10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2003

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)

Registrant’s telephone number, including area code: 650-314-3400

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of Class)

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 than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    YES  x    NO  ¨

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $37,848,000 as of June 30, 2003, based upon the closing sale price on the Nasdaq National Market reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

There were 17,974,728 shares of the registrant’s Common Stock issued and outstanding as of January 30, 2004.

Documents Incorporated by Reference

Part III incorporates information by reference from the definitive proxy statement to be filed in connection with the registrant’s 2004 annual meeting of stockholders.

RITA Medical Systems, Inc.

Annual Report on Form 10-K

For the Fiscal Year Ended December 31, 2003

TABLE OF CONTENTS

Filing Sections

Item No.		Page
PART I
Item 1.	Business	1
Item 2.	Properties	11
Item 3.	Legal Proceedings	11
Item 4.	Submission of Matters to a Vote of Security Holders	11
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	12
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Business Overview and Discussion of Known Trends	14
	Critical Accounting Policies and Estimates	16
	Results of Operations	17
	Liquidity and Capital Resources	19
	Recent Development: Private Placement of Securities	20
	Income Taxes	20
	Recent Accounting Pronouncements	20
	Factors That May Affect Future Results	21
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 8.	Consolidated Financial Statements and Supplementary Data
	Index to Consolidated Financial Statements	29
	Report of Independent Accountants	30
	Consolidated Balance Sheets	31
	Consolidated Statements of Operations and Comprehensive Loss	32
	Consolidated Statements of Stockholders’ Equity (Deficit)	33
	Consolidated Statements of Cash Flows	34
	Notes to Consolidated Financial Statements	35
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	49
Item 9A	Controls and Procedures	49
PART III	Part III incorporates information by reference from the definitive proxy statement to be filed in connection with the registrant’s 2004 annual meeting of stockholders.
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	50
	Signatures	53
	Power of Attorney	53

This Report on Form 10-K contains forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include, among other things, those listed under “Risk factors” and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “our future success depends,” “seek to continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under “Risk factors.” These factors may cause our actual results to differ materially from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Report on Form 10-K to conform these statements to actual results.

PART I

Item 1. Business.

Overview

We are a medical device company that develops, manufactures and markets minimally invasive products to treat patients with solid cancerous or benign tumors. Our proprietary system uses radiofrequency energy to heat tissue to a high enough temperature to ablate it, or cause cell death. The RITA system includes radiofrequency generators and a family of disposable needle electrode devices that deliver controlled thermal energy to the targeted tissue.

We are currently focused on addressing the liver cancer market and the bone cancer market. We believe our system offers a viable option to patients who previously had few or no effective alternatives. We estimate that the worldwide market opportunity for the radiofrequency ablation of unresectable liver cancer is approximately $500 million annually and $600 million annually for the radiofrequency ablation of painful tumors that have metastasized or spread to the bone.

In addition to liver and bone cancer, we believe that our minimally invasive technology may in the future be applied to the treatment of other types of cancerous or benign tumors, including tumors of the lung, breast, uterus, prostate and kidney. We believe the market opportunity for these additional applications exceeds $1 billion annually.

We have received regulatory clearance for sale in major markets worldwide, including the United States. In March 2000, RITA became the first radiofrequency ablation company to receive specific Food and Drug Administration clearance for unresectable liver lesions in addition to its previous general FDA clearance for the ablation of soft tissue. In October 2002, RITA again became the first company to receive specific FDA clearance, this time for the palliation of pain associated with metastatic lesions involving bone. Our system is distributed in the United States through our direct sales force and internationally through distribution partners. Since our product launch, we have sold nearly 60,000 disposable devices.

RITA has a broad patent portfolio. As of December 31, 2003, we had 56 issued patents worldwide and 59 United States and foreign patent applications pending. The issued patents cover, among other things, deployable multi-array electrode technology and temperature feedback technology.

Market Opportunity

Cancer Market

Millions of people throughout the world are afflicted with cancer. Only heart disease kills more people in the United States every year.

Cancer can be categorized into two broad groups: solid tumor cancers, such as liver, lung, bone, breast, prostate and kidney cancers as well as hematologic or blood-borne cancers, such as lymphomas and leukemias. Approximately 90 percent of all cancers are solid tumor cancers.

Liver Cancer Market

There are two forms of liver cancer: primary and metastatic. Primary liver cancer originates in the liver. Secondary, or metastatic, liver cancer originates elsewhere in the body and spreads to the liver. A significant number of patients treated for primary and metastatic liver cancer experience a recurrence of their disease.

The worldwide incidence of primary liver cancer is estimated to be one million new patients each year. The vast majority of primary liver cancer patients are located outside the United States, particularly in Asia and Southern Europe. Approximately 90 percent of patients diagnosed with primary liver cancer will die within five years. Due to a rise in the number of worldwide cases of Hepatitis B and C, both of which are correlated to the development of primary liver cancer, we believe that the incidence of primary liver cancer may increase in the future.

It is estimated that there are almost as many cases of metastatic liver cancer worldwide as there are cases of primary liver cancer and approximately 300,000 annual cases in the United States alone. The liver is one of the most common sites for the spread of cancer. For example, one of the most common forms of primary cancer is colorectal cancer, and approximately 60 percent of these patients will develop metastatic liver tumors. Due to numerous factors, including the absence of viable treatment options, metastatic liver cancer often causes death.

Treatment Options for Liver Cancer

The prognosis for primary and metastatic liver cancer is poor. Although limited treatment options are currently available for liver cancer, they are typically ineffective, are generally associated with significant side effects and can even cause death. Traditional treatment options include surgery, chemotherapy, cryosurgery, percutaneous ethanol injection and radiation therapy.

Surgery

While surgery is considered by the medical community to be the preferred treatment option to address liver tumors, approximately 70 to 90 percent of liver cancer patients are unresectable, which means they do not qualify for surgery. This is most often due to the following:

• operative risk: limited liver function or poor patient health threatens survival as a result of the surgery; or

• technical feasibility: the proximity of a cancerous tumor to a critical organ or artery, or the size, location on the liver or number of tumors makes surgery infeasible.

For the few patients who qualify for surgery, there are significant complications related to the procedure and the operative mortality rate is two percent. One-year recurrence rates following surgery have been reported to be as low as 12 percent; however, when tumors recur, surgery typically cannot be repeated.

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Chemotherapy

Chemotherapy uses drugs to kill cancer cells. Chemotherapy can be used systemically or locally. In systemic chemotherapy, drugs are delivered throughout the body. In local chemotherapy, drugs are delivered directly to the liver tumor. Systemic chemotherapy is not considered an effective means of treating liver cancer. In some cases, treatment regimens using localized chemotherapy in addition to systemic treatment have been reported to increase the efficacy of these alternatives to a limited extent.

Systemic chemotherapy causes significant side effects in the majority of patients, including loss of appetite, nausea and vomiting, hair loss and ulcerations of the mouth. In addition, chemotherapy can damage the blood-producing cells of the bone marrow, leading to a low blood cell count. As a result, chemotherapy patients have an increased chance of infection, bleeding or bruising after minor cuts or injuries, and fatigue or shortness of breath.

Cryosurgery

Cryosurgery is the destruction of cancer cells using sub-zero temperatures in an open surgical procedure. During cryosurgery, multiple stainless steel probes are placed into the center of the tumor and liquid nitrogen is circulated through the end of the device, creating an ice ball. Cryosurgery involves a cycle of treatments in which the tumor is frozen, allowed to thaw and then refrozen.

While cryosurgery is considered to be relatively effective with one-year local recurrence rates of approximately 10 percent, we believe adoption of this procedure has been limited by the following factors:

• it is not an option for patients who cannot tolerate an open surgical procedure;

• it involves significant complications which are similar to other open surgical procedures, as well as liver fracture and hemorrhaging caused by the cycle of freezing and thawing and, at times, excessive bleeding;

• it is associated with mortality rates estimated to be between one and five percent; and

• it is expensive compared to other alternatives.

Percutaneous Ethanol Injection

Percutaneous ethanol injection, or PEI, involves the injection of alcohol into the center of the tumor. The alcohol causes cells to dry out and cellular proteins to disintegrate, ultimately leading to tumor cell death.

While PEI can be successful in treating some patients with primary liver cancer and has a reported one-year local recurrence rate of approximately 13 percent, it is generally considered ineffective on large tumors as well as metastatic tumors. Patients are required to receive multiple treatments, making this option unattractive for many patients. Complications include pain and alcohol introduction to bile ducts and major blood vessels. In addition, this procedure can cause cancer cells to be deposited along the needle tract when the needle is withdrawn.

Radiation Therapy

Radiation therapy uses high dose x-rays to kill cancer cells. Radiation therapy is not considered an effective means of treating liver cancer and is rarely used for this purpose.

Bone Metastases Market and Treatment Options

One of the most common sites of the spread of cancer or metastases is the bone. The worldwide incidence of bone metastases is estimated to be over 1 million cases each year with over 400,000 new cases in the U.S. alone. Most of these patients have breast or prostate cancer that eventually spreads to the bone, though some also have other types of cancer, such as kidney and lung cancer. More than 75% of patients with bone metastases report

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pain associated with this condition. The primary treatment options for painful bone metastases are analgesics and radiation therapy. More than half of patients experiencing pain respond to conventional treatments such as these, but the remainder receive inadequate relief or no relief at all.

The RITA Solution

Our Procedure

Our proprietary system is designed to use radiofrequency energy to provide a minimally invasive approach to ablating solid cancerous or benign tumors. Our system delivers radiofrequency energy to raise the temperature of cells above 45 to 50°C, causing cellular death.

The physician inserts the RITA disposable needle electrode device into the target body tissue, typically under ultrasound, computed tomography or magnetic resonance imaging guidance. Once the device is inserted, pushing on the handle of the device causes a group of curved wires to be deployed from the tip of the electrode. When the power is turned on, these wires deliver radiofrequency energy throughout the tumor. In addition, temperature sensors on the tips of the wires measure tissue temperature throughout the procedure. During the procedure, our system automatically adjusts the amount of energy delivered in order to maintain the temperature necessary to ablate the targeted tissue. For a typical five centimeter ablation using our Starburst Xli or Starburst XLie disposable device, the ablation process takes approximately ten minutes. When the ablation is complete, pulling back on the handle of the device causes the curved wire array to be retracted into the device so it can be removed from the body. Our disposable device cauterizes the tissue along the needle tract, which we believe kills any residual cancer cells that might be removed from the tumor.

Benefits of the RITA System

The benefits of our system include:

• Effective Treatment Option. We believe that our system provides an effective treatment option to liver cancer patients who previously had few options available to effectively address their unresectable liver tumors. Further, our system provides an effective treatment option for patients whose tumors have metastasized to the bone and cause pain that cannot be adequately relieved by other means. In the future, our system may offer patients with other types of tumors a better treatment option.

• Minimally Invasive Procedure. The RITA system offers physicians an effective minimally invasive treatment option with few side effects or complications. Our products can be used in an outpatient procedure that requires only local anesthesia, and patients are typically sent home the same day with a small bandage over the entry site. Alternatively, patients can be treated with just an overnight hospital stay either through a small puncture in the skin or laparoscopically through several small incisions. Compared to existing alternatives, we believe our minimally invasive procedure is cost effective and can result in reduced hospital stays.

• Proprietary Array Design and Temperature Feedback Provide Procedural Control. Our array design enables the physician to predictably ablate large volumes of targeted tissue. In addition, our temperature feedback feature allows physicians to ensure that the temperature is high enough throughout the tissue to achieve cell death.

• Repeat Treatments Possible. Cancer is most often a recurrent disease. However, due to the invasive nature of other treatment options, such as surgery, the majority of patients who undergo traditional therapies cannot be retreated in the event that new tumors appear or previously treated tumors reappear. Because of the minimally invasive nature of our procedure, patients treated with our system can often be retreated.

• Broadly Applicable Technology. Our significant clinical experience with liver tumors and bone tumors as well as feasibility studies in other organs indicates that our technology may in the future be broadly applied to the ablative treatment of solid tumors in the lung, uterus, breast, prostate and kidney.

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While there are numerous benefits of our system, there are some side effects of treatment as well. Published reports on the use of the RITA system indicate low overall complication rates. These include ground-pad burns, which are burns that can occur when there is a concentration of heat at the ground-pad site, bleeding, abscesses and, in cases involving the treatment of bone tumors, fractures and nerve damage. Studies have also shown some recurrence of tumors following treatment with our system. However, in many cases where tumors recur, our procedure can be repeated. In rare cases, physician misuse of our system has resulted in patient deaths.

Our Business Strategy

Our goal is to be the leading provider of minimally invasive devices for the treatment of solid cancerous or benign tumors. To achieve this goal, we plan to do the following:

• Increase Our Penetration of the Liver Cancer Market. We believe we can capitalize on the opportunity to increase our penetration of the market for the radiofrequency ablation of unresectable liver tumors, which is currently estimated to be $500 million annually. We intend to execute this strategy by doing the following:

• Increase awareness among key physicians through sales, marketing and training programs including programs directed specifically at medical oncologists, who are a key referral source for this procedure;

• Conduct additional clinical research to provide data supporting the expanded use of our products; and

• Drive patient awareness with marketing efforts and an Internet site focused on educating patients on the benefits of the RITA system for liver cancer.

• Expand the Application of Our Proprietary Technology to Markets Beyond Liver Cancer. We believe our minimally invasive proprietary technology can be broadly applied to the treatment of other types of cancerous and benign tumors, including tumors in the bone, lung, breast, prostate, uterus and kidney. In 2002 we received FDA clearance for treating painful bone metastases and plan to expand our marketing efforts to capitalize on this opportunity. We plan to build on our extensive clinical experience in liver tumors as well as studies in additional organs to support the extension of our technology to additional applications in the future. We estimate that the market for these additional applications exceeds $1 billion annually.

• Continue to Advance Technology. We intend to aggressively pursue ongoing research and development of additional products and technologies. We plan to continue to expand and improve our product offerings to better serve patients with solid cancerous or benign tumors whose needs are not met by existing treatments.

Our Technology and Products

Technology

All of our products are based on our proprietary radiofrequency technology that is used to ablate tissue in a controlled manner. A radiofrequency generator supplies energy through our disposable device placed within the targeted tissue. Our devices contain curved, space-filling arrays of wires which are deployed from the tip to allow the radiofrequency energy to be dispersed throughout the tumor.

Radiofrequency energy supplied by the generator produces ionic agitation, or cellular friction, in the tissue closely surrounding the electrode. This friction produces heat that can be used to predictably ablate volumes of tissue. To effectively ablate tissue, it must be heated to an approximate temperature of 45 to 50°C, or 113 to 122°F.

Our system is designed to permit the physician to set the desired treatment time and temperature at the beginning of the procedure. Once that temperature is reached, our proprietary temperature control technology

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automatically adjusts the energy supplied from the generator to maintain the optimal temperature within the tissue during the course of the procedure. We believe our system has the potential to provide a more effective ablation than competing technologies by providing critical tissue temperature feedback during the procedure.

Some of our products make use of saline to enhance the ablation process. This saline is used to irrigate the ablation site and is delivered through the curved array of wires in our devices. The use of saline can significantly increase the speed of the ablation treatment.

Products

The RITA system consists of a radiofrequency generator and a family of disposable devices. The following chart summarizes our current product offerings.

	Product Name	Description	Year of Introduction	U.S. List Price
Disposable Devices:	StarBurst	Creates a scalable 2 to 3 centimeter ablation. Compatible with the Model 1500 and 1500X generator.	2000	$	1,100
	StarBurst XL	Creates a scalable 3 to 5 centimeter ablation. Compatible with the Model 1500 and 1500x generator.	2000	$	1,440
	StarBurst Flex	Creates a scalable 3 to 5 centimeter ablation and has a flexible shaft. Compatible with the Model 1500 and 1500X generator.	2002	$	2,195
	StarBurst Semi-Flex	Creates a scalable 3 to 5 centimeter ablation and has a partially flexible shaft. Compatible with the Model 1500 and 1500X generator.	2003	$	2,195
	7 cm Starburst Xli and XLie	Creates a scalable 4 to 7 centimeter ablation. Compatible with the Model 1500 and 1500X generator; requires an accessory infusion pump for irrigation of saline.	Xli: 2001 Xlie: 2003	$	2,495
Generators:	Model 1500	150 Watt Generator	2000	$	37,500
	Model 1500X	250 Watt Capable Generator with Field-Software Upgradeability	2002	$	37,500

Disposable Devices

Our disposable devices all consist of needle shaped electrodes containing curved wire arrays that are deployed into the targeted body tissue. Each device contains several thermocouples, or temperature sensors, which provide feedback to the physician of the tissue temperature during the ablation and which allow the generator to automatically adjust the amount of radiofrequency energy so that the desired tissue temperature can be achieved.

Our disposable devices are available in different array sizes to allow the physician to create a spherical ablation volume of anywhere from two to seven centimeters. Three centimeters is slightly smaller than a ping-pong ball. Seven centimeters is approximately the size of a tennis ball. In addition, depending on product line, the devices are available in 10, 12, 15 or 25 centimeter lengths to allow physicians to access tumors that are located more or less deeply within the body. Each disposable device is supplied with one or more ground pads to allow a return path for the flow of radiofrequency energy from the patient back to the generator.

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Generators

All of our generators employ an internal computer to assist the physician in safely and effectively controlling the delivery of radiofrequency during the ablation. In addition, each generator has a display to convey information to the physician while using the system. Our Model 1500 generators have the ability, using a laptop computer, to display real-time, color-coded graphs of items such as power, and temperature and impedance to aid the user in controlling the system and to collect procedural information for the patient’s record. Our Model 1500X generators also have the ability to have their software changed in the field through the insertion of a small card containing electronic memory circuits.

Sales and Marketing

We have a geographically diverse customer base which includes the United States, Europe and Asia. Our customers include surgical oncologists, hepatobiliary surgeons, liver transplant surgeons, laparoscopists and interventional radiologists. We also target patient referral sources, including colorectal surgeons, radiation oncologists and medical oncologists.

In the United States, we market our products through a direct sales force consisting of 22 field representatives and 3 regional managers. Overseas, we market our products through distribution partners, supported by three full-time RITA field representatives. To date, we have entered into agreements with distributors in the major countries in Europe and Asia. One of our distributors has accounted for 10% or more of our sales in prior years. ITX Corporation distributes our products in Japan, Korea and Taiwan. It accounted for 4% of our sales in 2003, 14% of our sales in 2002 and 14% of our sales in 2001.

