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, 2004

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 $51,425,855 as of June 30, 2004, 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. This determination and calculation have been made without taking into account the effect of the merger of the registrant and Horizon Medical Products, Inc. on July 29, 2004.

There were 41,406,634 shares of the registrant’s Common Stock issued and outstanding as of January 31, 2005.

Documents Incorporated by Reference

Part III incorporates information by reference from the definitive proxy statement to be filed in connection with the registrant’s 2005 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	14
Item 3.	Legal Proceedings	14
Item 4.	Submission of Matters to a Vote of Security Holders	14
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
Item 6.	Selected Financial Data	16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Business Overview	17
	Critical Accounting Policies and Estimates	20
	Results of Operations	21
	Liquidity and Capital Resources	24
	Private Placement of Securities	25
	Income Taxes	26
	Recent Accounting Pronouncements	26
	Factors That May Affect Future Results	26
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 8.	Consolidated Financial Statements and Supplementary Data	36
	Index to Consolidated Financial Statements	36
	Report of Independent Registered Public Accounting Firm on Financial Statements	37
	Consolidated Balance Sheets	38
	Consolidated Statements of Operations and Comprehensive Loss	39
	Consolidated Statements of Stockholders’ Equity	40
	Consolidated Statements of Cash Flows	41
	Notes to Consolidated Financial Statements	42
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	61
Item 9A	Controls and Procedures	61
Item 9B	Other Information	62
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 and Financial Statement Schedules	63
	Signatures	70
	Power of Attorney	70

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 “Factors That May Affect Future Results” and elsewhere in this report. 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 “Factors That May Affect Future Results.” 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.

We are a diversified medical device oncology company that develops, manufactures and markets innovative products for cancer patients including radiofrequency ablation (RFA) systems for treating cancerous tumors as well as percutaneous vascular ports and specialty access catheters. Founded in 1994 on our core radiofrequency ablation platform, we are a leader in radiofrequency ablation for the treatment of solid cancerous and benign tumors in solid organs. We pioneered radiofrequency technology and have led the market in clinical training and clinical acceptance. In July 2004, we merged with Horizon Medical Products, Inc. (“Horizon”) in order to add Horizon’s specialty access catheter (SAC) product line to our product portfolio. Our SAC products include implantable infusion ports for the delivery of systemic chemotherapy, tunneled central venous catheters, safety needles, PICC lines, dialysis catheters and specialty catheters for the stem cell transplant procedure. We also distribute the Isomed Hepatic Artery Infusion Pump from Medtronic, Inc., for use in delivering high dose regionally delivered chemotherapy.

With our RFA and SAC products lines, our sales and marketing organization targets the same practicing clinicians: the surgical oncologists and interventional radiologists. We believe that the blend of a complex RFA technology with a core SAC product offering strengthens our market position and value to our customers. Our future success and market share growth depends on new product launches, procedure adoption across multiple organs, license and distribution arrangements and possible acquisitions of other synergistic businesses. We believe there is an increasing role for medical devices in the management of cancer whether as an integral part in drug delivery or in the local control of tumors. We intend to continue to build our platform based on our core medical oncology device platform and will endeavor to identify new drug or device treatments which enhance patient care.

Our Business Strategy

Our goal in ablative therapy 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;

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• 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.

• Increase our Market share in Vascular Access. By means of differentiating the features and benefits of our specialty access ports and catheters, and with the intent of reducing interventions and complications we intend to create additional demand for our existing specialty access products as well as additional products that we’ll bring to the market place.

• 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.

Overview: Radiofrequency Ablation Products

With our RFA products, we are currently focused on addressing the liver cancer market and the bone cancer market. We believe our system offers an attractive 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 for the radiofrequency ablation of painful tumors that have metastasized or spread to the bone is approximately $600 million annually.

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, we became the first radiofrequency ablation company to receive specific Food and Drug Administration (FDA) clearance for unresectable liver lesions in addition to our previous general FDA clearance for the ablation of soft tissue. In October 2002, we again received 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 approximately 75,000 disposable devices.

Market Opportunity

Cancer Market

Millions of people throughout the world are afflicted with cancer. According to the American Cancer Society, cancer has surpassed heart disease as the leading annual cause of death in the United States.

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

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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 1,000,000 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% 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 that there are approximately 300,000 annual cases of primary and metastatic liver cancer 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% 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% 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%; however, when tumors recur, surgery typically cannot be repeated.

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-

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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%, 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 1,000,000 cases each year with over 400,000 new cases in the United States 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 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.

Prospective Future Markets

Breast Cancer: According to the American Cancer Society (ACS), breast cancer is the most common cancer among women, excluding non-melanoma skin cancers. The ACS estimates there are more than 200,000

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new invasive and 55,000 new cases of in situ breast cancer annually among U.S. women, resulting in more than 40,000 deaths per year. We estimate that there are 1,000,000 breast cancer cases diagnosed annually worldwide.

In 2004, we began investigating the clinical benefit of RFA as an adjunct to surgical lumpectomy in breast cancer surgery. The aim of our investigation is to demonstrate that RFA can be used to provide an ablated margin in the lumpectomy cavity as a compensation for inadequate surgical margins associated with the gold standard lumpectomy procedure. We believe that as many as 100,000 patients annually can benefit from this procedure, with the potential clinical benefit being the elimination of re-excision operations due to inadequate surgical margins. In the future, we may also attempt to show that this procedure provides similar local tumor control benefits to that of brachytherapy; however we do not have any specific plans at this time to pursue this.

Lung Cancer: According to the ACS, lung cancer is the leading cause of death from cancer in the United States in both men and women, with more than 170,000 new cases of lung cancer expected to be diagnosed in the United States in 2005. The ACS estimates that lung cancer now claims more than 160,000 lives per year in the United States, along with 187,000 lives in the European Union and 55,000 lives in Japan. Again according to the ACS, 50% of lung cancer patients in the United States are non-surgical candidates and over 140,000 of the cases diagnosed in the United States have non-small cell lung cancer (NSCLC). Additionally, autopsy series have demonstrated that lung metastases are present in 20-54% of all patients who die of cancer.

The RITA system has been used in clinical studies to treat NSCLC and metastatic lung cancer patients who were not candidates for surgery. Publications reporting on the results of the clinical studies suggest that the RITA system may provide a safe and useful adjunctive therapy in the management of disease in lung cancer patients. Furthermore, we believe that RFA may be a particularly attractive treatment modality for the approximately 55,000 (US only) Stage III and Stage IV (late stage) NSCLC patients who have fewer treatment options than early stage lung cancer patients do.

Kidney Cancer-Renal Cell Carcinoma: The worldwide incidence of renal cell carcinoma (RCC), the most common type of kidney cancer, is estimated to be in excess of 180,000 cases annually. The ACS estimates that there are now more than 30,000 new cases of kidney cancer diagnosed in the United States annually, one of the highest per capita rates of kidney cancer in the world. There are approximately 90,000 deaths per year associated with renal cell carcinoma (RCC). We estimate that 50% of these patients are RFA amenable.

Surgery is the gold standard for the treatment of this disease, because chemotherapy and radiation therapy yield poor results for kidney cancer patients. Laparoscopic partial nephrectomy has become an increasingly popular surgical intervention, and RFA is being used in combination with this minimally invasive kidney cancer treatment as a tool to provide hemostatis during the resection of RCC cancer. RFA is also being used as a primary therapy for RCC and we believe the early results in the published literature are encouraging.

Our RFA 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

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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 similar 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 at the electrode 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.

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.

Radiofrequency Ablation Product Technology

Our radiofrequency ablation products are based on proprietary technology 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

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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 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.

Radiofrequency Ablation 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.	2000	$	1,100
	StarBurst XL	Creates a scalable 3 to 5 centimeter ablation.	2000	$	1,440
	StarBurst SDE	Creates a 2 cm ablation, via a side-deployed array.	2003	$	2,195
	StarBurst Semi-Flex	Creates a scalable 3 to 5 centimeter ablation and has a partially flexible shaft.	2003	$	2,195
	7 cm Starburst XLie	Creates a scalable 4 to 7 centimeter ablation. Requires an accessory infusion pump for irrigation of saline.	2003	$	2,495
Generators:	Model 1500X	250 Watt Capable Generator with Field-Software Upgradeability	2002	$	37,500

RFA Disposable Devices

Our RFA 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. Sales of RFA disposable devices totaled $15.9 million, $14.6 million and $13.1 million in the years ended December 31, 2004, 2003 and 2002, respectively.

Our RFA 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 RFA 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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RFA 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 1500X 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. These 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 of our generators totaled $1.6 million, $2.0 million and $4.3 million in the years ended December 31, 2004, 2003 and 2002, respectively.

Overview: Specialty Access Catheter Products

We manufacture and market specialty access catheter products including implantable ports, hemodialysis catheters, central venous catheters, needle infusion sets, peripherally inserted central venous catheters and other accessories used in vascular procedures.

Vascular Access Ports

Vascular access ports are implantable devices utilized for the central venous administration of a variety of medical therapies and for blood sampling and diagnostic purposes. Central venous access facilitates a more systemic delivery of treatment agents, while mitigating certain of the harsh side effects of certain treatment protocols and eliminating the need for repeated access to peripheral veins. Once implanted in the body, a port can be utilized for up to approximately 2,000 accesses depending upon needle gauge size and the port size. Our vascular access ports are used primarily in systemic or regional short-and long-term cancer treatment protocols that require frequent infusions of highly concentrated or toxic medications (such as chemotherapy agents, antibiotics or analgesics) and frequent blood samplings. Our line of vascular access ports consist of the following families of products: (i) the Vortex family of ports including Vortex VTX, LifePort VTX, TriumphTM VTX and GenesisTM VTX; (ii) LifePort; (iii) Triumph-1; (iv) Infuse-a-Port; (v) OmegaPort; (vi) TitanPort; and (vii) the Vortex MP Port system. Port sales totaled $6.4 million during the August 2004 through December 2004 period in which we reported sales for this and other specialty access products acquired in the Horizon merger. We believe that as a result of our merger with Horizon, we are the second largest supplier of vascular access ports within the United States.

Our Vortex^® line of ports is a clear-flow port technology that revolutionizes port design. With its rounded chamber, the Vortex^® is designed to have no sludge-harboring corners or dead spaces. This contrasts to conventional ports where squared reservoir design promotes sludge accumulation setting the stage for occlusions and infections. A tangential stem adds to the flow dynamics, which is designed to result in a hyper-cleaning flow process to remove blood deposits and drug residuals. A comparative study on RITA’s Vortex^® port technology to non-Vortex bodied ports published in the summer 2000 issue of the Journal of Vascular Access Devices, concluded, “The design of the Vortex^® reservoir appears to contribute to a condition of less build-up of thrombus, and/or drug residuals in the device itself, resulting in fewer complications.” This same study reports that patients in the study with the Vortex^® port implanted required 56% fewer interventions than those patients with conventional ports. Almost one out of every ten conventional ports failed before the end of therapy requiring surgical removal, whereas none of the Vortex^® ports had to be removed prematurely.

Catheters

We also produce and market hemodialysis and apheresis catheters. Hemodialysis catheters are used in the treatment of patients suffering from renal failure who are required to undergo short-term (acute) care or long-term (chronic) hemodialysis, a process involving the removal of waste products from the blood by passing a patient’s blood through a dialysis machine. Stem cell apheresis is a protocol for treating certain forms of mid and late-stage cancers, particularly breast cancer. The typical apheresis procedure involves the insertion of a catheter

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into a patient through which (i) blood is withdrawn from the patient, cycled through an apheresis machine in which stem cells (cells which perform a key role in the body’s immune system) are removed from the blood and the blood is reinfused into the body, (ii) high doses of chemotherapy agents, as well as antibiotics and blood products, are administered to the patient over extended periods of time, and (iii) the previously removed stem cells are subsequently reintroduced into the patient. Our catheters are used primarily in hemodialysis and apheresis procedures. Our catheters include the following families of products: (i) Circle C chronic and acute hemodialysis catheters, including the LifeJet and LifeJet F-16 chronic hemodialysis catheters; (ii) long-term triple lumen central venous catheters; (iii) peripherally inserted central venous catheters and (iv) the LifeValve Platinum central venous catheter. We expect that our specialty hemodialysis and apheresis families of catheters will continue to benefit from unique designs, allowing some of the highest flow rates available in the market.

