. Accuray Incorporated (the “Company”) is pleased to extend this offer of employment as Senior Vice President, Human Resources of the Company onthe terms and conditions set forth in this letter, effective as of July 2, 2007 (the “Effective Date”). This letter agreement amends and restates youroriginal Employment Terms and Offer of Employment letter dated June 18, 2007 (the “Original Offer Letter”).2. TERM. The employment relationship between you and the Company will be at-will. You and the Company will have the right to terminate theemployment relationship at any time and for any reason whatsoever, with or without cause, and without any liability or obligation except as may beexpressly provided herein.3. POSITION, DUTIES AND RESPONSIBILITIES. During the period of the employment relationship between you and the Company (the “Term”),the Company will employ you, and you agree to be employed by the Company, as Senior Vice President, Human Resources of the Company. In thecapacity of Senior Vice President, Human Resources, you will have such duties and responsibilities as are normally associated with such position andwill devote your full business time and attention serving the Company in such position. Your duties may be changed from time to time by theCompany, consistent with your position. You will dual line report to the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the“CFO”) of the Company, and will work full-time at our principal offices located at 1310 Chesapeake Terrace, Sunnyvale, California 94089 (or suchother location in the greater San Jose area as the Company may utilize as its principal offices), except for travel to other locations as may be necessary tofulfill your responsibilities.4. BASE COMPENSATION. During the Term, the Company will pay you a base salary of $235,000 per year, less payroll deductions and allrequired withholdings, payable in accordance with the Company’s normal payroll practices and prorated for any partial month of employment. Yourbase salary may be subject to increase pursuant to the Company’s policies as in effect from time to time.5. ANNUAL BONUS. In addition to the base salary set forth above, during the Term, you will be eligible to participate in the Company’s executivebonus plan applicable to similarly situated executives of the Company. The amount of your annual bonus will be based on the attainment ofperformance criteria established and evaluated by the Company in accordance1with the terms of such bonus plan as in effect from time to time, provided that, subject to the terms of such bonus plan, your target (but not necessarilymaximum) annual bonus shall be 40% of your base salary actually paid for such year.6. STOCK OPTIONS. As an added incentive, we will recommend to the Compensation Committee of the Board of Directors that you be granted anoption (the “Option”) to purchase 65,000 shares of Accuray common stock at a per share exercise price equal to the fair market value of a share of ourcommon stock on the date of the grant, as determined in accordance with the Accuray Incorporated 2007 Incentive Award Plan (the “Incentive Plan”). The grant of the Option is subject to and conditioned on approval of the grant and its terms by the Compensation Committee. Subject to your continuedemployment, the Option would vest with respect to 25% of the shares subject thereto on the first anniversary of the Effective Date, and with respect toan additional 1/48th of the shares subject thereto on each monthly anniversary thereafter, such that the entire Option would be vested on the fourthanniversary of the Effective Date. The Option will be subject to the terms and conditions of the Incentive Plan and a stock option agreement in a formprescribed by Accuray, which you will be required to sign as a condition to receiving the Option (the “Option Agreement”).7. RESTRICTED STOCK UNITS. We will recommend to the Compensation Committee of the Board of Directors that you be granted 8,000 restrictedstock units (“RSUs”) under the Accuray 2007 Incentive Award Plan. The grant of the RSUs is subject to and conditioned on approval of the grant andits terms by the Compensation Committee. Subject to the your continued service as an Employee through the applicable vesting date, twenty-fivepercent (25%) of the RSUs shall vest on the first anniversary of the Effective Date and an additional twenty-five percent (25%) of the RSUs shall veston each of the second, third and fourth anniversaries of the Effective Date.Payment in respect of any RSUs that vest in accordance with the grant agreement will be made to you in whole shares of our common stock as soon aspracticable after the applicable vesting date, but in no event later than 60 days after such vesting date. The RSUs will be subject to the terms andconditions of the Incentive Plan and a restricted stock unit grant agreement in a form prescribed by Accuray, which you will be required to sign as acondition to receiving the RSUs (the “RSU Agreement”).8. BENEFITS AND PAID TIME OFF. During the Term, you will be eligible to participate in all incentive, savings and retirement plans, practices,policies and programs maintained or sponsored by the Company from time to time which are applicable to other similarly situated executives of theCompany, subject to the terms and conditions thereof. During the Term, you will also be eligible for standard benefits, such as medical, vision anddental insurance, paid time off, and holidays to the extent applicable generally to other similarly situated executives of the Company, subject to the termsand conditions of the applicable Company plans or policies. The benefits described in this Section 8 will be subject to change from time to time asdeemed appropriate and necessary by the Company.9. TERMINATION OF EMPLOYMENT.