Our marketing and sales efforts are directed at placing generators at key cancer centers and other leading medical centers worldwide and then working with those centers’ physicians to increase their usage of our disposable devices. We recognize that our predominant source of recurring revenue will be from our disposable devices, which can only be used once a generator is placed. Most of our generators are sold to our customers at a discount from list price, and we have also established a variety of programs, including volume discount and preferred customer discount programs, to facilitate generator placement.

We plan to continue to drive physician adoption by increasing awareness of the RITA system among potential users. We have established relationships with leading physicians at prominent cancer and other leading medical institutions, many of whom we believe are now strong advocates of our products. To increase adoption of our system, we are involving these physicians in formal courses, doctor-to-doctor preceptorship programs and hands-on training programs. We also offer programs to assist our customers in marketing the benefits of the RITA system to referring clinical oncologists and colorectal surgeons. In addition, because cancer treatment options are often affected by patient choice, we are expanding public awareness in this area through a patient education Internet site that focuses on liver cancer.

Competition

The medical device industry is subject to intense competition. Accordingly, our future success will depend on our ability to meet the clinical needs of physicians, improve patient outcomes and remain cost-effective for third-party payors, such as health insurance companies. There are a limited number of treatment alternatives available to patients with liver cancer. The traditional treatment options include surgery, chemotherapy, cryosurgery, percutaneous ethanol injections and radiation therapy. There are a limited number of treatment options available to patients with painful bone metastases. These options include radiation therapy and analgesics. We do not believe any of these treatments are directly competitive with our products, as none are intended to use heat to ablate liver lesions or painful bone metastases. Further, we believe that these treatments generally have limited efficacy and/or applicability.

RadioTherapeutics Corporation, a division of Boston Scientific Corporation, and Radionics, a division of Tyco Healthcare, which is a division of Tyco International, are the two companies whose products compete

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directly with ours in the United States and overseas. Both companies offer systems that include a generator and disposable electrodes and use radiofrequency energy to ablate soft tissue. However, neither system is designed to provide physicians with the temperature feedback throughout the tissue that we believe is important to help ensure successful tissue ablation.

We believe the principal competitive factors in our markets are:

• improved patient outcomes;

• the publication of favorable peer-reviewed clinical studies;

• acceptance by leading physicians;

• ease of use of our generators and electrode devices;

• sales and marketing capability;

• reimbursement levels to customers;

• regulatory approvals;

• timing and acceptance of product innovation;

• patent protection;

• product quality and reliability; and

• cost effectiveness.

While there are several international companies using radiofrequency technology to treat cancer, we do not expect these companies to establish a meaningful presence in our core domestic market in the near future. If companies that currently sell products that utilize radiofrequency energy enter our market or products using microwave or laser or other thermal energy prove to be useful, competition could increase.

Third-Party Reimbursement

Establishing reimbursement for any new technology is a challenge in the current environment of cost containment and managed care. Currently, hospitals and physicians in the United States are reimbursed for open, laproscopic and percutaneous liver procedures using procedural codes and CPT codes approved by the American Medical Association. Medicare has also established payment levels for the physician, inpatient hospital and outpatient hospital settings associated with the codes. In most cases, reimbursement is highest for liver procedures when conducted on an inpatient basis. To date, we believe most of our physician and hospital customers in the United States have been successful in obtaining reimbursement from third-party payors.

Effective January 1, 2004 a new CPT code established by the American Medical Association for percutaneous bone tumor ablation procedures became effective. Medicare has also set payment levels for the physician, inpatient hospital and outpatient hospital setting for this code. The AMA CPT code is applicable to government and private payor health insurance systems. Private payors commonly set reimbursement levels for medical treatments using the Medicare rates, although with any new code payor clinical review for coverage remains necessary. We believe initial clinical reviews will be favorable.

We have limited reimbursement experience for procedures using our system other than for liver and bone cancer. Reimbursement for such procedures in other organs may not be favorable.

Outside the United States, reimbursement procedures and policies are country-specific. We believe physicians in our international markets can be successful in obtaining reimbursement for procedures using our products, though significant effort on the part of the physicians is required. However, in countries where specific reimbursement codes are strictly required and have not yet been issued, reimbursement has been denied on that basis. In conjunction with our distributors, we are pursuing strategies to address reimbursement issues in international markets.

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Clinical Research and Product Development

Our clinical research staff regularly works with clinicians and medical and academic institutions in the development of new technologies and the evaluation and testing of our products. These relationships are valuable in generating data necessary for regulatory compliance. Our research and development efforts are currently focused on the extension of our technology to address tumors of the breast, kidney and lung, and initial results of our lung, kidney and breast clinical investigations have been published or presented.

We believe that we have a strong base of proprietary design, development and manufacturing capabilities. We have particular expertise in the core research and development areas relevant to the production of new disposable electrode devices and computer controlled radiofrequency ablation systems. We are working on a number of enhancements to our existing ablation products that we believe will further improve their ease of use and performance across a broad array of applications.

Patents and Proprietary Technology

We believe that a key element of our competitive advantage depends on our ability to develop and maintain the proprietary aspects of our technology. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws to protect our intellectual property. As of December 31, 2003, we had 56 issued patents worldwide and 59 United States and foreign patent applications pending. The issued patents cover, among other things, deployable multi-array electrode technology and temperature feedback technology. Our United States patents expire between 2012 and 2018. Our European-wide patent expires in 2015 and our Japanese patent expires in 2015.

In April 2003 we entered an agreement with Boston Scientific Corporation and certain of its affiliates and licensors in settlement of various patent litigation disputes. This agreement includes cross licensing of several patents between Boston Scientific, the related affiliates and licensors and ourselves, providing us with access to a number of additional patents in the Boston Scientific portfolio in exchange for one-time payments totaling $2,650,000.

Government Regulation

Our products are regulated in the United States by the FDA under the Federal Food, Drug, and Cosmetic Act, or FDC Act, and require clearance of a premarket notification under Section 510(k) of the FDC Act or approval of a premarket approval application under Section 515 of the FDC Act by the FDA prior to commercialization. Material changes or modifications to medical devices, including changes to product labeling, are also subject to FDA review and clearance or approval. Under the FDC Act, the FDA regulates, among other things, the research, clinical testing, manufacturing, safety, effectiveness, labeling, storage, record keeping, advertising, distribution, sale and promotion of medical devices in the United States. Non-compliance with applicable requirements can result in, among other actions, warning letters, fines, injunctions, civil and criminal penalties against us, our officers, and our employees, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket approval or clearance for devices, withdrawal of marketing approvals and recommendation that we not be permitted to enter into government contracts. Before a new device can be marketed in the United States, the manufacturer or distributor must obtain FDA clearance of a 510(k) premarket notification submission or FDA approval of a premarket approval application. It generally takes three to twelve months from the date of the submission to obtain clearance of a 510(k) submission, but it may take longer. The FDA is increasingly requiring a more rigorous demonstration of substantial equivalence, including clinical trials for some devices.

To date, all of our products have received 510(k) clearances or are exempt from the 510(k) clearance process. Our initial clearances in the United States were general in nature and allow our products to be marketed for the ablation of soft tissue. In March 2000, we received a specific 510(k) clearance from the FDA for the partial or complete ablation of nonresectable liver lesions. In October 2002, we received another specific 510(k)

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clearance, this time for the palliation of pain associated with metastatic lesions involving bone in patients who have failed or are not candidates for standard pain therapy. While we have been successful to date in obtaining regulatory clearance of our products through the 510(k) notification process, if the FDA concludes that any product does not meet the requirements for 510(k) clearance, then a premarket approval would be required and the time required for obtaining regulatory approval would be significantly lengthened.

Once 510(k) clearance has been received, any products that we manufacture or distribute are subject to extensive and continuing regulation by the FDA. Modifications to devices, including changes to product labeling, cleared via the 510(k) process may require a new 510(k) submission. We have made some modifications to some of our devices and we believe that such modifications do not require the filing of new 510(k) submissions. If the FDA requires us to file a new 510(k) submission for any device modification, we may be prohibited from marketing the modified device until the 510(k) is cleared by the FDA.

We are required to register as a medical device manufacturer with the FDA and with the California Department of Health Services and to list our products with the FDA. As such, we are subject to inspection by both the FDA and the California Department of Heath and Safety for compliance with good manufacturing practices, quality systems regulations, and other applicable regulations, including labeling and the adulteration and misbranding provisions of the FDC Act. In addition, our manufacturing processes are required to comply with good manufacturing practices and quality system regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging and shipping of our products.

We are also required to comply with medical device reporting regulations that require us to report to the FDA any incident in which our product may have caused or contributed to a death or serious injury, or in which our product malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury. If the FDA believes that a company is not in compliance with the law or regulations, it can institute proceedings to, among other things, detain or seize products, order a recall, enjoin future violations or distributions and assess civil and criminal penalties against a company, its officers, and employees. We have filed medical device reports with the FDA related to skin burns primarily caused by a ground pad, arterial bleeding caused by improper needle placement and abscesses which resulted from the large volume of ablated tissue. We believe that none of these incidents were attributed to a device malfunction.

We are also subject to regulations and product registration requirements in many of the foreign countries in which we sell our products in the areas of product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. The time required to obtain marketing approval or clearance required by foreign countries may be longer or shorter than that required for FDA approval or clearance, and requirements for licensing a product in a foreign country may differ significantly from FDA requirements. Either our distributors or we have received registrations and approvals to market certain of our products in international markets that include the European Economic Area, Japan, Korea, Canada, Australia, New Zealand, and other countries.

The European Union has promulgated rules, under the Medical Devices Directive, or MDD, which require medical devices to bear the “CE mark”. The CE mark is an international symbol of adherence to quality assurance standards. We obtained MDD certification in December 1996. We received our ISO9001/EN46001 recertification in January 2000 and have instituted all the systems necessary to meet the Medical Device Directive, thus acquiring the ability to affix the CE mark to our devices and export our devices to any EC-member country. New devices may be required to meet additional requirements before we affix the CE mark.

Manufacturing

Our manufacturing process for electrodes includes the inspection, assembly, testing, packaging and external sterilization of finished products. Our generators and infusion pumps are currently manufactured to our specifications by outside contractors.

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We devote significant attention to quality control of our products. We have established quality systems in conformance with the Quality System Regulation as mandated by the FDA. Our Mountain View, California facility received ISO 9001/EN46001 recertification in January 2000 and is in conformance with the European Medical Device Directive for sale of products in Europe.

Corporate History, Headquarters and Website Information

RITA was incorporated in California on January 6, 1994 and reincorporated in Delaware on May 9, 2000. Our principal executive offices are located at 967 N. Shoreline Blvd. Mountain View, California 94043. Our telephone number at that location is (650) 314-3400 and our website is www.ritamedical.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports available free of charge on our website as soon as reasonably practicable after we file these reports with the Securities and Exchange Commission.

Employees

As of January 30, 2004 we had 77 full-time employees, including 37 in sales and marketing, 21 in manufacturing, 9 in research and development and 10 in general and administrative functions. From time to time, we also employ independent contractors to support our organization.

Item 2. Properties.

We are headquartered in Mountain View, California, where we lease one building with approximately 18,000 square feet of office, research and development and manufacturing space. The lease is noncancellable and expires in August 2004. We believe the facility is suitable and adequate to meet our current or foreseeable requirements through 2004, should we choose to extend our lease, and that additional or alternative space will be available at commercially reasonable terms to meet future growth requirements. See also Note 4 in the “Notes to Consolidated Financial Statements” contained elsewhere in this Form 10-K.

Item 3. Legal Proceedings.

From 1999 through March 2003, the Company was involved in patent-related disputes that were settled in April 2003, and are more fully described in our annual report on Form 10-K filed on March 28, 2003, our report on Form 10-Q filed on May 15, 2003, and our report on Form 10-Q filed on August 13, 2003.

The Company may, from time to time, become a party to legal proceedings arising in the ordinary course of business. Such matters generally 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 such future litigation or other legal proceedings and no amounts have been provided for such matters in the accompanying consolidated financial statements.

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

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

Our common stock is traded on the Nasdaq National Market under the symbol “RITA”. We commenced trading on July 27, 2000. The following table shows the high and low closing sales prices of our common stock by quarter for 2002 and 2003, and through January 30, 2004, as reported by the Nasdaq National Market:

	HIGH		LOW
Year ended December 31, 2002
First quarter	$	10.05	$	5.41
Second quarter	$	10.25	$	7.90
Third quarter	$	9.77	$	3.84
Fourth quarter	$	7.04	$	4.95
Year ended December 31, 2003
First quarter	$	5.71	$	4.03
Second quarter	$	4.40	$	2.70
Third quarter	$	3.59	$	2.48
Fourth quarter	$	4.94	$	3.02
Year ended December 31, 2004
First quarter (through January 30, 2004)	$	4.70	$	4.15

On January 30, 2004, the last reported sales price of our common stock on the Nasdaq National Market was $4.21. The market price of our common stock has been and may continue to be subject to wide fluctuations in response to a number of events and factors, such as quarterly variations in our operating results, announcements of technological innovations or new products by us or our competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets. These fluctuations, as well as general economic and market conditions, may adversely affect the market price for our common stock. As of January 30, 2004, there were 85 holders of our common stock, excluding persons whose stock is in nominee or “street name” accounts through brokers.

No dividends have been declared on our common stock. We currently intend to retain any future earnings to fund the development and growth of our business. It is not expected that any dividends will be declared on our capital stock in the foreseeable future.

On January 24, 2003, we issued 2,045,453 shares of our unregistered common stock at a price of $4.40 per share to SF Capital Partners Ltd., Riverview Group, LLC, Baystar Capital II, L.P., and Baystar International II, L.P. We netted approximately $8.3 million after issuance fees and expenses. The issuance was deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) thereof as transactions by an issuer not involving any public offering. On February 14, 2003, our Registration Statement on Form S-3, which registered the shares of common stock sold to SF Capital Partners Ltd., Riverview Group, LLC, Baystar Capital II, L.P., and Baystar International II, L.P., was declared effective by the SEC. We are required to keep this registration statement effective until the earlier of (i) the date when the selling stockholders have sold all the shares pursuant to the registration statement, (ii) the date on which all of the shares may be sold pursuant to Rule 144 under the Securities Act of 1933, as amended or (iii) January 24, 2005.

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Item 6. Selected Financial Data.

You should read the following selected financial data in conjunction with our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Form 10-K. The annual data presented below is derived from our audited consolidated financial statements. Our audited consolidated statement of operations for the years ended December 31, 2003, 2002 and 2001 and our audited consolidated balance sheet at December 31, 2003 and 2002 are presented elsewhere in this Form 10-K. The information provided below is in thousands, except for per share data.

	Years ended December 31,
	2003			2002			2001			2000			1999
Statement of Operations Data:
Sales	$	16,607		$	17,393		$	14,791		$	10,010		$	4,629
Cost of goods sold		6,166			6,908			6,132			6,048			2,994
Gross profit		10,441			10,485			8,659			3,962			1,635
Operating expenses:
Research and development		4,294			5,052			6,489			5,615			3,931
Selling, general and administrative		17,418			19,366			16,646			12,052			5,452
Total operating expenses		21,712			24,418			23,135			17,667			9,383
Loss from operations		(11,271	)		(13,933	)		(14,476	)		(13,705	)		(7,748	)
Interest and other income / expense, net		192			434			1,516			898			238
Net loss	$	(11,079	)	$	(13,499	)	$	(12,960	)	$	(12,807	)	$	(7,510	)
Net loss per common share, basic and diluted	$	(0.63	)	$	(0.91	)	$	(0.90	)	$	(1.99	)	$	(9.33	)
Shares used in computing net loss per common share, basic and diluted		17,647			14,890			14,353			6,440			805
	December 31,
	2003			2002			2001			2000			1999
Balance Sheet Data:
Cash, cash equivalents and marketable securities, current and long term	$	9,535		$	12,835		$	23,537		$	40,057		$	12,153
Working capital		11,886			16,066			25,478			41,512			12,437
Total assets		22,033			24,166			35,834			46,270			15,705
Long-term obligations, net of current portion		23			—			—			180			1,854
Convertible preferred stock and preferred stock warrants		—			—			—			—			38,516
Common stock and additional paid-in capital		98,055			88,540			88,474			88,435			3,652
Total stockholders’ equity (deficit)		19,084			20,603			32,145			42,647			(26,991	)

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Business Overview and Discussion of Known Trends

We develop, manufacture and market minimally invasive products that use radiofrequency energy to treat patients with solid cancerous or benign tumors. 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. In 2002, the XLi family of disposable devices gained wide acceptance with our customers in the United States. In 2003, we introduced our next generation in infusion technology, the Xli-Enhanced (“Xlie”) disposable device. The Xlie device builds upon our established infusion expertise, making the ablation process easier and more efficient.

Management relies on certain statistical measurements to assess trends in sales growth and the effectiveness of our selling strategies. The following table, derived from our Consolidated Statements of Operations and other unaudited data for the years ended December 31, 2003, 2002 and 2001, sets forth some of these measurements:

	Years ended December 31,
	2003			2002			2001
Total sales (in thousands)	$	16,607		$	17,393		$	14,791
Percentage of sales: United States		80	%		74	%		54	%
Percentage of sales: International		20	%		26	%		46	%
Percentage of sales: Disposable products		88	%		75	%		78	%
Percentage of sales: Hardware products		12	%		25	%		22	%
Gross margin		63	%		60	%		59	%

Our products are sold in the United States through our direct sales force and internationally through distribution partners. Our sales in the United States are more profitable than our sales in international markets because direct selling, which avoids distributor discounts, permits higher average selling prices for our products. Accordingly, we have made significant investments in our domestic sales force in an effort to increase sales growth in the United States, and have, to date, introduced our premium-priced Starburst Xli and Xlie families of disposable needles only in this region. These actions have resulted in a growing percentage of sales derived from the domestic market. In contrast, our international markets in Europe and Japan have relatively more restrictive reimbursement conditions than those in the United States, which combined with our distributor discounts, limit our average selling prices in these markets. Further, some of our distributors in Europe and Japan have been reducing their inventory levels. These factors have resulted in slow growth or even declining volume in some of our international markets. Going forward, we expect 2004 sales growth in the United States to continue to outpace international growth, because we believe our international markets, particularly Japan, will continue to reduce inventory levels, and because we believe the introduction of premium products to our international distributors will have a relatively small impact on growth due to pricing limitations. However, we also note reimbursement approval for our procedure in Japan, effective April 1, 2004, and we believe that Japan will once again be an important source of international revenue beginning in 2005.