The LifeGuard^™ Safety Infusion Set, launched in 2002 and used to infuse our ports, complements our port and specialty access catheter products. The unique, intuitive design was developed with the input of clinicians to provide safer needle placements, and the needles’ low profile design is intended to allow clinicians to easily dress the site. We believe that the ease of use and visual confirmation of safety is ideal in the clinical setting.

Also, under a distribution agreement with Medtronic, Inc., we sell Medtronic’s IsoMed constant flow infusion system for the delivery of chemotherapy agents for use in hepatic arterial infusion therapy for patients with colorectal and/or liver cancer in the treatment of hepatic arterial infusion and malignant pain.

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 34 field representatives and 8 managers. We also utilize two domestic distributors. Overseas, we market our products through distribution partners, including distributors in all the major countries in Europe and Asia, supported by four full-time field representatives.

Our sales and marketing efforts regarding RFA products 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 from our RFA products 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 of radiofrequency ablation as a therapy 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. 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.

Our sales and marketing efforts for our SAC product line emphasize the importance of increasing market share by having physicians switch from our competitors’ products to our Vortex^® port systems. We believe that a direct, targeted, and focused strategy supported by our clinically proven SAC technology will achieve this result.

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We intend to leverage our established relationships with leading physicians and prominent cancer centers from our RFA therapy to promote our Vortex Ports and the rest of our SAC product line. We will also continue to develop products for implanters that are easy to use, with features that are designed to expedite implant procedures; such as “suture anywhere” capabilities and the FluoroMax^™ high radiopacity catheter technology.

Competition

The medical device industry is subject to intense competition. Accordingly, our future success in the market for RFA products 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 directly with our RFA products 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. Furthermore, several other companies, such as Vivant Medical, Inc. and Microsulis Limited, are developing microwave technologies for the treatment of tumor ablation. Vivant Medical has an FDA 510(k) clearance for soft tissue ablation.

We believe the principal competitive factors in our markets for RFA products 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.

The markets for our specialty access catheter product lines are also highly competitive. We face substantial competition from a number of other manufacturers and suppliers of vascular access ports, dialysis and apheresis catheters and related ancillary products, including companies with greater research, manufacturing and financial resources than we have. One of our primary competitors in the market for SAC products in the United States and overseas is Bard Access Systems, a division of C.R. Bard, Inc (Bard). Bard is a publicly traded company with substantially greater resources than we have.

We believe the principal competitive factors in our markets for SAC products are:

• product quality and reliability;

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• product line diversity;

• customer service;

• relationships; and

• price.

Third-Party Reimbursement

During the past several years, the major third-party payors of hospital services (Medicare, Medicaid, private healthcare indemnity insurance and managed care plans) have substantially revised their payment methodologies to contain healthcare costs. These cost pressures are leading to increased emphasis on the price and cost-effectiveness of any treatment regimen and medical device. In addition, third-party payors, such as governmental programs, private indemnity insurance and managed care plans which are billed by hospitals for such healthcare services, are increasingly negotiating the prices charged for medical products and services and may deny reimbursement if they determine that a device was not used in accordance with cost-effective treatment methods as determined by the payor, was experimental or was used for an unapproved application. There can be no assurance that in the future, hospital purchasing decisions or third party reimbursement levels will not adversely affect our profitability. Furthermore, 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 radiofrequency ablation liver procedures using procedural diagnosis codes as well as 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. Private payor reimbursement from the top national organizations, including Blue Cross and Blue Shield plans, has also been established.

On January 1, 2004 a 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 settings 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 are favorable.

We have limited reimbursement experience for radiofrequency ablation procedures using our system other than for liver cancer and bone tumors. 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.

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 radiofrequency ablation product 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 also continue to develop new catheter and port products featuring improved performance and lower cost.

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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, 2004, we had 58 issued patents worldwide and 58 United States and foreign patent applications pending in the field of radiofrequency ablation. The issued patents cover, among other things, deployable multi-array electrode technology and temperature feedback technology. These patents expire between 2012 and 2022.

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 RFA 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.

Our merger with Horizon resulted in acquisition of 25 issued and 2 pending patents covering our specialty access catheter product lines. The issued patents cover, among other things, port reservoir technology, valved catheter technology and needle safety technology. These patents expire between 2006 and 2022.

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 (PMA). 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. Approval of a PMA generally requires several years:

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 RFA 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) 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.

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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.

The FDA regulates the labeling, advertising, and distribution of our products, including promotional communications outside conventional marketing materials. Our marketing materials are consistent with the FDA’s clearance for our device products. However, the FDA evaluates other activities and if it concludes that promotional communications for our products fall outside the clinical conditions cleared for our products, it may cause them to consider our products to be in violation of the FDC Act.

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 a result, we are subject to inspection by the FDA and the California Departments of Heath and Safety for compliance with good manufacturing practices, and other applicable equivalents, including labeling and the adulteration and misbranding provisions of the FDC Act. Specifically, our manufacturing processes are required to comply with the FDA’s 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. We have filed medical device reports with the FDA for our RFA products 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 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 of our Mountain View, California facility 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. Our Manchester, Georgia facility is also certified as an ISO 9001 medical device manufacturer and is similarly in conformance with the European Medical Device Directive for sale of products in Europe.

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. Our radiofrequency electrodes were manufactured in our Mountain View, California facility throughout 2004, but these operations will be transferred to our Manchester, Georgia facility by the second quarter of 2005. Our Manchester facility also produces our complete line of ports, infusion sets,

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hemodialysis catheters, other miscellaneous catheters, and dialysis accessories, except for a peripherally inserted central venous catheter line and certain product accessories. Some component parts are produced for us by other manufacturers.

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. Our Manchester, Georgia facility is also certified as an ISO 9001 medical device manufacturer and is similarly in conformance with the European Medical Device Directive for sale of products in Europe. GMP regulations may also apply to 3rd party manufacturers depending on the type of component they manufacture for us.

Corporate History, Headquarters and Available Information

We were 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, proxy statements and other information available free of charge on our website as soon as reasonably practicable after we file these reports with the Securities and Exchange Commission. These filings are also accessible on the SEC’s website at www.sec.gov. The public may read and copy any materials we filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information for the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Employees

As of January 31, 2005 we had 182 full-time employees, including 58 in sales and marketing, 83 in manufacturing, 21 in research and development and 20 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 April 2005. Effective April 2005, our headquarters location will be moving to Fremont, California, where we will lease one building with approximately 14,500 square feet of office, research and development space. Our lease on the Fremont, California facility is also noncancellable and expires in April 2010. Our principle manufacturing facility is one building of approximately 60,000 square feet located in Manchester, Georgia. This facility also includes office and research and development space and is leased through 2010. We also lease approximately 3,000 square feet of administrative office space in Atlanta, Georgia; this lease expires in 2007. We believe these facilities are suitable and adequate to meet our current or foreseeable requirements at least through 2005 and that additional or alternative space will be available at commercially reasonable terms to meet future growth requirements.

Item 3. Legal Proceedings.

We are now and may in the future 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, Related Stockholder Matters and Issuer Purchases of Equity Securities.

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 2003 and 2004, and through January 31, 2005, as reported by the Nasdaq National Market:

	HIGH		LOW
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	$	5.91	$	4.15
Second quarter	$	6.88	$	3.75
Third quarter	$	4.34	$	2.95
Fourth quarter	$	4.05	$	2.47
First quarter of 2005, through January 31, 2005	$	3.87	$	2.95

On January 31, 2005, the last reported sales price of our common stock on the Nasdaq National Market was $3.16. 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 31, 2005, there were 177 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 November 24, 2004, we entered into Stock and Warrant Purchase Agreements, with SF Capital Partners Ltd., BayStar Capital, Walker Smith Capital (and its affiliates) and Capital Ventures International. Pursuant to the terms of the Purchase Agreements, we sold an aggregate of 4,363,634 shares of its unregistered common stock at a per share price of $2.75 and warrants to purchase an aggregate of 3,272,724 shares of its common stock which are initially exercisable at a price of $4.00 per share, netting approximately $11.1 million after issuance fees and expenses. The issuance was deemed to be exempt from registration under the Securities Act of 1933 in reliance upon Section 4(2) thereof as transactions by an issuer not involving any public offering. On January 21, 2005, our Registration Statement on Form S-3/A, which registered the shares of common stock and the shares of common stock issuable upon exercise of the warrants to SF Capital Partners Ltd., Baystar Capital, Walker Smith Capital (and its affiliates) and Capital Ventures International, became effective. 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 of common stock and the shares of common stock issuable upon exercise of the warrants 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) November 24, 2006.

The disclosure required by Item 201(d) of Regulation S-K is incorporated by reference to the definitive proxy statement for our 2005 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation

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14A no later than 120 days after the end of the fiscal year covered by this report, or the Proxy Statement, under the caption “Equity Compensation Plan Information.”

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, 2004, 2003 and 2002 and our audited consolidated balance sheet at December 31, 2004 and 2003 are presented elsewhere in this Form 10-K. The information provided below is in thousands, except for per share data. The merger with Horizon in July 2004 has affected the selected financial data for the year ended December 31, 2004 and as of December 31, 2004, making comparisons with prior periods difficult.

	Years ended December 31,
	2004			2003			2002			2001			2000
Statement of Operations Data:
Sales	$	28,215		$	16,607		$	17,393		$	14,791		$	10,010
Cost of goods sold		11,200			6,166			6,908			6,132			6,048
Gross profit		17,015			10,441			10,485			8,659			3,962
Operating expenses:
Research and development		3,787			4,294			5,052			6,489			5,615
Selling, general and administrative		20,637			17,418			19,366			16,646			12,052
Restructuring charges		1,309			—			—			—			—
Total operating expenses		25,733			21,712			24,418			23,135			17,667
Loss from operations		(8,718	)		(11,271	)		(13,933	)		(14,476	)		(13,705	)
Interest expense		(604	)		—			(12	)		(86	)		(683	)
Interest and other income, net		19			192			446			1,602			1,581
Net loss	$	(9,303	)	$	(11,079	)	$	(13,499	)	$	(12,960	)	$	(12,807	)
Net loss per common share, basic and diluted	$	(0.35	)	$	(0.63	)	$	(0.91	)	$	(0.90	)	$	(1.99	)
Shares used in computing net loss per common share, basic and diluted		26,465			17,647			14,890			14,353			6,440
	December 31,
	2004			2003			2002			2001			2000
Balance Sheet Data:
Cash, cash equivalents and marketable securities, current and long term	$	13,858		$	9,535		$	12,835		$	23,537		$	40,057
Working capital		14,255			11,886			16,066			25,478			41,512
Total assets		152,309			22,033			24,166			35,834			46,270
Long-term obligations, net of current portion		9,722			23			—			—			180
Common stock and additional paid-in capital		216,934			98,055			88,540			88,474			88,435
Total stockholders’ equity		128,656			19,084			20,603			32,145			42,647

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

Business Overview

We develop, manufacture and market innovative products for cancer patients, including radiofrequency ablation systems for treating cancerous tumors as well as percutaneous vascular and spinal access systems. 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.