(a) In the event of a termination of your employment by the Company without Cause or by you for Good Reason (each as defined below) then, inaddition to any other accrued2amounts payable to you through the date of termination of your employment (including any earned but unpaid bonus),i) the Company will no later than the date that is six (6) months and one (1) day after the date of your termination of employment, or the lastday of such shorter period upon such termination of employment that is sufficient to avoid the imposition of additional tax under Section409A(a)(l)(B) of the Internal Revenue Code of 1986, as amended (the “Code”), or any other taxes or penalties imposed under Section 409A ofthe Code, pay you a lump-sum severance payment (the “Severance Payment”) in an amount equal to the sum of (x) six (6) months of yourannual base salary as in effect on the date of termination plus (y) a pro rata portion of your target annual bonus for the fiscal year of theCompany in which such termination occurs, calculated based on the number of days elapsed in such fiscal year through the date oftermination plus (z) 50% of your target annual bonus for the fiscal year of the Company in which such termination occurs, andii) provided that you properly elect COBRA continuation coverage, the Company will pay the COBRA premium for health care coverage for youand your spouse and children, as applicable and to the extent eligible (the “Severance Benefits”), for the six (6) month period immediatelyfollowing the date of such termination of your employment. Such payments for the Severance Benefits will begin no later than the date that issix (6) months and one (1) day after the date of your termination of employment, or the last day of such shorter period upon such terminationof employment that is sufficient to avoid the imposition of additional tax under Section 409A(a)(l)(B) of the Code or any other taxes orpenalties imposed under Section 409A of the Code (the “Deferred COBRA Payment Date”), and on the Deferred COBRA Payment Date,the Company will pay you an amount equal to the Severance Benefits for the period beginning on the date of your termination of employmentand ending on the Deferred COBRA Payment Date.(b) If a Change in Control (as defined in Exhibit A hereto) occurs within the first thirty-six (36) months of employment (from Effective Date throughJuly 2, 2010) and your employment with the Company is terminated by the Company without Cause or by you for Good Reason, in each casewithin the twelve (12) month period immediately following the effective date of the Change in Control, then, in addition to the amounts payable toyou pursuant to paragraph (a) of this Section 9, each of your then outstanding stock options and RSUs to purchase shares and units of theCompany’s common stock and RSUs shall become fully vested and exercisable immediately prior to the effective time of the termination of youremployment.(c) Notwithstanding the foregoing, your right to receive the payments and benefits set forth in this Section 9 is conditioned on and subject to yourexecution and non-revocation of a general release of claims against the Company and its affiliates, in a form prescribed by the Company. In noevent shall you or your estate or beneficiaries be entitled to any of the payments or benefits set forth in this Section 9 upon any termination of youremployment by reason of your total and permanent disability or your death.3(d) For purposes of this letter:i) “Cause” shall mean (i) your commission of a felony, (ii) your commission of a crime involving moral turpitude or your commission of anyother act or omission involving dishonesty, disloyalty, breach of fiduciary duty or fraud with respect to the Company or any of itssubsidiaries or any of their customers or suppliers, or (iii) your failure to perform the normal and customary duties of your position with theCompany as reasonably directed by the CEO, provided, that any of the acts or omissions described in the foregoing clauses (i), (ii) or (iii) arenot cured to the Company’s reasonable satisfaction within thirty (30) days after written notice thereof is given to you; andii) “Good Reason” shall mean the occurrence of any one or more of the following events without your prior written consent, unless the Companyfully corrects the circumstances constituting Good Reason within 30 days after notice from you that Good Reason exists: (i) a materialreduction of your duties and responsibilities hereunder; (ii) a relocation of your principal workplace more than 35 miles outside theCompany’s Sunnyvale corporate headquarters; or (iii) the Company’s reduction of your annual base salary or bonus opportunity, each as ineffect on the date hereof or as the same may be increased from time to time; provided that written notice of your resignation for Good Reasonmust be delivered to the Company within 30 days after the date you first know or should reasonably know of the occurrence of any such eventin order for your resignation with Good Reason to be effective hereunder.10. CODE SECTION 280G.