10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2002

OR

¨ 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 000-30959

RITA MEDICAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware	94-3199149
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

967 N. Shoreline Blvd.

Mountain View, CA 94043

(Address of principal executive offices, including zip code)

650-314-3400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x        No  ¨

As of November 8, 2002, there were 15,143,708 shares of the registrant’s Common Stock outstanding.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets—September 30, 2002 and December 31, 2001	3
	Condensed Consolidated Statements of Operations—three and nine months ended September 30, 2002 and 2001	4
	Condensed Consolidated Statements of Cash Flows—nine months ended September 30, 2002 and 2001	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	21
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 2.	Changes in Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Submission of Matters to a Vote of Security Holders	22
Item 5.	Other Information	22
Item 6.	Exhibits and Reports on Form 8-K	22
SIGNATURES		23
CERTIFICATION    Certification of the President and Chief Executive Officer		24
CERTIFICATION    Certification of the Chief Financial Officer and Vice President, Finance and Administration		25
EXHIBIT INDEX		26

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PART 1.    FINANCIAL INFORMATION

Item 1.    Financial Statements

RITA MEDICAL SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts, unaudited)
	September 30, 2002			December 31, 2001
Assets
Current assets:
Cash and cash equivalents	$	9,484		$	7,297
Marketable securities		5,766			11,887
Accounts and note receivable, net of allowance for doubtful accounts of $1,308 at September 30, 2002 and $629 at December 31, 2001		3,966			5,056
Inventories, net		3,096			3,645
Prepaid assets and other current assets		1,205			1,282
Total current assets		23,517			29,167
Long term securities		—			4,353
Long term note receivable, net		414			—
Property and equipment, net		1,586			1,934
Intangibles and other assets		1,562			380
Total assets		$27,079		$	35,834
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	955		$	822
Accrued liabilities		2,737			2,675
Capital lease obligations		45			192
Total liabilities		3,737			3,689
Contingencies (Note 5)
Stockholders’ equity
Common stock, $0.001 par value		15			15
Additional paid-in capital		88,359			88,459
Deferred stock compensation		(159	)		(1,905	)
Receivable from stockholders		(49	)		(99	)
Accumulated other comprehensive income		16			70
Accumulated deficit		(64,840	)		(54,395	)
Total stockholders’ equity		23,342			32,145
Total liabilities and stockholders’ equity		$27,079		$	35,834

See accompanying notes

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RITA MEDICAL SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, unaudited)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
Sales	$	4,454		$	3,707		$	13,679		$	10,780
Cost of goods sold		1,730			1,472			5,773			4,912
Gross profit		2,724			2,235			7,906			5,868
Operating expenses
Research and development		1,218			1,627			3,882			4,837
Selling, general and administrative		4,311			4,016			14,837			11,539
Total operating expenses		5,529			5,643			18,719			16,376
Loss from operations		(2,805	)		(3,408	)		(10,813	)		(10,508	)
Interest income and other expense, net		85			324			368			1,309
Net loss	$	(2,720	)	$	(3,084	)	$	(10,445	)	$	(9,199	)
Net loss per share, basic and diluted	$	(0.18	)	$	(0.21	)	$	(0.70	)	$	(0.64	)
Shares used in computing basic and diluted net loss per share		14,996			14,406			14,816			14,299

See accompanying notes

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RITA MEDICAL SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)
	Nine Months Ended September 30,
	2002			2001
Operating activities:
Net loss	$	(10,445	)	$	(9,199	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,021			704
Stock-based compensation		308			1,417
Allowance for doubtful accounts		823			389
Allowance for inventory reserve		517			223
Changes in operating assets and liabilities
Accounts and note receivable		(147	)		(2,316	)
Inventories		32			(1,090	)
Prepaid and other current assets		77			(289	)
Accounts payable and accrued liabilities		195			370
Net cash used in operating activities		(7,619	)		(9,791	)
Cash flows from investing activities:
Purchase of property and equipment		(614	)		(1,364	)
Purchases of short term investments		—			(16,647	)
Maturities of investments		10,420			27,499
Capitalization of patent litigation costs		(1,245	)		(88	)
Other assets		4			5
Net cash provided by investing activities		8,565			9,405
Cash flows from financing activities:
Proceeds from issuance of common stock		1,389			682
Proceeds from revolving term loan		—			25
Payments on revolving term loan		—			(858	)
Payments on capital lease obligations		(148	)		(212	)
Net cash provided by (used in) financing activities		1,241			(363	)
Net increase (decrease) in cash and cash equivalents		2,187			(749	)
Cash and cash equivalents at beginning of period		7,297			12,676
Cash and cash equivalents at end of period	$	9,484		$	11,927

See accompanying notes

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RITA MEDICAL SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by RITA Medical Systems, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information. These principles are consistent in all material respects with those applied in the Company’s financial statements contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2001 and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. However, interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (all of which are normal and recurring in nature, including the elimination of intercompany accounts) necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods indicated. Interim results of operations are not necessarily indicative of the results to be expected for the full year or any other interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and footnotes thereto for the year ended December 31, 2001 contained in the Company’s annual report on Form 10-K.

2.    Net loss per share

Basic earnings (loss) per share figures are calculated based on the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share figures include the dilutive effect of common stock equivalents consisting of stock options, warrants and shares subject to repurchase, provided that the inclusion of such common stock equivalents is not antidilutive. For the three-month and nine-month periods ended September 30, 2002 and 2001 respectively, the Company has excluded the following period end potentially dilutive securities (in thousands) from earnings per share computations because their inclusion would have the effect of reducing our loss per share:

	Three and Nine Months Ended September 30,
	2002	2001
Options and warrants	2,887	2,388
Common shares subject to repurchase	28	55
	2,915	2,443

The reconciliation of total weighted average common shares to shares used in determining net loss per share is as follows (in thousands):

	Three months ended September 30,		Nine months ended September 30,
	2002	2001	2002	2001
Weighted average shares of common stock outstanding	15,027	14,467	14,851	14,368
Less: weighted-average shares subject to repurchase	31	61	35	69
Weighted average shares used in basic and diluted net loss per share	14,996	14,406	14,816	14,299

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3.    Balance sheet components—Note receivable and Inventories

During the third quarter of 2002, the Company converted the outstanding receivable from a major customer to a five-year unsecured note, bearing interest at the rate of 3% per year. Related balances as of September 30, 2002 are as follows (in thousands):

	September 30, 2002
	Current		Long-term
Note receivable, net	$	100	$	414

The current portion of the note receivable has been included within accounts receivable for presentation on the Company’s Condensed Consolidated Balance Sheet.

The components of the Company’s inventories at September 30, 2002 and December 31, 2001 respectively were as follows (in thousands):

	September 30,		December 31,
	2002		2001
Raw materials	$	1,087	$	1,017
Work-in-process		291		377
Finished goods		1,718		2,251
	$	3,096	$	3,645

4.    Recent Accounting Pronouncements

In July 2002, The Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” which is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The standard nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity including Certain Costs Incurred in a Restructuring).” SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. The Company does not believe adoption of this statement will materially impact its financial position or results of operations.

5.    Contingencies

In July 1999, the United States Patent and Trademark Office (“USPTO”) declared an interference involving us, which was provoked by RadioTherapeutics Corporation, a competitor of ours and now a wholly owned subsidiary of Boston Scientific Corporation, in which the validity of a patent claim previously issued to us was called into question. The claims at issue in the interference covered a radiofrequency ablation device having an array of deployable electrodes effective, in a deployed state, to define a tissue ablation volume. In February 2001, the USPTO issued a decision on preliminary motions filed in the patent interference proceeding. The decision found that one of the claims in our United States Patent No. 5,536,267 (claim no. 32) is invalid. On September 27, 2002, the USPTO Board of Patent Appeals and Interferences (the Board) issued a final decision finding that RadioTherapeutics had failed to establish priority of invention over the Company’s established invention date and, therefore, were not themselves entitled to any patent claims in the interference. The Board also affirmed the earlier preliminary decision, described above, regarding claim 32. On October 16, 2002, RadioTherapeutics filed an action in the United States District Court for the Northern District of California seeking to reverse the Board’s priority decision, affirm the Board’s decision

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regarding claim 32, and to initiate a new interference between certain issued patent claims licensed to RadioTherapeutics and certain of the Company’s patent claims. Final determination of these patent interference proceedings may take several years. If the United States District Court reverses the decision of the Board as to RadioTherapeutics’ entitlement to priority, and we were found to infringe RadioTherapeutics’ patent claims and were unable to obtain a license to use the relevant patent or successfully modify our disposable device, we could be unable to sell our system and our business could suffer. If the District Court affirms the Board’s decision regarding claim 32 or if RadioTherapeutics prevails on its new interference, the Company could lose one or more of its issued patent claims.

In March 2000, RadioTherapeutics filed an opposition to our European Patent No. 0777445 before the European Patent Office. This patent also covers the curvature of the array at the tip of our disposable devices. In this opposition, the validity of our issued patent is being questioned. In February 2002, the European Patent Office determined that we were entitled to European Patent No. 0777445. Both parties have appealed this ruling and a final decision is not expected in this proceeding for several years. If we do not prevail in the opposition proceeding, we could lose our only currently issued patent in Europe.

In August 2001, the Company filed a complaint in the United States District Court for the Northern District of California against RadioTherapeutics. This complaint alleges that RadioTherapeutics’ radiofrequency ablation products infringe six different patents held by the Company. As of September 30, 2002, the Company has capitalized approximately $1,577,000 in litigation costs incurred in defense of its patent positions.

In April 2002, a patent infringement suit against the Company was filed in the United States District Court for the Northern District of California by RadioTherapeutics and SciMed Life Systems, Inc. (two wholly-owned subsidiaries of Boston Scientific Corporation), the Board of Regents of the University of Nebraska and UneMed Corporation. The suit alleges that certain of the Company’s products infringe a patent assigned to the University of Nebraska and licensed by UneMed and RadioTherapeutics and a patent owned by Scimed. RadioTherapeutics filed a first amended complaint in October 2002 adding to the complaint a second patent assigned to the University of Nebraska and licensed to RadioTherapeutics.

In July 2002, a patent infringement suit against the Company was filed in the United States District Court for the Northern District of California by Boston Scientific Corporation, the University of Kansas and the University of Kansas Medical Center Research Institute. The suit alleges that certain of the Company’s products infringe a patent assigned to the University of Kansas and licensed by Boston Scientific Corporation.

We believe that the outcome of our outstanding legal proceedings, claims and litigation will not have a material adverse effect on our business, results of operations or financial condition. However, such matters involve complex questions of fact and law and could involve significant costs and the diversion of resources to defend. Additionally, the results of litigation are inherently uncertain, and an adverse outcome is at least reasonably possible. We are unable to estimate the range of possible loss from outstanding litigation and other legal proceedings and no amounts have been provided for such matters in the accompanying Consolidated Financial Statements. If we are not successful in defending these claims, our business, financial condition and results of operations could be materially adversely affected.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, and similar expressions identify such forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or forecasted. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Factors That May Affect Future Results” and those appearing elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements that reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

Overview

We develop, manufacture and market minimally invasive products that use radiofrequency energy to treat patients with solid cancerous or benign tumors. From inception in 1994 through 1996, our operations consisted primarily of various start-up activities, including development of technologies central to our business, recruiting personnel and raising capital. In 1997, we began commercial product shipments. In 2001, we commercially launched our StarBurst XLi family of disposable devices and significantly expanded our direct domestic sales organization and our international distribution network.