On July 29, 2004, we completed a merger with Horizon Medical Products, Inc. Horizon operated as a specialty medical device company focused on manufacturing and marketing vascular products, particularly oncology product lines including implantable vascular ports, tunneled catheters and stem cell transplant catheters used in cancer treatment protocols. Each Horizon common stockholder received 0.4212 of a share of our common stock for each share of Horizon common stock held. We thereby issued approximately 18.7 million shares of its common stock to acquire all issued and outstanding shares of Horizon common stock, and further assumed all outstanding Horizon options and warrants that, upon exercise, will result in the issuance of approximately 3.9 million shares of our common stock. The fair value of shares we issued was approximately $91.6 million based on a price per share of $4.896, our average closing price the day the proposed merger was announced (May 13, 2004), the two business days preceding the announcement and the two business days following the announcement. The fair value of options and warrants, all of which were fully vested when we assumed them, was determined to be approximately $15.3 million using the Black-Scholes valuation model. Costs incurred to effect the merger and included as a component of purchase price were $2.4 million. The total purchase price was approximately $109.3 million. The fair value of assets acquired, net of liabilities assumed, was approximately $18.0 million, resulting in goodwill of $91.3 million. We believe the merger will lead to higher sales and greater profitability than either or both of the pre-merger companies on a standalone basis due to a larger, more effective sales group, consolidation of manufacturing resulting in lower product costs, and reduced administrative expenses.

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, 2004, 2003 and 2002, sets forth some of these measurements:

	Years ended December 31,
	2004			2003			2002
Total sales (in thousands)	$	28,215		$	16,607		$	17,393
Percentage of sales: United States		84	%		80	%		74	%
Percentage of sales: International		16	%		20	%		26	%
Percentage of sales: Radiofrequency products		62	%		100	%		100	%
Percentage of sales: Specialty access catheters		38	%		0	%		0	%
Gross margin		60	%		63	%		60	%

Consolidation of Horizon’s results did not begin until the closing date of the merger, July 29, 2004. Therefore, the percentages shown for historical periods are not indicative of future results. In particular, the percentage of sales attributable to specialty access products is expected to be higher in future years that reflect twelve months of specialty access product results.

Prior to completion of the Horizon merger, our products were sold in the United States exclusively through our direct sales force and internationally through distribution partners. Horizon, in contrast, made use of domestic distribution partners in selected areas of the United States. Since completion of the merger, we have begun to

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distribute our radiofrequency ablation products through two of these domestic distribution partners. However, direct sales will remain our predominant mode of domestic distribution for the foreseeable future.

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 we introduced our premium-priced Starburst Xli and Xlie families of disposable needles in this region earlier than in Europe or other regions. These actions have resulted in a growing percentage of sales derived from the domestic market. The merger with Horizon should permit wider and even more efficient coverage of the domestic market, further strengthening this trend. 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. We expect 2005 sales growth in the United States to continue to outpace international growth because we believe the principle impact of the Horizon merger will be upon the domestic market and because introduction of premium products to our international distributors will have a relatively small impact on growth due to pricing limitations.

Prior to completion of the Horizon merger, essentially all of our sales came from the sale of our disposable devices and radiofrequency generators used in the treatment of cancerous liver tumors. The merger with Horizon expanded our product offering and has resulted in additional sales, primarily from the specialty access catheter and port product lines used in cancer treatment protocols. Going forward, we expect that nearly 95% of our sales will be derived from our RFA and SAC disposable products, with the balance of our sales coming from hardware products. During the third quarter of 2004, integration of the two sales groups required training that adversely impacted sales growth. However, sales in the fourth quarter of 2004 returned to historically normal rates. We believe that in 2005 the broader product line and larger sales group resulting from the merger will enable us to increase the efficiency of our selling effort.

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. The ongoing integration of our manufacturing operations in our Manchester, Georgia location should result in lower costs in the future from the use of less expensive labor and economies of scale. We also believe we 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 2004 and 2003 reflects amortization of intangible assets relating to product technology acquired in the merger and the 2003 settlement of patent litigation. We expect these amortization charges to continue through 2016. 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.

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 inventory. Our gross margin for the 2004 was 60%, compared to a 2003 gross margin of 63%. Historically, the gross margin rate for our specialty access catheter products has been lower than that of our radiofrequency ablation products. Also, amortization of our product technology related intangible assets will negatively impact cost of goods sold. We expect that our future gross margins will be somewhat lower than our historical gross margin rates because of inclusion of these products and expenses in our results.

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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 three years ended December 31, 2004, 2003 and 2002 and our Consolidated Balance Sheets as of December 31, 2004 and 2003.

	Years ended December 31,
	2004		2003		2002
Research and development expense	$	3,787	$	4,294	$	5,052
Selling, general and administrative expense		20,637		17,418		19,366
Restructuring charges		1,309		—		—
Total operating expenses	$	25,733	$	21,712	$	24,418
	December 31,
	2004		2003
Cash and cash equivalents	$	12,978	$	3,780
Marketable securities, current and long term		880		5,755
Total cash and marketable securities	$	13,858	$	9,535

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, Europe and Asia, 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 expenses are determined by the breadth of our new product development 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.

Research spending in 2004 was $3.8 million, or 12% lower than in 2003. Research spending in 2005 is expected to increase modestly, driven by programs aimed at technical innovation of our radiofrequency ablation products and the introduction of new implantable ports and access catheters.

Selling, general and administrative in 2004 was $20.6 million, about $3.2 million higher than in 2003. The primary reasons for the increase were the consolidation of Horizon results and expenses incurred in the integration of the two companies. Also, the merger resulted in recognition of intangible assets relating to trademarks, customer relationships and our distribution contract with Medtronic, amortization of which will result in charges to selling, general and administrative expense of $1.4 million to $1.6 million per year through 2014. We further note significant costs related to compliance with the Sarbanes-Oxley Act of 2002. However, headcount reductions, particularly in the domestic sales groups, were begun in the third quarter of 2004. These headcount reductions should result in expense levels for the combined company lower than the sum of expenses for the two companies prior to the merger. We incurred restructuring expenses of $1.3 million during the year ended December 31, 2004, consisting of severance related to the termination of employees to eliminate certain duplicative activities.

In addition to management of our operating expenses, we must continue to conserve our cash. Our combined total of cash, cash equivalents and marketable securities was $13.9 million as of December 31, 2004, compared to $9.5 million at December 31, 2003. Our net cash used in operating activities for the year ended December 31, 2004 was $5.6 million. We had approximately $16.8 million in short term and long term debt as of December 31, 2004. We paid $6.5 million of our outstanding debt, plus accrued interest, in February 2005. We may in the future need to raise additional cash through borrowing or sale of equity securities or to renegotiate the payment terms of our debt.

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We incurred a net loss of $9.3 million for year ended December 31, 2004 compared to $11.1 million for the year ended December 31, 2003. Prior to considering the impact of the adoption of Statement of Accounting Standards (SFAS) No. 123R, “Share-Based Payment,” we believed that the efficiencies achieved by our merger with Horizon and continued growth in sales of our products would permit us to achieve profitability for the year ended December 31, 2005. We have not yet been able to determine the impact of SFAS No. 123R on our future results, but we expect to incur significant charges as a result of adoption of the standard. Profitability further depends on, among other things, our success in expanding product usage in our current markets and in developing new markets, as well as the successful integration of Horizon’s operations. To the extent current or new markets do not materialize in accordance with our expectations, our sales 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 (using standard costs, which approximate actual costs 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, historical experience and 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 deemed reasonably assured. Except for our two distributors in the United States, our customers have no price protection and may only return undamaged product within thirty days of purchase. Our two distributors in the United States have no price protection, but it is our policy for these two customers to swap new product for undamaged returned product within 90 days of purchase, subject to a limit of 5% of their purchases in our preceding fiscal quarter. Based on our historical rate of product returns, we maintain a reserve for projected future product returns; provisions to this reserve are accounted for as a deduction from current period sales. Should changes in conditions, including the rate of product returns, or the status of obligations cause us to determine that our criteria for revenue recognition 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. Through December 31, 2004, all of our billings have been denominated in U.S. dollars, although we expect relatively minor billings in foreign currencies in future periods.

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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. Subsequently, we would recognize tax expense at amounts approximating statutory rates.

Goodwill and other intangible assets: We account for our goodwill under Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” The SFAS No. 142 goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the reporting units that have goodwill assigned to them. In our case, operating in one business segment, the fair value of the reporting unit is equal to our market capitalization. If fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. Recoverability of the asset is measure by comparison of the asset’s carrying amount to future net undiscounted cash flows the asset is expected to generate. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the projected discounted future net cash flows arising from the asset. We test goodwill for impairment during the third quarter of every fiscal year, and when an event occurs or circumstances change such that it is reasonably possible that impairment exists. Events that could, in the future, result in impairment include, but are not limited to, sharply declining sales for a significant product or in a significant geographic region.

Impairment of Long Lived Assets: We review long lived assets whenever events or changes in business conditions indicate that these carrying values may not be recoverable in the ordinary course of business. When such an event occurs, our management determines whether there has been impairment by comparing the anticipated undiscounted future net cash flows to the related asset’s carrying value. If an asset is considered impaired, the asset is written down to fair value, which is determined based either on discounted cash flows or appraised value, depending on the nature of the asset.

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, 2004, 2003 and 2002:

	Years ended December 31,
	2004		2003		2002
Sales	100	%	100	%	100	%
Cost of goods sold	40	%	37	%	40	%
Gross profit	60	%	63	%	60	%
Operating expenses:
Research and development	13	%	26	%	29	%
Selling, general and administrative	73	%	105	%	111	%
Restructuring	5	%	0	%	0	%
Total operating expenses	91	%	131	%	140	%
Loss from operations	(31	)%	(68	)%	(80	)%
Interest expense	(2	)%	0	%	(0	)%
Interest and other income, net	0	%	1	%	(2	)%
Net loss	(33	)%	(67	)%	(78	)%

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The following table sets forth comparisons of key components of our sales results for the years ended December 31, 2004 and 2003, providing additional information on the sales impact of the consolidation of our acquired specialty access catheter products.

	2004		2003		Growth		%
Domestic sales:
Radiofrequency ablation products	$	13,865	$	13,275	$	590	4	%
Specialty access catheter products		9,747		—		9,747
Total domestic sales	$	23,612	$	13,275	$	10,337	78	%
International sales:
Radiofrequency ablation products	$	3,688	$	3,332	$	356	11	%
Specialty access catheter products		915		—		915
Total international sales	$	4,603	$	3,332	$	1,271	38	%
Total radiofrequency ablation sales	$	17,553	$	16,607	$	946	6	%
Total specialty access catheter products		10,662		—		10,662
Total sales	$	28,215	$	16,607	$	11,608	70	%

Years Ended December 31, 2004 and 2003

For the year ended December 31, 2004, sales totaled $28.2 million, an increase of 70% or $11.6 million from $16.6 million in 2003. The merger with Horizon added $10.7 million to our sales, while sales of our radiofrequency ablation products grew $0.9 million or 6% over 2003. Domestic sales of radiofrequency ablation products were 4% higher in 2004 than in 2003. We believe that sales were limited by the impact of training and turnover in our sales group that resulted from the Horizon merger. International sales of radiofrequency ablation products grew 11% over 2003. For the year ended December 31, 2004, domestic sales represented 84% of total sales, compared to 80% in 2003. Radiofrequency ablation products accounted for 62% of sales in 2004, while specialty access catheter products accounted for 38% of sales, although the results of the specialty access catheter products acquired in the Horizon merger reflect only sales made from July 29, 2004 through December 31, 2004.