(a) In the event it shall be determined that any payment or distribution to you or for your benefit which is in the nature of compensation and iscontingent on a change in the ownership or effective control of the Company or the ownership of a substantial portion of the assets of theCompany (within the meaning of Section 280G(b)(2) of the Code), whether paid or payable pursuant to this letter or otherwise (a “Payment”),would constitute a “parachute payment” under Section 280G(b)(2) of the Code and would be subject to the excise tax imposed by Section 4999 ofthe Code (together with any interest or penalties imposed with respect to such excise tax, the “Excise Tax”), then the Payments shall be reduced tothe extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code but only if, by reason ofsuch reduction, the net after-tax benefit received by you shall exceed the net after-tax benefit received by you if no such reduction was made. Forpurposes of this Section 10(a), “net after-tax benefit” shall mean (i) the Payments which you receive or are then entitled to receive from theCompany that would constitute “parachute payments” within the meaning of Section 280G of the Code, less (ii) the amount of all federal, stateand local income taxes payable with respect to the Payments calculated at the maximum marginal income tax rate for each year in which thePayments shall be paid to you (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of theforegoing), less (iii) the amount of Excise Taxes imposed with respect to the Payments.(b) All determinations required to be made under this Section 10 shall be made by such nationally recognized accounting firm as may be selected bythe Audit Committee of the Board of Directors of the Company as constituted immediately prior to the change4in control transaction (the “Accounting Firm”), provided, that the Accounting Firm’s determination shall be made based upon “substantialauthority” within the meaning of Section 6662 of the Code. The Accounting Firm shall provide its determination, together with detailedsupporting calculations and documentation, to you and the Company within 15 business days following the date of termination of youremployment, if applicable, or such other time as requested by you (provided that you reasonably believe that any of the Payments may be subjectto the Excise Tax) or the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company.11. RESTRICTIVE COVENANTS.(a) As a condition of your employment with the Company, you agree that during the Term and thereafter, you will not directly or indirectly discloseor appropriate to your own use, or the use of any third party, any trade secret or confidential information concerning the Company or itssubsidiaries or affiliates (collectively, the “Company Group”) or their businesses, whether or not developed by you, except as it is required inconnection with your services rendered for the Company. You further agree that, upon termination of your employment, you will not receive orremove from the files or offices of the Company Group any originals or copies of documents or other materials maintained in the ordinary courseof business of the Company Group, and that you will return any such documents or materials otherwise in your possession. You further agreethat, upon termination of your employment, you will maintain in strict confidence the projects in which any member of the Company Group isinvolved or contemplating.(b) You further agree that during the Term and continuing through the first anniversary of the date of termination of your employment, you will notdirectly or indirectly solicit, induce, or encourage any employee, consultant, agent, customer, vendor, or other parties doing business with anymember of the Company Group to terminate their employment, agency, or other relationship with the Company Group or such member or torender services for or transfer their business from the Company Group or such member and you will not initiate discussion with any such personfor any such purpose or authorize or knowingly cooperate with the taking of any such actions by any other individual or entity.(c) While employed by the Company, you agree that you will not engage in any business activity in competition with any member of the CompanyGroup nor make preparations to do so.(d) Upon the termination of your relationship with the Company, you agree that you will promptly return to the Company, and will not take with youor use, all items of any nature that belong to the Company, and all materials (in any form, format, or medium) containing or relating to theCompany’s business.