Our products are sold in the United States through our direct sales force and internationally through distribution partners. For the three months ended September 30, 2002, sales in the United States accounted for 77% of our total sales while sales in our international markets accounted for 23% of our total sales. We expect domestic sales to account for a majority of sales in future periods due to our significant investment in and the efforts of our domestic sales force. Conversely, we expect reimbursement issues in Europe and Japan to limit sales growth in these regions for the next several years. However, our international operations will continue to represent a significant, if decreasing, portion of our revenue at least in part because of the high incidence of primary liver cancer in certain Asian and European markets.

All of our revenue is derived from the sale of our disposable devices and radiofrequency generators. For the three months ended September 30, 2002, 79% of our revenue was derived from the sale of our disposable devices and 21% was derived from the sale of our generators. We will continue to focus on expanding our base of customer accounts and on increasing usage of our disposable products in our established accounts. As a result, revenue from our higher-margin disposable devices should continue to predominate our sales. During the third quarter of 2002, we were affected by a disruption in the supply of an accessory device used with our Starburst XLi line of disposable devices. This disruption had a modest impact on sales for the period and is likely to have a more significant impact on sales in the fourth quarter. We expect to resolve these supply issues by year-end and return towards our historical rates of growth.

To date, essentially all of our revenue has come from products sold in the treatment of cancerous liver tumors. In 2002, we expect nominal revenue in the fourth quarter to come from the use of the RITA system sold for the treatment of patients with metastatic bone tumors. In 2003, we expect additional revenue from the treatment of bone tumors and nominal revenue from the treatment of unresectable lung tumors in overseas markets. We are conducting research and clinical trials in other organs that may lead to additional sources of revenue in the years beyond 2003.

Our manufacturing costs consist of raw materials, including generators and ancillary devices produced for us by third-party suppliers, labor to produce our disposable devices and to inspect incoming materials and in-process and finished goods, sterilization performed by an outside service provider and general overhead expenses. Gross margins are affected by production volumes, average selling prices, the sales mix of higher-margin disposable devices versus generators and the mix of domestic direct sales versus international sales, which provide for standard distributor discounts. Our gross margin for the three months ended September 30, 2002 was 61%, approximately 1% higher than our margin in the third quarter ended September 30, 2001, and about 3% higher than our margin in the preceding quarter ended June 30, 2002, which bore unusually heavy charges relating to our provision for obsolete inventory. We expect gross

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margins to further improve in the fourth quarter primarily as a result of continued improvements in sales mix and cost factors.

For the three months ended September 30, 2002, 22% of our operating expenses were related to research and development activities, compared with 20% in each of the two preceding quarters, but in terms of dollars expended, our investment in research has remained essentially constant since the beginning of 2002. We expect our research and development activities to account for a similar percentage of our operating expense in the fourth quarter of 2002, with dollars expended about equal to third quarter levels. Selling, general and administrative activities represented 78% of our operating expenses for the third quarter, down from 80% in the first and second quarters of 2002, but still higher than in recent preceding 2001 quarters, reflecting our investments in our domestic sales force, international distribution activities, physician training and patient awareness programs. In dollar terms, however, selling and administrative expense for the third quarter was approximately one million dollars less than in the second quarter, due to lower sales compensation expense and general expense management efforts. Also, our provision to our allowance for uncollectible accounts was lower in the third quarter than in the second, because while we continue to experience relatively long collection periods with many of our European distributors, our allowance has now grown to the point where we believe it adequately reflects this change in business conditions. We expect charges for selling and administrative expense in the fourth quarter to increase modestly in response to higher levels of marketing activity.

In connection with grants of stock options to employees and non-employees, we record deferred stock-based compensation as a component of stockholders’ equity. This stock-based compensation is amortized as charges to operations over the vesting periods of the options. We recorded amortization of deferred compensation of approximately $57,000 for the three months ended September 30, 2002. We expect to record additional amortization expense for deferred compensation in diminishing amounts through 2004, at which point our existing deferred stock-based compensation will be fully amortized.

We incurred net losses of $2.7 million for the three months ended September 30, 2002. As of September 30, 2002, we had an accumulated deficit of $64.8 million. Because we expect to continue to incur high costs associated with our research and development programs, clinical research programs and sales and marketing efforts, we expect to continue to incur net losses through 2002 and most or all of 2003. We currently expect to become modestly profitable around the end of 2003, which would be the final quarter of 2003 or the first quarter of 2004. Profitability will depend on our success in expanding product usage in our current market and in developing new markets. To the extent current or new markets do not materialize in accordance with our expectations, our sales and profitability could be lower than expected and we may be unable to achieve or sustain profitability.

We are currently involved in patent proceedings and may become a party to additional patent or product liability proceedings. The costs of such lawsuits or proceedings may be material and could affect our earnings and financial position and the point at which we achieve profitability; to date, we have capitalized certain costs related to patent proceedings. An adverse outcome in a patent lawsuit could require us to cease sales of affected products or to pay royalties and/or fees, which could harm our results of operations.

Results of Operations

The following table sets forth the percentage of net revenue represented by certain items in our Statements of Operations for the current quarter ended September 30, 2002 and the four preceding fiscal quarters:

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	Q3 2002		Q2 2002		Q1 2002		Q4 2001		Q3 2001
Domestic sales	77	%	73	%	72	%	65	%	56	%
International sales	23	%	27	%	28	%	35	%	44	%
Total sales	100	%	100	%	100	%	100	%	100	%
Cost of goods sold	(39	%)	(42	%)	(45	%)	(30	%)	(40	%)
Gross profit	61	%	58	%	55	%	70	%	60	%
Operating Expenses:
Research and development	(27	%)	(28	%)	(30	%)	(41	%)	(44	%)
Selling, general and administrative	(97	%)	(110	%)	(118	%)	(128	%)	(108	%)
Total operating expenses	(124	%)	(138	%)	(148	%)	(169	%)	(152	%)
Loss from operations	(63	%)	(80	%)	(93	%)	(99	%)	(92	%)
Other income, net	2	%	2	%	3	%	5	%	9	%
Net loss	(61	%)	(78	%)	(90	%)	(94	%)	(83	%)

Three months ended September 30, 2002 and 2001

Sales increased 20% to $4.5 million for the quarter ended September 30, 2002 from $3.7 million for the quarter ended September 30, 2001. Domestic sales increased by 64% over the comparable prior year period, although international sales decreased by 36%. Sales of our disposable products totaled $3.5 million for the quarter, an increase of 18% over the comparable prior year period. Domestically, higher unit shipments of disposable products resulted from increased physician awareness of our technology and the efforts of our expanded sales force. However, our international shipment volumes were lower due to reimbursement pressures in Europe and Japan as well as the timing of shipments to distributors. Average selling prices of disposable products benefited from the increasing proportion of domestic business in our sales mix as well as the acceptance of our premium-priced StarBurst XLi line of disposable devices. Generator sales for the quarter were 27% higher than sales in the third quarter of 2001, reflecting higher unit placements.

Cost of goods sold for the quarter ended September 30, 2002 was $1.7 million compared to $1.5 million for the quarter ended September 30, 2001, primarily as a result of higher unit placements of generators and ancillary hardware devices. Charges to cost of goods sold for amortization of deferred stock-based compensation were essentially zero for the quarter, compared to $142,000 in the prior year period. With sales up 20% and cost of goods sold increasing 18%, the company’s gross margin rate improved to 61% for the quarter ended September 30, 2002, compared to 60% for the quarter ended September 30, 2001.

Research and development expenses for the quarter ended September 30, 2002 were $1.2 million compared to $1.6 million for the corresponding period in 2001. This decrease was primarily attributable to reduced new product development charges. Our investment in clinical programs investigating new applications for our technology has remained relatively constant. Charges to research and development expense for amortization of deferred stock-based compensation were $28,000 for the quarter, down from $96,000 in the corresponding period in 2001.

Selling, general and administrative expenses for the quarter ended September 30, 2002 were $4.3 million as compared to $4.0 million in the corresponding period in 2001. The increase was primarily due to expansion of our domestic sales organization and increased customer training costs, modestly offset by small reductions in marketing, business development and administrative expenses. Charges to selling, general and administrative expense for amortization of deferred stock-based compensation were $32,000 for the quarter compared to $159,000 for the corresponding period in 2001.

Interest income, net of interest expense, was $0.1 million for the quarter ended September 30, 2002 compared to $0.3 million in the corresponding period of 2001. The change was primarily attributable to a

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smaller portfolio of interest bearing securities, reflecting our use of cash over the past year, and lower interest rates.

Nine months ended September 30, 2002 and 2001

Sales increased 27% to $13.7 million for the nine months ended September 30, 2002 from $10.8 million for the nine months ended September 30, 2001. Domestic sales increased by 86% over the comparable prior year period, although international sales decreased by 33%. Sales of our disposable products totaled $10.2 million for the nine months ended September 30, 2002, an increase of 22% over the comparable prior year period. Domestically, higher unit shipments of disposable products resulted from increased physician awareness of our technology and the efforts of our expanded sales force, although our international shipment volumes were lower. Average selling prices of disposable products benefited from the increasing proportion of domestic business in our sales mix as well as the acceptance of our premium-priced StarBurst XLi line of disposable devices. Generator sales for the nine months ended September 30, 2002 were 43% higher than sales in the comparable period of 2001, reflecting higher unit placements.

Cost of goods sold for the nine months ended September 30, 2002 was $5.8 million compared to $4.9 million for the nine months ended September 30, 2001. The cost of product shipments rose about $0.9 million. Other manufacturing costs, principally increases in our reserve for obsolete inventory, were $0.5 million higher, totaling $0.9 million for the nine months ended September 30, 2002, compared to $0.4 million in the prior year period. These reserve provisions relate to older generation disposable devices that have been largely replaced in the market by our Starburst and Starburst Xli devices; such reserve provisions are now essentially complete. These increases were offset by a reduction in the charge to cost of goods sold for amortization of deferred stock-based compensation, which fell to $52,000 for the nine months, compared to $518,000 in the prior year period. With sales up 27% and cost of goods sold increasing 18%, the company’s gross margin rate improved to 58% for the nine months ended September 30, 2002, compared to 54% for the nine months ended September 30, 2001.

Research and development expenses for the nine months ended September 30, 2002 were $3.9 million compared to $4.8 million for the corresponding period in 2001. This decrease was primarily attributable to reduced new product development charges. Our investment in clinical programs investigating new applications for our technology has remained relatively constant. Charges to research and development expense for amortization of deferred stock-based compensation were $182,000 for the nine months, down from $340,000 in the corresponding period in 2001.