All of our revenue is derived from the sale of our disposable devices and radiofrequency generators. As the number of customers using our products grows, we expect that the percentage of sales related to disposable products will grow relative to that of hardware products, although we have, in the past, seen temporary deviations from this trend as a result of large hardware shipments to international distributors. Since our disposable products are self-manufactured and more profitable than our vendor-sourced hardware products, a growing percentage of disposable product sales is favorable to the Company. In 2004, we will continue to focus on expanding our base of customers and on increasing usage of our disposable products in our established accounts. As a result, we expect revenue from the sale of our higher-margin disposable devices to grow faster than revenue from the sale of our generators. We have, in the past, experienced supply shortages that limited our sales. We are not currently experiencing such shortages and do not expect shortages in the future, although there cannot be complete assurance to this effect.

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To date, essentially all of our revenue has come from products sold in the treatment of cancerous liver tumors. In 2002, however, we began to see some additional nominal revenue from the use of the RITA system sold for the treatment of patients with metastatic bone tumors. Our sales from devices used in bone tumor procedures remained small in 2003, but we expect the January 2004 approval of a reimbursement code for bone procedures to have a favorable impact going forward. We are conducting research and clinical trials in other organs that may lead to additional sources of revenue in future years, although there can be no assurances that such additional revenue will materialize.

Our manufacturing costs consist of raw materials, including generators and ancillary hardware components produced for us by third-party suppliers, labor to produce our disposable devices and to inspect incoming, in-process and finished goods, sterilization performed by an outside service provider and general overhead expenses. Our manufacturing costs are volume-dependent, and our unit costs should decrease as our production volumes increase. We also have the opportunity to reduce the cost of our vendor-supplied hardware products through higher order volumes or product redesign. Besides manufacturing costs, our cost of goods sold for 2003 reflects amortization of capitalized license fees associated with the April 2003 settlement of our patent litigation dispute with Boston Scientific Corporation. We expect these amortization charges to continue through 2015. Further, our cost of goods sold also includes provisions to our reserve for obsolete inventory. Technology in our marketplace has evolved rapidly and we have, from time to time, recognized relatively high expenses related to obsolete inventory as our product line has changed. We may experience similar product changes and related obsolete inventory provisions in the future, although we generally expect only modest impacts from such provisions.

Our gross margins reflect our selling prices, our domestic / international mix percentages, our product mix percentages, our production volumes, the costs we pay for vendor manufactured product and our provisions for obsolete product. The net effect of these factors has been improvement in our gross margin rate from 59% in 2001, to 60% in 2002 and to 63% in 2003. In 2004, we expect continued modest improvement in our gross margin rate, based on projected improvements in domestic / international and product sales mix, lower manufacturing costs and relatively modest provisions for obsolete product.

In addition to the selling statistics discussed above, management relies on certain measurements to assess the effectiveness of our operations. The following tables sets forth some of these measurements, derived from our Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001, and our Consolidated Balance Sheets as of December 31, 2003, 2002 and 2001:

	Years ended December 31,
	2003		2002		2001
Research and development expense	$	4,294	$	5,052	$	6,489
Selling, general and administrative expense		17,418		19,366		16,646
Total operating expenses	$	21,712	$	24,418	$	23,135
	December 31,
	2003		2002		2001
Cash and cash equivalents	$	4,580	$	6,888	$	7,297
Marketable securities, current and long term		4,955		5,947		16,240
Total cash and marketable securities	$	9,535	$	12,835	$	23,537

If we are to become profitable, we must continue to manage our operating expenses. Our operating expenses consist of product development costs, clinical trial expenses, patent litigation expenses, sales and marketing expenses related to our selling efforts in the United States and Europe, and administrative expenses, including the costs associated with our status as a public company, professional service expenses and our provisions for uncollectible accounts. Changes in these areas are determined by the breadth of our new product development

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portfolio, the number of headcount we maintain in our selling and administrative functions, the scope of our marketing efforts, the costs we incur in defense of our patents and intellectual property rights and the extent to which credit issues and economic conditions constrain our ability to collect our receivables. For the year ended December 31, 2003, research and development expense was 15% lower than in 2002, while selling, general and administrative expense was down by 10% from 2002, reflecting lower headcount and reduced activity in research projects and clinical trials. In 2004, we expect a modest increase in research expenditures, reflecting the ongoing need to develop innovative technology, but little or no growth in selling, general and administrative expense.

In addition to management of our operating expenses, we must continue to conserve our cash and / or raise additional cash. Our combined total of cash, cash equivalents and marketable securities was $9.5 million as of December 31, 2003, down from $12.8 million as of December 31, 2002. Our net cash used in operating activities for the year ended December 31, 2003 was $8.8 million. However, our rate of net cash used in operating activities fell to $2.6 million in the second half of 2003, as compared to $6.2 million in the first half of 2003, and with this lower rate of cash use we believe we have sufficient cash on hand for at least 12 months of operations.

We incurred net losses of $11.1 million for the year ended December 31, 2003. Due to the costs associated with research and development programs and our sales and marketing efforts, we expect to incur net losses throughout 2004. Profitability depends on our success in expanding product usage in our current markets 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.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe the following accounting policies have been critical in the preparation of our financial statements because they involve a high degree of judgment and complexity. We believe users of our financial statements, including potential and current investors, will find an explanation of these policies important to understanding our discussions of financial condition, results of operations and liquidity. A more extensive review of all accounting policies considered to be significant in the preparation of our financial statements appears in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K.

Trade accounts receivable and allowance for doubtful accounts: We extend credit to our customers, who are primarily private companies in the United States, Europe and Asia. We perform ongoing credit evaluations of our customers’ financial condition and past transaction credit-worthiness and generally require no collateral. We maintain an allowance for doubtful accounts receivable based on our assessment of the likelihood of collection of individual accounts. This allowance may prove to be inadequate if collections fail to meet current estimates, which could occur as a result of general economic conditions or the insolvency of specific key customers.

Inventories and inventory reserves: Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. We maintain a reserve for obsolete, unmarketable or excess product based on assumptions regarding future demand or market conditions. We may be required to make further provisions to our reserve if market conditions prove less favorable than our current expectations, or if the introduction of new products renders existing products obsolete.

Revenue recognition: Revenue is recognized upon receipt of a customer purchase order and subsequent product shipment provided no significant obligations remain and collection of the associated receivable is

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deemed reasonably assured. Our customers, including our distributors, have no price protection and no return rights on product purchased. Should changes in conditions or the status of obligations cause us to determine that our criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Payments for maintenance services are usually prepaid and the related maintenance revenue is deferred and recognized ratably over the service contract term. Service contract terms range from 12 to 36 months. We do not generally engage in bundling transactions that would call for the deferral of revenue. Through December 31, 2003, all of our billings have been denominated in U.S. dollars, although we expect relatively minor billings in foreign currencies in future periods.

Deferred Tax Valuation Allowance: Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We have established a full valuation allowance to reduce our deferred tax assets to zero. While we have considered potential future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the full valuation allowance, in the event that we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase net income in the period such determination was made.

Results of Operations

The following table sets forth the percentage of sales represented by certain items in our Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001:

	Years ended December 31,
	2003		2002		2001
Sales	100	%	100	%	100	%
Cost of goods sold	37	%	40	%	41	%
Gross profit	63	%	60	%	59	%
Operating expenses:
Research and development	26	%	29	%	44	%
Selling, general and administrative	105	%	111	%	113	%
Total operating expenses	131	%	140	%	156	%
Loss from operations	(68	)%	(80	)%	(98	)%
Interest and other income / expense, net	1	%	2	%	10	%
Net loss	(67	)%	(78	)%	(88	)%

Years Ended December 31, 2003 and 2002

For the year ended December 31, 2003, sales totaled $16.6 million, a decrease of 5% from $17.4 million in 2002. This result was due to a reduction of $1.8 million, or 77%, in year-to-year sales to our distributor in Japan, where the reduction of in-country inventory levels severely limited demand in 2003. Elsewhere, our business grew. Domestic sales were 3% higher in 2003 than in 2002, as we increased our installed customer base. International sales, excluding Japan, grew by 29% in 2003, compared with 2002, reflecting higher sales in the rest of Asia and some European markets. For the year ended December 31, 2003, domestic sales represented 80% of total sales, compared to 74% in 2002. Sales of our disposable products grew by 11% compared with 2002 results, although hardware sales, influenced by the decrease in shipments to Japan, decreased 53%. For the year ended December 31, 2003, disposable sales accounted for 88% of total revenue, compared to 75% in 2002.

Cost of goods sold for the year ended December 31, 2003 was $6.2 million as compared to $6.9 million in 2002, resulting in a 63% gross margin for 2003 compared to a 60% gross margin rate in 2002. Cost of goods sold

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was affected by charges for obsolete inventory that totaled approximately $0.5 million for 2003, down from $0.7 million in 2002. We may experience similar product changes and related obsolete inventory provisions in the future, although we generally expect only modest impacts from such provisions. Costs for the first two quarters of 2003 were further increased by temporary price increases of approximately $0.5 million on our vendor sourced ancillary infusion pumps. These temporary price increases ceased by June of 2003 and we do not expect increases of this sort in the future. Our cost of goods sold in 2003 also included $0.2 million amortization of capitalized license fees associated with the settlement of our patent litigation dispute with Boston Scientific Corporation. We expect such amortization charges to continue through 2015.

Research and development expenses for the year ended December 31, 2003 were $4.3 million as compared to $5.1 million in 2002. This decrease was due to reduced new product development and clinical trial costs. Also, there were no charges for amortization of deferred stock-based compensation in 2003, compared to $0.2 million of such charges for 2002. We expect a modest increase in research expenditures for 2004, driven by developmental charges associated with technical innovation of our products.

Selling, general and administrative expenses for the year ended December 31, 2003 were $17.4 million as compared to $19.4 million in 2002. About $1.2 million of this decrease is due to lower selling expenses, on lower headcount, reflecting organizational changes in our domestic sales group. Another $1.0 million in reduced expense resulted from lower provisions to our allowance for uncollectible accounts, as our collection experience with our international customers stabilized. Also, there were no charges for amortization of deferred stock-based compensation in 2003, compared to $0.2 million of such charges for 2002. Other marketing and general administrative expense areas increased by $0.4 million in 2003 over 2002. We expect our selling, general and administrative expense to show little or no growth in 2004, reflecting the full-year impact of our 2003 organizational changes.

Interest income was $0.2 million for the year ended December 31, 2003, down from $0.5 million in 2002, because average daily cash balances fell during 2003 as we utilized cash for operations. We had no interest expense for 2003, compared with $12,000 for 2002.

Years Ended December 31, 2002 and 2001

For the year ended December 31, 2002, sales totaled $17.4 million, an increase of 18% from $14.8 million in 2001. We experienced growth in our domestic market, with domestic sales increasing by 61% over 2001, reflecting increased physician awareness of our technology and increased coverage from our domestic sales group, which was larger in 2002 than in 2001. Sales in our international markets decreased by 33% in 2002 compared to 2001, as our global distributor network reduced inventories and coped with weak economic conditions. For the year ended December 31, 2002, domestic sales represented 74% of total sales, compared to 54% in 2001. Sales of our disposable products grew by 13% and generator sales increased by 34% compared with 2001 results. Also, for the year ended December 31, 2002, disposable sales accounted for 75% of total sales, compared to 78% in 2001. Results in 2002 in our domestic business were constrained by supply issues relating to accessory infusion pumps used with our Starburst XLi line of disposable products. We believe that these issues have been addressed and have had no further significant impact on sales in 2003. Our generator placements increased 51% compared with 2001, reflecting both the expansion of our customer base and the introduction of newer technology to our existing customers.

Cost of goods sold for the year ended December 31, 2002 was $6.9 million as compared to $6.1 million in 2001. Costs associated with increased unit shipments of generators and other hardware components of the RITA system increased by $1.0 million over 2001, but lower unit shipments of devices resulted in a $0.7 million reduction in costs associated with these products. Also, cost of goods sold was affected by charges for obsolete inventory, which totaled $0.7 million for 2002, but were only nominal in 2001. Further, amortization of deferred stock-based compensation of $42,000 was included in 2002 cost of goods sold, down from $558,000 in 2001. Our gross margin was 60% in 2002, compared to 59% in 2001.

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Research and development expenses for the year ended December 31, 2002 were $5.1 million as compared to $6.5 million in 2001. This decrease was primarily due to a $1.1 million reduction in new product development costs and clinical trial costs, as the large development expenses associated with the introduction of our Starburst XLi product line in 2001 were not matched by similarly scaled programs in 2002. Also, amortization of deferred stock-based compensation was $216,000 for the year, down from $465,000 in 2001.

Selling, general and administrative expenses for the year ended December 31, 2002 were $19.4 million as compared to $16.6 million in 2001. The increase was primarily attributable to the 2001 expansion of our domestic sales organization, which resulted in higher compensation and travel expenses in 2002. Also, we made additional investments in market development and public relations, and recognized higher administrative expenses relating to provisions to our allowance for uncollectible accounts. Amortization of deferred stock-based compensation was $196,000 for the year, down from $349,000 in 2001.

Interest income was $0.5 million for the year ended December 31, 2002, down from $1.6 million in 2001, because average daily cash balances fell during 2002 as we utilized cash for operations. Interest expense for 2002 was $12,000, down from $86,000 in 2001, as we carried no bank debt in 2002 and recognized only nominal amounts of interest expense associated with capital lease payments.

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 (see below), which were fully repaid as of December 31, 2002. In January of 2003, we raised an additional $8.3 million, net of expenses, through a private placement of our common shares. As of December 31, 2003, we had $4.6 million of cash and cash equivalents, $4.0 million of marketable securities, $0.9 million in investments intended for resale and $11.9 million of working capital.

For the year ended December 31, 2003, net cash used in operating activities was $8.8 million principally due to our net loss of $11.1 million, offset by non-cash charges of $2.3 million, including depreciation and amortization and provisions to reserves for uncollectible accounts and inventory. Amortization of our deferred stock-based compensation was completed in the year ended December 31, 2002, so there were no further charges in 2003. Approximately $0.1 million in cash was used in 2003 by changes in working capital accounts, with $0.8 million in reduced inventory offset by reduced payables and liabilities, and a $0.2 million increase in accounts receivable. Our investing activities for the year were limited to the purchase of property and equipment in the amount of $1.0 million. Through April of 2003, when we settled our outstanding patent disputes with Boston Scientific Corporation, we capitalized certain patent defense litigation costs; such costs totaled $0.6 million for the year ended December 31, 2003. In April of 2003, we also capitalized $2.65 million in payments made in settlement of those disputes. Maturities and (net) sales of investment instruments provided $1.0 million in cash in support of operations. Financing activities for the year provided $9.6 million in cash, including the $8.3 million we raised in our January 2003 private placement of common stock and $1.3 million related to the issuance of common stock in conjunction with the exercise of stock options.

For the year ended December 31, 2002, net cash used in operating activities was $8.8 million principally due to our net loss of $13.5 million, offset by $3.4 million in non-cash charges and $1.3 million provided by reduced accounts receivable and other changes in working capital accounts. Our investing activities for the year were limited to the purchase of property and equipment in the amount of $0.9 million and $10.2 million of net sales of short-term investment instruments. Net cash provided by financing activities for the year was $1.4 million, primarily the proceeds received from issuance of common stock in conjunction with the exercise of stock options.

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We have, from time to time, financed equipment through capital and operating leases. As of December 31, 2003, we had no future minimum payments due under capital leases, and future minimum payments due under operating leases were as follows (in thousands):

Payments due in 2004	$	356
Total of future minimum operating lease payments	$	356

Our capital requirements depend on numerous factors including our research and development expenditures, expenses related to selling, general and administrative operations and working capital to support business growth. Our net cash used in operating activities averaged $0.7 million per month for the year ended December 31, 2003, but net cash used in operating activities averaged only $0.4 million per month for the last half of the year. Although it is difficult for us to predict future liquidity requirements with certainty, we believe that our current balances of cash and cash equivalents, and the sale of marketable securities as necessary, will satisfy our cash requirements for at least the next 12 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 Company and our stockholders.

Private Placement of Securities

In January of 2003, the Company issued 2,045,453 shares of unregistered common stock at a price of $4.40 per share, netting approximately $8.3 million after issuance fees and expenses. The issuance was deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) thereof as transactions by an issuer not involving any public offering. On February 14, 2003, our Registration Statement on Form S-3, which registered the shares of common stock sold to SF Capital Partners Ltd., Riverview Group, LLC, Baystar Capital II, L.P., and Baystar International II, L.P., was declared effective by the SEC.

Income Taxes

As of December 31, 2003, we had federal net operating loss carryforwards of approximately $66.1 million and state net operating loss carryforwards of approximately $22.0 million, available to offset future regular taxable income. We have fully reserved our deferred tax assets, however, because realization of favorable tax assets in future returns is very uncertain. The federal net operating loss carryforwards will expire between 2008 and 2022, and the state net operating loss carryforwards will expire between 2004 and 2013, if not utilized. The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of the Company, and our utilization of our carryforwards could be restricted. See also Note 7 to “Notes to Consolidated Financial Statements” appearing elsewhere in this Form 10-K.

Recent Accounting Pronouncements

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

In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which codifies, revises and rescinds certain sections of SAB No. 101, “Revenue Recognition,” in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on the Company’s financial position or results of operations.

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Factors That May Affect Future Results

In addition to the other information in this report, the following factors should be considered carefully in evaluating our 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 physicians to use the RITA system, we may not be able to generate revenues because we do not have alternative products.

We have a history of losses and may never achieve profitability.

Although operating expenses during the final two quarters of the year ended December 31, 2003 were lower than in preceding quarters, and although we believe that our quarterly operating expenses will stabilize at or below these levels throughout 2004, to become profitable we must increase our sales and continue to manage our operating expenses. If our sales do not grow, we may not be able to achieve or maintain profitability in the future. In particular, we incurred net losses of $11.1 million in 2003, $13.5 million in 2002, $13.0 million in 2001, $12.8 million in 2000 and $7.5 million in 1999. At December 31, 2003, we had an accumulated deficit of approximately $79.0 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. Furthermore, in April 2003, we entered into a license agreement with Boston Scientific, its affiliates and licensors, pursuant to which we granted Boston Scientific rights to manufacture and sell products using our infusion technology after October 5, 2004. As a result, Boston Scientific may develop and sell some competing products that would, in the absence of this license agreement, infringe our patents.