Cost of goods sold for the year ended December 31, 2004 was $11.2 million as compared to $6.2 million in 2003, resulting in a 60% gross margin for 2004 compared to a 63% gross margin rate in 2003. As with our sales results, the increase in our cost of goods sold was primarily due to the merger with Horizon and inclusion of the results of the acquired specialty access catheter products. Our cost of goods sold during the fourth quarter of 2004 reflected a negative impact of approximately $1.0 million in inefficiencies resulting from the transfer of our radiofrequency product manufacturing operations from our Mountain View, California location to our Manchester, Georgia location. These inefficiencies will likely continue into the second quarter of 2005, because we do not expect to achieve full production volumes or complete training of our manufacturing personnel in Georgia until that point. Our cost of goods sold in 2004 was also affected by amortization of intangibles, including $0.3 million in amortization of capitalized license fees associated with the settlement of our patent litigation dispute with Boston Scientific Corporation and $0.3 million in amortization of a product technology intangible asset recognized as part of the Horizon merger. The amortization expense of the product technology intangible asset will grow to $0.6 million in 2005, as we will amortize the asset for a full year, rather than only five months. We expect such amortization charges to continue through 2016.

Research and development expenses for the year ended December 31, 2004 were $3.8 million as compared to $4.3 million in 2003. This decrease was due to reduced new product development and clinical trial costs. We expect an increase in research expenditures for 2005, driven by developmental charges associated with technical innovation of our products, the expansion of our product line after the Horizon merger and, to some extent, the implementation of SFAS 123R.

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Selling, general and administrative expenses for the year ended December 31, 2004 were $20.6 million as compared to $17.4 million in 2003. Most of the increase, about $2.6 million, reflects higher sales, marketing and administrative expenses associated with our increased size after the Horizon merger, including $0.7 million in amortization of related intangibles. However, about $0.4 million of the increase was due to expenses associated with merger integration and sales training, and another $0.6 million of the increase was due to legal, audit and consulting expenses associated with compliance with the Sarbanes-Oxley Act of 2002. Our bad debt expense was about $0.4 million lower in 2004 than in 2003, primarily reflecting reduced allowances relating to our domestic distributors. In 2005, we expect selling, general and administrative expenses to increase 8% to 10% as a result of including a full year of the operations acquired from Horizon, compared to only five months in 2004. Also, a further increase will result from implementation of SFAS 123R. We are not now able to precisely quantify the impact of SFAS 123R on our results, but we believe it will significantly increase our selling, general and administrative expenses.

We incurred restructuring expenses of $1.3 million during the year ended December 31, 2004, consisting of severance related to the termination of employees to eliminate certain duplicative activities, primarily in the areas of sales, accounting and operations. We do not expect significant additional restructuring expenses in 2005.

Interest expense for the year ended December 31, 2004 was $0.6 million, compared to zero during the year ended December 31, 2003. The interest expense in 2004 relates to debt assumed in the merger with Horizon, the balance of which was $16.8 million at December 31, 2004. We had no debt throughout 2003. In 2005, despite payments made or to be made on our debt, interest expense on the remaining debt will be incurred for twelve months rather than only five months, as in 2004. For this reason, and because the interest rate on some of our remaining debt is scheduled to increase in 2005, we expect our interest expense to increase to approximately $1.0 million in 2005.

Interest income was essentially zero during the year ended December 31, 2004, down from $0.2 million for the year ended December 31, 2003, because average daily cash balances fell during 2004 as we utilized cash for operations.

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 was affected by charges for obsolete inventory that totaled approximately $0.5 million for 2003, down from $0.7 million in 2002. 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 charges ceased by June of 2003. 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.

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.

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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.

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.

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 that 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. In November of 2004, we raised an additional $11.1 million, net of expenses, through a second private placement of our common shares. As of December 31, 2004, we had $13.0 million of cash and cash equivalents, $0.9 million of marketable securities and $14.3 million of working capital.

For the year ended December 31, 2004, net cash used in operating activities was $5.6 million principally due to our net loss of $9.3 million, offset by non-cash charges of $2.1 million, including depreciation and amortization, stock-based compensation and provisions to reserves for uncollectible accounts receivable and inventory. Stock-based compensation for 2004 totaled $143,000, primarily from issuance of options to non-employees. Approximately $1.6 million in cash was provided in 2004 by changes in working capital accounts, including $0.7 million in reduced inventory, $0.4 million in reduced prepaid and other current assets, a $0.2 million in reduced accounts receivable and $0.2 million in higher accounts payable and current accrued liabilities. During 2004, $3.2 million was provided by investing activities, with net sales of marketable securities providing $4.9 million offset by $0.7 million used in purchase of property and equipment. Further, the acquisition of Horizon used $1.2 million in cash, the excess of professional service expenses incurred in the merger over Horizon’s cash as of the merger date. Financing activities for the year provided $11.6 million in cash, including the $11.1 million we raised in our November 2004 private placement of common stock and $0.7 million related to the issuance of common stock in conjunction with the exercise of stock options. We used $0.3 million to make payments on our debt.

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We have, from time to time, financed equipment through capital and operating leases. Also, in the course of the Horizon merger, we acquired debt, the balance of which was $16.8 million as of December 31, 2004. As of December 31, 2004, we had no future minimum payments due under capital leases. Future minimum payments due under operating leases, including the 2005 operating lease we have entered regarding our new headquarters space in Fremont, California, and debt agreements were as follows (in thousands):

	Operating Leases		Debt		Total
Year ending December 31, 2005	$	461	$	7,200	$	7,661
Year ending December 31, 2006		361		382		743
Year ending December 31, 2007		339		988		1,327
Year ending December 31, 2008		304		8,262		8,566
Year ending December 31, 2009.		308		—		308
Year ending December 31, 2010 and thereafter		116		—		116
Total of future minimum operating lease payments	$	1,889	$	16,832	$	18,721

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 was $5.6 million for the year ended December 31, 2004. In 2005, we will be required to make $7.2 million in debt payments; $6.5 million of this amount was made in February 2005. Our balance of cash, cash equivalents and marketable securities on December 31, 2004 was $13.9 million. Although it is difficult for us to predict future liquidity requirements with certainty, we believe that our current balances of cash, cash equivalents and marketable securities 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, obtain an additional credit facility or renegotiate debt repayment terms. 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 us and our stockholders, or that we will be successful in renegotiating debt repayment terms. Failure to obtain sufficient funds on acceptable terms when needed, to make timely debt payments, or to achieve our growth or profitability objectives may require us to curtail operations, perhaps to a significant extent.

Private Placement of Securities

On November 24, 2004, we entered into Stock and Warrant Purchase Agreements, with SF Capital Partners Ltd., BayStar Capital, Walker Smith Capital (and its affiliates) and Capital Ventures International. Pursuant to the terms of the Purchase Agreements, we sold an aggregate of 4,363,634 shares of its unregistered common stock at a per share price of $2.75 and warrants to purchase an aggregate of 3,272,724 shares of its common stock which are initially exercisable at a price of $4.00 per share, netting approximately $11.1 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 January 21, 2005, our Registration Statement on Form S-3/A, which registered the shares of common stock and the shares of common stock issuable upon exercise of the warrants to SF Capital Partners Ltd., Baystar Capital, Walker Smith Capital (and its affiliates) and Capital Ventures International, became effective.

In January of 2003, we 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., became effective.

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Income Taxes

As of December 31, 2004, we had federal net operating loss carryforwards of approximately $103.5 million and state net operating loss carryforwards of approximately $56.6 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 2024, and the state net operating loss carryforwards will expire between 2005 and 2014, 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 8, “Income Taxes,” in the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K.

Recent Accounting Pronouncements

In March 2004, the FASB issued EITF Issue No. 03-1 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” which provides new guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however, the disclosure requirements remain effective for annual periods ending after June 15, 2004. We will evaluate the impact of EITF 03-1 once the final guidance is issued.

In November 2004, the Financial Accounting Standards Board issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning in the second quarter of fiscal 2006. We do not believe the adoption of SFAS No. 151 will have a material effect on our consolidated financial position, results of operations or cash flows.

In December 2004, the Financial Accounting Standards Board issued Statement of Accounting Standards (SFAS) No. 123R, “Share-Based Payment”, which replaces SFAS No. 123. SFAS No. 123R requires public companies to recognize an expense for share-based payment arrangements including stock options and employee stock purchase plans. The statement eliminates a company’s ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for using a fair-value based method. SFAS No. 123R requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the date of grant, and to recognize the cost over the period during which the employee is required to provide service in exchange for the award. SFAS No. 123R is effective for us in the quarter ending September 30, 2005. Upon adoption of SFAS 123R, companies are allowed to select one of three alternative transition methods, each of which has different financial reporting implications. Management is currently evaluating the transition methods, valuation methodologies and other assumptions for employee stock options in light of SFAS No. 123R. Current estimates of option values using the Black-Scholes method may not be indicative of results from the valuation methodologies we ultimately implement upon adoption of SFAS No. 123R. Although we have not yet fully quantified the impact this standard will have on our financial statements, it is likely that the adoption of SFAS No. 123R will have a material impact on our financial position and results of operations.

Factors That May Affect Future Results

In addition to the other information in this report, the following factors should be considered carefully in evaluating our business and prospects:

We may be unable to integrate our operations successfully and realize all of the anticipated benefits of our merger with Horizon Medical Products.

Our merger with Horizon involves the integration of two companies that previously have operated independently, which is a complex, costly and time-consuming process. The difficulties of combining the companies’ operations include, among other things:

• Coordinating geographically disparate organizations, systems and facilities;

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• Integrating personnel with diverse business backgrounds;

• Consolidating corporate and administrative functions;

• Consolidating research and development, and manufacturing operations;

• Coordinating sales and marketing functions;

• Retaining key employees; and

• Preserving research and development, collaboration, distribution, marketing, promotion and other important relationships of the companies.

The process of integrating our operations with Horizon’s has caused and could cause an interruption of, or loss of momentum in, the activities of the combined company’s business and the loss of key personnel. The diversion of our management’s attention and any delays or difficulties encountered in connection with the integration of our operations with those of Horizon Medical Products could harm our business, results of operations, financial condition or prospects after the merger.

We have identified material weaknesses in our internal control over financial reporting. Failure to remediate these weaknesses could impact the reliability of our financial reporting.

To date, we have identified material weaknesses in our procurement process which did, prior to adjustment, or could otherwise, result in a material misstatement of our annual or interim financial statements. As a result of these material weaknesses, we have determined that we did not maintain effective internal control over financial reporting as of December 31, 2004. See our disclosure in “Status of Management’s Report on Internal Control over Financial Reporting” included under Item 9A for further discussion of these material weaknesses.

Because of the significant delays we have encountered in executing against our internal Section 404 project plan, it is possible that we will not be able to timely deliver the required management report on internal control over financial reporting May 2, 2005. If we are not so able to report by this extended due date, we will no longer be “current” in our Exchange Act reporting obligations and the liquidity of our common stock for certain of our selling stockholders will be adversely impacted.

In an exemptive order dated November 30, 2004, the Securities and Exchange Commission provided an extension on the due date for management’s and the independent registered accounting firm’s reports on internal control over financial reporting for certain filers until May 2, 2005. We are eligible for this extended due date and will elect to use it. However, because of the significant delays we have encountered in executing against our internal Section 404 project plan, it is possible that we will not be able to timely deliver the required management report by the extended due date. If we are not able to deliver this report by May 2, 2005, we will no longer be “current” in our Exchange Act reporting obligations. As a result, selling stockholders would be unable to use any registration statements on Form S-3 and on Form S-8 that we had filed in order for them to sell their shares of our common stock. Furthermore, selling stockholders would be unable to rely upon Rule 144 of the Securities Act in order to sell their shares of our common stock. The liquidity of our common stock for these selling stockholders will be reduced.

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We will be heavily dependent on the RITA system and our line of specialty access catheters in order to achieve our sales goals and our profitability targets. Failure to achieve and grow market acceptance for either product line could harm our business.

The majority of our sales will come from the sale of the RITA system and our line of specialty access catheters. Our financial performance will depend upon physician adoption and patient awareness of these products. If we are unable to convince physicians to use these products, we may not be able to generate sales because we do not have alternative products.