Selling, general and administrative expenses for the nine months ended September 30, 2002 were $14.8 million as compared to $11.5 million in the corresponding period in 2001. The increase was primarily due to the major expansion of our domestic sales organization and increased customer training costs. Also, provisions to our reserve for uncollectible accounts resulted in $0.5 million in increased expenses. Charges to selling, general and administrative expense for amortization of deferred stock-based compensation were approximately $104,000 for the nine months compared to $559,000 for the corresponding period in 2001.

Interest income, net of interest expense, was $0.4 million for the nine months ended September 30, 2002 compared to $1.3 million in the corresponding period of 2001. The change was primarily attributable to a smaller portfolio of interest bearing securities, reflecting our use of cash over the past year, and lower interest rates.

Liquidity and Capital Resources

Prior to August 2000, we financed our operations principally through private placements of convertible preferred stock, raising approximately $37.9 million net of expenses. On August 1, 2000, we completed our initial public offering of 3.6 million common shares at a price of $12 per share, raising approximately $39.0 million net of expenses. All outstanding convertible preferred shares were converted to common shares at that time. To a lesser extent, we also financed our operations through equipment financing and other loans, of which there was less than $0.1 million in principal outstanding at September 30, 2002. Also as of September 30, 2002, we had $9.5 million of cash and cash equivalents, $5.8 million of short-term marketable securities and $19.8 million of working capital.

For the nine months ended September 30, 2002, net cash used in operating activities was $7.1 million, principally due to our net loss. Our investing activities for this period were limited to the purchase of

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property and equipment in the amount of $0.6 million and net purchases or sales of both short-term and long-term investment instruments. Also, we capitalized $1.2 million in costs associated with legal action we initiated in 2001 in defense of our patent rights (see Part II, “Legal Proceedings” for discussion of this and other legal proceedings). Net cash provided by financing activities was $1.2 million, principally from the issuance of common shares.

We have, from time to time, financed equipment through capital and operating leases. As of September 30, 2002, our future minimum payments due under capital and operating leases are as follows (in thousands):

Future minimum capital lease payments

Payments due in the remainder of 2002	$     46
Less imputed interest (including warrants)	(1)
Present value of future minimum capital lease payments	$     45

Future minimum operating lease payments

Remainder of 2002	$   135
2003	539
2004	360
Total of future minimum operating lease payments	$1,034

Our capital requirements depend on numerous factors including our research and development expenditures, including certain legal expenses, expenses related to selling, marketing and administration as well as working capital to support business growth. Although it is difficult for us to predict future liquidity requirements with certainty, we believe that our current cash and cash equivalents will satisfy our cash requirements for at least the next 15 months. During or after this period, if cash generated by operations is insufficient to satisfy our liquidity requirements, we may need to sell additional equity or debt securities or obtain an additional credit facility. There can be no assurance that additional financing will be available to us or, if available, that such financing will be available on terms favorable to the us and our stockholders.

Recent Accounting Pronouncements

In July 2002, The Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” which is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The standard nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity including Certain Costs Incurred in a Restructuring).” SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. The Company does not believe adoption of this statement will materially impact its financial position or results of operations.

Factors That May Affect Future Results

In addition to the other information in this report, the following factors should be considered carefully in evaluating the Company’s business and prospects.

Due to our dependence on the RITA system, failure to achieve market acceptance in a timely manner could harm our business.

Because all of our revenue comes from the sale of the RITA system, our financial performance will depend upon physician adoption and patient awareness of this system. If we are unable to convince

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physicians to use the RITA system, we may not be able to generate revenues because we do not have alternative products.

We are currently involved in a patent interference action and a patent opposition action involving RadioTherapeutics Corporation, and if we do not prevail in these actions, we may be unable to sell the RITA system.

In July 1999, the United States Patent and Trademark Office declared an interference involving us, which was provoked by RadioTherapeutics Corporation, a competitor of ours and now a wholly owned subsidiary of Boston Scientific Corporation, in which the validity of a patent claim previously issued to us was called into question. The claims at issue in the interference cover a radiofrequency ablation device having an array of deployable electrodes effective, in a deployed state, to define a tissue ablation volume. In February 2001, the Patent and Trademark Office issued a decision on preliminary motions filed in the patent interference proceeding. The decision found that one of the claims in our United States Patent No. 5,536,267 (claim no. 32) is invalid. On September 27, 2002, the Patent and Trademark Office Board of Patent Appeals and Interferences issued a final decision finding that RadioTherapeutics had failed to establish priority of invention over RITA’s established invention date and, therefore, were not themselves entitled to any patent claims in the interference. It also affirmed the earlier preliminary decision, described above, regarding claim 32. On October 16, 2002, RadioTherapeutics filed an action in the United States District Court for the Northern District of California seeking to reverse the Patent and Trademark Office Board of Patent Appeals’ priority decision, affirm its decision regarding claim 32, and to initiate a new interference between certain issued patent claims licensed to RadioTherapeutics and certain of the RITA’s patent claims. Final determination of these patent interference proceedings may take several years. If the United States District Court reverses the decision of the Patent and Trademark Office Board of Patent Appeals’ as to RadioTherapeutics’ entitlement to priority, and we were found to infringe RadioTherapeutics’ patent claims and were unable to obtain a license to use the relevant patent or successfully modify our disposable device, we could be unable to sell our system and our business could suffer. If the District Court affirms the Patent and Trademark Board’s decision regarding claim 32 or if RadioTherapeutics prevails on its new interference, we could lose one or more of our issued patent claims.

In March 2000, RadioTherapeutics filed an opposition to our European Patent No. 0777445 before the European Patent Office. This patent also covers the curvature of the array at the tip of our disposable devices. In this opposition, the validity of our issued patent is being questioned. In February 2002, the European Patent Office determined that we were entitled to European Patent No. 0777445. Both parties have appealed this ruling and a final decision is not expected in this proceeding for several years. If we do not prevail in the opposition proceeding, we could lose our only currently issued patent in Europe.

We have been sued for patent infringement by two Boston Scientific Corporation entities, UneMed Corporation and their licensors and if we do not prevail in this lawsuit, we could be prevented from selling our products and our business could suffer.

On April 11, 2002, RadioTherapeutics Corporation and SciMed Life Systems, Inc., (two wholly-owned subsidiaries of Boston Scientific Corporation), the Board of Regents of the University of Nebraska, and UneMed Corporation filed a complaint against us alleging that certain of our products infringe a patent assigned to the University of Nebraska and licensed by UneMed and RadioTherapeutics and a patent owned by SciMed. RadioTherapeutics filed a first amended complaint on October 30, 2002 adding to the litigation a second patent assigned to the University of Nebraska and licensed to RadioTherapeutics. Also, in a separate action initiated on July 9, 2002, Boston Scientific Corporation and the University of Kansas filed a complaint against us alleging that certain of our products infringe a patent assigned to the University of Kansas and licensed by Boston Scientific. In addition, we are aware of the existence of patents held by competitors in our market, which could result in additional patent lawsuits against us. In the event that we do not prevail in the Boston Scientific lawsuits or if we are subject to additional patent litigation and we are found to infringe, we could be prevented from selling our products unless we could obtain a license or were able to redesign our products to avoid infringement. If we were unable to obtain a license or successfully redesign our products, we may be prevented from selling our products and our business could suffer.

We have a history of losses, anticipate significant increases in our operating expenses over the next several years and may never achieve profitability.

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Although we anticipate that our operating expenses will begin to stabilize in absolute dollars over the next several quarters, to become profitable we must continue to increase our sales. If sales do not continue to grow, we may not be able to achieve or maintain profitability in the future. In particular, we incurred net losses of $10.4 million in the first nine months of 2002, $13.0 million in 2001, $12.8 million in 2000 and $7.5 million in 1999. At September 30, 2002, we had an accumulated deficit of approximately $64.8 million.

Because we face significant competition from companies with greater resources than we have, we may be unable to compete effectively.

The market for our products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants.

We compete directly with two companies in the domestic and international markets: RadioTherapeutics Corporation, a division of Boston Scientific Corporation, and Radionics, Inc., a division of Tyco Healthcare, which is a division of Tyco International. Boston Scientific Corporation and Tyco International are publicly traded companies with substantially greater resources than we have. Both RadioTherapeutics and Radionics sell products that use radiofrequency energy to ablate soft tissue.

We are also aware of several small companies in international markets which sell products that compete directly with ours. These companies could erode our international market share in the future.

Alternative therapies could prove to be superior to the RITA system, and physician adoption could be negatively affected.

In addition to competing against other companies offering products that use radiofrequency energy to ablate soft tissue, we also compete against companies developing, manufacturing and marketing alternative therapies that address both cancerous and benign tumors. If these alternative therapies prove to offer treatment options that are superior to our system, physician adoption of our products could be negatively affected and our revenues could decline.

We currently lack long-term data regarding the safety and efficacy of our products and may find that long-term data does not support our short-term clinical results or that further short or long-term studies do not support the safety and efficacy of our products in various applications.

In the area of liver cancer, our products are supported by clinical follow-up data in published clinical reports or scientific presentations covering periods from five months to three years after radiofrequency ablation. If additional studies in liver cancer or in other applications fail to confirm or demonstrate the effectiveness of our products, our sales could decline. If longer-term patient follow-up or clinical studies indicate that our procedures cause unexpected, serious complications or other unforeseen negative effects, we could be subject to significant liability. Further, because some of our data has been produced in studies that were retrospective, not randomized or included small patient populations and because, in certain circumstances, we rely on clinical data developed by independent third party physicians, our clinical data may not be reproduced in wider patient populations.

If we are unable to protect our intellectual property rights or if we are found to infringe the rights of others, we may lose market share to our competitors and our business could suffer.

Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products, and yet we may be unable to do so. A number of companies in our market, as well as universities and research institutions, have issued patents and have filed patent applications that relate to the use of radiofrequency energy to ablate soft tissue. That could result in additional lawsuits against us. Our pending United States and foreign patent applications may not issue or may issue and be subsequently successfully challenged by others. In addition, our pending patent applications include claims to material aspects of our products that are not currently protected by issued patents. Both the patent application process and the process of managing patent disputes can be time consuming and expensive.

In the event a competitor infringes on our patent or other intellectual property rights, enforcing those rights may be difficult and time consuming. Even if successful, litigation to enforce our intellectual property

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rights or to defend our patents against challenge could be expensive and time consuming and could divert management’s attention. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge. In addition, confidentiality agreements executed by our employees, consultants and advisors may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. If we are unable to protect our intellectual property rights we could lose market share to our competitors and our business could suffer.

Our dependence on international revenues, which account for a significant portion of our revenues, could harm our business.

Because our future profitability will depend in part on our ability to grow product sales in international markets, we are exposed to risks specific to business operations outside the United States. These risks include:

• the challenge of managing international sales without direct access to the end customer;

• the risk of inventory build-up by our distributors which could negatively impact sales in future periods;

• obtaining reimbursement for procedures using our devices in some foreign markets;

• the burden of complying with complex and changing foreign regulatory requirements;

• longer accounts receivable collection time;

• significant currency fluctuations, which could cause our distributors to reduce the number of products they purchase from us because the cost of our products to them could increase relative to the price they could charge their customers;

• reduced protection of intellectual property rights in some foreign countries; and

• contractual provisions governed by foreign laws.