We are also aware of several companies in international markets which sell products that compete directly with ours. These companies are affecting our international market share and may erode that share in the future. In addition, one of these companies, Berchtold Corporation, has received FDA clearance for using radiofrequency energy to ablate soft tissue.

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 solid cancerous and benign tumors. If these alternative therapies prove to offer treatment options that are perceived to be superior to our system or to have less severe side effects than those resulting from our system, physician adoption of our products could be negatively affected and our revenues could decline.

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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. If the safety or efficacy of our products is questioned, our sales could decline.

Our products are supported by clinical follow-up data in published clinical reports or scientific presentations covering periods from five months to five 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. Under certain circumstances these could result in 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 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 total revenues, could harm our business.

Because our future profitability will depend in part on our ability to increase 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 (for example, our distributor in Japan has built up a significant inventory of product in anticipation of the receipt of reimbursement approvals);

• 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;

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• 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 its 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 21% of our international revenues in 2003 and 55% of our international revenues in 2002. M.D.H. s.r.l. Forniture Ospedaliere, our distributor in Italy, accounted for 22% of our international revenues in 2003 and 17% of our international revenues for 2002. Because international revenues accounted for 20% of our total revenues for 2003 and these two distributors represented 43% of that total, the loss of either distributor or a significant decrease in unit purchases by either distributor could cause our 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. During the first quarter of 2003, we terminated our agreements with three of our international distributors and although we contracted with replacement distributors we have expended significant time and resources in doing so, and our sales in the three affected markets have suffered during the transition period that we estimate ended September 30, 2003. However, if our distributors or we terminate other distributor agreements, we could incur similar or more burdensome expenses, have to expend significant time and resources in finding replacement distributors and our sales could decrease during any related 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 negatively impacted and 2003 sales to our Japanese distributor were so affected. 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 which may also impact our revenue recognition policy on future distributor sales.

In 2002, we significantly increased our allowance for uncollectible accounts to address the risk associated with longer collection periods that have arisen principally with our European distributors. Although the deterioration we experienced in international collections in 2002 stabilized in 2003, we may encounter new difficulties with collections that require further increases in our allowance for uncollectible accounts in the future, and we may require specific accounts to post letters of credit or pay in advance to minimize credit risk to the Company. Additional future increases in our allowance for uncollectible accounts would reduce our 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 Corporation, our distributor in Japan, is seeking to obtain reimbursement coverage in Japan, but to date has not received this approval. If we or our distributors are unable to either obtain the required reimbursement codes or develop an effective strategy to resolve the reimbursement issue, physicians in foreign markets may be unwilling to purchase our products which could negatively impact our international revenues.

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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 coverage or adequate reimbursement for the cost of procedures using our products from third-party payors, such as Medicare, Medicaid and private health insurance plans. If physicians believe that using our system will add cost to a procedure but will not add sufficient offsetting economic or clinical benefits, physician adoption of our products could be delayed. Even though the American Medical Association has established CPT codes relating to liver procedures and bone tumor procedures, some third-party payors still may not cover or reimburse adequately for liver or bone tumor procedures using our products. We are aware of liver procedures using our system where the patient’s insurance has denied coverage. In addition, there are no assigned CPT codes for radiofrequency ablation of tumors in organs other than liver or bone. Further, we believe the advent of the Medicare fixed payment schedules has made it difficult to receive adequate liver reimbursement for procedures using our products in the outpatient setting. Medicare reimbursement levels for procedures using our products are highest when our products are used in an in-patient setting. If there is a trend toward the use of our products on an outpatient basis or if coverage continues to be denied or reimbursement levels continue to be inadequate, physician use of our products could decline which would cause our revenues to decline.

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 team, including our Chief Executive Officer and Chief Financial Officer, as well as key staff in the areas of finance, operations and research and development. Our future success will depend in part on the continued service of our staff and our ability to identify, hire and retain additional personnel. The market for qualified management personnel in Northern California, where our offices are located, is competitive and is expected to remain so. Because the environment for good personnel is so competitive, costs related to compensation may increase significantly. If we are unable to attract and retain both the management team and key 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 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. Such use may result in unsatisfactory patient outcomes, patient injury and related liability or negative publicity that could have an adverse effect on our product sales.

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 or our 2003 private placement transaction;

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• 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 by us or our competitors;

• product liability claims;

• 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.

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

We may be required to relocate, or choose to relocate, to a new facility in 2004. If so, we will incur moving expenses, and if we become unable to meet custormer demand, our business could suffer.

The operating lease on our current facility expires in August of 2004. We believe that during 2004 we will be able to either renew the lease on our existing facility, or lease alternative space, at commercially reasonable terms. If we choose to relocate to a new facility, we will incur normal and customary moving costs and may experience an interruption in our manufacturing operations. If we become unable to meet customer demand for our products, our business could suffer.

We are dependent on two suppliers as the only sources of a component that we use in our disposable devices, and any disruption in the supply of this component could negatively affect our business.

Until 2003, there was only one supplier available to provide us with a component that we include in our disposable devices. During the quarter ended June 30, 2003, we qualified a second supplier. 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

25

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 two suppliers as our only sources of an accessory device used in conjunction with our Starburst XLi and Xlie lines of disposable devices, and any disruption in the supply of these devices could negatively affect our revenues.

Until December 2002, we had only one supplier available to provide us with accessory infusion pumps used in conjunction with our Starburst XLi line of disposable devices. Our Starburst Xlie product line, introduced in 2003, also requires an accessory infusion pump. During the quarters ended September 30, 2002 and December 31, 2002, we experienced shortages in the supply of accessory infusion pumps. In December 2002, we qualified a new accessory infusion pump from our existing supplier for which we now have approval from UL and conditional approval from TUV for use in the United States and Europe. Also in December 2002, we qualified a second supplier of an accessory infusion pump, although we have not yet shipped this product to our customers commercially. Although we were able to remedy this supply disruption, future disruptions in the supply of this component are still possible and, in that event, our business could suffer through lower revenues or higher costs. Additionally, we have limited experience with both the primary and alternative pump and if either pump fails to perform as desired, revenues could be negatively affected.

We are dependent on two 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 foreign 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 foreign 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 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. Obtaining this approval or clearance can be a lengthy and time-consuming process. To date, all of our products have received clearances from the FDA through premarket notification

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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, or it may require us to recall previously sold products. 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. In addition, in the course of the FDA process leading to clearance or approval for a new indication, the FDA may request an advisory panel meeting or meetings to discuss the clinical data, the appropriate study design or other criteria for clearance or approval. In the event that the advisory panel advises FDA that the clinical data are inadequate or the study design or other criteria are inappropriate, and the FDA concurs, the FDA clearance or approval process could be lengthened and anticipated revenues from that new indication would be delayed.

We may acquire technologies or companies in the future, which could result in the dilution of our stockholders and disruption of our business, and reduce our revenues.

We are continually evaluating business alliances and external investments in technologies related to our business. Acquisitions of companies, divisions of companies, businesses or products entail numerous risks, any of which could materially harm our business in several ways, including:

• diversion of management’s attention from our core business objectives and other business concerns;

• failure to integrate efficiently businesses or technologies acquired in the future with our pre-existing business or technologies;

• potential loss of key employees from either our pre-existing business or the acquired business;

• dilution of our existing stockholders as a result of issuing equity securities; and

• assumption of liabilities of the acquired company.

Some or all of these problems may result from future acquisitions or investments. Furthermore, we may not realize any value from such acquisitions or investments.

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 10 percent of our outstanding common stock as of December 31, 2003, these stockholders may, as a practical matter, be able

27

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 merger or acquisition or other change of control that a stockholder may consider favorable.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Our exposure to interest rate risk at December 31, 2003 and December 31, 2002 is related to our investment portfolio. We had no interest rate sensitive borrowings as of December 31, 2003 or December 31, 2002. Fixed rate investments and borrowings may have their fair market value adversely impacted from changes in interest rates. Floating rate investments may produce less income than expected if interest rates fall, and floating rate borrowings, should we acquire any, will lead to additional interest expense if interest rates increase. Due in part to these factors, our future investment income may fall short of expectations, and our interest expense may be above our expectations. Further, we may suffer losses in investment principal if we are forced to sell securities that have declined in market value due to changes in interest rates.

We invest our excess cash in debt instruments of the United States government and its agencies and in high quality corporate issuers. The average contractual duration of our investments in 2003 was less than one year. Due to the short-term nature of these investments, we believe that there is no material exposure to interest rate risk arising from our investments.

All of our sales and purchases have historically been denominated in United States dollars. In the future, we may begin to make sales in other currencies such as the Euro. We believe we currently have no significant direct foreign currency exchange rate risk and that such risk in the future will be minimal.

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Item 8.    Consolidated Financial Statements and Supplementary Data.

RITA Medical Systems, Inc.

Index to Consolidated Financial Statements

	Page
Report of Independent Auditors	30
Consolidated Balance Sheets	31
Consolidated Statements of Operations and Comprehensive Loss	32
Consolidated Statements of Stockholders’ Equity	33
Consolidated Statements of Cash Flows	34
Notes to Consolidated Financial Statements	35

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Report of Independent Auditors

To the Stockholders and Board of Directors

of RITA Medical Systems, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of RITA Medical Systems, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and comprehensive loss and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

San Jose, California

March 8, 2004

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RITA MEDICAL SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	December 31,
	2003			2002
ASSETS
Current assets:
Cash and cash equivalents	$	4,580		$	6,888
Marketable securities		4,022			5,427
Accounts and note receivable, net of allowance for doubtful accounts of $1,117 at December 31, 2003 and $1,353 at December 31, 2002		2,990			2,798
Inventories		2,192			3,521
Prepaid assets and other current assets		1,028			995
Total current assets		14,812			19,629
Long term marketable securities		933			520
Long term note receivable, net of collection allowance of $45 at December 31, 2003 and $141 at December 31, 2002		338			381
Property and equipment, net		1,089			1,565
Intangibles and other assets		4,861			2,071
Total assets	$	22,033		$	24,166
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	757		$	1,053
Accrued liabilities		2,169			2,510
Total current liabilities		2,926			3,563
Deferred maintenance revenue, less current portion		23			—
Total liabilities	$	2,949		$	3,563
Commitments (Note 4)
Stockholders’ equity :
Preferred stock, $0.001 par value:
Authorized: 2,100 shares at December 31, 2003
Issued and outstanding: No shares at December 31, 2003 and 2002		—			—
Common stock, $0.001 par value:
Authorized: 100,000 shares at December 31, 2003
Issued and outstanding: 17,975 shares at December 31, 2003 and 15,155 shares at December 31, 2002		18			15
Additional paid-in capital		98,037			88,525
Stockholder notes receivable		—			(50	)
Accumulated other comprehensive income		2			7
Accumulated deficit		(78,973	)		(67,894	)
Total stockholders’ equity		19,084			20,603
Total liabilities and stockholders’ equity	$	22,033		$	24,166

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

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RITA MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data)

	Years Ended December 31,
	2003			2002			2001
Sales	$	16,607		$	17,393		$	14,791
Cost of goods sold (including stock-based compensation of $0, $42 and $558 in 2003, 2002 and 2001, respectively)		6,166			6,908			6,132
Gross profit		10,441			10,485			8,659
Operating expenses:
Research and development (including stock-based compensation of $0, $216 and $465 in 2003, 2002 and 2001, respectively)		4,294			5,052			6,489
Selling, general and administrative (including stock-based compensation of $0, $196 and $349 in 2003, 2002 and 2001, respectively)		17,418			19,366			16,646
Total operating expenses		21,712			24,418			23,135
Loss from operations		(11,271	)		(13,933	)		(14,476	)
Interest income		201			473			1,610
Interest expense		—			(12	)		(86	)
Other expense, net		(9	)		(27	)		(8	)
Net loss		(11,079	)		(13,499	)		(12,960	)
Other comprehensive income (expense):
Change in unrealized gain (loss) on marketable securities		(5	)		(63	)		57
Comprehensive loss	$	(11,084	)	$	(13,562	)	$	(12,903	)
Net loss per common share, basic and diluted	$	(0.63	)	$	(0.91	)	$	(0.90	)
Shares used in computing net loss per common share, basic and diluted		17,647			14,890			14,353

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

32

RITA MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

	Common Stock				Additional Paid-in Capital			Deferred Stock-based Compensation			Stockholder Notes Receivable			Accumulated Other Compre- hensive Income			Accumulated Deficit			Total Stockholders’ Equity
	Shares Issued		Amount
Balances, December 31, 2000	13,970		$	14	$	88,421		$	(4,202	)	$	(164	)	$	13		$	(41,435	)	$	42,647
Issuance of common stock	89			—		324			—			—			—			—			324
Stock options and warrants exercised	551			1		406			—			—			—			—			407
Cancellation of common stock	(19	)		—		(31	)		—			31			—			—			—
Issuance of common stock warrants for services received	—			—		264			—			—			—			—			264
Deferred stock-based compensation	—			—		(925	)		925			—			—			—			—
Amortization of deferred stock-based compensation	—			—		—			1,372			—			—			—			1,372
Forgiveness of stockholder note receivable	—			—		—			—			34			—			—			34
Change in unrealized gain on marketable securities	—			—		—			—			—			57			—			57
Net loss	—			—		—			—			—			—			(12,960	)		(12,960	)
Balances, December 31, 2001	14,591			15		88,459			(1,905	)		(99	)		70			(54,395	)		32,145
Issuance of common stock	125			—		421			—			—			—			—			421
Stock options and warrants exercised	466			—		1,130			—			—			—			—			1,130
Cancellation of common stock	(27	)		—		(15	)		—			15			—			—			—
Revaluation of common stock warrant	—			—		(19	)		—			—			—			—			(19	)
Deferred stock-based compensation	—			—		(1,451	)		1,451			—			—			—			—
Amortization of deferred stock-based compensation	—			—		—			454			—			—			—			454
Forgiveness of stockholder note receivable	—			—		—			—			34			—			—			34
Change in unrealized gain on marketable securities	—			—		—			—			—			(63	)		—			(63	)
Net loss	—			—		—			—			—			—			(13,499	)		(13,499	)
Balances, December 31, 2002	15,155			15		88,525			—			(50	)		7			(67,894	)		20,603
Issuance of common stock.	2,126			2		8,605			—			—			—			—			8,607
Stock options exercised .	714			1		1,028			—			—			—			—			1,029
Cancellation of common stock	(20	)		—		(20	)		—			20			—			—			—
Revaluation of common stock warrant	—			—		(101	)		—			—			—			—			(101	)
Forgiveness of stockholder note receivable	—			—		—			—			30			—			—			30
Change in unrealized gain on marketable securities	—			—		—			—			—			(5	)		—			(5	)
Net loss	—			—		—			—			—			—			(11,079	)		(11,079	)
Balances, December 31, 2003	17,975		$	18	$	98,037		$	—		$	—		$	2		$	(78,973	)	$	19,084

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

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RITA MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Years Ended December 31,
	2003			2002			2001
Cash flows from operating activities:
Net loss	$	(11,079	)	$	(13,499	)	$	(12,960	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		1,713			1,401			1,018
Loss on disposal of property and equipment		275			—			—
Issuance and revaluation of common stock warrants for services received		(101	)		(19	)		264
Allowance for doubtful accounts		(99	)		865			526
Provision for obsolete inventories		551			670			137
Amortization of stock-based compensation		—			454			1,372
Changes in operating assets and liabilities:
Accounts and note receivable		(190	)		1,534			(3,145	)
Inventories		778			(546	)		(2,144	)
Prepaid and other current assets		(33	)		287			(459	)
Accounts payable and accrued liabilities		(637	)		66			1,177
Deferred warranty revenue		23			—			—
Net cash used in operating activities		(8,799	)		(8,787	)		(14,214	)
Cash flows from investing activities:
Purchase of property and equipment		(1,003	)		(893	)		(1,648	)
Purchase of investments		(9,387	)		(404	)		(19,451	)
Sales and maturities of investments		10,374			10,634			30,650
Capitalization of patent litigation costs		(621	)		(1,802	)		(332	)
Acquisition of intangibles		(2,650	)		—			—
Note receivable and other assets		142			(516	)		6
Net cash provided by (used in) investing activities		(3,145	)		7,019			9,225
Cash flows from financing activities:
Proceeds from issuance of common stock		9,636			1,551			731
Proceeds from revolving term loan		—			—			25
Payments on revolving term loan		—			—			(858	)
Payments on capital lease obligations		—			(192	)		(288	)
Net cash provided by (used in) financing activities		9,636			1,359			(390	)
Net decrease in cash and cash equivalents		(2,308	)		(409	)		(5,379	)
Cash and cash equivalents at beginning of year		6,888			7,297			12,676
Cash and cash equivalents at end of year	$	4,580		$	6,888		$	7,297
Supplemental disclosures of cash flow information:
Cash paid for taxes	$	9		$	27		$	8
Cash paid for interest	$	—		$	12		$	75

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

34

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:    FORMATION AND BUSINESS OF THE COMPANY

RITA Medical Systems, Inc. (the “Company”) was incorporated in January 1994. The Company is engaged in developing, manufacturing and marketing innovative products that use radiofrequency energy to treat patients with solid cancerous or benign tumors. Products include radiofrequency generators and disposable needle electrode devices that deliver controlled thermal energy to targeted tissue.

NOTE 2:    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of RITA Medical Systems, Inc. and its wholly owned subsidiaries, RITA Medical Systems Netherlands, BV, and Rita Medical Systems France, S.A.R.L. Intercompany transactions and accounts have been eliminated.

Liquidity

As of December 31, 2003, the Company’s total assets were $22.1 million, total liabilities were $2.9 million, working capital was $11.9 million and cash and cash equivalents totaled $4.6 million. Current and anticipated demand for the Company’s products as well as procurement and production affect the need for capital. Changes in these or other factors could have a material impact on capital requirements and may require the Company to raise additional capital. While the Company believes that its existing cash resources, including short-term and long-term marketable securities, will be sufficient to fund its operating needs for the next twelve months, additional financing may be required for the Company’s currently envisioned long term needs. There can be no assurance that any additional financing will be available on terms acceptable to the Company, or at all. In addition, future equity financings could result in dilution to shareholders, and future debt financings could result in certain financial and operational restrictions.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those required in the assessment of allowances for doubtful accounts and for potentially excess and obsolete inventory. Actual results could differ from those estimates.