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

We incurred net losses of $9.3 million in 2004, $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, 2004, we had an accumulated deficit of $88.3 million. To become profitable we must increase our sales and continue to limit the growth of our operating expenses. If our sales do not grow, or if expenses grow excessively, we may not be able to achieve or maintain profitability in the future.

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.

In the market for radiofrequency ablation products, we compete directly with two companies both domestically and internationally: RadioTherapeutics Corporation, a division of Boston Scientific, and Radionics, Inc., a division of Tyco Healthcare, which is a division of Tyco International. Boston Scientific 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.

In the market for specialty access catheters and ports, we compete directly with C.R. Bard Inc. C.R. Bard is a publicly traded company with substantially greater resources than we have.

We are also aware of several companies in international markets that 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 radiofrequency ablation system or implantable vascular products, and physician adoption of our products could be negatively affected.

In addition to competing against other companies offering products that use radiofrequency energy to ablate soft tissue or implantable vascular products, 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 sales could decline.

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We currently lack long-term data regarding the safety and efficacy of our radiofrequency ablation 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 radiofrequency ablation products in various applications. If the safety or efficacy of our radiofrequency ablation products is questioned, our sales could decline.

Our radiofrequency ablation 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 radiofrequency ablation 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 or to the design or manufacture of implantable vascular products. 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;

• lower average selling prices for our products, due to distributor discounts;

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

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

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

• longer accounts receivable collection time;

29

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

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

• contractual provisions governed by foreign laws.

We are substantially dependent on two distributors in our international markets, and if we lose either distributor or if either distributor significantly reduces its product demand, our international and total sales 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 sales could decline. ITX Corporation, formerly known as Nissho Iwai Corporation, is our primary distributor in Asia. Although it accounted for only 7% of our international sales in 2004, it accounted for 21% of our international sales in 2003. M.D.H. s.r.l. Forniture Ospedaliere, our distributor in Italy, accounted for 19% of our international in 2004 and 22% of our international sales in 2003. International sales accounted for 16% of our total sales in 2004, and these two distributors represented 26% of that total. For the year ended December 31, 2003, international sales accounted for 20% of our total sales and these distributors represented 43% of that total. The loss of either distributor or a significant decrease in unit purchases by either distributor could cause our sales to decline substantially. If we are unable to attract additional international distributors, our international and total sales may not grow.

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

We sell our products in international markets and selected domestic markets through third-party distributors over whom we have limited control, and, if they fail to adequately support our products, our sales could decline. In the past, we have terminated agreements with distributors and although we contracted with replacement distributors, we expended significant time and resources in doing so, and our sales in the affected markets suffered during the transition period that lasted approximately nine months. If our distributors or we terminate other distributor agreements, we could incur similar or more burdensome expenses, we could 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 distributors have built up inventory of our products. As a result, future sales to these distributors could be negatively impacted. Sales to our Japanese distributor in 2004 and 2003 and to a domestic distributor in the three months ended September 30, 2004 were so affected. In addition, while our distributors have no price protection and may only return undamaged products per our return policies, if we permit the return of products in excess of our provision for returns, we will have to adjust our revenues relating to these products. This may also impact our revenue recognition policy on future distributor sales.

In 2002, we significantly increased our allowance for doubtful 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, and remained stable in 2004, we may encounter new difficulties with collections that require further increases in our allowance for doubtful accounts in the future, and we may require specific accounts to post letters of credit or pay in advance to minimize our credit risk. Further, we may, in the future, terminate relationships with some of the domestic distributors utilized by Horizon prior to the merger, making collection of accounts receivable with these customers difficult. We believe our allowance for doubtful accounts sufficiently reflects this possibility, but additional provisions to the allowance for doubtful accounts are could be required. Additional future increases in our allowance for doubtful accounts would reduce our profits.

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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. If our distributors or we 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, negatively impacting our international revenues.

Our business is dependent upon reimbursement from government programs, such as Medicare and Medicaid, and we may face limitations on such third-party reimbursement, which could harm our operating results.

In the United States, our products are purchased primarily by hospitals and medical clinics, which then bill various third-party payors, such as Medicare, Medicaid and other government programs and private insurance plans, for the healthcare services provided to patients. Government agencies, private insurers and other payors determine whether to provide coverage for a particular procedure and reimburse hospitals for medical treatment at a fixed rate based on the diagnosis-related group, or DRG, established by the United States Centers for Medicare and Medicaid Services, or CMS. The fixed rate of reimbursement is based on the procedure performed and is unrelated to the specific devices used in that procedure. If a procedure is not covered by a DRG, payors may deny reimbursement. In addition, third-party payors may deny reimbursement if they determine that the device used in a treatment was unnecessary, inappropriate or not cost-effective, experimental or used for a non-approved indication.

There can be no assurance that reimbursement for implantation of our vascular access ports and catheter products will continue at current levels, or that future reimbursement policies of third-party payors will not adversely affect our ability to sell our vascular products on a profitable basis. Failure by hospitals and other users of our products to obtain reimbursement from third-party payors, or changes in government and private third-party payors’ policies toward reimbursement for procedures employing our products, would have a material adverse effect on our business, results of operations and financial condition.

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 markets for qualified management personnel in Northern California, where our headquarters are located, and Georgia, where are primary operating facilities are located, are competitive and 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 are subject to, and may in the future 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 are and may in the future be subject to product liability lawsuits. 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.

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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 is likely to fluctuate owing to market uncertainty about our ability to successfully integrate the operations of Horizon and manage our cash during the process of integration. Our stock price may also fluctuate for a number of other reasons including:

• our ability to repay debt;

• our ability to successfully commercialize our products;

• our ability to comply with Section 404 of the Sarbanes-Oxley Act of 2002;

• conclusions that our internal control over financial reporting are ineffective;

• 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. Also, we are consolidating our manufacturing operations at our Manchester, Georgia location, and, prior to September 30, 2004, personnel at that location had essentially no experience in manufacturing our radiofrequency ablation disposable devices.

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

32

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, particularly considering our plans to consolidate our manufacturing operations in our Manchester, Georgia location by the second quarter of 2005, or are otherwise unable to meet customer demand for our products, our business could suffer.

We will relocate our headquarters to a new facility in 2005. We will incur moving expenses, and if we become unable to meet customer demand through disruption of manufacturing operations, our business could suffer.

We are planning to relocate our headquarters facility in April 2005, and to complete transition of our manufacturing operations to our Manchester, Georgia location by that time. In so doing, 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 radiofrequency ablation 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 September 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 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.

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

In the past, we have experienced shortages in the supply of accessory infusion pumps used in conjunction with our Starburst Xli and Starburst Xlie lines of disposable radiofrequency devices. We currently have one supplier for our accessory infusion pumps and, although we believe this supplier to be reliable, future disruptions in supply are possible. In that event, our business could suffer through lower sales or higher costs.

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 sales.

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 sales.

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.

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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 RFA 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 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, in the past, made minor modifications to the RITA system and to our implantable vascular products. 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 or our implantable vascular products 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.

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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. Failure to obtain sufficient funds on acceptable terms when needed or to make timely debt payments may require us to curtail operations, perhaps to a significant extent.

Our executive officers and directors could exert significant influence over matters requiring stockholder approval.

Our executive officers and directors, and their respective affiliates, own approximately 4% of our outstanding common stock as of January 31, 2005. These stockholders may, as a practical matter, be able to exert significant influence over matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combinations. This concentration of voting stock could have the effect of delaying or preventing a 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, 2004 and December 31, 2003 is related to our investment portfolio. We had no interest rate sensitive borrowings as of December 31, 2004 or December 31, 2003, although as of December 31, 2004, we have borrowings with interest rates that will increase by fixed amounts as of certain dates during 2005. 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 2004 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.

Our outstanding long-term debt is fixed rate and not subject to rate fluctuation, although our Senior Notes feature scheduled rate increases in January and July of 2005. The fair value of our debt will increase or decrease as interest rates decrease or increase, respectively.

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 currently have no significant direct foreign currency exchange rate risk and such risk in the future is expected to 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 Registered Public Accounting Firm on Financial Statements	37
Consolidated Balance Sheets	38
Consolidated Statements of Operations and Comprehensive Loss	39
Consolidated Statements of Stockholders’ Equity	40
Consolidated Statements of Cash Flows	41
Notes to Consolidated Financial Statements	42

36

Report of Independent Registered Public Accounting Firm on Financial Statements

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, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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 28, 2005

37

RITA MEDICAL SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	December 31,
	2004			2003
ASSETS
Current assets:
Cash and cash equivalents	$	12,978		$	3,780
Marketable securities		880			4,822
Accounts and note receivable, net of allowance for doubtful accounts and sales returns of $1,237 at December 31, 2004 and $1,117 at December 31, 2003		6,410			2,990
Inventories		7,126			2,192
Prepaid and other current assets		792			1,028
Total current assets		28,186			14,812
Long term marketable securities.		—			933
Long term note receivable, net of collection allowance of $61 at December 31, 2004 and $45 at December 31, 2003		177			338
Property and equipment, net		1,966			1,089
Goodwill		91,339			—
Intangible assets		30,600			4,814
Other assets		41			47
Total assets	$	152,309		$	22,033
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,572		$	1,124
Accrued liabilities		4,159			1,802
Current portion of long term debt		7,200			—
Total current liabilities		13,931			2,926
Long term debt, net of current portion		9,632			—
Other long term liabilities		90			23
Total liabilities		23,653			2,949
Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $0.001 par value:
Authorized: 2,000 shares at December 31, 2004
Issued and outstanding: No shares at December 31, 2004 and 2003		—			—
Common stock, $0.001 par value:
Authorized: 150,000 shares at December 31, 2004
Issued and outstanding: 41,350 shares at December 31, 2004 and 17,975 shares at December 31, 2003		41			18
Additional paid-in capital		216,893			98,037
Accumulated other comprehensive income (loss)		(2	)		2
Accumulated deficit		(88,276	)		(78,973	)
Total stockholders’ equity		128,656			19,084
Total liabilities and stockholders’ equity	$	152,309		$	22,033

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

38

RITA MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data)

	Years Ended December 31,
	2004			2003			2002
Sales	$	28,215		$	16,607		$	17,393
Cost of goods sold (including stock-based employee compensation of $42 in 2002)		11,200			6,166			6,908
Gross profit		17,015			10,441			10,485
Operating expenses:
Research and development (including stock-based employee compensation of $216 in 2002)		3,787			4,294			5,052
Selling, general and administrative (including stock-based employee compensation of $26, $0 and $196 in 2004, 2003 and 2002, respectively)		20,637			17,418			19,366
Restructuring charges		1,309			—			—
Total operating expenses		25,733			21,712			24,418
Loss from operations		(8,718	)		(11,271	)		(13,933	)
Interest income		46			201			473
Interest expense		(604	)		—			(12	)
Other expense, net		(27	)		(9	)		(27	)
Net loss		(9,303	)		(11,079	)		(13,499	)
Other comprehensive loss:
Change in unrealized loss on marketable securities		(4	)		(5	)		(63	)
Comprehensive loss	$	(9,307	)	$	(11,084	)	$	(13,562	)
Net loss per common share, basic and diluted	$	(0.35	)	$	(0.63	)	$	(0.91	)
Shares used in computing net loss per common share, basic and diluted		26,465			17,647			14,890

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

39

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, 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
Issuance of common stock	4,427			5		11,285			—			—			—			—			11,290
Issuance of common stock in conjunction with acquisition	18,704			18		91,560			—			—			—			—			91,578
Issuance of stock options and warrants in conjunction with acquisition	—			—		15,322			—			—			—			—			15,322
Stock options exercised	244			—		546			—			—			—			—			546
Stock compensation expense	—			—		143			—			—			—			—			143
Change in unrealized gain on marketable securities	—			—		—			—			—			(4	)		—			(4	)
Net loss	—			—		—			—			—			—			(9,303	)		(9,303	)
Balances, December 31, 2004	41,350		$	41	$	216,893		$	—		$	—		$	(2	)	$	(88,276	)	$	128,656