We are substantially dependent on two distributors in our international markets, and if we lose either distributor or if either distributor significantly reduces their product demand, our international and total revenues could decline.

We are substantially dependent on a limited number of significant distributors in our international markets, and if we lose these distributors and fail to attract additional distributors, our international revenues could decline. ITX Corporation, formerly known as Nissho Iwai Corporation, is our primary distributor in Asia. It accounted for 50 percent of our international revenues for the nine months ended September 30, 2002 and 31 percent of our international revenues in 2001. M.D.H. s.r.l. Forniture Ospedaliere, our distributor in Italy, accounted for 20 percent of our international revenues for the nine months ended September 30, 2002 and 17 percent of our international revenues for 2001. Because international revenues accounted for 26 percent of our total revenues for the nine months ended September 30, 2002 and these two distributors represented 70 percent of that total, the loss of either distributor or a significant decrease in unit purchases by either distributor could cause revenues to decline substantially. If we are unable to attract additional international distributors, our international revenues may not grow.

Our relationships with third-party distributors could negatively affect our sales.

We sell our products in international markets through third-party distributors over whom we have limited control, and, if they fail to adequately support our products, our sales could decline. If our distributors or we terminate our existing agreements, finding companies to replace them could be an expensive and time-consuming process and sales could decrease during any transition period.

We are aware that some of our international distributors have built up inventory of our products. As a result, future sales to these distributors could be

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negatively impacted. In addition, while these distributors have no price protection and no right of return relating to purchased products, if we permit the return of any of these products, we will have to adjust our revenues relating to these products.

In recent quarters we have significantly increased our reserve for uncollectible accounts to address the risk associated with longer collection periods that have arisen principally with our European distributors. If difficult economic conditions persist, and our collection experience worsens as a result, we may need to further adjust our reserve for uncollectible accounts in future periods, thereby reducing profits.

If customers in markets outside the United States experience difficulty obtaining reimbursement for procedures using our products, international sales could decline.

Certain of the markets outside the United States in which we sell our products require that specific reimbursement codes be obtained before reimbursement for procedures using our products can be approved. As a result, in countries where specific reimbursement codes are strictly required and have not yet been issued, reimbursement has been denied on that basis. For example, ITX, our distributor in Japan, is seeking to obtain reimbursement coverage in Japan, but to date has not yet received this approval. If we are unable to either obtain the required reimbursement codes or develop an effective strategy to resolve the reimbursement issue, physicians may be unwilling to purchase our products which could negatively impact our international revenues.

If third-party payors do not reimburse health care providers for use of the RITA system, purchases could be delayed and our revenues could decline.

Physicians, hospitals and other health care providers may be reluctant to purchase our products if they do not receive substantial reimbursement for the cost of the procedures using our products from third-party payors, such as Medicare, Medicaid and private health insurance plans. Even though in February of 2002 we were successful in establishing a new CPT code related to liver procedures with the American Medical Association, a payor still may not reimburse adequately for the procedure or product. In addition, there is no specific reimbursement code for radiofrequency ablation of tumors in other organs. Further, we believe the advent of fixed payment schedules has made it difficult to receive reimbursement for disposable products, even if the use of these products improves clinical outcomes. Fixed payment schedules typically permit reimbursement for a procedure rather than a device. If physicians believe that our system will add cost to a procedure but will not add sufficient offsetting economic or clinical benefits, physician adoption could be slowed.

You may have a difficult time evaluating our company as an investment because we have a limited operating history.

You can only evaluate our business based on a limited operating history because we began selling the RITA system in 1997. This short history may not be adequate to enable you to fully assess our ability to achieve market acceptance of our products and respond to competition.

We depend on key employees in a competitive market for skilled personnel and without additional employees, we cannot grow or achieve profitability.

We are highly dependent on the principal members of our management, operations and research and development staff. Our future success will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional personnel, including sales and marketing staff. The market for qualified management personnel in Northern California, where our offices are located, is competitive and is expected to continue to be competitive. Because the environment for good personnel is so competitive, costs related to compensation may increase significantly. If we are unable to attract and retain the personnel we need to support and grow our business, our business will suffer.

We may be subject to costly and time-consuming product liability actions.

We manufacture medical devices that are used on patients in both minimally invasive and open surgical procedures and, as a result, we may be subject to product liability lawsuits. To date, we have not been subject to a product liability claim; however, any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates or the inability to secure coverage

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in the future. In addition, we could have to pay any amount awarded by a court in excess of policy limits. Finally, even a meritless or unsuccessful product liability claim could be time consuming and expensive to defend and could result in the diversion of management’s attention from managing our core business.

Any failure in our physician training efforts could result in lower than expected product sales.

It is critical to our sales effort to train a sufficient number of physicians and to instruct them properly in the procedures that utilize our products. We have established formal physician training programs and rely on physicians to devote adequate time to understanding how and when our products should be used. If physicians are not properly trained, they may misuse or ineffectively use our products. This may result in unsatisfactory patient outcomes, patient injury and related liability or negative publicity that could have an adverse effect on our product sales.

Any failure to build and manage our direct sales organization may negatively affect our revenues.

We have significantly expanded our direct sales force in the United States over the past eighteen months. There is intense competition for skilled sales and marketing employees, especially for people who have experience selling disposable devices and generators to the physicians in our target market, and we may be unable to hire skilled individuals to sell our products. Any inability to build and effectively manage our direct sales force could negatively impact our growth.

We may incur significant costs related to a class action lawsuit due to the likely volatility of our stock.

Our stock price may fluctuate for a number of reasons including:

• failure of the public market to support the valuation established in our initial public offering;

• our ability to successfully commercialize our products;

• announcements regarding patent litigation or the issuance of patents to us or our competitors;

• quarterly fluctuations in our results of operations;

• announcements of technological or competitive developments;

• regulatory developments regarding us or our competitors;

• acquisitions or strategic alliances by us or our competitors;

• changes in estimates of our financial performance or changes in recommendations by securities analysts; and

• general market conditions, particularly for companies with small market capitalizations.

Securities class action litigation is often brought against a company after a period of volatility in the market price of its stock. If our future quarterly operating results are below the expectations of securities analysts or investors, the price of our common stock would likely decline. Stock price fluctuations may be exaggerated if the trading volume of our common stock is low. Any securities litigation claims brought against us could result in substantial expense and divert management’s attention from our core business.

If we fail to support our anticipated growth in operations, our business could suffer.

If we fail to execute our sales strategy and develop further our products, our business could suffer. To manage anticipated growth in operations, we must, over time, increase our operations staff and expand our manufacturing facilities. Our systems, procedures and controls may not be adequate to support our expected growth in operations.

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We have limited experience manufacturing our disposable devices in substantial quantities, and if we are unable to hire sufficient additional personnel, purchase additional equipment or are otherwise unable to meet customer demand our business could suffer.

To be successful, we must manufacture our products in substantial quantities in compliance with regulatory requirements at acceptable costs. If we do not succeed in manufacturing quantities of our disposable devices that meet customer demand, we could lose customers and our business could suffer. At the present time, we have limited high-volume manufacturing experience. Our manufacturing operations are currently focused on the in-house assembly of our disposable devices. As we increase our manufacturing volume and the number of product designs for our disposable devices, the complexity of our manufacturing processes will increase. Because our manufacturing operations are primarily dependent upon manual assembly, if demand for our system increases we will need to hire additional personnel and may need to purchase additional equipment. If we are unable to sufficiently staff our manufacturing operations or are otherwise unable to meet customer demand for our products, our business could suffer.

We are dependent on one supplier as the only source of a component that we use in our disposable devices, and any disruption in the supply of this component could negatively affect our revenues.

To date, there has been only one supplier available to provide us with a component that we include in our disposable devices. Recently, we have identified a second supplier, but we have not yet qualified them. However, a disruption in the supply of this component is still possible and could negatively affect revenues. If we were unable to remedy a disruption in supply of this component within twelve months, we could be required to redesign the handle of our disposable devices, which could divert engineering resources from other projects or add to product costs. In addition, a new or supplemental filing with applicable regulatory authorities may require clearance prior to our marketing a product containing new materials. This clearance process may take a substantial period of time, and we may be unable to obtain necessary regulatory approvals for any new material to be used in our products on a timely basis, if at all. This could also create supply disruptions that could negatively affect our business.

We are dependent on one supplier as our only source of an accessory device used in conjunction with our Starburst XLi line of disposable devices, and any disruption in the supply of these devices could negatively affect our revenues.

During the quarter ended September 30, 2002, we experienced shortages in the supply of accessory infusion pumps for which we currently have no alternate supplier. If we are unable to remedy this supply disruption, if we suffer similar disruptions in the future, or if we are unable to identify an alternate supplier of accessory infusion pumps our business could suffer through lower revenues or higher costs.

We are dependent on third-party contractors for the supply of our generators, and any failure to deliver generators to us could result in lower than expected revenues.

We are dependent on two third-party suppliers to produce our generators. While we have agreements with both of these suppliers, any delay in shipments of generators to us could result in our failure to ship generators to customers and could negatively affect revenues.

Complying with the FDA and other domestic and international regulatory authorities is an expensive and time-consuming process, and any failure to comply could result in substantial penalties.

We are subject to a host of federal, state, local and international regulations regarding the manufacture and marketing of our products. In particular, our failure to comply with FDA regulations could result in, among other things, seizures or recalls of our products, an injunction, substantial fines and/or criminal charges against our employees and us. The FDA’s medical device reporting regulations require us to report any incident in which our products may have caused or contributed to a death or serious injury, or in which our products malfunctioned in a way that would be likely to cause or contribute to a death or serious injury if the malfunction recurred.

Sales of our products outside the United States are subject to foreign regulatory requirements that vary from country to country. The time required to obtain approvals from foreign countries may be longer than that required for FDA approval or clearance, and requirements for foreign licensing may differ from FDA

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requirements. For example, some of our newer products have not received approval in Japan. Any failure to obtain necessary regulatory approvals for our new products in foreign countries could negatively affect revenues.

Product introductions or modifications may be delayed or canceled as a result of the FDA regulatory process, which could cause our revenues to be below expectations.

Unless we are exempt, we must obtain the appropriate FDA approval or clearance before we can sell a new medical device in the United States. This can be a lengthy and time-consuming process. To date, all of our products have received clearances from the FDA through premarket notification under Section 510(k) of the Federal Food, Drug and Cosmetic Act. However, if the FDA requires us to submit a new premarket notification under Section 510(k) for modifications to our existing products, or if the FDA requires us to go through a lengthier, more rigorous examination than we now expect, our product introductions or modifications could be delayed or canceled which could cause our revenues to be below expectations. The FDA may determine that future products will require the more costly, lengthy and uncertain premarket approval process. In addition, modifications to medical device products cleared via the 510(k) process may require a new 510(k) submission. We have made minor modifications to our system. Using the guidelines established by the FDA, we have determined that some of these modifications do not require us to file new 510(k) submissions. If the FDA disagrees with our determinations, we may not be able to sell the RITA system until the FDA has cleared new 510(k) submissions for these modifications. In addition, we intend to request additional label indications, such as approvals or clearances for the ablation of tumors in additional organs, including lung, uterus and breast, for our current products. The FDA may either deny these requests outright, require additional extensive clinical data to support any additional indications or impose limitations on the intended use of any cleared product as a condition of approval or clearance. Therefore, obtaining necessary approvals or clearances for these additional applications could be an expensive and lengthy process.