Concentration of credit risk and other risks and uncertainties

The Company’s products include components subject to rapid technological change. Certain components used in manufacturing the product have relatively few alternative sources of supply and establishing additional or replacement suppliers for such components cannot be accomplished quickly. The Company has been constrained by supply issues in the past, but was not affected by supply constraints as of December 31, 2003. While the Company has ongoing programs to minimize the adverse effect of such changes and considers technological change in estimating its allowances, such estimates could change in the future.

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, marketable securities, accounts receivable and notes receivable. Cash and cash equivalents are deposited in demand and money market accounts in three financial institutions in the United States, one

35

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

financial institution in the Netherlands and one financial institution in France. Deposits held with financial institutions may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash, cash equivalents or marketable securities.

The Company extends credit to its customers, which are primarily comprised of accounts of private companies in the United States, Europe and Asia. The Company performs ongoing credit evaluations of its customers’ financial conditions and generally requires no collateral. The Company maintains an allowance for doubtful accounts receivable and/or notes receivable based on the expected collectibility of individual accounts. For the year ended December 31, 2003, the Company reduced its allowance for doubtful accounts by approximately $99,000. For the years ended December 31, 2002 and 2001, provisions to the allowance for doubtful accounts were made in the approximate amounts of $902,000 and $535,000, respectively. Charges against the allowance were approximately $233,000, $37,000 and $9,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

Cash and cash equivalents

All highly liquid investments with original maturities of ninety days or less from the date of purchase, if not restricted, are considered to be cash equivalents. The Company has reported approximately $117,000 in restricted cash accounts as other current assets.

Marketable securities

The Company’s marketable securities are categorized as available-for-sale. Marketable securities with original maturities greater than three months and remaining maturities of no more than one year are classified as short-term investments. Marketable securities with remaining maturities greater than one year are classified as long-term investments. Unrealized holding gains and losses are reflected as a net amount in a separate component of stockholders’ equity until realized. For the purpose of computing realized gains and losses, cost is identified on a specific identification basis.

Fair Value of Financial Instruments

The carrying amounts of some of the Company’s financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities.

Inventories

Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. The Company records provisions to write down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and its estimated market value based upon assumptions about future market demand and market conditions. If future demand or market conditions are less favorable than currently expected, additional inventory provisions may be required. Provisions to the allowance for excess and obsolete inventory were approximately $551,000, $733,000 and $355,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Charges against the allowance were approximately $277,000, $63,000 and $218,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

36

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets as follows:

Machinery and equipment	1 to 5 years
Computers and software	3 to 5 years
Furniture and fixtures	5 years

Leasehold improvements are amortized over their estimated useful lives, or the remaining lease term, whichever is shorter, using the straight-line method. Upon sale or retirement, the asset’s cost and related accumulated depreciation are removed from the accounts and any related gain or loss is reflected in operations.

Long-lived assets

The Company periodically assesses the impairment of its long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Accounting for the Impairment or Disposal of Long-Lived Assets.” An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the Company’s long-lived assets may not be recoverable. Indicators which could trigger an impairment review include, but are not limited to, significant underperformance relative to past or planned operating results, significant changes in the strategy for the overall business, significant negative industry trends and/or a significant decline in the stock price of the Company for a sustained period of time. When it is determined, based on one or more of these indicators, that the carrying value of the Company’s long-lived assets may not be recoverable, impairment is measured using the projected discounted cash flow method and charged to operations.

Intangible assets

Litigation costs incurred in defense of the Company’s patent positions have been capitalized and are carried at cost less accumulated amortization. Amortization of these costs is computed using the straight-line method over the remaining life of the related patents, which was approximately ten years as of December 31, 2003.

The costs of patent rights acquired in settlement of litigation have been capitalized and are carried at cost less accumulated amortization. Amortization of these costs is computed using the straight-line method over the remaining lives of the related patents, which ranged from approximately six to eleven years as of December 31, 2003.

Revenue recognition

Product-related revenue is recognized upon receipt of a customer purchase order and subsequent product shipment, provided no significant obligations remain and collection of the associated receivable is reasonably assured. The Company’s customers, including distributors, have no price protection or return rights on product purchased. Revenue related to maintenance contracts is deferred and recognized ratably over the terms of underlying contracts. Maintenance contract terms range from 12 to 36 months.

Research and Development

Research and development costs are expensed as incurred. Research and development costs consist of direct and indirect internal costs related to specific projects as well as fees paid to other entities that conduct certain research activities on behalf of the Company.

37

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Advertising

Advertising production costs are expensed as incurred. Media for print placement costs are expensed in the period the advertising appears. Total advertising and promotional expenses were approximately $71,000, $119,000 and $169,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

Income Taxes

Income taxes are accounted for using the liability method under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Accounting for stock-based compensation

During the year ended December 31, 2002, the Company adopted SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Financial Accounting Standards Board Interpretations (“FIN”) No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans” and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.”

Under APB Opinion No. 25, compensation expense is based on the difference, if any, on the date of the grant between the fair value of the Company’s stock and an option’s exercise price. SFAS No. 123 defines a “fair value” based method of accounting for an employee stock option or similar equity instruments.

The following table illustrates the effect on net loss and net loss per common share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share amounts):

	Years ended December 31,
	2003			2002			2001
Net loss, as reported	$	(11,079	)	$	(13,499	)	$	(12,960	)
Add: Stock-based employee compensation expense included in reported net loss		—			454			1,372
Deduct: Total stock-based employee compensation determined under fair value based method for all awards		(1,914	)		(2,274	)		(2,491	)
Pro forma net loss	$	(12,993	)	$	(15,319	)	$	(14,079	)
Basic and diluted net loss per common share:
As reported	$	(0.63	)	$	(0.91	)	$	(0.90	)
Pro forma	$	(0.74	)	$	(1.03	)	$	(0.98	)

Such pro forma disclosure may not be representative of future compensation cost because options vest over several years and additional grants are anticipated each year.

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

38

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Under EITF Issue No. 96-18, the fair value of an equity instrument is calculated using the Black-Scholes valuation model each reporting period, with charges amortized to the results of operations over the instrument’s vesting period.

Net loss per share

Basic earnings per share is calculated based on the weighted-average number of common shares outstanding during the period less the weighted average number of any common shares subject to repurchase by the Company. Diluted earnings per share further includes the dilutive effect of potential common stock consisting of stock options, warrants and shares issuable upon conversion of preferred stock provided that the inclusion of such securities is not antidilutive; the Company has reported net losses since its inception and therefore excludes such potentially dilutive securities from its calculation of diluted earnings per share.

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

	Years ended December 31,
	2003		2002		2001
Net loss, basic and diluted	$	11,079	$	13,499	$	12,960
Weighted-average shares of common stock outstanding		17,651		14,923		14,419
Less: weighted-average shares subject to repurchase		4		33		66
Weighted-average shares used in basic and diluted net loss per common share		17,647		14,890		14,353

The following numbers of shares represented by options and warrants (prior to application of the treasury stock method), and shares subject to repurchase were excluded from the computation of diluted net loss per share as their effect was antidilutive (in thousands):

	December 31,
	2003	2002	2001
Effect of potential common stock:
Unvested common stock subject to repurchase	—	28	55
Options outstanding	2,675	2,725	2,657
Warrants outstanding	25	25	61
Total potential common stock excluded from the computation of earnings per common share	2,700	2,778	2,773

Recent accounting pronouncements

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Adoption of this statement has had no material impact on the Company’s financial position or results of operations.

39

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which codifies, revises and rescinds certain sections of SAB No. 101, “Revenue Recognition,” in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on the Company’s financial position or results of operations.

NOTE 3:    BALANCE SHEET COMPONENTS

Marketable securities (in thousands):

The cost and fair value of available-for-sale securities at December 31, 2003 were as follows:

Short term marketable securities	Cost Value		Unrealized Gain			Fair Value
Corporate notes	$	2,221	$	—		$	2,221
United States government agency notes		1,000		1			1,001
Market auction preferred		800		—			800
	$	4,021	$	1		$	4,022
Long term marketable securities	Cost Value		Unrealized Gain			Fair Value
Corporate notes (maturing in 2005)	$	539	$	2		$	541
United States government agency notes (maturing in 2005)		393		(1	)		392
	$	932	$	1		$	933

The cost and fair value of available-for-sale securities at December 31, 2002 were as follows:

Short term marketable securities	Cost Value		Unrealized Gain		Fair Value
Corporate notes	$	4,220	$	7	$	4,227
Market auction preferred		1,200		—		1,200
	$	5,420	$	7	$	5,427
Long term marketable securities	Cost Value		Unrealized Gain		Fair Value
Corporate notes (maturing in 2004)	$	520	$	—	$	520

Inventories (in thousands):

	December 31,
	2003		2002
Raw materials	$	719	$	1,039
Work in progress		214		341
Finished goods		1,259		2,141
	$	2,192	$	3,521

40

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Property and equipment, net (in thousands):

	December 31,
	2003			2002
Computer equipment and software	$	1,202		$	973
Furniture and fixtures		195			193
Leasehold improvements		794			794
Machinery and equipment		4,261			4,002
		6,452			5,962
Less: accumulated depreciation and amortization		(5,363	)		(4,397	)
	$	1,089		$	1,565

Depreciation expense was approximately $1,203,000, $1,262,000 and $968,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

Intangibles and other assets (in thousands):

	December 31,
	2003			2002
Capitalized patent defense litigation costs	$	2,755		$	2,134
Capitalized patent rights		2,650			—
Deposits		46			46
Other non-current assets		1			2
		5,452			2,182
Less: accumulated amortization		(591	)		(111	)
	$	4,861		$	2,071

The capitalized patent defense litigation costs relate to the Company’s suit against RadioTherapeutics, a division of Boston Scientific Corporation. For the year ended December 31, 2003, the Company capitalized approximately $621,000 in such costs, and amortization expense associated with this asset was approximately $240,000. The future minimum amortization expense associated with this asset is approximately $242,000 for each of the next five years ended December 31, 2004 through 2008.

The capitalized patent rights relate to the settlement of the Company’s suit against RadioTherapeutics and of suits brought against the Company by Boston Scientific Corporation and several related parties. In April of 2003 the Company capitalized $2,650,000 in payments made to acquire patent rights from Boston Scientific and the other opposing litigants. For the year ended December 31, 2003, amortization associated with this asset was approximately $240,000. The future minimum amortization expense associated with this asset is approximately $320,000 for each of the next five years ended December 31, 2004 through 2008.

41

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accrued liabilities (in thousands):

	December 31,
	2003		2002
Payroll and related expenses	$	687	$	771
Accrued vacation		226		323
Accrued legal expenses		40		255
Product received but not yet invoiced		367		258
Other accrued liabilities		849		903
	$	2,169	$	2,510

Deferred maintenance revenue (in thousands):

Revenue for maintenance contracts is recognized on a pro-rata basis over the period of the applicable maintenance contract, ranging from 12 to 36 months. Costs are recognized as incurred. Changes in the Company’s deferred maintenance revenue during the year ended December 31, 2003 were as follows:

Balance as of January 1, 2003	$	—
Add: maintenance contract billings		48
Less: Revenue recognized		(3	)
Balance as of December 31, 2003		45
Less: current portion		(22	)
Deferred maintenance revenue, less current portion	$	23

NOTE 4:    COMMITMENTS

Operating Leases

The Company leases manufacturing and office space under a 60 month noncancelable operating lease terminating in August 2004. The base rent increases according to the CPI formula as stipulated in the lease agreement. Under the terms of the lease, the Company is responsible for property taxes, insurance and maintenance costs. Rent expense was approximately $539,000, $529,000 and $475,000 for the years ended December 31, 2003, 2002 and 2001 respectively. Future minimum annual rental payments are approximately $356,000 for the year ended December 31, 2004, the year in which the lease expires.

From time to time, the Company may become involved in litigation relating to additional claims arising from the ordinary course of business. Management is not currently aware of any matters that will have a material adverse effect on the financial position, results of operations or cash flows of the Company.

NOTE 5:    STOCKHOLDERS’ EQUITY

Warrants

In December 2001, the Company issued a warrant to BEKL Corporation under the terms of a clinical data and patent license agreement. The warrant is exercisable for 25,000 shares of the Company’s common stock at a price of $6.10 per share and expires in December 2006. Its aggregate fair value of approximately $110,000 as of December 31, 2001, based on the Black-Scholes valuation model, was charged to operations in 2001. This warrant is outstanding as of December 31, 2003. Further, BEKL Corporation was to have been awarded additional performance based warrants in the future based on achievement of milestones under the clinical data and patent license agreement. In December 2001, the Company recorded charges to operations of approximately $120,000, representing the Black-Scholes fair value of a second warrant the Company expects to issue to BEKL Corporation in 2003. During the year ended December 31, 2002, the Company revalued the warrant using the Black-Scholes valuation method and recorded a $19,000 reduction of previously recorded amounts. During the year ended

42

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2003, the Company’s clinical data and patent license agreement with BEKL was terminated, and the remaining $101,000 balance recorded in regard to the prospective warrant award was reversed.

Private placement of common shares

In January of 2003, the Company issued 2,045,453 shares of unregistered common stock at a price of $4.40 per share, netting approximately $8.3 million after issuance fees and expenses. The issuance was deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) thereof as transactions by an issuer not involving any public offering. On February 14, 2003, the Company’s Registration Statement on Form S-3, which registered the shares of common stock sold to SF Capital Partners Ltd., Riverview Group, LLC, Baystar Capital II, L.P., and Baystar International II, L.P., became effective.

NOTE 6:    STOCK OPTIONS

Stock Options: 1994 Incentive Stock Plan, 2000 Director’s Stock Option Plan and 2000 Stock Plan

Under the 1994 Incentive Stock Plan, options were granted to employees and non-employees at prices determined by the board of directors to be not lower than 85% of the fair market value of the common stock for non-statutory stock options or 100% of the fair market value of the common stock for incentive stock options. (For individuals who at the time of grant owned stock representing more than 10% of the voting power of all classes of outstanding stock, options were granted at prices not lower than 110% of the fair value of the common stock for both non-statutory and incentive stock options.) Options granted under this plan become exercisable and vest on a cumulative basis at the discretion of the board of directors and generally expire ten years from the date of grant. The Company’s board of directors has determined that no future grants will be made under this plan.

Under the 2000 Director’s Stock Option Plan, shares of common stock have been reserved for issuance to non-employee directors. Option grants have been and will continue to be made at the fair market value of the common stock on the date of the grant. Options granted under this plan become exercisable, vest on a cumulative basis and generally expire ten years from the date of grant.

The 2000 Stock Plan provides for the grant of incentive stock options to employees and non-statutory stock options and stock purchase rights to employees and consultants. A total of 2,000,000 common shares were originally reserved for issuance under this plan at its inception in 2000. A total of 796,473 common shares were available for issuance as of December 31, 2003. Future increases to the shares available for issuance will occur on the first day of each fiscal year through 2010 in the amount of the lesser of 1,000,000 shares, 7% of the Company’s outstanding common stock on the last day of the preceding fiscal year or a lower number as determined by the board of directors. Incentive stock options granted under this plan must have an exercise price of at least 100% of the fair market value of the common stock on the date of the grant, and at least 110% of the fair market value of the common stock if the options are awarded to an employee who holds more than 10% of the total voting power of all classes of the Company’s stock. Options granted under this plan become exercisable and vest on a cumulative basis at the discretion of the board of directors and generally expire ten years from the date of grant.

43

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Combined activity under these plans has been as follows (in thousands, except per share data):

	Shares Available		Options Outstanding
			Shares		Aggregate Price			Weighted Average Exercise Price
Balances, December 31, 2000	2,520		1,993		$	4,263		$	2.14
Additional shares reserved	500		—			—
Options granted	(1,458	)	1,458			6,601			4.53
Options exercised	—		(499	)		(407	)		0.82
Options canceled	75		(295	)		(940	)		3.19
Shares removed from plan	(171	)	—			—
Balances, December 31, 2001	1,466		2,657			9,517			3.58
Options granted	(868	)	868			5,422			6.25
Options exercised	—		(435	)		(1,053	)		2.42
Options canceled	293		(365	)		(1,857	)		5.09
Balances, December 31, 2002	891		2,725			12,029			4.41
Shares reserved	1,000		—			—
Options granted	(1,724	)	1,724			5,118			2.97
Options exercised	—		(714	)		(1,029	)		1.44
Options canceled	1,001		(1,060	)		(5,607	)		5.29
Balances, December 31, 2003	1,168		2,675		$	10,511		$	3.93

Stock Options: Options outstanding and exercisable

Options outstanding, from all plans, and exercisable as of December 31, 2003 are as follows by exercise price ranges (in thousands, except per share data):

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Outstanding	Weighted- Average Exercise Price
$ 0.50 to $  2.52	750	9.28 years	$	2.40	58	$	1.00
$ 2.70 to $  3.10	625	9.24 years	$	2.90	99	$	2.90
$ 3.12 to $  3.97	412	8.76 years	$	3.32	90	$	3.55
$ 4.00 to $  5.41	400	8.20 years	$	4.67	182	$	4.76
$ 5.45 to $  6.75	301	7.00 years	$	5.84	163	$	5.83
$ 9.50 to $11.63	187	7.33 years	$	10.00	148	$	10.01
	2,675	8.64 years	$	3.93	740	$	5.36

2000 Employee Stock Purchase Plan

The Company’s 2000 employee stock purchase plan was adopted in the second quarter of 2000. A total of 650,000 common shares were initially reserved for issuance under this plan. Automatic increases occurred on the first day of 2002, 2003 and 2004, in amounts equal to the lesser of 650,000 shares, 4% of the Company’s outstanding common stock on the last day of the preceding year, or such lesser number that board of directors

44

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

determines. This plan permits employees to purchase common shares at a price equal to the lower of 85% of the fair market value of the common stock at the beginning of each offering period or the end of each offering period. Employee purchases are nonetheless limited to 15% of eligible cash compensation, and other restrictions regarding the amount of annual purchases also apply. As of December 31, 2003, there have been 279,571 shares issued under this plan.