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

40

RITA MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Years Ended December 31,
	2004			2003			2002
Cash flows from operating activities:
Net loss	$	(9,303	)	$	(11,079	)	$	(13,499	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		2,597			1,713			1,401
Loss on disposal of property and equipment		23			275			—
Issuance and revaluation of common stock warrants for services received		—			(101	)		(19	)
Stock compensation expense		143			—			454
Allowance for doubtful accounts		(694	)		(99	)		865
Provision for obsolete inventories		40			551			670
Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts and note receivable		221			(190	)		1,534
Inventories		742			778			(546	)
Prepaid and other current assets		441			(33	)		287
Accounts payable and accrued liabilities		236			(637	)		66
Deferred maintenance revenue		(9	)		23			—
Net cash used in operating activities		(5,563	)		(8,799	)		(8,787	)
Cash flows from investing activities:
Purchase of property and equipment		(662	)		(1,003	)		(893	)
Purchases of marketable securities		(698	)		(12,787	)		(1,604	)
Sales and maturities of marketable securities		5,568			15,424			11,684
Net cash used in acquisition of Horizon Medical Products, Inc.		(1,150	)		—			—
Capitalization of patent litigation costs		—			(621	)		(1,802	)
Acquisition of intangibles		—			(2,650	)		—
Note receivable, other assets and other long term liabilities		150			142			(516	)
Net cash provided by (used in) investing activities		3,208			(1,495	)		6,869
Cash flows from financing activities:
Principle payments on debt		(283	)		—			—
Proceeds from issuance of common stock, net of issuance costs		11,836			9,636			1,551
Payments on capital lease obligations		—			—			(192	)
Net cash provided by financing activities		11,553			9,636			1,359
Net increase (decrease) in cash and cash equivalents		9,198			(658	)		(559	)
Cash and cash equivalents at beginning of year		3,780			4,438			4,997
Cash and cash equivalents at end of year	$	12,978		$	3,780		$	4,438
Supplemental disclosures of cash flow information:
Cash paid for taxes	$	39		$	9		$	27
Cash paid for interest	$	572		$	—		$	12
Supplemental disclosure of non-cash investing and financing activities:
Non-cash net assets acquired in acquisition	$	16,712		$	—		$	—

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

41

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. On July 29, 2004, the Company completed a merger with Horizon Medical Products, Inc. (“Horizon”). From that date, the Company has also been engaged in the manufacture and marketing of specialty access catheters. The Company’s products include radiofrequency generators, disposable needle electrode devices that deliver controlled thermal energy to targeted tissue, implantable ports, venous catheters, stem cell catheters and kidney dialysis catheters.

NOTE 2:    BUSINESS COMBINATION

On July 29, 2004, the Company merged with Horizon in a transaction accounted for under the purchase method of accounting. The combined companies will continue to operate under the name RITA Medical Systems, Inc. The merger was pursued and completed because the management groups and stockholders of each company believe the combined entity will achieve higher sales and profitability than either or both of the pre-merger companies on a stand-alone basis. These factors contributed to a purchase price in excess of the fair value of Horizon’s net tangible and intangible assets acquired and, as a result, the Company has recorded goodwill in connection with this transaction.

Each Horizon common stockholder received 0.4212 of a share of the Company’s common stock for each share of Horizon common stock held. The Company thereby issued approximately 18.7 million shares of its common stock to acquire all issued and outstanding shares of Horizon common stock, and further assumed all outstanding Horizon options and warrants that, upon exercise, will result in the issuance of approximately 3.9 million shares of the Company’s common stock. The fair value of shares issued by the Company was approximately $91.6 million based on a price per share of $4.896, the Company’s average closing price the day the proposed merger was announced (May 13, 2004), the two business days preceding the announcement and the two business days following the announcement. The fair value of options and warrants, all of which were fully vested when assumed by the Company was determined to be approximately $15.3 million using the Black-Scholes valuation model. Costs incurred to effect the merger included as a component of purchase price were $2.4 million. The total purchase price was approximately $109.3 million. The fair value of assets acquired, net of liabilities assumed, was approximately $18.0 million, resulting in goodwill of $91.3 million.

The allocation of purchase price was as follows (in thousands):

Current assets	$	10,666
Property and equipment		1,312
Intangible assets		27,309
Goodwill		91,339
Other assets		6
Current liabilities		(11,337	)
Debt		(9,928	)
Other long term liabilities		(81	)
Purchase consideration	$	109,286

The merger was completed on July 29, 2004 and none of Horizon’s results of operations prior to that date are included in the Company’s condensed consolidated statements of operations for the twelve months ended December 31, 2004. However, the Company has prepared pro forma financial information showing sales and net loss for the combined entity for the years ended December 31, 2004, 2003 and 2002, respectively, as if the

42

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

merger occurred as of the beginning of those periods. This unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations of the Company that would have been reported had the acquisition been completed as of the dates presented and should not be taken as representative of the future consolidated results of operations or financial condition of the Company (in thousands, except per share amounts):

	Years ended December 31,
	2004			2003			2002
				Unaudited
Sales	$	44,079		$	44,582		$	39,105
Net loss	$	(13,853	)	$	(12,748	)	$	(40,640	)
Net loss per common share, basic and diluted	$	(0.37	)	$	(0.35	)	$	(1.21	)

Restructuring costs of $1,309,000, consisting entirely of severance related to the termination of employees to eliminate certain duplicative activities, were incurred in the year ended December 31, 2004 (see Note 12, “Restructuring”).

NOTE 3:    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, Horizon Medical Products, Inc., 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, 2004, the Company’s total assets were $152.3 million, total liabilities were $23.7 million, working capital was $14.3 million and cash, cash equivalents and marketable securities totaled $13.9 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 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. If the Company needs to raise additional financing, it will seek to sell additional equity or debt securities, obtain an additional credit facility or renegotiate debt repayment terms. 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. Failure to obtain sufficient funds on acceptable terms when needed, to make timely debt payments, or to achieve our growth or profitability objectives may require us to curtail operations, perhaps to a significant extent.

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 affect 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 sales returns, doubtful accounts and for potentially excess and obsolete inventory. Actual results could differ from those estimates.

43

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Concentration of credit risk and other risks and uncertainties

The Company’s products include components subject to rapid technological change. Certain components used in the manufacture of some of our products 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, 2004. While the Company has ongoing programs to minimize the adverse effect of such changes and considers technological change in estimating its reserves, 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 four financial institutions in the United States, one 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, 2004, the Company increased its allowance for doubtful accounts by approximately $1,436,000, the amount of Horizon’s allowance for doubtful accounts as of the merger date of July 29, 2004. Subsequently, the Company reduced its allowance for doubtful accounts by approximately $694,000 due to collections of previously reserved amounts. For the year ended December 31, 2003, the Company reduced its allowance for doubtful accounts by approximately $99,000. For the year ended December 31, 2002 a provision of $902,000 was made to the allowance for doubtful accounts. Charges against the allowance were approximately $606,000, $233,000 and $37,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Reclassifications

Certain prior year balances have been reclassified to conform to current year presentation. In the Company’s annual reports for the year ended December 31, 2003 and all prior years, investments in variable rate debt obligations featuring interest rate reset intervals of less than 90 days were classified as cash equivalents. In the current year, such investments have been reclassified as current marketable securities in the Company’s Consolidated Balance Sheets as of December 31, 2003. Also, the Company’s Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2002 have been modified from past presentation to give effect to purchases and sales or maturities of such securities in the determination of net cash provided by (used in) investing activities. For the year ended December 31, 2003, net cash used in investing activities decreased by $1,650,000. For the year ended December 31, 2002, net cash provided by investing activities decreased by $150,000. The Company’s Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2004, 2003 and 2002 were not affected by this reclassification.

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 classified approximately $87,000 and $117,000 in restricted cash accounts as other current assets as of December 31, 2004 and 2003, respectively.

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

44

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

short-term investments. Also, the Company’s holdings of investment grade variable debt obligations, which are asset-backed and categorized as available-for sale, are classified as short-term investments. The Company’s investments in these variable rate securities are recorded at cost, which approximates fair value because the periodic reset of their interest rates eliminates or greatly reduces realized or unrealized holding gains or losses on such securities. Further, variable rate securities are highly liquid despite the long term nature of the stated contractual maturities. 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 equivalents, short-term marketable securities, accounts receivable and accounts payable approximate fair value due to their short maturities. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of its debt obligations approximate fair value.

Inventories

Inventories are stated at lower of cost or market value. Cost is determined using standard cost, which approximates actual costs on a first-in, first-out basis. Market value is determined as the lower of replacement cost or net realizable value. 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. For the year ended December 31, 2004, the Company increased its reserve for excess and obsolete inventory by approximately $1,693,000, the amount of Horizon’s reserve for excess and obsolete inventory as of the merger date of July 29, 2004. Provisions to the reserve for excess and obsolete inventory were approximately $40,000, $551,000 and $733,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Charges against the reserve were approximately $1,043,000, $277,000 and $63,000 for the years ended December 31, 2004, 2003 and 2002, respectively, as a result of disposals of the related inventory.

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, including its intangible assets, in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” An impairment review is performed whenever events or

45

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, the impairment is measured using the projected discounted cash flow method and charged to operations.

Intangible assets and Goodwill

All of the Company’s intangible assets are amortized using the straight-line method. The amortization periods of our intangible assets as of December 31, 2004 are as follows:

Capitalized patent defense litigation costs	9	years
Capitalized patent license agreements	5-10	years
Customer relationships	15	years
Product technology	12	years
Trademarks	10	years
Isomed distribution contract	4	years
Loan closing costs	7	months
Non-compete contracts	1	month

The Company’s merger with Horizon resulted in goodwill, the excess of purchase price over the fair value of assets acquired, of $91.3 million. The Company accounts for goodwill under SFAS No. 142, “Goodwill and Other Intangible Assets.” The SFAS No. 142 goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the reporting units that have goodwill assigned to them. In the Company’s case, operating in one business segment, the fair value of the reporting unit is equal to market capitalization. If fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. Recoverability of the asset is measure by comparison of the asset’s carrying amount to future net undiscounted cash flows the asset is expected to generate. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the projected discounted future net cash flows arising from the asset. The Company tests goodwill for impairment during the third quarter of every fiscal year, and when an event occurs or circumstances change such that it is reasonably possible that impairment exists. Events that could, in the future, result in impairment include, but are not limited to, sharply declining sales for a significant product or in a significant geographic region. No impairment of goodwill has been determined to exist as of December 31, 2004.

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. This policy is applied to all the Company’s customers. Except for our two distributors in the United States, our customers have no price protection and may only return undamaged product within thirty days of purchase. Our two distributors in the United States have no price protection, but it is our policy for these two customers to swap new product for undamaged returned product within 90 days of purchase, subject to a limit of 5% of their purchases in our preceding fiscal quarter. A provision for returns is made in the period that the related sales are recorded as a reduction against revenue. Revenue related to service contracts is deferred and recognized ratably over the terms of underlying contracts. Service contract terms range from 12 to 36 months.