We may need to raise additional capital in the future resulting in dilution to our stockholders.

We may need to raise additional funds for our business operations and to execute our business strategy. We may seek to sell additional equity or debt securities or to obtain an additional credit facility. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights that are senior to holders of common stock and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, if at all.

Our executive officers and directors own a large percentage of our voting stock and could exert significant influence over matters requiring stockholder approval.

Because our executive officers and directors, and their respective affiliates, own approximately 26 percent of our outstanding common stock, these stockholders may, as a practical matter, be able to exert significant influence over matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combinations. This concentration of voting stock could have the effect of delaying or preventing a change in control.

Our certificate of incorporation, our bylaws, Delaware law and our stockholder rights plan contain provisions that could discourage a takeover.

Provisions of our certificate of incorporation, our bylaws, Delaware law and our stockholder rights plan contain provisions that may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Our market risk disclosures have not changed significantly from those set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K filing dated March 28, 2002.

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Item 4.    Controls and Procedures

RITA evaluated the design and operation of its disclosure controls and procedures to determine whether they are effective in ensuring that the disclosure of required information is timely made in accordance with the Exchange Act and the rules and forms of the Securities and Exchange Commission. This evaluation was made under the supervision and with the participation of management, including RITA’s principal executive officer and principal financial officer within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q. The principal executive officer and principal financial officer have concluded, based on their review, that RITA’s disclosure controls and procedures, as defined at Exchange Act Rules 13a-14(c) and 15d-14(c), are effective to ensure that information required to be disclosed by RITA in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. No significant changes were made to RITA’s internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings.

On July 16, 1999, the United States Patent and Trademark Office declared an interference involving us, which was instituted by RadioTherapeutics Corporation, a competitor of ours and now a wholly owned subsidiary of Boston Scientific Corporation, in which the validity of a patent claim previously issued to us was called into question. The principal parties in the proceeding are RadioTherapeutics and RITA. The claims at issue in the interference cover a radiofrequency ablation device having an array of deployable electrodes effective, in a deployed state, to define a tissue ablation volume. In February 2001, the Patent and Trademark Office issued a decision on preliminary motions filed in the patent interference proceeding. The decision found that one of the claims in our United States Patent No. 5,536,267 (claim no. 32) is invalid. On September 27, 2002, the Patent and Trademark Office Board of Patent Appeals and Interferences issued a final decision finding that RadioTherapeutics had failed to establish priority of invention over RITA’s established invention date and, therefore, were not themselves entitled to any patent claims in the interference. It also affirmed the earlier preliminary decision, described above, regarding claim 32. On October 16, 2002, RadioTherapeutics filed an action in the United States District Court for the Northern District of California seeking to reverse the Patent and Trademark Office Board of Patent Appeals’ priority decision, affirm its decision regarding claim 32, and to initiate a new interference between certain issued patent claims licensed to RadioTherapeutics and certain of the RITA’s patent claims. The factual basis alleged to underlie the new interference proceeding is the claim that our patent and the patent licensed to RadioTherapeutics interfere. RadioTherapeutics seeks to invalidate our patent claims. Final determination of these patent interference proceedings may take several years. If the United States District Court reverses the decision of the Patent and Trademark Office Board of Patent Appeals as to RadioTherapeutics’ entitlement to priority, and we were found to infringe RadioTherapeutics’ patent claims and were unable to obtain a license to use the relevant patent or successfully modify our disposable device, we could be unable to sell our system and our business could suffer. If the District Court affirms the Patent and Trademark Office Board of Patent Appeals’ decision regarding claim 32 or if RadioTherapeutics prevails on its new interference, we could lose one or more of our issued patent claims.

On July 9, 2002, Boston Scientific Corporation, the University of Kansas and the University of Kansas Medical Center Research Institute filed a complaint against us in United States District Court for the Northern District of California. The principal parties in the dispute are Boston Scientific Corporation, the University of Kansas, the University of Kansas Medical Center Research Institute and RITA. The factual basis alleged to underlie the claim is that certain of our products infringe a patent licensed by Boston Scientific from the University of Kansas. The complaint seeks unspecified monetary damages and injunctive relief.

On April 11, 2002, RadioTherapeutics and SciMed Life Systems, Inc., (two wholly-owned subsidiaries of Boston Scientific Corporation), the Board of Regents of the University of Nebraska, and UneMed Corporation filed a complaint against us in United States District Court for the Northern District of California. The principal parties in the dispute are RadioTherapeutics, SciMed, the Board of Regents of the University of Nebraska, UneMed Corporation and RITA. The factual basis alleged to underlie the claim is that certain of our products infringe a patent licensed by UneMed and RadioTherapeutics and a patent owned by SciMed. The complaint seeks unspecified monetary damages and injunctive relief. RadioTherapeutics filed a first amended complaint on October 30, 2002 adding to the litigation a second patent assigned to the University of Nebraska and licensed to RadioTherapeutics.

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On August 27, 2001 we filed a complaint against RadioTherapeutics in the United States District Court for the Northern District of California. The principal parties in the proceeding are RadioTherapeutics and RITA. The factual basis underlying the proceeding is our claim that the sale by RadioTherapeutics of its radiofrequency ablation products infringes six of our patents. On October 17, 2001, RadioTherapeutics filed an answer and affirmative defenses to our complaint denying certain of the allegations in the complaint and asserting counterclaims requesting declaratory relief that RadioTherapeutics is not infringing our patents and that our asserted patents are invalid and unenforceable. Our complaint seeks treble damages against RadioTherapeutics for its sale of radiofrequency ablation products, as well as temporary and permanent injunctive relief enjoining RadioTherapeutics from further infringement of our patents.

We are also involved in a patent opposition pending before the European Patent Office. This opposition was instituted on March 2, 2000. The principal parties are RadioTherapeutics and RITA. This patent also covers the curvature of the array at the tip of our disposable devices. The factual basis alleged to underlie the claim is the allegation by RadioTherapeutics that our European patent is not valid. RadioTherapeutics seeks to invalidate our patent claim and to establish the patentability of the claims in their patent application. We seek to maintain the priority of our patent claim. On February 7, 2002, the European Patent Office determined that we are entitled to Patent No. 0777445 covering radiofrequency ablation technology, approving 27 claims. Both parties have appealed this rating.

In addition to these patent proceedings, we may from time to time become a party to various legal proceedings arising in the ordinary course of our business.

Item 2.    Changes in Securities and Use of Proceeds.    Not applicable.

Item 3.    Defaults Upon Senior Securities.    Not applicable.

Item 4.    Submission of Matters to a Vote of Security Holders.    Not applicable.

Item 5.    Other Information.    Not applicable.

Item 6.    Exhibits and Reports on Form 8-K.

(a)  Exhibits:

10.28	Separation Agreement with Ronald Steckel effective July 31, 2002.
10.29	Separation Agreement with Daniel Balbierz dated July 30, 2002.
10.30	Change of Control Agreement entered into between the Company and Stephen J. Williams dated July 29, 2002.
10.31	Indemnification Agreement between the Company and Stephen J. Williams on July 29, 2002.
99.1	Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2	Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)  Reports on Form 8-K:    Not applicable.

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SIGNATURES

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

RITA MEDICAL SYSTEMS, INC
By:	/S/    DONALD STEWART
Donald Stewart Chief Financial Officer and Vice President, Finance and Administration

Date: November 14, 2002

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CERTIFICATION

Pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Barry Cheskin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of RITA Medical Systems, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

/s/    BARRY CHESKIN         

Barry Cheskin

President and Chief Executive Officer

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CERTIFICATION

Pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Donald Stewart, certify that:

1. I have reviewed this quarterly report on Form 10-Q of RITA Medical Systems, Inc.;

4. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

5. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

/s/    DONALD STEWART         

Donald Stewart

Chief Financial Officer and

Vice President, Finance and Administration

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EXHIBIT INDEX

10.28	Separation Agreement with Ronald Steckel effective July 31, 2002.
10.29	Separation Agreement with Daniel Balbierz dated July 30, 2002.
10.30	Change of Control Agreement entered into between the Company and Stephen J. Williams dated July 29, 2002.
10.31	Indemnification Agreement between the Company and Stephen J. Williams on July 29, 2002.
99.1	Certificate pursuant to 18.U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2	Certificate pursuant to 18.U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-10.28

EXHIBIT 10.28

July 25, 2002

Ronald T. Steckel

1115 Abbott Ave.

Campbell, CA 95008

Dear Ron:

This Letter Agreement describes our understanding and agreements regarding the termination of your employment relationship with RITA Medical Systems, Inc. (the “Company”). By your signature below, you acknowledge and agree with the following:

1.    Separation Date and Final Salary Payment.    Your employment relationship with the Company will terminate on August 15, 2002 (the “Separation Date”). As of the Separation Date you will receive all salary due to you as of the Separation Date (including payment for any accrued and unused vacation as of the Separation Date).

2.    Separation Benefits.    In consideration for your release of claims as set forth below and your other obligations set forth herein, and provided that you sign the acknowledgement and agreement below signifying your agreement to the terms of this Letter Agreement, including the release of claims, and return the signed letter to me and all company property in your possession no later than 5:00 p.m. on August 15, 2002, and provided further that you do not exercise your right to revoke this Letter Agreement under Paragraph 6 below, the Company will provide the following:

        (a)    Salary Continuation.    You will be entitled to receive continuation of your base salary payable in two equal payments per month for up to six (6) months following the date of termination of your employment. The first payment shall be made on the first regular payroll date following the end of the Revocation Period described in Paragraph 6 below. This salary continuation is conditioned on your confirmation, to the Company’s satisfaction, that you are actively seeking full-time employment. In the event you commence full-time employment during the Severance period, the Company’s obligation to pay any severance shall cease at the time of such employment. For purposes of this paragraph, “full-time employment” shall be defined as at least 35 hours per week of compensated labor, including consulting or other contract work.

                (b)    Stock Options.    Your stock option vesting will cease as of August 15, 2002.

3.    Insurance Benefits.    You will continue to receive the Company’s health insurance benefits (medical, dental and vision) at the Company’s expense through August 31, 2002, which date shall be the “qualifying event” date under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”). Following such date, you have the right to continue the health insurance coverage under COBRA at your own expense.

4.    Nondisclosure of Confidential and Proprietary Information.    You acknowledge and agree to continue to maintain the confidentiality of all confidential and proprietary information of the

Ron Steckel

July 25, 2002

Page 2

Company as provided by the Confidential Information and Inventions Assignment Agreement previously entered into between you and the Company, a copy of which is attached hereto as Exhibit A (the “Confidentiality Agreement”), and that such Confidentiality Agreement shall remain in full force and effect notwithstanding this Letter Agreement.