Stock-based compensation

The weighted average per share fair values of options granted during 2003, 2002 and 2001 were $1.87, $4.10 and $4.53 respectively. The value of each option grant was estimated on the date of grant using the Black-Scholes valuation model with the following weighted average assumptions:

	Years ended December 31,
	2003		2002		2001
Volatility	75	%	79	%	80	%
Risk-free interest rate	3.16	%	3.93	%	4.54	%
Expected life	5 years		5 years		5 years
Expected dividends	0	%	0	%	0	%

The corresponding assumptions for the 2000 Employee Stock Purchase Program were as follows:

	Years ended December 31,
	2003		2002		2001
Volatility	70	%	79	%	80	%
Risk-free interest rate	2.95	%	3.29	%	5.42	%
Expected life	1.3 years		0.7 years		0.5 years
Expected dividends	0	%	0	%	0	%

During the year ended December 31, 2003, the Company recorded no deferred stock-based compensation in accordance with APB Opinion No. 25, SFAS No. 123 or EITF Issue No. 96-18, and recognized no stock compensation expense. During the years ended December 31, 2002 and 2001, the Company recognized stock compensation expense of approximately $454,000 and $1,372,000, respectively. Stock compensation expense was recognized in accordance with FIN No. 28 over the vesting periods of the related options, generally four years. Option grants to non-employees in 2003 were insignificant. No option grants were made to non-employees in 2002 or 2001.

NOTE 7:    INCOME TAXES

No provisions for federal income taxes were recorded during the years ended December 31, 2003 and 2002, as the Company incurred net operating losses during these years.

45

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The tax effects of temporary differences that give rise to significant portions of deferred tax assets are as follows (in thousands):

	December 31,
	2003			2002
Net operating loss carryforwards	$	23,771		$	20,849
Capitalized startup and research and development costs		909			170
Research and development credit		1,392			1,214
Other		2,546			1,842
Total deferred tax assets		28,618			24,075
Less: valuation allowance		(28,618	)		(24,075	)
	$	—		$	—

At December 31, 2003, the Company had federal and state net operating loss carryforwards of approximately $66.1 million and $22.0 million, respectively, available to offset future taxable income. The Company’s federal and state operating loss carryforwards expire between 2008 and 2022 and between 2004 and 2013, respectively, if not utilized.

Due to the uncertainty surrounding the realization of the favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its deferred tax assets. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. Provisions to the allowance were approximately $4,543,000, $6,138,000 and $3,419,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event the Company has a change in ownership, utilization of the carryforwards could be restricted.

Reconciliation of the statutory federal income tax to the Company’s effective tax rate follows:

	2003		2002
	%		%
Tax at federal statutory rate	34.0	%	34.0	%
State, net of federal benefit	6.0	%	6.0	%
Other	0.0	%	1.0	%
Deferred tax assets not benefited	-38.0	%	-39.0	%
Federal research and development credit	-2.0	%	-2.0	%
Provision for taxes	0.0	%	0.0	%

NOTE 8:    RELATED PARTY TRANSACTIONS

In August 1994, the Company entered into a cross-license agreement (the “Agreement”) with VIDAMed (a company whose founder was also one of the founders of the Company) whereby the Company granted VIDAMed and exclusive royalty-free license to use the Company’s technology for certain applications. In return, VIDAMed granted the Company an exclusive license to use VIDAMed’s technology for certain applications. The Company is required to pay a royalty of 2.5% of net sales on products developed incorporating the VIDAMed technology. This obligation terminates on the earlier of ten years from the effective date of the Agreement or when payments by the Company to VIDAMed total $500,000. To date, the Company has made no payments under this agreement. During 2002, VIDAMed was acquired by Medtronic, Inc.

46

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the years ended December 31, 2003, 2002 and 2001, and from time to time prior to 2001, the Company has received professional services relating to the administration of its clinical trials as well as regulatory advice from a firm in which one of the Company’s directors serves as an officer. The Company has recognized expenses relating to the services received from this firm of approximately $55,000, $160,000 and $109,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

In April 2003, a member of the Company’s Board of Directors began providing consulting services to the Company. This board member was paid approximately $164,000 and was granted options to purchase 35,000 shares of the Company’s common stock in connection with his consulting services.

NOTE 9:    SEGMENT INFORMATION

The Company operates in one business segment. The Company sells its products and systems directly to customers in the United States, Europe and Asia.

Sales for geographic regions reported below are based upon the customers’ locations. Following is a summary of the geographic information related to revenues, long-lived assets and information related to significant customers for the years ended December 31, 2003, 2002 and 2001 (in thousands, except percentage data):

	Years Ended December 31,
	2003			2002			2001
Sales:
United States	$	13,274		$	12,898		$	8,032
Italy		726			789			1,137
Japan		535			2,331			1,879
Other		2,072			1,375			3,743
Total	$	16,607		$	17,393		$	14,791
	Years Ended December 31,
	2003			2002			2001
Long-lived assets:
United States	$	1,089		$	1,501		$	1,802
Europe		—			64			132
Total	$	1,089		$	1,565		$	1,934
	Years Ended December 31,
	2003			2002			2001
Significant customers: Revenue
Customer A		4	%		14	%		14	%
Customer B		4	%		5	%		8	%

	December 31,
	2003		2002
Significant customers: Accounts and Notes Receivable
Customer A	12	%	14	%
Customer B	7	%	12	%
Customer C	1	%	10	%

47

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 10:    EMPLOYEE BENEFIT PLAN

The Company sponsor’s a 401(k) defined contribution plan covering all employees. Contributions made by the Company are determined annually by the board of directors. To date, there have been no company contributions to the plan.

NOTE 11:    QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

The following table sets forth selected items from our consolidated statements of operations for each of the eight quarters ended December 31, 2003. This data has been derived from unaudited consolidated financial statements that, in the opinion of the Company’s management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such information when read in conjunction with our annual audited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K. The operating results for any quarter are not necessarily indicative of results for any future period.

	Quarter Ended
	Dec. 31, 2003			Sept. 30, 2003			June 30, 2003			Mar. 31, 2003			Dec. 31, 2002			Sept. 30, 2002			June 30, 2002			Mar. 31, 2002
Sales	$	4,196		$	3,865		$	4,049		$	4,497		$	3,715		$	4,454		$	4,806		$	4,418
Gross profit		2,559			2,612			2,347			2,923			2,580			2,724			2,766			2,415
Net loss	$	(2,241	)	$	(2,514	)	$	(3,400	)	$	(2,924	)	$	(3,053	)	$	(2,720	)	$	(3,733	)	$	(3,993	)
Net loss per common share, basic and diluted	$	(0.12	)	$	(0.14	)	$	(0.19	)	$	(0.17	)	$	(0.20	)	$	(0.18	)	$	(0.25	)	$	(0.27	)
Shares used in computing net loss per common share, basic and diluted		17,971			17,807			17,578			17,223			15,109			14,996			14,835			14,614

48

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A. Controls and Procedures.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of December 31, 2003, the Company’s disclosure controls and procedures are effective. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives and are effective in doing so.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these internal controls during the latest fiscal quarter.

49

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a) The following documents are filed as part of this report:

(1) Financial Statements and Report of PricewaterhouseCoopers, LLP

	Page
Report of Independent Auditors	30
Consolidated Balance Sheets	31
Consolidated Statements of Operations and Comprehensive Loss	32
Consolidated Statements of Stockholders’ Equity (Deficit)	33
Consolidated Statements of Cash Flows	34
Notes to Consolidated Financial Statements	35

(2) Exhibits are incorporated herein by reference or are filed in accordance with item 601 of Regulation S-K.

(b) Reports on Form 8-K:

A report on Form 8-K was filed with the SEC on October 7, 2003.

A report on Form 8-K was filed with the SEC on October 23, 2003.

A report on Form 8-K was filed with the SEC on November 5, 2003.

A report on Form 8-K was filed with the SEC on November 13, 2003.

A report on Form 8-K was filed with the SEC on December 3, 2003.

A report on Form 8-K was filed with the SEC on December 5, 2003.

(c) Exhibits:

Number		Description
2.1	(1)	Form of Agreement and Plan of Merger between the Registrant and RITA Medical Systems, Inc., a Delaware corporation.
3.2	(1)	Amended and Restated Certificate of Incorporation of RITA Medical Systems, Inc., a Delaware corporation.
3.4	(1)	Amended and Restated Bylaws of RITA Medical System, Inc.
4.1	(2)	Preferred Shares Rights Agreement, dated as of July 31, 2001, between RITA Medical Systems, Inc. and U.S. Stock Transfer Corporation, including the Certificate of Designation, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively.
4.2	(7)	Stock Purchase Agreement with SF Capital Partners Ltd., dated January 24, 2003.
4.3	(7)	Stock Purchase Agreement with RIVERVIEW GROUP, LLC, dated January 24, 2003.
4.4	(7)	Stock Purchase Agreement with BAYSTAR CAPITAL GROUP II, dated January 24, 2003.
4.5	(7)	Stock Purchase Agreement with BAYSTAR INTERNATIONAL II, Ltd., dated January 24, 2003.
10.1	(1)	Sixth Amended and Restated Shareholder Rights Agreement dated June 20, 2000 by and among the Registrant and certain security holders.
10.2	(1)	1994 Incentive Stock Plan (as amended) and form of option agreement.
10.3	(4)	2000 Stock Plan (as amended) and form of option agreement.

50

Number	Description
#10.4(4)	2000 Directors’ Stock Option Plan (as amended) and form of option agreement.
10.5(1)	2000 Employee Stock Purchase Plan and form of subscription agreement.
10.6(a)(1)	Master Lease Agreement with Brown Mountain View Joint Venture dated July 12, 1994 and extension of Master Lease Agreement dated May 12, 1999.
#10.7(1)	Form of Indemnification Agreement between the Registrant and its officers and directors.
#10.11(1)	Form of Change of Control Agreement entered into between the Company and it officers.
*10.13(1)	Distribution Agreement with Nissho Iwai Corporation (now named ITX Corporation) for South Korea dated March 12, 1999.
*10.15(1)	Manufacturing Agreement with Plexus Corporation dated February 17, 2000.
*10.16(1)	Manufacturing Agreement with Apical Instruments dated February 23, 2000.
*10.18(3)	Amendment of Distribution Agreement with Nissho Iwai Corporation (now named ITX Corporation) for Japan dated May 11, 2001.
*10.19(5)	Distribution Agreement with MDH s.r.l. Forniture Ospedaliene for Italy dated December 31, 2001.
10.22(5)	Amendment to Master Lease Agreement with Brown Mountain View Joint Venture dated June 4, 2001.
#10.23(6)	Form of Change of Control Agreement entered into between the Company, Trent Reutiman on November 16, 2001, between the Company and Donald Stewart on April 16, 2001.
#10.25(6)	Form of Indemnification Agreement between the Company and Trent Reutiman on November 16, 2001, and between the Company and Donald Stewart on April 16, 2001.
**10.32(8)	Litigation settlement agreement, dated April 4, 2003, between RITA Medical Systems, Inc., RadioTherapeutics Corporation, Boston Scientific Corporation, Scimed Life Systems, Inc., The Board of Regents of the University of Nebraska, Unemed Corporation, University of Kansas d/b/a/ University of Kansas Medical Center and University of Kansas Medical Center Research Institute.
#10.33(8)	Form of Indemnification Agreement between the Company and Randy Lindholm on April 25, 2003 and between the Company and Lynn Saccoliti on May 1, 2003.
10.34(8)	Consulting Agreement with Randy Lindholm dated April 25, 2003.
#10.35(8)	Amendment to Offer Letter to Donald Stewart dated as of May 1, 2003.
#10.36(8)	Offer Letter to Lynn Saccoliti dated as of May 1, 2003.
#10.37(9)	Amended and Restated Consulting Agreement with Randy Lindholm dated August 5, 2003.
#10.38(9)	Form of Indemnification Agreement between the Company and Joseph DeVivo dated August 18, 2003, Wes Johnson dated August 5, 2003, Stephen Pedroff dated September 2, 2003 and Darrin Uecker dated January 12, 2004.

51

Number		Description
#10.39	(9)	Form of Change of Control Agreement entered into between the Company and Joseph DeVivo dated August 18, 2003, Stephen Pedroff dated September 10, 2003 and Darrin Uecker dated January 12, 2004.
#10.40	(9)	Offer letter between the Company and Joseph DeVivo dated July 23, 2003.
#10.41	(9)	Offer letter between the Company and Stephen Pedroff dated August 22, 2003.
#10.42		Change of Control Agreement entered into between the Company and Juan J. Soto dated as of September 3, 2003.
#10.43		Contract of Employment between RITA Medical Systems Netherlands BV of DeBoelelaan 7 and Juan J. Soto dated October 15, 2003.
#10.44		Indemnification Agreement between the Company and Juan J. Soto dated November 1, 2003
#10.45		Offer letter between the Company and Darrin Uecker dated January 9, 2004.
23.1		Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1		Power of Attorney (See Signature Page).
31.1		Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer.
31.2		Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer.
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer.
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer.

* Confidential treatment granted with respect to certain portions of this Exhibit.

** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

# Management contract or compensatory plan or arrangement.

(1) Incorporated by reference to our registration statement on Form S-1 (File No. 333-36160) initially filed with the SEC on May 3, 2000.

(2) Incorporated by reference to our registration statement on Form 8-A (File No. 000-30959) filed with the SEC on August 7, 2001.

(3) Incorporated by reference to our report on Form 10-Q (File No. 000-30959) filed with the SEC on August 8, 2001.

(4) Incorporated by reference to our report on Form 10-Q (File No. 000-30959) filed with the SEC on November 14, 2001.

(5) Incorporated by reference to our report on Form 10-K (File No. 000-30959) filed with the SEC on March 28, 2002.

(6) Incorporated by reference to our report on Form 10-Q (File No. 000-30959) filed with the SEC on May 15, 2002.

(7) Incorporated by reference to our report on Form S-3 (File No. 333-102896) filed with the SEC on January 31, 2003.

(8) Incorporated by reference to our report on Form 10-Q (File No. 000-30959) filed with the SEC on August 13, 2003.

(9) Incorporated by reference to our report on Form 10-Q (File No. 000-30959) filed with the SEC on November 13, 2003.

52

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 15, 2004	RITA MEDICAL SYSTEMS, INC.
	By:	/S/    JOSEPH DEVIVO
		Joseph DeVivo President, Chief Executive Officer and Director

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Joseph DeVivo and Donald Stewart, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/S/    JOSEPH DEVIVO         Joseph DeVivo	President, Chief Executive Officer and Director (Principal Executive Officer)	March 15, 2004
/S/    DONALD STEWART         Donald Stewart	Chief Financial Officer and Vice President, Finance and Administration (Principal Financial and Accounting Officer)	March 15, 2004
/S/    VINCENT BUCCI         Vincent Bucci	Director	March 15, 2004
/S/    RANDY LINDHOLM         Randy Lindholm	Director	March 15, 2004
/S/    JOHN GILBERT         John Gilbert	Director	March 15, 2004
/S/    SCOTT HALSTED         Scott Halsted	Director	March 15, 2004
/S/    WESLEY JOHNSON         Wesley Johnson	Director	March 15, 2004

53

EX-10.42

Exhibit 10.42

CHANGE OF CONTROL AGREEMENT

This Change of Control Agreement (the “Agreement”) is made and entered into effective as of September 2, 2003, by and between Juan J. Soto (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 wholly owned subsidiary of the Company, RITA Medical Systems Netherlands BV (“Subsidiary”), as a key employee whose continued employment with the Subsidiary 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 Subsidiary 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 either the Company, the Subsidiary or any other affiliate of 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, the Subsidiary or any other affiliate of 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.

-2-

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:

(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, (including the Subsidiary) (ii) repeated unexplained or unjustified absence from the Company or its subsidiaries, (including the Subsidiary), (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 its subsidiaries, (including the Subsidiary); or (v) conviction of a felony or a crime involving moral turpitude causing material harm to the standing and reputation of the Company or its subsidiaries, (including the Subsidiary), 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 or its subsidiaries, (including the Subsidiary) 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 or its subsidiaries, (including the Subsidiary) 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 Subsidiary’s current location.

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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 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.

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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.

(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.

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(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.

(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.		JUAN J. SOTO
By:	/s/    Joseph DeVivo	/s/    Juan J. Soto
Title:	President & CEO

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EX-10.43

Exhibit 10.43

CONTRACT OF EMPLOYMENT

This Agreement is made on        October 15, 2003

Between

(1) Rita Medical Systems Netherlands BV of De Boelelaan 7, 1083 HJ Amsterdam, The Netherlands (“the Company”); and

(2) Mr. Juan Soto of 5 Knapphill, Heathery Fauld, Dunfermline, Fife KY11 8WG, Scotland (“you”).

1. Introduction

1.1 This Agreement sets out the principal terms and conditions of your employment with the Company which are required to be given to you under the Employment Rights Act 1996.

1.2 These terms and conditions supersede any previous terms and conditions that may have been applicable to your employment in the past, whether written, oral or implied; those are now deemed to be terminated by mutual consent with effect from the date of this Agreement.

2. Continuous Employment

2.1 Your employment with the Company shall commence on 2 September 2003 (“the Commencement Date”). Your period of continuous employment for statutory purposes commenced on 2 September 2003. No period of employment with any previous employer counts as part of your period of continuous employment with the Company for statutory purposes.

3. Job Title

3.1 The title of the job that you are employed to do is Vice President, International Sales. A job description for this role is annexed to this contract of employment at Appendix 1. However, because of the changing nature of the Company’s business, at any time, or from time to time, upon reasonable notice, you may be required to undertake additional or other duties, which fall within your capabilities, as necessary to meet the needs of the Company’s business.

3.2 You will report to the Chief Executive Officer of the Company. You shall devote your best efforts to the interests of the Company at all times during the continuance of your employment.

4. Place of Work

Your normal place of work will be at 5 Knapphill, Heathery Fauld, Dunfermline, Fife KY11 8WG, Scotland. However, you may be required to work at such other locations (whether within or outside the United Kingdom) on either a temporary or permanent basis as the Company may reasonably require.

5. Overseas Employment

You may be required to work outside the United Kingdom for a period of more than a month, in which case you will be given reasonable notice of and be provided with written information about the terms of your employment outside the United Kingdom.