46

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

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 $85,000, $71,000 and $119,000 for the years ended December 31, 2004, 2003 and 2002, 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 common 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,
	2004			2003			2002
Net loss, as reported	$	(9,303	)	$	(11,079	)	$	(13,499	)
Add: Stock-based employee compensation expense included in reported net loss		26			—			454
Deduct: Total stock-based employee compensation determined under fair value based method for all awards		(2,021	)		(1,914	)		(2,274	)
Pro forma net loss.	$	(11,298	)	$	(12,993	)	$	15,319
Basic and diluted net loss per common share:
As reported	$	(0.35	)	$	(0.63	)	$	(0.91	)
Pro forma	$	(0.43	)	$	(0.74	)	$	(1.03	)

47

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

This determination of pro forma net loss and pro forma net loss per common share utilizes the weighted average per share fair values of options granted during 2004, 2003 and 2002, which were $2.47, $1.87 and $4.10 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,
	2004		2003		2002
Volatility	78	%	75	%	79	%
Risk-free interest rate	3.55	%	3.16	%	3.93	%
Expected life	5 years		5 years		5 years
Expected dividends	0	%	0	%	0	%

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

	Years ended December 31,
	2004		2003		2002
Volatility	60	%	70	%	79	%
Risk-free interest rate	1.10	%	2.95	%	3.29	%
Expected life	0.7 years		1.3 years		0.7 years
Expected dividends	0	%	0	%	0	%

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.” Under EITF Issue No. 96-18, the fair value of the 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 unvested restricted common 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,
	2004			2003		2002
Net loss, basic and diluted	$	(9,303	)	$	11,079	$	13,499
Weighted-average shares of common stock outstanding		26,465			17,651		14,923
Less: weighted-average shares subject to repurchase		—			4		33
Weighted-average shares used in basic and diluted net loss per common share		26,465			17,647		14,890

48

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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,
	2004	2003	2002
Effect of potential common stock:
Unvested common stock subject to repurchase	—	—	28
Options outstanding	7,273	2,675	2,725
Warrants outstanding	3,350	25	25
Total potential common stock excluded from the computation of earnings per common share	10,623	2,700	2,778

Recent accounting pronouncements

In March 2004, the FASB issued EITF Issue No. 03-1 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” which provides new guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however, the disclosure requirements remain effective for annual periods ending after June 15, 2004. The Company will evaluate the impact of EITF 03-1 once the final guidance is issued.

In November 2004, the Financial Accounting Standards Board issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning in the second quarter of fiscal 2006. The Company does not believe the adoption of SFAS No. 151 will have a material effect on its consolidated financial position, results of operations or cash flows.

In December 2004, the Financial Accounting Standards Board issued Statement of Accounting Standards (SFAS) No. 123R, “Share-Based Payment”, which replaces SFAS No. 123. SFAS No. 123R requires public companies to recognize an expense for share-based payment arrangements including stock options and employee stock purchase plans. The statement eliminates a company’s ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for using a fair- value based method. SFAS No. 123R requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the date of grant, and to recognize the cost over the period during which the employee is required to provide service in exchange for the award. SFAS No. 123R is effective for the Company in the quarter ending September 30, 2005. Upon adoption of SFAS 123R, companies are allowed to select one of three alternative transition methods, each of which has different financial reporting implications. Management is currently evaluating the transition methods, valuation methodologies and other assumptions for employee stock options in light of SFAS No. 123R. Current estimates of option values using the Black-Scholes method may not be indicative of results from valuation methodologies ultimately implemented the Company upon adoption of SFAS No. 123R. Although the Company has not yet fully quantified the impact this standard will have on its financial statements, it is likely that the adoption of SFAS No. 123R will have a material impact on the Company’s financial position and results of operations.

49

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 4:    BALANCE SHEET COMPONENTS

Marketable securities (in thousands):

The cost and fair value of available-for-sale securities at December 31, 2004 were as follows:

Short term marketable securities	Cost Value		Unrealized Gain			Fair Value
Corporate notes	$	507	$	(1	)	$	506
United States government agency notes		375		(1	)		374
	$	882	$	(2	)	$	880

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		1,600		—			1,600
	$	4,821	$	1		$	4,822
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

Inventories (in thousands):

	December 31,
	2004		2003
Raw materials	$	2,776	$	719
Work in progress		682		214
Finished goods		3,668		1,259
	$	7,126	$	2,192

Property and equipment, net (in thousands):

	December 31,
	2004			2003
Computer equipment and software	$	1,464		$	1,202
Furniture and fixtures		413			195
Leasehold improvements		1,289			794
Machinery and equipment		5,223			4,261
		8,389			6,452
Less: accumulated depreciation and amortization		(6,423	)		(5,363	)
	$	1,966		$	1,089

Depreciation expense was approximately $1,074,000, $1,203,000 and $1,262,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

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RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Intangible assets (in thousands):

	December 31, 2004							December 31, 2003
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Capitalized patent defense litigation costs	$	2,755	$	(593	)	$	2,162	$	2,755	$	(351	)	$	2,404
Capitalized patent license agreements		2,650		(561	)		2,089		2,650		(240	)		2,410
Intangible assets recorded at merger with Horizon:														—
Customer relationships		16,600		(461	)		16,139		—		—			—
Product technology		6,900		(239	)		6,661		—		—			—
Trademarks		3,000		(125	)		2,875		—		—			—
Isomed distribution contract		700		(73	)		627		—		—			—
Loan closing costs		73		(32	)		41		—		—			—
Non-compete contracts		36		(30	)		6		—		—			—
	$	32,714	$	(2,114	)	$	30,600	$	5,405	$	(591	)	$	4,814

The capitalized patent defense litigation costs relate to the Company’s suit against RadioTherapeutics, a division of Boston Scientific Corporation. This suit was settled in April 2003 and no additional costs have been capitalized since that date.

The capitalized patent license agreements 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 2003, the Company capitalized $2,650,000 in payments made to acquire patent license agreements from Boston Scientific and the other opposing litigants.

Intangible assets acquired at fair value in the merger with Horizon include unamortized loan closing costs related to a debt repayment date extension negotiated by Horizon in March 2003, and unamortized costs of a non-compete agreement to which the Company acquired rights. The Company carries these intangible assets at their acquired fair value less accumulated amortization.

Valuation of the fair value of Horizon’s net assets resulted in assignment of a portion of the purchase price to intangible assets related to acquired trademarks, product technology, customer relationships and a distribution contract. The Company carries these assets at their fair value as of the acquisition date of July 29, 2004, less accumulated amortization.

Aggregate amortization expense for the year ended December 31, 2004, and estimated amortization expense for each of the five years ended December 31, 2005 through 2009 is as follows (in thousands):

Aggregate amortization expense:
For the twelve months ended December 31, 2004	$	1,523
Estimated amortization expense:
For the twelve months ended December 31, 2005	$	2,744
For the twelve months ended December 31, 2006	$	2,738
For the twelve months ended December 31, 2007	$	2,723
For the twelve months ended December 31, 2008	$	2,647
For the twelve months ended December 31, 2009	$	2,457

51

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accrued liabilities (in thousands):

	December 31,
	2004		2003
Payroll and related expenses	$	2,170	$	687
Accrued vacation		280		226
Accrued legal and audit expenses		491		183
Accrued sales and franchise taxes		403		41
Other accrued liabilities		815		665
	$	4,159	$	1,802

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, 2004 were as follows:

	December 31,
	2004			2003
Balance, beginning of year	$	45		$	—
Add: maintenance contract billings		15			48
Less: Revenue recognized		(30	)		(3	)
Balance, end of year		30			45
Less: current portion		(16	)		(22	)
Deferred maintenance revenue, less current portion	$	14		$	23

For the years ended December 31, 2004 and 2003, the current portion of deferred maintenance revenue is included in accrued liabilities and the long-term portion of deferred maintenance revenue is included in other long-term liabilities.

Debt

As part of the merger with Horizon, the Company assumed the following debts:

Senior Subordinated Convertible Notes (the “Senior Notes”) were originally issued by Horizon in March 2002. At July 29, 2004, the date of the Horizon merger, $14,763,000 of the Senior Notes remained due. As of December 31, 2004, the same $14,763,000 was due under the Senior Notes. Of this amount, $6,501,000 was to have come due in July 2005, but was prepaid in February 2005. The balance of $8,262,000 will come due in July 2008. The Senior Notes bear interest, payable quarterly, at 6.0% per annum. As of December 31, 2004, the interest rate on the Senior Notes will increased to 8% per annum on January 29, 2005 and will increase to 14% per annum on July 29, 2005. The Company may prepay the Senior Notes without a penalty prior to their respective maturity dates. See Note 13 “Subsequent Events” for Further Discussion on the Senior Notes.

A Junior Promissory Note (the “Junior Note”) payable to a major financial institution was originally executed by Horizon in April 2002. At July 29, 2004, the date of the Horizon merger, $1,640,000 of the Junior Note remained due. At December 31, 2004, $1,527,500 was due under the Junior Note. The Junior Note bears interest at a rate of 6% per annum, is payable monthly and matures in March 2007. The monthly principal payment is $22,500 until maturity at which time a balloon payment of $920,000 is due.

52

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A note payable for the Stepic business purchase (the “Stepic Note”) was executed by Horizon in 1998. At July 29, 2004, the date of the Horizon merger, $710,542 of the Stepic Note remained due. At December 31, 2004, $541,658 was due under the Stepic Note. The Stepic Note bears interest at 8% and calls for monthly interest and principal payments of approximately $38,000. The Stepic Note is scheduled to be fully repaid in March 2006.

None of the Company’s note agreements are collateralized. The principal covenants of the note agreements relate to events of default which include, but are not limited to, failure to pay an obligation when due, breach of any covenant which remains uncured for 15 days, bankruptcy and a change of control. Generally, upon an event of default, the holders of a majority of the aggregate principal amount of the notes outstanding may declare the unpaid principal and interest on the notes immediately due and payable.

Future maturities of debt outstanding as of December 31, 2004 are as follows (in thousands):

	Outstanding as of December 31, 2004		Amounts due in the years ended December 31,
			2005		2006		2007		2008
Senior Notes	$	14,763	$	6,501	$	—	$	—	$	8,262
Junior Note		1,528		270		270		988		—
Stepic Note		541		429		112		—		—
Total	$	16,832	$	7,200	$	382	$	988	$	8,262

NOTE 5:    COMMITMENTS AND CONTINGENCIES

Litigation

The Company is now and may in the future become involved in litigation relating to 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.

Operating Leases

As of December 31, 2004, the Company had commitments under operating leases for its facilities in Mountain View, California, Manchester, Georgia and Atlanta, Georgia, as well as for office and other equipment. All of the facility leases are non-cancelable. The leases pertaining to the Manchester, Georgia facility expire in 2010. The lease pertaining to the Atlanta, Georgia facility expires in 2007. The lease on the Company’s office facility in Mountain View, California expires in April 2005. During the first quarter of 2005, the Company leased office space in Fremont, California (See Note 13, “Subsequent Events”). The lease on the Fremont, California facility is also non-cancelable and expires in 2010. Rent expense was approximately $597,000, $539,000 and $529,000 for the years ended December 31, 2004, 2003 and 2002 respectively.

Future minimum payments under operating leases, including the new lease on the Fremont, California facility, are as follows (in thousands):

Year ending December 31, 2005	$	461
Year ending December 31, 2006		361
Year ending December 31, 2007		339
Year ending December 31, 2008		304
Year ending December 31, 2009		308
Year ending December 31, 2010 and thereafter		116
Total of future minimum operating lease payments	$	1,889

53

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 6:    STOCKHOLDERS’ EQUITY

Private placement of common shares

As part of the November 24, 2004, Stock and Warrant Purchase Agreements, the Company sold an aggregate of 4,363,634 shares of its unregistered common stock at a per share price of $2.75 and warrants to purchase an aggregate of 3,272,724 shares of its common stock which are initially exercisable at a price of $4.00 per share, netting approximately $11.1 million after issuance fees and expenses. The issuance was deemed to be exempt from registration under the Securities Act.

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.

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 2006. Its aggregate fair value of approximately $110,000 was charged to operations in 2001. Fair value was determined using the Black-Scholes valuation model.

On July 29, 2004, the Company completed its merger with Horizon. Under the terms of the merger agreement, the Company assumed 125,000 Horizon warrants, which were converted into warrants exercisable for 52,650 shares of the Company’s common stock at an average price of $2.11 per share. In 2005, 21,060 of these warrants will expire. Another 21,060 will expire in 2006, and the remaining 10,530 will expire in 2011. Their aggregate fair value of approximately $201,000 was recorded as part of the purchase price described in Note 2, “Business Combination.” Fair value was determined using the Black-Scholes valuation model.