5.    Release of Claims.

        (a)    You acknowledge and agree that the foregoing consideration represents settlement in full of all outstanding obligations owed to you by the Company. On behalf of yourself, and your heirs, executors, successors and assigns, you agree to hereby fully and forever release the Company and its officers, directors, employees, investors, shareholders, administrators, predecessor and successor corporations and assigns from any claim, duty, obligation or cause of action relating to any matters of any kind, whether known or unknown, suspected or unsuspected, that you may possess arising from any omissions, acts or facts that have occurred up until and including the date you sign this Letter Agreement under any and all applicable state and federal laws including, without limitation:

                (i)    any and all claims relating to or arising from your employment relationship with the Company and termination of that relationship;

                (ii)    any and all claims relating to, or arising from, your right to purchase, or actual purchase of shares of stock of the Company;

                (iii)    any and all claims for wrongful discharge of employment; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; and defamation;

                (iv)    any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, Americans with Disabilities Act, the Age Discrimination in Employment Act of 1967 (up to and including the date you sign this Letter Agreement), the California Fair Employment and Housing Act, and any and all claims arising out of any other laws and regulations relating to employment or employment discrimination; and

                (vi)    any and all claims for attorney’s fees and costs.

You agree that the release set forth in this Paragraph 5(a) will be and remain in effect in all respects as a complete and general release as to the matters released. This release does not extend to any obligations incurred under this Letter Agreement.

        (b)    Except as otherwise provided above in Paragraph 3, you acknowledge and agree that you will not be entitled to participate in any of the Company’s benefit plans or programs offered to employees of the Company, including, but not limited to, any accrual of vacation, after the Separation Date.

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Ron Steckel

July 25, 2002

Page 3

6.    Acknowledgment of Waiver of Claims under ADEA.    You acknowledge that you are waiving and releasing any rights you may have under the Age Discrimination Act of 1967 (“ADEA”) and that this waiver and release is knowing and voluntary. You and the Company agree that this waiver and release does not apply to any rights or claims that may arise under ADEA after the date you execute this Letter Agreement. You acknowledge that the consideration given for the waiver and release in this Letter Agreement is in addition to anything of value to which you were already entitled. You further acknowledge that you have been advised by this writing that (a) you should consult with an attorney prior to executing this Letter Agreement; (b) you have at least twenty-one (21) days within which to consider this Letter Agreement; (c) you have seven (7) days following your execution of this Letter Agreement to revoke the Letter Agreement (the “Revocation Period”); and (d) this Letter Agreement shall not be effective until the Revocation Period has expired.

7.    Civil Code Section 1542.    You and the Company (“we”) each represent to the other that we are not aware of any claim by either of us other than the claims that are released by Paragraph 5 of this Letter. We each acknowledge that we are familiar with the provisions of California Civil Code Section 1542, which provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

We, each being aware of such code section, agree to waive any rights we may have thereunder, as well as under any other statute or common law principles of similar effect.

8.    Breach of Confidentiality Obligations.    You acknowledge that upon breach of any of the confidentiality provisions contained in Paragraph 4 of this Letter Agreement, the Company would sustain irreparable harm from such breach, and, therefore, you agree that in addition to any other remedies which the Company may have for any breach of the obligations set forth in this Letter Agreement or the Confidentiality Agreement, the Company will be entitled to obtain equitable relief, including specific performance and injunctions, restraining you from committing or continuing any such violation of this Letter Agreement or the Confidentiality Agreement.

9.    Non-Disparagement.    The undersigned each agree to refrain from any disparagement, criticism, defamation, slander of the other, or interference with the contracts and relationships of the other, and the undersigned each represent and warrant that they have not disparaged, criticized, defamed, slandered the other, or interfered in any manner with the contracts and relationships of the other prior to the Separation Date.

10.    Arbitration.    The undersigned each agree to attempt to settle all disputes arising in connection with this Agreement through good faith consultation. In the event no agreement can be reached on such dispute within fifteen (15) days after notification in writing by either party to the other concerning such dispute, the dispute shall be settled by binding arbitration to be conducted in Santa Clara County, California before the American Arbitration Association under its under its California Employment Dispute Resolution Rules, or by a judge to be mutually agreed upon. The arbitration decision shall be final, conclusive and binding on both parties and any arbitration award or decision may

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Ron Steckel

July 25, 2002

Page 4

be entered in any court having jurisdiction. The undersigned each agree that the prevailing party in any arbitration shall be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award and that the prevailing party in any such proceeding shall be awarded reasonable attorneys’ fees and costs. This Paragraph 10 shall not apply to the Confidentiality Agreement. The undersigned hereby waive any rights they may have to trial by jury in regard to arbitrable claims.

11.    Voluntary Execution of Agreement.    You acknowledge that this Letter Agreement is executed by you voluntarily, with the full intent of releasing all claims against the Company and without any duress or undue influence. You further acknowledge that (i) you have read this entire Letter Agreement, (ii) you understand the terms and consequences of this Letter Agreement and of the releases it contains, and you have been advised that you may seek legal representation with respect to the matters contained in this Letter Agreement; and (iii) you are fully aware of the legal and binding effect of this Letter Agreement.

RITA MEDICAL SYSTEMS, INC.
By:	/s/    Barry Cheskin
Title:	President and Chief Executive Officer

AGREED AND ACKNOWLEDGED:

My agreement with the above terms is acknowledged by my signature below. Furthermore, I acknowledge that I have read and understand the foregoing Letter Agreement and that I sign this release of all claims voluntarily, with full appreciation that I am forever foreclosed from pursuing any of the rights I have waived.

/s/    RONALD T. STECKEL

Ronald T. Steckel

Dated:  July 31, 2002

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EXHIBIT A

CONFIDENTIALITY AGREEMENT

EX-10.29

EXHIBIT 10.29

RITA MEDICAL SYSTEMS, INC.

SEPARATION AGREEMENT AND MUTUAL RELEASE

This Separation Agreement and Mutual Release (“Agreement”) is made by and between RITA Medical Systems, Inc., a Delaware corporation (the “Company”), and Daniel Balbierz (“Mr. Balbierz” or “Employee”).

WHEREAS, Mr. Balbierz is employed by the Company pursuant to the terms of an offer letter dated March 19,1998, as amended on April 17, 2002, (the “Offer Letter”); and

WHEREAS, the Company and Mr. Balbierz have mutually agreed to terminate the existing employment relationship, to release each other from any claims arising from or related to the employment relationship and to enter into a consulting relationship.

NOW, THEREFORE, in consideration of the mutual promises made herein, the Company and Mr. Balbierz (collectively referred to as the “Parties”) hereby agree as follows:

1.    Termination of Employment.    Mr. Balbierz and the Company acknowledge and agree that Mr. Balbierz shall voluntarily terminate his employment as Vice President, Research and Development, with the Company effective at the close of business on August 16, 2002 (the “Termination Date”).

2.    Separation Benefits.    In consideration for the release of claims set forth below and other obligations under this Agreement, and provided this Agreement is signed by Mr. Balbierz and not revoked under Section 7 herein, the Company agrees to provide the following separation benefits to Mr. Balbierz:

        (a)    The Company shall pay as severance to Mr. Balbierz a lump sum payment equal to $39,700.00. The severance payment shall be reduced by applicable tax withholding and shall be paid on the first regular payroll date following the Effective Date of this Agreement (as defined in Section 19 below); and

        (b)    The Company agrees to retain Mr. Balbierz as a consultant for the period from the Termination Date through the end of the trial in the Company’s patent litigation with RadioTherapeutics Corporation (now owned by Boston Scientific Corporation), which litigation commenced in August 2001 (the “Consulting Period”), to perform such services as may reasonably be requested in writing by the Company, including, without limitation, the provision of testimony and general advice and consulting to the Company with regard to patent matters. Mr. Balbierz agrees to make himself reasonably available to provide the requested services during the Consulting Period. Beginning on February 17, 2003, the Company shall pay Mr. Balbierz $175.00 for each hour of consulting services provided to the Company. Mr. Balbierz shall receive no other compensation for such services.

3.    Employee Benefits.

        (a)    On or before the Termination Date, the Company shall reimburse Mr. Balbierz for all reasonable business expenses incurred by Mr. Balbierz up until the Termination Date and submitted for reimbursement in accordance with Company policy. Any expenses incurred by Mr. Balbierz during the Consulting Period shall be reimbursed in accordance with Company policy.

                (b)    Except as otherwise provided above, Mr. Balbierz shall not be entitled to participate in any of the Company’s benefit plans or programs offered to employees of the Company after the Termination Date.

4.    Stock Options.

        (b)    Stock Option.    As of the Termination Date, Mr. Balbierz has been granted a total of 190,700 options to purchase shares of Company Common Stock (“Options”) 122,102 of which are vested and exercisable and 18,000 of which have been exercised and 12,624 shares of Restricted Common Stock (“Restricted Stock”) 6,312 of which are no longer subject to a Company repurchase option. The Options and Restricted Stock are subject to the terms of the Company’s 1994 Incentive Stock Plan and 2000 Stock Plan and the related option or restricted stock agreements. Notwithstanding any terms set forth in the option or restricted stock purchase agreements to the contrary, the Company and Mr. Balbierz have agreed that any unvested options and restricted stock held by Mr. Balbierz on the Termination Date shall continue to vest for a period of six(6) months following the Termination Date.

Except as set forth in this Agreement, Mr. Balbierz acknowledges that as of the Termination Date, Mr. Balbierz has no right, title or interest in or to any shares of the Company’s capital stock, or any other agreement (oral or written) or plan with the Company.

5.    No Other Payments Due.    Mr. Balbierz and the Company agree that the Company shall pay to Mr. Balbierz on or before the Termination Date, his accrued salary, accrued vacation and other sums as are due to Mr. Balbierz through such date. By executing this Agreement, Mr. Balbierz hereby acknowledges receipt of all such payments as received and acknowledges that, in light of the payment by the Company of all wages due to Mr. Balbierz, California Labor Code Section 206.5 is not applicable to the Parties hereto. That section provides in pertinent part as follows:

No employer shall require the execution of any release of any claim or
right on account of wages due, or to become due, or made as an advance
on wages to be earned, unless payment of such wages has been made.

6.    Release of Claims.    In consideration for the obligations of both parties set forth in this Agreement, Mr. Balbierz and the Company, on behalf of themselves, and their respective heirs, executors, officers, directors, employees, investors, stockholders, administrators and assigns, hereby fully and forever release each other and their respective heirs, executors, officers, directors, employees, investors, stockholders, administrators, predecessor and successor corporations and assigns, of and from any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that any of them may possess arising from any omissions, acts or facts that have occurred up until and including the date of this Agreement including, without limitation:

        (a)    any and all claims relating to or arising from Mr. Balbierz’s employment relationship with the Company and the termination of that relationship;

        (b)    any and all claims relating to, or arising from, Mr. Balbierz’s right to purchase, or actual purchase of shares of stock of the Company;

        (c)    any and all claims for wrongful discharge of employment; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied, negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; negligence; and defamation;

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        (d)    any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, and the California Fair Employment and Housing Act;

        (e)    any and all claims arising out of any other laws and regulations relating to employment or employment discrimination; and

        (f)    any and all claims for attorneys’ fees and costs.