Contract of Employment Page 1

6. Hours of Work

6.1 Subject to clause 6.2 below, your usual working week for your employment will constitute a minimum of 40 hours, Mondays to Fridays inclusive. Subject to you discharging your duties and responsibilities as set out in Appendix 1 below, you may choose when you work the minimum hours required of you.

6.2 You may, from time to time, be required to work longer hours without additional remuneration in order to meet the requirements of the Company’s business.

6.3 You hereby agree to opt out of Regulation 4(1) of the Working Time Regulations 1998 (to the extent it applies to you) although you may terminate this opt out at any time by giving the Company not less than 3 months’ written notice.

7. Salary

7.1 Your gross salary will be £99,338 per annum, before tax and National Insurance that the Company is obliged to deduct. This will accrue from day to day and be paid in equal monthly installments, in arrears, on the last working day of each calendar month, by bank credit.

7.2 Payment in respect of a period less than a month will be apportioned and calculated based on the number of days worked by you as a proportion of the total number of working days in that month.

7.3 Payments of salary will be subject to statutory deductions.

7.4 Your basic salary will be reviewed annually but the fact that your salary may be increased in any year or years during your employment does not confer any right on you to receive any increase in any subsequent year.

8. Bonus

In the absolute discretion of the Company, you may be entitled to participate in the Rita Management Bonus Program or any other bonus scheme operated by the Company from time to time and on such terms as the Company may, in its absolute discretion, determine from time to time. Participation in or payments made under any such bonus scheme for any year or part thereof will not confer any right on you to participate in any such bonus scheme or be paid in respect of any such bonus scheme during the course of the following year or part thereof or in any subsequent year or part thereof. No payment will be made under any such bonus scheme if, on the payment date or due date for payment, your employment has terminated or you have given or the Company has given, notice of termination of your employment. Any bonus scheme is entirely discretionary in nature and is non-contractual.

9. Expenses

The Company will reimburse you in respect of all reasonable traveling and subsistence expenses wholly, exclusively and necessarily incurred by you in the performance of your duties under this Agreement, provided that you provide evidence of expenditure and comply with the Company’s guidelines generally relating to expenses, as amended from time to time.

10. Other Benefits

10.1 In addition to your basic salary, you will be entitled to the sum of £110 per month by way of contributions towards the cost of you maintaining private medical health cover with a provider of your choice. Such contribution will be paid to you together with your monthly salary and shall be subject to deductions for tax and National Insurance in the normal way.

Contract of Employment Page 2

10.2 The Company will provide you with a laptop computer for your use in connection with your duties under this Agreement. The Company will also reimburse you for those expenses incurred by you in carrying out your usual business duties, such as telephone line rental charges, telephone charges for business calls from a mobile telephone, internet access charges from your Company laptop, and similar expenses to be agreed with your line manager. You will be reimbursed on the basis that you provide such evidence of expenditure as requested by the Company and comply with the Company’s guidelines generally relating to expenses, as amended from time to time.

11. Share Option Scheme

On commencement of your employment with the Company, and entirely at the discretion of the Company, you will be granted 100,000 share options subject to and in accordance with the terms of the Rita Medical Systems Inc. Stock Plan and subject also to the terms of the relevant Stock Option Agreement between you and Rita Medical Systems Inc. Any right to participate in this Stock Plan shall not form part of your contractual benefits under this Agreement, and no compensation in respect of share options is payable on termination of employment, unless otherwise stated by the Stock Plan.

12. Annual Leave

12.1 You are entitled to take 20 working days’ paid holiday in each holiday year (which runs from 1 September to 31 August) (“Holiday Year”) plus 8 bank holidays (pro rata for part year). Bank holidays are to be taken as and when the specified day falls. For the avoidance of doubt, the following days are classed as bank holidays: New Year’s Day, Good Friday, Easter Monday, May Day, Spring Bank Holiday Monday, August Bank Holiday Monday, Christmas Day and Boxing Day.

12.2 The Company reserves the right to direct that holiday must be taken during your notice period.

12.3 All annual leave is granted in accordance with the needs of the Company’s business. The timing and duration of periods of leave is subject to the agreement of your manager.

12.5 In each full Holiday Year, you are expected to take at least 20 days’ holiday (including statutory holidays), in accordance with the provisions of the Working Time Regulations 1998 (as amended). Holiday entitlement not used at the end of the relevant Holiday Year will be lost and may not be carried over into the following Holiday Year except with the prior written consent of your manager.

12.6 If your employment commenced or terminates part way through the Holiday Year, your entitlement to holidays during that Holiday Year will be assessed on a pro rata basis.

12.7 On termination of your employment, you will be entitled to receive payment in lieu of any accrued untaken holiday entitlement as at the date of termination. If you have taken holiday in excess of that accumulated up to the termination date then a sum equivalent to the pay in respect of the excess holiday taken will be deducted from any final payment made to you.

13. Sickness Absence and Sick Pay

13.1 If you are absent from work on account of sickness or injury, you or someone on your behalf must inform your manager of the reason for your absence and its likely duration, as soon as possible and, unless there are extenuating circumstances, by no later than 10 a.m. on the first day of absence.

Contract of Employment Page 3

13.2 In respect of such absence lasting seven calendar days or fewer, you are not required to produce a medical certificate unless you are specifically requested to do so. You must, however, complete the Company’s self-certification form immediately upon your return to work after such absence and send it to your manager (a copy of the self-certification form is attached to this agreement).

13.3 In respect of such absence lasting more than seven calendar days, you must, on the eighth calendar day of absence, if it is a working day, or, if not, on the first working day thereafter, provide the Company with a medical certificate, signed and completed by a registered medical practitioner, stating the reason for the absence. After that, you must provide such a medical certificate each week to cover any subsequent continuous period of absence.

13.4 If you are absent from work because of sickness or injury and otherwise comply with the provisions of this clause, provided your employment continues, the Company may at its sole discretion pay your normal basic salary less the amount of any statutory sick pay or social security sickness benefit to which you may be entitled. If the Company does decide, in its absolute discretion, to make such payments to you these payments may be varied or discontinued at any time.

13.5 The Company operates the Statutory Sick Pay scheme and you are required to co-operate in the maintenance of necessary records. For the purposes of calculating your entitlement to Statutory Sick Pay, “qualifying days” are those on which you are normally required to work.

13.6 Any unauthorised absence from work or conduct incompatible with the alleged sickness, injury or other incapacity may be regarded by the Company as gross misconduct.

13.7 If your absence is occasioned by the actionable negligence of a third party in respect of which damages are or may be recoverable any sums paid to you by the Company in terms of clause 13.4 during such period of absence shall constitute a loan to you (“the Loan”) and you must immediately notify the Company of the relevant circumstances and particulars of any claims, compromise, settlement or judgement made or awarded and you must, if requested by the Company, refund some or all of the Loan at the Company’s discretion subject to the sum to be repaid being the lesser of (a) the amount of damages recovered by you under such compromise, settlement or judgement, and/or (b) the Loan.

14. Medical Examinations

It is a condition of employment that, during any stage of sickness absence, the Company has the right to require you to attend for one or more medical examinations by a medical practitioner or consultant employed or nominated by the Company. You will be expected to authorise your own medical practitioner to be consulted by the Company’s medical adviser or nominated adviser or consultant, if required.

15. Disciplinary Rules and Procedure

15.1 Prior to any disciplinary action being taken by the Company, an investigation will be carried out into any disciplinary matter. You will be advised of the nature of any complaint against you and will be given an opportunity to state your case before any action is taken.

15.2 You may choose to have a work colleague or Trade Union Representative present at any disciplinary hearing or appeal.

Contract of Employment Page 4

15.3 Unless found guilty of gross misconduct (which may result in your dismissal without notice), you will not be dismissed for any first breach of discipline. Minor faults will be dealt with informally where possible. Where the matter is more serious, the Company will operate a warnings system:

15.3.1 For a first minor breach of discipline, a verbal warning may be issued. This will be recorded in writing;

15.3.2 For second or more serious breaches of discipline, a first written warning may be issued. Such warning will remain ‘live’ for a specified period of time, depending on the nature of the breach of discipline;

15.3.3 For further breaches of discipline during a ‘live’ first written warning, or for serious breaches of discipline but which is insufficiently serious to justify dismissal, a final written warning may be issued. Such warning will remain ‘live’ for a specified period of time, depending on the nature of the breach of discipline;

15.3.3 For further breaches of discipline following the issue of a final written warning, or where the breach of discipline is sufficiently serious to justify dismissal, then dismissal may be the penalty.

15.4 The Company reserves the right to issue such disciplinary warning as it considers appropriate to the situation. It is not bound to follow each stage of this warnings system.

15.5 Acts of gross misconduct will usually result in dismissal without notice. Acts of gross misconduct include, but are not limited to, theft of cash or Company property, fraud or misuse of Company funds, gross negligence in the performance of duties, working whilst under the influence of or the consumption of non-prescription drugs or alcohol during working hours or on Company business, refusal to carry out reasonable management requests, unauthorised absence, acts of harassment or discrimination, dishonesty, breach of duty regarding non-disclosure of confidential information.

15.6 If you are dissatisfied with any disciplinary decision taken in relation to you, you should appeal against the decision, in writing, to your manager within five working days.

16. Grievance Procedure

16.1 If you have a grievance relating to your employment you should, in the first instance, speak to your manager or, if this is inappropriate, to the Chief Financial Officer. If your grievance is not resolved at this stage, you should set out the nature of your grievance in writing to the Chairman of the Company who will give consideration to the matter and whose written decision will be final.

16.2 You may choose to have a colleague or trade union representative present at any grievance hearing or appeal.

17. Confidentiality

17.1 You acknowledge that, during the course of your employment, you will have access to and be entrusted with information about the business, finances, dealings, transactions and affairs of the Company and its associated and Group companies, including Rita Medical Systems Inc., and that of their employees, clients, customers, agents, distributors, suppliers, management and/or shareholders, which amounts to a trade secret, is confidential or commercially sensitive. You are therefore under a duty to preserve the confidentiality of all confidential information (as defined) relating to the work of the Company, its associated and Group companies and their employees, clients, customers and/or suppliers.

Contract of Employment Page 5

17.2 “Confidential Information” includes, but is not limited to, any secret or confidential information or information constituting a trade secret relating to the Company, any associated company and/or Group company, acquired, received, discovered or made by you in the course of your employment with the Company relating to the affairs, dealings, finances, practice, trading or business of the Company, any associated and/or Group company or their employees, clients, prospective clients, customers, prospective customers, agents, distributors, suppliers, management and/or shareholders. It includes, but is not limited to, information relating to personnel and/or personnel records, budgeting, marketing and financial information (including but not limited to costings, accounts, profit margins, discounts, rebates), contracts and potential contracts, client/customer or prospective client/customer lists, marketing strategies and tactics, research and development (including the development of new products), inventions, methods of processing, manufacture and production, production or design secrets, process , formulae and production controls (including quality controls), engineering, hardware configuration information, licensing information, software, know-how, suppliers and their production and delivery capabilities, actual and potential clients and actual and potential customers and, in each case, their particular requirements, current and proposed activities relating to development, production or sales and information in respect of which the Company, any associated company and/or Group company owes a duty of confidentiality to a third party.

17.3 You may not, at any time, whether before or after the termination of your employment with the Company, use, disclose or communicate (including by omission to exercise due care) and will use your best endeavours to prevent the improper use, disclosure or communication of any Confidential Information to any person, firm, company or organization or otherwise make use, disclosure or communication of any Confidential Information either during or after your employment with the Company without limit in time, unless expressly authorized in writing to do so by the Company or required in the proper performance of your duties or as required by law. The obligations set out in this clause will cease to apply where the use, disclosure or communication of Confidential Information is required by the order of a court of competent jurisdiction or by an appropriate regulatory authority or as otherwise required by law or where you can demonstrate that such Confidential Information was in the public domain otherwise than as a result of a breach by you or a third party of this clause.

17.4 Breaches of confidentiality are potential acts of gross misconduct and will result in disciplinary action being taken against you. Additionally, any such breaches, regardless of any action by the Company, may result in a civil action for damages against you.

18. Warranty

18.1 You warrant that your performance of all material terms of this Agreement as an employee of the Company has not and will not breach any prior agreement with any third party to keep in confidence any proprietary information, knowledge or data acquired by you prior or subsequent to the commencement of your employment with the Company. You further agree that you will not disclose to the Company or use any inventions, confidential or non-public proprietary information or material belonging to any previous client, employer or other third party and that you will not induce the Company to use any inventions, confidential or non-public proprietary information, or material belonging to any previous client, employer or other third party. You acknowledge and agree that you have set out at Appendix 2 to this Agreement all agreements (including but not limited to any non-competition, non-solicitation of customers, non-solicitation of employees, confidentiality or intellectual property agreements) with any former employer or other third party, that may restrict your ability to accept employment with the Company or your ability as an employee to recruit or engage customers or service providers on behalf of the Company, or otherwise relate to or restrict your ability to perform your duties as an employee of the Company or any other obligation you may have to the Company.

Contract of Employment Page 6

19. Restrictive Covenants

19.1 You agree that you will not directly or indirectly, either alone or jointly with or on behalf of any person, firm or company and whether on his own account or as principal, shareholder, partner, employee, agent or otherwise:

19.1.1 for 6 months after Termination, solicit the employment or engagement of any person who immediately prior to the termination of your employment was a senior employee or consultant in a managerial, executive or technical capacity of the Company or any Relevant Group Company with whom you worked or with whom you had contact in the course of your employment with the Company in the 12 months prior to Termination;

19.1.2 at any time after Termination represent yourself as being in any way connected with or interested in the business of the Company or any Relevant Group Company.

19.2 Each of the obligations contained in clause 19.1 above is an entirely separate and independent restriction on you, despite the fact that it may be contained in the same phrase or sub-clause, and if any part is found to be unenforceable the remainder will remain valid and enforceable. The restrictions are considered by you and the Company to be reasonable, but in the event that any such restriction is held to be void or ineffective but would be valid and effective if some part thereof were deleted such restriction shall apply with such modification as may be necessary to make it valid and effective.

19.3 For the purposes of this clause the following definitions apply:

• “Relevant Group Company” means any Group Company for which you have worked or performed services or in which you held office during the 12 months immediately prior to Termination (and if applicable their predecessors in business during such 12 month period).

• “Termination” means the termination of your employment.

19.4 Before entering into or agreeing to enter into any future employment with another employer, you shall disclose a copy of clauses 17, 18 and 19 of this Agreement to the prospective employer.

19.5 Nothing in this clause 19 shall prevent you from holding securities in a company listed on a recognised Stock Exchange where your holding does not exceed 5% of the class of securities concerned.

20.    Intellectual Property

20.1 You shall promptly communicate to the Company all and any ideas, inventions, modifications, improvements, processes, formulae, material, know-how, designs, models, prototypes, marks, sketches, drawings, plans or other similar matters (“Property”) (whether or not capable of protection by any Intellectual Property Right) which at any time during the subsistence of your employment, you alone or jointly with one or more others might conceive, create, devise, produce, discover or formulate either during working hours or in the normal course of your duties or in the course of duties falling outside your normal duties but specifically assigned to you or with the Company’s materials and/or facilities which relate to the Company’s business or in which the Company is interested.

20.2 You agree that all right, title and interest to Property (including all rights in connection with it which arise whether before or after your employment terminates) throughout the world except any such Property which by virtue of the Patents Act 1977 (as amended) belongs to you shall, without payment, belong to the Company absolutely.

Contract of Employment Page 7

20.3 When instructing any person, firm or company to carry out work (including the supply of goods and/or services) for the Company or any Group Company or in connection with the Company’s business or the business of any Group Company you shall ensure that such person, firm or company first assigns to the Company or any Group Company all future Intellectual Property Rights in any Property which they conceive, create, devise, produce, discover or formulate in the course of carrying out the work which they are instructed to perform.

20.4 You shall, during your employment and thereafter at the direction and expense of the Company, apply for and do all acts and things necessary to obtain and maintain any Intellectual Property Right that may subsist in any Property which by virtue of this Clause or any statute affecting Property belongs to the Company or any Group Company in any part of the world as the Company may require and shall vest all such Intellectual Property Rights in the Company or as the Company may direct.

20.5 You hereby irrevocably appoint the Company to be your attorney in your name and on your behalf to do and execute all acts, deeds, matters and things and generally to use for the purpose of giving to the Company (or its nominee) the full benefit of the provisions of this Clause and in favour of any third party a certificate in writing signed by any director or secretary of the Company that any instrument or act falls within the authority hereby conferred shall be conclusive evidence that such is the case.

20.6 You hereby irrevocably waive all moral rights arising under the Copyright, Designs and Patents Act 1988 in any copyright work written or created by you in the course of your employment and all moral rights in all other countries in which copyright (including future copyright) in any work subsists or may subsist except to the extent that you shall exercise such moral rights at the Company’s request provided that the Company shall pay your expenses in so doing.

20.7 For the purposes of this clause “Intellectual Property Rights” means any right conferred by English law in respect of any patent, registered design, design right, copyright, database right, trademark, domain name, plant breeder right and semi-conductor product right together with any analogous right conferred by the law of any country other than England and Wales.

21. Outside Employment

You may not at any time during your employment, whether in working hours or not, be employed, engaged, concerned or interested in any capacity whatsoever, whether directly or indirectly, in any business other than that of the Company, without the prior written consent of the Company.

22. Delivery of Property

You must, upon request, and in any event on the termination of your employment (for any reason) immediately return to the Company all property (including but not limited to documents, records and software, credit cards, mobile telephones, computer equipment, facsimile machine, keys and security passes) belonging to the Company, any associated or Group Company, customer, client, prospective customers and clients etc in your possession or under your control. For the avoidance of doubt, you must return all copies, drafts, reproductions, notes, extracts and summaries (however stored) of all documents and software.

23. Outstanding Monies/Deduction From Money Due To The Employee

23.1 The Company is entitled:

23.1.1. At any time, to deduct from your salary, or any other invoices payable or reimbursable to you from the Company, all sums which you owe to the Company. This may include any overpayment of wages or expenses that have been paid to you or monies that you owe to the Company (including but not limited to unpaid meals, drinks or private telephone calls) for whatever reason.

Contract of Employment Page 8

23.1.2. Upon the termination of your employment (howsoever arising), to make any such deduction, including deduction in respect of holiday loans or other advances that have been made to you, and which represent an overpayment, at the date of the termination of your employment.