(e) In recognition of the facts that irreparable injury will result to the Company in the event of a breach by you of your obligations under Sections11(a), (b), (c) or (d) above, that monetary damages for such breach would not be readily calculable, and that the Company would not have anadequate remedy at law therefore, you acknowledge, consent and agree that in the event of such breach, or the threat thereof, the Company shall beentitled, in addition to any other legal remedies and damages available, to5specific performance thereof and to temporary and permanent injunctive relief (without the necessity of posting a bond) to restrain the violation orthreatened violation of such obligations by you.12. COMPANY RULES AND REGULATIONS. As an employee of the Company, you agree to abide by Company policies, procedures, rules andregulations as set forth in the Company’s Employee Handbook or as otherwise promulgated. In addition, as a condition of your employment, you willbe required to complete, sign, return, and abide by the Employee Confidentiality and Inventions Agreement.13. WITHHOLDING. The Company may withhold from any amounts payable under this letter such federal, state, local or foreign taxes as shall berequired to be withheld pursuant to any applicable law or regulation.14. ARBITRATION. Except as set forth in Section 11(e) above, any disagreement, dispute, controversy or claim arising out of or relating to this letter orthe interpretation of this letter or any arrangements relating to this letter or contemplated in this letter or the breach, termination or invalidity thereof shallbe settled by final and binding arbitration administered by JAMS/Endispute in Santa Clara County, California in accordance with the then existingJAMS/Endispute Arbitration Rules and Procedures for Employment Disputes. Except as provided herein, the Federal Arbitration Act shall govern theinterpretation, enforcement and all proceedings. The arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the state ofCalifornia, or federal law, or both, as applicable, and the arbitrator is without jurisdiction to apply any different substantive law. The arbitrator shallhave the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing suchmotions under the Federal Rules of Civil Procedure. Judgment upon the award may be entered in any court having jurisdiction thereof. Each partyshall pay his or its own attorneys’ fees and expenses associated with such arbitration to the extent permitted by applicable law.15. ENTIRE AGREEMENT. As of the Effective Date, this letter constitutes the final, complete and exclusive agreement between you and the Companywith respect to the subject matter hereof and replaces and supersedes any and all other agreements, offers or promises, whether oral or written, made toyou by any member of the Company Group (including, without limitation, your Original Offer Letter dated June 15, 2007).16. SEVERABILITY. Whenever possible, each provision of this letter will be interpreted in such manner as to be effective and valid under applicablelaw, but if any provision of this letter is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction,such invalidity, illegality or unenforceability will not affect any other provision of this letter, but such invalid, illegal or unenforceable provision will bereformed, construed and enforced so as to render it valid, legal, and enforceable consistent with the intent of the parties insofar as possible.17. ACKNOWLEDGEMENT. You hereby acknowledge (a) that you have consulted with or have had the opportunity to consult with independentcounsel of your own choice concerning this letter, and have been advised to do so by the Company, and (b) that you have read and understand thisletter, are fully aware of its legal effect, and have entered into it freely based on your own judgment.618. SECTION 409A OF THE CODE. To the extent that any payments or benefits under this letter are deemed to be subject to Section 409A of the Code,this letter will be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issuedthere under in order to (a) preserve the intended tax treatment of the benefits provided with respect to such payments and (b) comply with therequirements of Section 409A of the Code.[SIGNATURE PAGE FOLLOWS]7Please confirm your agreement to the foregoing by signing and dating the enclosed duplicate original of this letter in the space provided below for your signatureand returning it to us in the enclosed, self-addressed stamped envelope. Please retain one fully-executed original for your files.Sincerely,ACCURAY INCORPORATED, a Delaware corporation /s/ Euan ThomsonEuan Thomson, Ph.D.,President and CEO Accepted and Agreed, /s/ Theresa L. DadoneSignature 8/30/07Signature Date 07/02/07Effective Date 8 EXHIBIT ADEFINITION OF CHANGE IN CONTROLFor purposes of this letter, “Change in Control” means and includes each of the following:(a) A transaction or series of transactions (other than an offering of the Company’s common stock to the general public through a registrationstatement filed with the Securities and Exchange Commission) whereby any “person” or related “group” of “persons” (as such terms are used inSections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (other than the Company, any of itssubsidiaries, an employee benefit plan maintained by the Company or any of its subsidiaries or a “person” that, prior to such transaction,directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficialownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company possessing more than 50% of the totalcombined voting power of the Company’s securities outstanding immediately after such acquisition; or(b) During any period of two consecutive years, individuals who, at the beginning of such period, constitute the Board of Directors of the Companytogether with any new director(s) (other than a director designated by a person who shall have entered into an agreement with the Company to effecta transaction described in clause (a) or clause (c) hereof) whose election by the Board of Directors of the Company or nomination for election bythe Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at thebeginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute amajority thereof; or(c) The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or moreintermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially allof the Company’s assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock of another entity, in eachcase other than a transaction:i) Which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remainingoutstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly orindirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the businessof the Company (the Company or such person, the “Successor Entity”)) directly or indirectly, at least a majority of the combined votingpower of the Successor Entity’s outstanding voting securities immediately after the transaction, andii) After which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the SuccessorEntity; provided,9however, that no person or group shall be treated for purposes of this clause (c) (ii) as beneficially owning 50% or more of combined votingpower of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or(d) The Company’s stockholders approve a liquidation or dissolution of the Company.10Exhibit 21.1Subsidiaries of the RegistrantNameState or Jurisdiction of OrganizationAccuray International SARLSwitzerlandAccuray Europe SARLFranceAccuray UK, Ltd.United KingdomAccuray Asia Ltd.Hong KongAccuray Japan K.K.JapanAccuray Spain, S.L.U.Spain Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our report dated August 28, 2007, accompanying the consolidated financial statements included in this Annual Report on Form 10-K ofAccuray Incorporated for the year ended June 30, 2007. We hereby consent to the incorporation by reference of said report in the Registration Statements ofAccuray Incorporated on Form S-8 (File No. 333-141194, No. 333-141195, and No. 333-141197)./s/ GRANT THORNTON LLPSan Francisco, CaliforniaAugust 28, 2007 Exhibit 31.1CertificationsI, Euan S. Thomson, Ph.D., certify that:1. I have reviewed this report on Form 10-K of Accuray Incorporated, a Delaware corporation;2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusion about the effectivenessof the disclosure controls and procedures, as or the end of the period covered by this report based on such evaluation; andc) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant’s ability to record, process, summarize and report financial information; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: August 31, 2007/s/ EUAN S. THOMSON, PH.D.Euan S. Thomson, Ph.D.President and Chief Executive Officer Exhibit 31.2I, Robert E. McNamara, certify that:1. I have reviewed this report on Form 10-K of Accuray Incorporated, a Delaware corporation;2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusion about the effectivenessof the disclosure controls and procedures, as or the end of the period covered by this report based on such evaluation; andc) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant’s ability to record, process, summarize and report financial information; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: August 31, 2007/s/ ROBERT E. MCNAMARARobert E. McNamaraSenior Vice President and Chief Financial Officer Exhibit 32.1Certification of Chief Executive OfficerPursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Accuray Incorporated, aDelaware corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:(i) the accompanying Annual Report on Form 10-K of the Company for the twelve months ended June 30, 2007 (the “Report”) fully complies withthe requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: August 31, 2007/s/ EUAN S. THOMSON, PH.D.Euan S. Thomson, Ph.D.President and Chief Executive Officer Exhibit 32.2Certification of Chief Financial OfficerPursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Accuray Incorporated, aDelaware corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:(i) the accompanying Annual Report on Form 10-K of the Company for the twelve months ended June 30, 2007 (the “Report”) fully complies withthe requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: August 31, 2007/s/ ROBERT E. MCNAMARARobert E. McNamaraSenior Vice President and Chief Financial Officer 

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