The Company and Mr. Balbierz agree that the release set forth in this Section 6 shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred or specified under this Agreement.

7.    Acknowledgment of Waiver of Claims under ADEA.    Mr. Balbierz acknowledges that he is waiving and releasing any rights he may have under the Age Discrimination in Employment Act of 1967 (“ADEA”) and that this waiver and release is knowing and voluntary. Mr. Balbierz and the Company agree that this waiver and release does not apply to any rights or claims that may arise under ADEA after the Effective Date of this Agreement. Mr. Balbierz acknowledges that the consideration given for this waiver and release Agreement is in addition to anything of value to which Mr. Balbierz was already entitled. Mr. Balbierz further acknowledges that he has been advised by this writing that (a) he should consult with an attorney prior to executing this Agreement; (b) he has at least twenty-one (21) days within which to consider this Agreement; (c) he has seven (7) days following his execution of this Agreement to revoke the Agreement (the “Revocation Period”). This Agreement shall not be effective until the Revocation Period has expired.

8.    Civil Code Section 1542.    The Parties represent that they are not aware of any claim by either of them other than the claims that are released by this Agreement. Mr. Balbierz and the Company acknowledge that they are familiar with the provisions of California Civil Code Section 1542, which provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH  THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN  HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,  WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY  AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

Mr. Balbierz and the Company, being aware of said Code section, agree to expressly waive any rights they may have thereunder, as well as under any other statute or common law principles of similar effect.

9.    Employee Covenants.

        (a)    General.    Mr. Balbierz agrees that for all periods described in this Agreement, he shall continue to conduct himself in a professional manner that is supportive of the business of the Company.

        (b)    Confidentiality.    Mr. Balbierz and the Company agree to maintain in strict confidence the existence of this Agreement, the contents and terms of this Agreement, and the consideration for this Agreement (hereinafter collectively referred to as “Settlement Information”) and each Party further agrees to take every reasonable precaution to prevent disclosure of any Settlement

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Information to any person or entity, other than Mr. Balbierz’s spouse, family members, tax and legal advisors and the Company’s accounting and legal advisors, unless otherwise required to disclose such information by law or by a governmental entity.

        (c)    Nondisclosure.    Mr. Balbierz represents and warrants that he has not breached his obligations to the Company under the terms of the Confidential Information and Invention Assignment Agreement entered into between Mr. Balbierz and the Company on March 25, 1998 (the “Confidentiality Agreement”), a copy of which is attached hereto as Exhibit A. Mr. Balbierz understands and agrees that his obligations to the Company under the Confidentiality Agreement survive the termination of his relationship with the Company under this Agreement; provided, however, that the Company and Mr. Balbierz hereby agree that Section 4(b) of the Confidentiality Agreement shall be amended as provided below:

“Assignment of Inventions.    I agree that I will promptly make full written disclosure to the Company, will hold in trust for the sole right and benefit of the Company and hereby assign to the Company, or its designee, all my right, title and interest throughout the world in and to any and all inventions, original works of authorship, developments, concepts, know-how, improvements or trade secrets, whether or not patentable or registrable under copyright or similar laws, which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, which use radiofrequency energy to treat solid cancerous or benign tumors, during the period of time in which I am employed by or a consultant of the Company (collectively referred to as “Inventions”), except as provided in Section 4(e) below. I further acknowledge that all Inventions which are made by me (solely or jointly with others) within the scope of and during the period of my Relationship with the Company are “works made for hire” (to the greatest extent permitted by applicable law) and are compensated by my salary (if I am an employee) or by such amounts paid to me under any applicable consulting agreement or consulting arrangements (if I am a consultant), unless regulated otherwise by the mandatory law of the state of California.”

10.    Non-Disparagement.    Each Party agrees to refrain from any disparagement, defamation, slander of the other, or tortious interference with the contracts and relationships of the other.

11.    Employment References.    The Company and Mr. Balbierz agree that upon request for references from prospective future employers, the Company shall direct all such inquiries to its Human Resources Department who shall then provide information only with respect to Mr. Balbierz’s length of employment and last position held with the Company.

12.    Authority.    The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Mr. Balbierz represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through his to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein.

13.    No Representations.    Neither Party has relied upon any representations or statements made by the other Party hereto which are not specifically set forth in this Agreement.

14.    Severability.    In the event that any provision hereof becomes or is declared by a court or other tribunal of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision.

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15.    Arbitration.    The Parties shall attempt to settle all disputes arising in connection with this Agreement through good faith consultation. In the event no agreement can be reached on such dispute within fifteen (15) days after notification in writing by either Party to the other concerning such dispute, the dispute shall be settled by binding arbitration to be conducted in Alameda County before the American Arbitration Association under its California Employment Dispute Resolution Rules, or by a judge to be mutually agreed upon. The arbitration decision shall be final, conclusive and binding on both Parties and any arbitration award or decision may be entered in any court having jurisdiction. The Parties agree that the prevailing party in any arbitration shall be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award. The Parties further agree that the prevailing Party in any such proceeding shall be awarded reasonable attorneys’ fees and costs. This Section 15 shall not apply to the Confidentiality Agreement. The parties hereby waive any rights they may have to trial by jury in regard to arbitrable claims.

16.    Entire Agreement.    This Agreement, with the exhibit attached hereto, represents the entire agreement and understanding between the Company and Mr. Balbierz concerning Mr. Balbierz’s separation from the Company, and supersede and replace any and all prior agreements and understandings concerning Mr. Balbierz’s relationship with the Company and his compensation by the Company.

17.    No Oral Modification.    This Agreement may only be amended in writing signed by Mr. Balbierz and the Company.

18.    Governing Law.    This Agreement shall be governed by the laws of the State of California, without regard to its conflicts of law provisions.

19.    Effective Date.    This Agreement is effective upon the expiration of the Revocation Period described in Section 7 and such date is referred to herein as the “Effective Date.”

20.    Counterparts.    This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned.

21.    Assignment.    This Agreement may not be assigned by Mr. Balbierz or the Company without the prior written consent of the other party. Notwithstanding the foregoing, this Agreement may be assigned by the Company to a corporation controlling, controlled by or under common control with the Company without the consent of Mr. Balbierz.

22.    Breach of the Agreement.    Mr. Balbierz acknowledges that upon his breach of this Agreement or the Confidentiality Agreement, the Company would sustain irreparable harm from such breach, and, therefore, Mr. Balbierz agrees that in addition to any other remedies which the Company may have under this Agreement or otherwise, the Company shall be entitled to obtain equitable relief, including specific performance and injunctions, restraining his from committing or continuing any such violation of the Agreement or the Confidentiality Agreement. Mr. Balbierz acknowledges and agrees that upon his material or intentional breach of any of the provisions of the Agreement (including Section 9) or the Confidentiality Agreement, in addition to any other remedies the Company may have under this Agreement or otherwise, the Company’s obligations to provide benefits to Employee, as described in this Agreement, including without limitation those benefits provided in Sections 2, 3 and 4 shall immediately terminate.

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23.    Voluntary Execution of Agreement.    This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that:

        (a)    they have read this Agreement;

        (b)    they have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel;

        (c)    they understand the terms and consequences of this Agreement and of the releases it contains; and

        (d)    they are fully aware of the legal and binding effect of this Agreement.

IN WITNESS WHEREOF, the Parties have executed this Separation Agreement and Mutual Release on the respective dates set forth below.

	RITA MEDICAL SYSTEMS, INC.
Dated as of July 30, 2002	By:	/s/    BARRY CHESKIN
	Title:	President and Chief Executive Officer
	DANIEL BALBIERZ, an individual
Dated as of July 30, 2002	/s/    DANIEL BALBIERZ

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EXHIBIT A

CONFIDENTIALITY AGREEMENT

EX-10.30

EXHIBIT 10.30

CHANGE OF CONTROL AGREEMENT

This Change of Control Agreement (the “Agreement”) is made and entered into effective as of July 29, 2002, by and between Stephen J. Williams (the “Employee”) and RITA Medical Systems, Inc., a Delaware corporation (the “Company”).

RECITALS

A.    It is understood that another company or other entity may from time to time consider the possibility of acquiring the Company or that a change in control may otherwise occur, with or without the approval of the Company’s Board of Directors (the “Board”). The Board has identified the Employee, an officer of the Company, as a key employee whose continued employment with the Company is critical to the Company’s future success and has determined that it is important to provide Employee with an incentive to continue his or her employment with the Company in the event that the Company consummates a Change of Control transaction. For purposes of this Agreement, this shall include Employee’s employment in a majority-owned subsidiary or other surviving entity of an acquiring Company.

B.    To accomplish the foregoing objectives, the Board of Directors has directed the Company, upon execution of this Agreement by the Employee, to agree to the terms provided in this Agreement.

C.    The Board believes that it is imperative to provide the Employee with certain benefits upon a Change of Control and, under certain circumstances, upon termination of the Employee’s employment in connection with a Change of Control, which benefits are intended to provide the Employee with financial security and provide sufficient income and encouragement to the Employee to remain with the Company notwithstanding the possibility of a Change of Control.

D.    To accomplish the foregoing objectives, the Board of Directors has directed the Company, upon execution of this Agreement by the Employee, to agree to the terms provided in this Agreement.

E.    Certain capitalized terms used in the Agreement are defined in Section 3 below.

In consideration of the mutual covenants contained in this Agreement, and in consideration of the continuing employment of Employee by the Company, the parties agree as follows:

        1.    At-Will Employment.    The Company and the Employee acknowledge that the Employee’s employment is and shall continue to be at-will, as defined under applicable law. If the Employee’s employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, the Employee shall not be entitled to any payments or benefits, other than as provided by this Agreement, or as may otherwise be available in

accordance with the terms of the Company’s established employee plans and written policies at the time of termination. The terms of this Agreement shall terminate upon the earlier of (i) the date on which Employee ceases to be employed as an officer of the Company, other than as a result of an involuntary termination by the Company without Cause, (ii) the date that all obligations of the parties hereunder have been satisfied, or (iii) twelve (12) months after a Change of Control. A termination of the terms of this Agreement pursuant to the preceding sentence shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits on account of a termination of employment occurring prior to the termination of the terms of this Agreement.

        2.    Change of Control.

                (a)    Stock Options and Restricted Stock.    Subject to Section 4 below, in the event of a Change of Control, on the effective date of the transaction, fifty percent (50%) of all unvested options to purchase the Company’s securities held by the Employee (the “Option”) prior to the effective date of the Change of Control transaction shall become fully vested and immediately exercisable and shall be exercisable to the extent so vested in accordance with the provisions of the Option Agreement and Plan pursuant to which such Option was granted and repurchase rights of the Company with respect to fifty percent (50%) of the shares of restricted stock held by the Employee purchased by the Employee pursuant to the terms of a Stock Purchase Agreement shall immediately lapse. In addition, on each one month anniversary of the effective date of the Change of Control transaction  ¹/12 of all remaining unvested options held by the Employee shall become fully vested and immediately exercisable and repurchase rights of the Company with respect to  ¹/12 of all remaining shares of restricted stock held by Employee shall lapse.