24. Notice of Termination

24.1 You are required to give the Company one month’s written notice of the termination of your employment.

24.2 Save in cases of gross misconduct, the length of notice, in writing, which you are entitled to receive from the Company to terminate your employment, is:

24.2.1 One week if your period of continuous employment is less than two years.

24.2.2 One week’s notice for each year of continuous employment if the period of continuous employment is two years or more but less than twelve years; and

24.2.3 Twelve weeks’ notice if the period of continuous employment is twelve years or more.

24.3 The Company reserves the right to require you to remain away from work during your notice period, and/or not to undertake any of the duties of your employment and is under no obligation to provide you with any work or can provide you with work other than your usual duties of employment, whichever may be appropriate.

24.4 The Company may terminate this contract without notice for gross misconduct.

24.5 In the event that the Company terminates your employment without Cause (as defined in clause 24.7 below), the Company will pay to you up to a maximum of 6 months’ of your basic salary at the time of termination, by way of severance pay. Such payment will be made in six equal monthly installments, in the same way as your salary would have been paid, and subject to deductions for tax and National Insurance. This benefit is contingent upon you demonstrating to the Company’s satisfaction that, during the six month period after the termination of your employment with the Company, you are actively seeking alternative full-time employment (which means paid employment for 35 hours per week and above). In the event that you obtain alternative full-time employment during the six month period after the termination of your employment with the Company, you must forthwith notify the Company of that fact. Any payments under this clause shall cease to accrue from the start of any such alternative employment and you will receive only a pro-rata payment under this clause in respect of the number of days in that given month that have elapsed before the start date of your new employment.

24.6 Termination for “Cause” shall mean—

24.6.1 any act of gross misconduct as explained further at clause 15 above;

24.6.2 any repeated unexplained or unjustified absence from the Company;

24.6.3 conviction for any offence (save for a motoring offence not attracting a custodial sentence) which causes material harm to the standing and reputation of the Company,

Contract of Employment Page 9

24.6.4 any serious or material breach of your obligations contained herein;

in each case as determined in good faith by the Board of Directors of the Company.

25. Pension

No pension is payable in terms of this agreement. You are required to make your own pension arrangements.

26. Data Protection

26.1 For the purposes of the Data Protection Act 1998 (as amended), by executing this Agreement, you consent to the Company or any Group Company holding, using, accessing and processing, both electronically and manually, personal data it collects in relation to you for the purposes of the Company’s administration and management, for the purposes of compliance with the relevant procedures, regulations and laws or for the performance of this Agreement and for any other purpose related to your employment including, without limitation, disciplinary action, selection for redundancy, training, career development, consideration of any grievance, promotion or demotion, salary review or performance review.

26.2 You also consent to the Company or any Group Company holding, using, accessing and processing, both electronically and manually, sensitive personal data relating to the matters as described below and for the reasons set out below :

• Racial or ethnic origin—for monitoring the composition of the workforce for the purposes of the Race Relations Act 1976

• Physical or mental health conditions—in order to help comply with the Disability Discrimination Act 1995 and deal with capability issues

• Commission or alleged commission of offences (except as provided for under the Rehabilitation of Offenders Act 1974) and sentence—for disciplinary purposes and the enforcement of Attachment of Earnings Orders

26.3 You agree that personal data may be transferred to other Company or Group Company locations as and when required, and this might include overseas locations that may or may not be within the European Economic Area.

26.4 The consent that you have provided under this Agreement will continue unless you withdraw it by one month’s prior written notice, to be sent to your manager.

27. Collective Agreements

There are no collective agreements that directly affect the terms and conditions of your employment.

28. Jurisdiction

The construction, interpretation and performance of this Agreement will be governed by the law of Scotland and subject to the exclusive jurisdiction of the Scottish Courts.

Definitions

In this Agreement, “Group Company” means the Company, any holding or subsidiary company including Rita Medical Systems Inc., or any associated company of the Company or such holding company, and “subsidiary” and “holding company having the meanings given to them in Section 736

Contract of Employment Page 10

of the Companies Act 1985, “subsidiary undertaking” having the meaning given to it in Section 258 of the Companies Act 1985, and “associated company” having the meaning given to it in Section 416 of the Income and Corporation Taxes Act 1988. RITA Medical Systems, Inc. is the U.S. parent company of Rita Medical Systems Netherlands BV.

IN WITNESS whereof this Agreement has been duly executed as a deed the day and year first above written.

Executed as a Deed by Rita Medical Systems Netherlands BV acting by two duly authorized officers	/s/ Joseph DeVivo Director
	/s/ Donald J. Stewart Director

Signed and delivered as a Deed by Mr. Juan Soto in the presence of:	/s/ John J. Soto
	Mr. Juan Soto

Witness signature	/s/ Harriet Bell
Name	Hariet Bell
Address	967 N. Shoreline Blvd Mountain View, CA 94043
Occupation	HR Director

Contract of Employment Page 11

APPENDIX 1

Job Description

RITA TITLE:         Vice President, International Sales

REPORTS TO:       President & CEO

DATE:                    September 1, 2003

SUMMARY OF RESPONSIBILITIES:

Responsible for establishing international sales strategies, the development and management of all distributors outside the United States, and for directing tactical efforts to implement same. Additional responsibilities include active participation in corporate decisions involving senior management staff.

ACCOUNTABILITIES:

• Achievement of short and long term revenue objectives through well considered and communicated sales programs and activities.

• Establish international sales and marketing policies and procedures, implement and evaluate the effectiveness of the program to achieve a culture of excellence in execution of customer awareness, and accountability to corporate priorities.

• Manage international sales, ensuring achievement of department objectives, adherence to expense budgets, and effective manpower planning.

• Establish, monitor and react to performance measures reflective of divisional accountabilities and objectives.

• Sustain highly trained and motivated distribution organization with clear direction, continual training, timely and appropriate reward, and strict accountability.

• Provide and execute overview of market demand through monthly demand forecast.

• Contribute sales and expense forecasts to annual and long-term business planning cycles.

• Maintain formal and informal channels of communications with leaders in the diagnosis and treatment of cancer.

• Contribute sales perspectives where required to the product development process.

FINANCIAL RESPONSIBILITY:

Develops, implements and monitors functional budgets. Development of pricing strategies also has significant impact on revenue and profitability.

INTERACTIONS:

Interacts with all functional groups within the organization, both in establishing policies and systems and in providing counsel and guidance. Interaction is typically at Director, VP, CEO level, but involvement is expected at all levels. Some interaction with Board of Directors. Regular interaction with executive level management of external organizations involving complex negotiations resulting in large financial implications over the long term. This level of involvement is typically restricted to interaction with international distributors.

Contract of Employment Page 12

DECISION MAKING:

Complexity of decision making is at its highest level where decisions will have a significant long-term impact on the success of the company. This generally involves strategic and tactical sales decisions. Work typically involves interactions with customers and staff related to short term developments, high and intermediate level interaction with every functional department in short and medium term planning and construction of business development programs with staff and senior management.

SUPERVISION:

Takes direction from the CEO and other members of the executive staff. Supervises international sales staff.

JOB REQUIREMENTS:

Education and Experience:

MBA. At least 10 years of progressively responsible positions in sales. Included should be direct responsibility for sales with responsibility for international markets and clinical education. Of this at least 5 years should have been with a leading medical device company and it is preferred that the remainder be with at least one medical start up. Individual should have experience in comprehensively redirecting a sales team to take advantage of shifting market dynamics in a rapidly emerging device/procedure category.

Knowledge / Skills:

Must be “hands-on” yet strategic in planning. Strong hands-on working knowledge of the fundamentals of medical device sales. Specific skills in sales development, distributor management, and clinical education. Specific experience with surgical and Interventional Radiology disposables is desirable. Strong communication and interpersonal skills are essential, most importantly, a demonstrated track record of attracting and developing a motivated team of competent individuals. Must be comfortable dealing with a strong management team and have the ability to positively influence the group when necessary. Ability to professionally represent the company when dealing with executive staff of external organizations, both domestically and internationally.

APPROVALS:

Date:	President & CEO:
Date:	Human Resources:

Contract of Employment Page 13

APPENDIX 2

[list by employee of any current restrictions/covenants]

Contract of Employment Page 14

APPENDIX 3

Self Certification Form

Employee Name:
First Day of Absence:
Return to Work Date:
Total Number of days absence*:
Reason for absence:
Did you see a doctor?
Signed                                   Employee Date	Signed                                                                On behalf of the Company Date

* If you are absent for 7 consecutive days or more, or if otherwise instructed to do so, you will be required to submit a doctor’s certificate to cover the entirety of your absence.

Contract of Employment Page 15

EX-10.44

Exhibit 10.44

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (the “Agreement”) is made as of November 1, 2003, by and between RITA Medical Systems, Inc., a Delaware corporation (the “Company”), and Juan J. Soto (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 has identified the Indemnitee, an officer of the wholly owned subsidiary of the Company, RITA Medical Systems Netherlands BV (“Subsidiary”), as a key employee. 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.

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(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 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

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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 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

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Commission (the “SEC”) has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits 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;

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(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 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

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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 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.

(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/ Joseph DeVivo
Title:	President & CEO
Address:	967 Shoreline Blvd. Mountain View, CA 94043

AGREED TO AND ACCEPTED:

/s/ Juan J. Soto
Juan J. Soto (Signature)
Address:	5 Knapphill Heathery Fauld Dunfermline Fife KY11 8WG U.K.

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EX-10.45

Exhibit 10.45

January 9, 2004

Darrin Uecker

3048 Foothill Rd.

Santa Barbara, CA 93105

Dear Darrin:

On behalf of RITA Medical Systems, Inc. (the “Company”), I am pleased to offer you the position of Chief Technology Officer. Speaking for myself, as well as the other members of the Company’s management team, we are all very impressed with your credentials and we look forward to your future success in this position.

The terms of your new position with the Company are as set forth below:

1. Position.

a. You will become the Chief Technology Officer, working out of the Company’s office in Mountain View, California. You will report to the Company’s Chief Executive Officer.

b. You agree to the best of your ability and experience that you will at all times loyally and conscientiously perform all of the duties and obligations required of and from you pursuant to the express and implicit terms hereof, and to the reasonable satisfaction of the Company. During the term of your employment, you further agree that you will devote all of your business time and attention to the business of the Company, the Company will be entitled to all of the benefits and profits arising from or incident to all such work services and advice, you will not render commercial or professional services of any nature to any person or organization, whether or not for compensation, without the prior written consent of the Company’s Board of Directors, and you will not directly or indirectly engage or participate in any business that is competitive in any manner with the business of the Company. Nothing in this letter agreement will prevent you from accepting speaking or presentation engagements in exchange for honoraria or from serving on boards of charitable organizations, or from owning no more than one percent (1%) of the outstanding equity securities of a corporation whose stock is listed on a national stock exchange.

2. Start Date. Subject to fulfillment of any conditions imposed by this letter agreement, you will commence this new position with the Company on January 12, 2004.

3. Proof of Right to Work. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated.

4. Compensation.

a. Base Salary. You will be paid a monthly gross salary of $17,916.67, which is equivalent to $215,000 on an annualized basis. Your salary will be payable in two equal payments on the 15^th and the last day of the month.

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b. Bonus. You will be eligible to participate in the Company management cash bonus program at the Vice President level.

c. One-Time Bonus. You will receive a one-time cash bonus of $10,000 (less appropriate withholdings) payable after completing sixty (60) days of employment, provided you are an active employee in good standing with the company on that date.

d. Annual Review. Your base salary will be reviewed as part of the Company’s normal annual salary review process.

e. Relocation Expenses. In connection with your relocation from Santa Barbara to the San Francisco Bay Area and subject to a budget not to exceed $80,000, the Company will reimburse you for, or pay directly, actual and reasonable expenses associated with the following:

• RITA agrees to gross up all applicable relocation expenses.

• Sale of your current home, including seller real estate commission, real estate tax and attorney’s fees (providing the sale occurs within the first four (4) months after your employment begins).

• Purchase of a new home in the Bay Area, including up to two (2) points, as well as usual closing costs (providing the purchase occurs within the first six (6) months after your employment begins).

• Movement of your household goods.

• Temporary living accommodations for up to three (3) months while locating a rental property or home to purchase.

Payment of any amount of the Relocation Package is contingent upon your submission of original receipts or invoices to the Company. Any amounts of the Relocation Package owed to you will be paid within 30 days after the Company’s receipt of your substantiated reimbursement request. Because this is a substantial investment, this payment is made with the expectation that you will not voluntarily leave the company after your move. If you do terminate your employment with RITA prior to completing 12 months of service after your relocation, you will owe RITA a pro-rated portion of the relocation bonus.

5. Stock Options.

a. Initial Grant. In connection with the commencement of your employment, the Company will recommend that the Board of Directors, or a Committee of the Board of Directors, grant you an option to purchase 200,000 shares of the Company’s Common Stock (“Shares”) with an exercise price equal to the fair market value on the date of the grant. These option shares will vest at the rate of 1/8 of the total after the first six months of employment and then 1/48 of the total per month, such that the options will become fully vested at the end of four years. Vesting will, of course, depend on your continued employment with the Company. The option will be an incentive stock option to the maximum extent allowed by the tax code and will be subject to the terms of the Company’s 2000 Incentive Stock Option Plan and the Stock Option Agreement between you and the Company. This option is subject to the approval of the Company’s Board of Directors or designated Committee of the Board.

Page 3

b. Subsequent Option Grants. Subject to the discretion of the Company’s Board of Directors, you may be eligible to receive additional grants of stock options or purchase rights from time to time in the future, on such terms and subject to such conditions as the Board of Directors shall determine as of the date of any such grant.

6. Benefits.

a. Insurance Benefits. The Company will make available to you medical, dental, vision, life and long-term disability insurance benefits. More detailed information will be provided in a new-hire packet that will be given to you after your acceptance of this offer.

b. Vacation. You will be entitled to 3 weeks paid vacation per year, pro-rated for the remainder of this calendar year. Vacation accrues as follows: five (5) hours accrue per pay period from your date of hire. During the first six months, no vacation may be taken unless a special exception has been granted.

c. 401K Retirement Plan. You will be eligible to participate in the Company’s employee-contribution 401K Retirement Plan beginning on the first January 1, April 1, July 1, or October 1 following commencement of your employment.

d. Employee Stock Purchase Plan. You will be eligible to participate in the Company’s Employee Stock Purchase Plan beginning on the first February 1 or August 1 following commencement of your employment.

7. Severance Benefits. In the event that the Company or its successor in interest terminates your employment without Cause (as defined below), then you will be entitled to receive continuation of your then-current monthly base salary for six (6) months following your termination date. This salary continuation shall be contingent upon confirmation to the Company’s satisfaction that you are actively seeking Full-Time Employment, which for purposes of this Offer Letter shall be defined as at least thirty-five (35) hours per week of compensated labor, including consulting and other work. In the event that you commence Full-Time Employment, your salary continuation will cease. In addition, following the termination of your employment, the Company will pay your COBRA insurance premiums (provided that you elect such coverage) until the earlier of (A) six (6) months following your termination date or (B) the date on which you become eligible for insurance benefits from another employer. Upon termination of your employment with the Company, you will be entitled to receive benefits only as set forth herein or as otherwise provided by applicable law. Your entitlement to these severance benefits will be conditioned upon your execution and delivery to the Company of (i) a general mutual release of all claims (provided that the Company shall not be required to release any claims arising from a material breach by you of the Confidentiality Agreement (as defined below)) and (ii) a resignation from all of your positions with the Company.

For purposes of this Offer Letter, “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.

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8. Confidential Information and Invention Assignment Agreement. Your acceptance of this offer and commencement of employment with the Company is contingent upon the execution, and delivery to an officer of the Company, of the Company’s Confidential Information and Invention Assignment Agreement, a copy of which is enclosed for your review and execution (the “Confidentiality Agreement”), prior to or on your Start Date.

9. Confidentiality of Terms. You agree to follow the Company’s strict policy that employees must not disclose, either directly or indirectly, any information, including any of the terms of this agreement, regarding compensation, or stock purchase or option allocations to any person, including other employees of the Company; provided, however, that you may discuss such terms with members of your immediate family and any legal, tax or accounting specialists who provide you with individual legal, tax or accounting advice.

10. At-Will Employment. Your employment with the Company will be on an “at will” basis, meaning that either you or the Company may terminate your employment at any time for any reason or no reason, without further obligation or liability.

We are all delighted to be able to extend you this offer and look forward to working with you. To indicate your acceptance of the Company’s offer, please sign, date this letter in the space provided below, and return it to me, along with a signed and dated copy of the Confidentiality Agreement. This letter, together with the Confidentiality Agreement, set forth the terms of your employment with the Company and supersedes any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by the Company and by you. This offer will expire unless signed by you by December 29, 2003.

Very truly yours,
RITA MEDICAL SYSTEMS, INC.
By:	/s/ Joseph DeVivo
	Joseph DeVivo
Title:	Chief Executive Officer

ACCEPTED AND AGREED:

DARRIN UECKER

/s/ Darrin Uecker

Signature

    12/29/03

Date

Enclosure:     Confidential Information and Invention Assignment Agreement

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-102896) and Form S-8 (No. 333-66346) of RITA Medical Systems, Inc. of our report dated March 8, 2004 relating to the financial statements, which appears in this Form 10-K.

/s/  PricewaterhouseCoopers LLP

San Jose, California

March 10, 2004

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Joseph DeVivo, certify that:

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

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4. The registrant’s other certifying officer 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 annual 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 annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer 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 officer and I have indicated in this annual 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: March 15, 2004

/s/   Joseph DeVivo

Joseph DeVivo

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Donald Stewart, certify that:

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

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4. The registrant’s other certifying officer 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 annual 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 annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer 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 officer and I have indicated in this annual 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: March 15, 2004

/s/   Donald Stewart

Donald Stewart

Chief Financial Officer and

Vice President, Finance and Administration

EX-32.1

Exhibit 32.1

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 Annual Report of RITA Medical Systems, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph DeVivo, 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/  Joseph DeVivo

Joseph DeVivo

President and Chief Executive Officer

March 15, 2004

EX-32.2

Exhibit 32.2

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 Annual Report of RITA Medical Systems, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Donald Stewart, Chief Financial 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/  Donald Stewart

Donald Stewart

Chief Financial Officer

March 15, 2004