                (b)    Termination Following A Change of Control.    If the Employee’s employment with the Company is involuntarily terminated at any time within twelve (12) months after a Change of Control all unvested options held by the Employee shall become fully vested and immediately exercisable and shall be exercisable to the extent so vested in accordance with the provisions of the Option Agreement and Plan pursuant to which such Option was granted and repurchase rights of the Company with respect to all of the shares of restricted stock held by the Employee purchased by the Employee pursuant to the terms of a Stock Purchase Agreement shall immediately lapse.

                        (i)    Voluntary Resignation and Termination for Cause.    If the Employee voluntarily resigns from the Company or is terminated for Cause following the Change of Control, then the Employee shall not be entitled to any acceleration of the vesting of his or her unvested options or lapse of repurchase rights with respect to his or her restricted stock.

        3.    Definition of Terms.    The following terms referred to in this Agreement shall have the following meanings:

                (a)    Change of Control.    “Change of Control” shall mean the consummation of any of the following events:

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(i)    Ownership.    Any “Person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the “Beneficial Owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities without the approval of the Board of Directors of the Company; or

(ii)    Merger/Sale of Assets.    A merger or consolidation of the Company whether or not approved by the Board of Directors of the Company, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets.

(b)    Cause.    “Cause” shall mean (i) gross negligence or willful misconduct in the performance of the Employee’s duties to the Company where such gross negligence or willful misconduct has resulted or is likely to result in substantial and material damage to the Company or its subsidiaries, (ii) repeated unexplained or unjustified absence from the Company, (iii) a material and willful violation of any federal or state law; (iv) commission of any act of fraud with respect to the Company; or (v) conviction of a felony or a crime involving moral turpitude causing material harm to the standing and reputation of the Company, in each case as determined in good faith by the Board of Directors of the Company.

(c)    Involuntary Termination.    “Involuntary Termination” shall include any termination by the Company other than for Cause and the Employee’s voluntary termination, upon 30 days prior written notice to the Company, following (i) a material reduction or change in job duties, responsibilities and requirements inconsistent with the Employee’s position with the Company and the Employee’s prior duties, responsibilities and requirements, taking into account the differences in job title and duties that are normally occasioned by reason of an acquisition of one company by another and that do not actually result in a material change in duties, responsibilities and requirements inconsistent with an employee’s prior position with the acquired company; (ii) any reduction of the Employee’s base and cash bonus compensation (other than in connection with a general decrease in base salaries for most similarly situated employees of the successor corporation); or (iii) the Employee’s refusal to relocate to a location more than 50 miles from the Company’s current location.

4. Limitation on Payments.

(a)    In the event that the severance benefits provided for in this Agreement to the Employee (i) constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”) and (ii) but for this Section, would be subject to the excise tax imposed by Section 4999 of the Code, then the Employee’s benefits under Section 2 shall be payable either: (i) in full, or (ii) as to such lesser

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amount which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by the Employee on an after-tax basis, of the greatest amount of benefits under Section 2, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. Unless the Company and the Employee otherwise agree in writing, any determination required under this Section 4 shall be made in writing by the Company’s independent public accountants (the “Accountants”), whose determination shall be conclusive and binding upon the Employee and the Company for all purposes. For purposes of making the calculations required by this Section 4, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Company and the Employee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 4.

(b)    The payment of severance benefits provided for in this Agreement shall be subject to all applicable income, employment and social tax rules and regulations.

5.    Successors.    Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. The terms of this Agreement and all of the Employee’s rights hereunder shall inure to the benefit of, and be enforceable by, the Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

6.    Notice.    Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. Mailed notices to the Employee shall be addressed to the Employee at the home address which the Employee most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.

7.    Miscellaneous Provisions.

(a)    No Duty to Mitigate.    The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor, except as otherwise provided in this Agreement, shall any such payment be reduced by any earnings that the Employee may receive from any other source.

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(b)    Waiver.    No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

(c)    Whole Agreement.    No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. This Agreement supersedes any agreement of the same title and concerning similar subject matter dated prior to the date of this Agreement, and by execution of this Agreement both parties agree that any such predecessor agreement shall be deemed null and void.

(d)    Choice of Law.    The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without reference to conflict of laws provisions.

(e)    Severability.    If any term or provision of this Agreement or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions of this Agreement or the application of such terms and provisions to circumstances other than those as to which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefor to carry out, insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision.

(f)    Arbitration.    Any dispute or controversy arising under or in connection with this Agreement may be settled at the option of either party by binding arbitration in the County of Santa Clara, California, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. Punitive damages shall not be awarded.

(g)    Legal Fees and Expenses.    The parties shall each bear their own expenses, legal fees and other fees incurred in connection with this Agreement.

(h)    No Assignment of Benefits.    The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor’s process, and any action in violation of this subsection (h) shall be void.

(i)    Employment Taxes.    All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes.

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(j)    Assignment by the Company.    The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term “Company” when used in a section of this Agreement shall mean the corporation that actually employs the Employee.

(k)    Counterparts.    This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

(SIGNATURE PAGE FOLLOWS)

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IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

	RITA MEDICAL SYSTEMS, INC.	STEPHEN J. WILLIAMS
By:	/S/    BARRY CHESKIN	/S/    STEPHEN J. WILLIAMS
Title:	President and Chief Executive Officer

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EX-10.31

EXHIBIT 10.31

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (the “Agreement”) is made as of July 29, 2002, by and between RITA Medical Systems, Inc., a Delaware corporation (the “Company”), and Stephen J. Williams (the “Indemnitee”).

RECITALS

The Company and Indemnitee recognize the increasing difficulty in obtaining liability insurance for directors, officers and key employees, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers and key employees to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and agents of the Company may not be willing to continue to serve as agents of the Company without additional protection. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, and to indemnify its directors, officers and key employees so as to provide them with the maximum protection permitted by law.

AGREEMENT

In consideration of the mutual promises made in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Company and Indemnitee hereby agree as follows:

1.    Indemnification.

(a)    Third Party Proceedings.    The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee

reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, that Indemnitee had reasonable cause to believe that Indemnitee’s conduct was unlawful.

(b)    Proceedings By or in the Right of the Company.    The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) and, to the fullest extent permitted by law, amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment to be liable to the Company in the performance of Indemnitee’s duty to the Company and its stockholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper.

(c)    Mandatory Payment of Expenses.    To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1(a) or Section 1(b) or the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by Indemnitee in connection therewith.

2.    No Employment Rights.    Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment.

3.    Expenses; Indemnification Procedure.

(a)    Advancement of Expenses.    The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referred to in Section l(a) or Section 1(b) hereof (including amounts actually paid in settlement of any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby.

(b)    Notice/Cooperation by Indemnitee.    Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give the Company notice in

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writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company and shall be given in accordance with the provisions of Section 12(d) below. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee’s power.

(c)    Procedure.    Any indemnification and advances provided for in Section 1 and this Section 3 shall be made no later than twenty (20) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company’s Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within twenty (20) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys’ fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties’ intention that if the Company contests Indemnitee’s right to indemnification, the question of Indemnitee’s right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct.

(d)    Notice to Insurers.    If, at the time of the receipt of a notice of a claim pursuant to Section 3(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

(e)    Selection of Counsel.    In the event the Company shall be obligated under Section 3(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees

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of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ counsel in any such proceeding at Indemnitee’s expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee’s counsel shall be at the expense of the Company.

4.    Additional Indemnification Rights; Nonexclusivity.

(a)    Scope.    Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company’s Certificate of Incorporation, the Company’s Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be deemed to be within the purview of Indemnitee’s rights and the Company’s obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties’ rights and obligations hereunder.

(b)    Nonexclusivity.    The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company’s Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested members of the Company’s Board of Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee’s official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he or she may have ceased to serve in any such capacity at the time of any action, suit or other covered proceeding.

5.    Partial Indemnification.    If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled.

6.    Mutual Acknowledgment.    Both the Company and Indemnitee acknowledge that in certain instances, Federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the “SEC”) has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits

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indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s right under public policy to indemnify Indemnitee.

7.    Officer and Director Liability Insurance.    The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company’s performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s directors, if Indemnitee is a director; or of the Company’s officers, if Indemnitee is not a director of the Company but is an officer; or of the Company’s key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company.

8.    Severability.    Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.

9.    Exceptions.    Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:

(a)    Claims Initiated by Indemnitee.    To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate;

(b)    Lack of Good Faith.    To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this

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Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous;

(c)    Insured Claims.    To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the extent such expenses or liabilities have been paid directly to Indemnitee by an insurance carrier under a policy of officers’ and directors’ liability insurance maintained by the Company; or

(d)    Claims under Section 16(b).    To indemnify Indemnitee for expenses or the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.

10.    Construction of Certain Phrases.

(a)    For purposes of this Agreement, references to the “Company” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.

(b)    For purposes of this Agreement, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to “serving at the request of the Company” shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner “not opposed to the best interests of the Company” as referred to in this Agreement.

11.    Attorneys’ Fees.    In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys’ fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys’ fees, incurred by Indemnitee in defense of such action (including with respect to

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Indemnitee’s counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee’s material defenses to such action were made in bad faith or were frivolous.

12.    Miscellaneous.

(a)    Governing Law.    This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflict of law.

(b)    Entire Agreement; Enforcement of Rights.    This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.

(c)    Construction.    This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto.

(d)    Notices.    Any notice, demand or request required or permitted to be given under this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party’s address as set forth below or as subsequently modified by written notice.

(e)    Counterparts.    This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.

(f)    Successors and Assigns.    This Agreement shall be binding upon the Company and its successors and assigns, and inure to the benefit of Indemnitee and Indemnitee’s heirs, legal representatives and assigns.

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(g)    Subrogation.    In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company to effectively bring suit to enforce such rights.

[Signature Page Follows]

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The parties hereto have executed this Agreement as of the day and year set forth on the first page of this Agreement.

RITA Medical Systems, Inc.
By:	/S/    BARRY CHESKIN
Title:	President and Chief Executive Officer
Address:	967 Shoreline Blvd.
	Mountain View, CA 94043

AGREED TO AND ACCEPTED:
STEPHEN J. WILLIAMS
/S/    STEPHEN J. WILLIAMS
(Signature)
Address:	3678 Deer Trail Drive
	Danville, CA 94506

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EX-99.1

Exhibit 99.1

RITA MEDICAL SYSTEMS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RITA Medical Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Barry Cheskin, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/S/    BARRY CHESKIN

Barry Cheskin

President and Chief Executive Officer

November 14, 2002

EX-99.2

Exhibit 99.2

RITA MEDICAL SYSTEMS, INC.

CERTIFICATION PURSUANT TO 

18 U.S.C. SECTION 1350, 

AS ADOPTED PURSUANT TO 

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RITA Medical Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Donald Stewart, Chief Financial Officer and Vice President, Finance and Administration of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/S/    DONALD STEWART

Donald Stewart

Chief Executive Officer and

Vice President, Finance and Administration
November 14, 2002