As part of the November 24, 2004 Stock and Warrant Purchase Agreements, the Company issued warrants to purchase an aggregate of 3,272,724 shares of its common stock. The warrants have an initial exercise price of $4.00 per share and expire on November 24, 2009. The warrants provide for adjustment of the number and kind of securities purchasable upon exercise of the warrants, as well as for adjustment of the per share exercise price, upon the occurrence of certain specified events. These specified events include, without limitation, the payment by the Company of a dividend or a distribution on its common stock in shares of common stock, the consolidation or merger of the Company with another entity in which the Company is not the surviving entity, and the recapitalization, reclassification or reorganization of the capital stock of the Company. The warrants also contain an anti-dilution adjustment provision which provides for an adjustment in the per share exercise price in the event that the Company issues and sells shares of its common stock for per share consideration that is less than the exercise price then in effect, subject to customary limitations and exclusions, but in no event will the per share exercise price for the warrant be adjusted to less than $3.23.

54

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 7:    STOCK OPTIONS

1994 Incentive Stock Plan, 1998 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 average vesting period of options granted under this plan has been approximately 4 years. 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 average vesting period of options granted under this plan has been approximately 2 years.

The 1998 Incentive Stock Plan was assumed by the Company effective with its merger with Horizon. Options granted under this plan became fully vested immediately prior to the merger, and will generally expire ten years from the original date of grant. The Company’s board of directors has determined that no future grants will be made under this plan.

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, directors and consultants. A total of 2,000,000 common shares were originally available for issuance under this plan at its inception in 2000. A total of 810,292 common shares were available for issuance as of December 31, 2004. 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. The average vesting period of options granted under this plan has been approximately 4 years.

55

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, 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
Shares reserved	1,000		—			—
Options assumed in merger	—		3,814			7,452			1.95
Options granted	(1,455	)	1,455			4,909			3.37
Options exercised	—		(244	)		(546	)		2.24
Options canceled	391		(427	)		(2,090	)		4.89
Balances, December 31, 2004	1,104		7,273		$	20,236		$	2.78

Stock Options: Options outstanding and exercisable

Options outstanding, from all plans, and exercisable as of December 31, 2004 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 $  1.07	1,847	7.02 years	$	1.06	1,848	$	1.06
$ 1.19 to $  1.94	678	3.09 years	$	1.75	678	$	1.75
$ 2.02 to $  2.52	1,434	7.40 years	$	2.35	915	$	2.25
$ 2.59 to $  3.07	853	8.96 years	$	2.86	240	$	2.81
$ 3.10 to $  3.87	1,164	8.92 years	$	3.28	231	$	3.3
$ 3.92 to $  6.75	1,117	7.59 years	$	4.56	805	$	4.56
$ 8.02 to $34.73	180	4.92 years	$	13.18	171	$	13.36
	7,273	7.30 years	$	2.78	4,888	$	2.58

At December 31, 2003, the Company had 2,675,000 options outstanding at a weighted average exercise price of $3.93 and 740,000 options outstanding and exercisable at a weighted average exercise price of $5.36.

56

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, and will occur on the first day of each year until 2010, 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 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, 2004, there have been 342,205 shares issued under this plan.

Stock-based compensation

During the years ended December 31, 2004, 2003 and 2002, the Company recorded approximately $26,000, $0 and $454,000, respectively, in employee stock compensation expense. The expense incurred in 2004 was due to modifications of employee stock options. This employee stock compensation expense was recognized over the vesting periods of the related options, generally four years. Option grants to a director in compensation for consulting services were made in 2004 and 2003. (See Note 9, “Related Party Transactions”). No option grants were made to non-employees in 2002.

NOTE 8:    INCOME TAXES

No provisions for federal income taxes were recorded during the years ended December 31, 2004 and 2003, as the Company incurred net operating losses during these years.

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

	December 31,
	2004			2003
Net operating loss carryforwards	$	38,525		$	23,771
Capitalized startup and research and development costs		1,371			909
Research and development credit		1,225			1,392
Other		2,466			2,546
Gross deferred tax assets		43,587			28,618
Deferred tax liability—intangible assets		(10,478	)		—
Total deferred tax assets		33,109			28,618
Less: Valuation allowance		(33,109	)		(28,618	)
Net deferred tax assets	$	—		$	—

At December 31, 2004, the Company had federal and state net operating loss carryforwards of approximately $103.5 million and $56.6 million, respectively, available to offset future taxable income. The Company’s federal and state operating loss carryforwards expire between 2008 and 2024 and between 2005 and 2014, respectively, if not utilized.

57

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Due to the uncertainty surrounding the realization of the favorable tax attributes in future years, the Company has placed a full 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.

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:

	2004		2003		2002
Tax at federal statutory rate	34.0	%	34.0	%	34.0	%
State, net of federal benefit	6.0	%	6.0	%	6.0	%
Other	0.0	%	0.0	%	1.0	%
Deferred tax assets not benefited	(39.0	)%	(38.0	)%	(39.0	)%
Federal research and development credit	(1.0	)%	(2.0	)%	(2.0	)%
Provision for taxes	0.0	%	0.0	%	0.0	%

NOTE 9:    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 an 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 was required to pay a royalty of 2.5% of net sales on products developed incorporating the VIDAMed technology. This obligation terminated in August 2004, with the Company having made no payments under this agreement. During 2002, VIDAMed was acquired by Medtronic, Inc.

During the years ended December 31, 2004, 2003 and 2002 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 $14,000, $55,000 and $160,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

In April 2003, a member of the Company’s Board of Directors began providing consulting services to the Company. In 2003, this board member was paid approximately $164,000 and was granted options to purchase 35,000 shares of the Company’s common stock under his consulting agreement. In 2004, this board member was granted options to purchase an additional 10,000 shares of the Company’s common stock in connection with his consulting services. The Company is recognizing the expense of all of the options granted to this board member for consulting services using the Black-Scholes valuation model; through December 31, 2004, this consulting expense totaled approximately $94,000.

NOTE 10:    SEGMENT INFORMATION

As a result of the merger with Horizon, the Company expanded its customer base and portfolio of products, which resulted in two groups of medical oncology products: radiofrequency ablation (RFA) systems, which consist largely of products sold by the Company prior to the merger, and specialty access catheter products, which are the products sold by Horizon prior to the merger.

58

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker reviews financial information on a consolidated basis, accompanied by disaggregated information about sales by groups of similar products for purposes of making operating decisions and assessing financial performance. However, significant expenses such as research and development and corporate administration are not allocated to product groups or geographical regions, but rather are employed by the entire enterprise. For this reason, the Company’s chief operating decision maker evaluates resource allocation on an enterprise-wide basis, and not on a product or geographic basis. Accordingly, the Company has concluded that it operates in only one reportable segment, the medical oncology products business.

The following table presents sales information for the Company’s two product groups for the years ended December 31, 2004, 2003 and 2002 (in thousands):

	Years Ended December 31,
	2004		2003		2002
Sales:
Radiofrequency ablation products	$	17,553	$	16,607	$	17,393
Specialty access catheter products		10,662		—		—
Total	$	28,215	$	16,607	$	17,393

Sales for geographic regions reported below are based upon the customers’ locations. Following is a summary of the geographic information related to revenues and long-lived assets for the years ended December 31, 2004, 2003 and 2002 (in thousands):

	Years Ended December 31,
	2004		2003		2002
Sales:
United States	$	23,612	$	13,274	$	12,898
Italy		883		726		789
Japan		437		535		2,331
Other		3,283		2,072		1,375
Total	$	28,215	$	16,607	$	17,393
	Years Ended December 31,
	2004		2003		2002
Long-lived assets:
United States	$	1,966	$	1,089	$	1,501
Europe		—		—		64
Total	$	1,966	$	1,089	$	1,565

In the years ended December 31, 2004 and 2003, the Company had no customers accounting for 10% or more of its sales. In the year ended December 31, 2002, the Company had one customer that accounted for 14% of its sales. In the year ended December 31, 2004, the Company had no customers accounting for 10% or more of its outstanding accounts and notes receivable. In the year ended December 31, 2003, the Company had one customer that accounted for 12% of its outstanding accounts and notes receivable.

NOTE 11:    EMPLOYEE BENEFIT PLAN

The Company sponsors 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.

59

RITA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 12:    RESTRUCTURING

In the year ended December 31, 2004, in connection with the merger of RITA and Horizon, the Company recorded a restructuring charge of $1,309,000 related to the termination of employees to eliminate certain duplicative activities, primarily in the sales, accounting and operations areas. These charges were accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” As of December 31, 2004, $707,000 of the severance amounts had been paid and $602,000 remained accrued. The Company expects to pay remaining accrued severance amounts by June 30, 2005.

NOTE 13:    SUBSEQUENT EVENTS

Prepayment of debt

In February 2005, the Company paid $6,501,000 in principal, plus accrued interest, to some of our Senior Note holders. By agreement, ComVest Venture Partners, L.P. and Medtronic, Inc., the majority holders of our Senior Notes, did not receive any portion of this payment and the notes they hold remain outstanding. This $6,501,000 payment would otherwise have been due in July 2005.

Operating lease on office space in Fremont, California

In February 2005, the Company entered a non-cancelable operating lease on approximately 14,500 square feet of office space in Fremont, California. The lease term is from April 2005 through May 2010. Rent on the facility will be approximately $146,000 during the first year of the lease, with annual increases of approximately 3.4% in subsequent years; these amounts have been reflected in the Company’s future minimum payments under operating leases as presented in Note 5, “Commitments and Contingencies.” The Company plans to use this facility as its corporate headquarters beginning in April 2005 and, as of that date, we expect that the Company’s current headquarters location in Mountain View, California will be vacated. The lease on the Company’s Mountain View, California facility expires in April 2005.

NOTE 14:    QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

The following table sets forth selected items from the Company’s consolidated statements of operations for each of the eight quarters ended December 31, 2004. 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 statement 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, 2004			Sept. 30, 2004			June 30, 2004			Mar. 31, 2004			Dec. 31, 2003			Sept. 30, 2003			June 30, 2003			Mar. 31, 2003
Sales	$	10,961		$	7,951		$	4,659		$	4,644		$	4,196		$	3,865		$	4,049		$	4,497
Gross profit		5,867			5,130			2,989			3,029			2,559			2,612			2,347			2,923
Net loss	$	(1,872	)(a)	$	(3,258	)(a)	$	(2,003	)	$	(2,170	)	$	(2,241	)	$	(2,514	)	$	(3,400	)	$	(2,924	)
Net loss per common share, basic and diluted	$	(0.05	)	$	(0.10	)	$	(0.11	)	$	(0.12	)	$	(0.12	)	$	(0.14	)	$	(0.19	)	$	(0.17	)
Shares used in computing net loss per common share, basic and diluted		38,574			31,079			18,025			17,998			17,971			17,807			17,578			17,223

(a) Net loss during the quarters ended December 31, 2004 and September 30, 2004 include restructuring charges of $220 and $1,089, respectively. Restructuring charges are discussed in Note 12, “Restructuring.”

60

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

Not applicable.

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Securities Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of Company management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(b) and 15d-15(b). Based upon, and as of the date of this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were not effective, because of the material weaknesses discussed below. To address the material weaknesses described below, the Company performed additional analysis and other post-closing procedures to ensure that the consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Status of Management’s Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with established policies or procedures may deteriorate.

The Company is in the process of conducting an evaluation of its internal control over financial reporting as of December 31, 2004. In making its assessment of internal control over financial reporting, management is using the criteria described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Management has not yet completed its assessment of the effectiveness of the Company’s internal control over financial reporting. However, to date, management has identified certain control deficiencies which represent material weaknesses. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of December 31, 2004, we did not maintain effective controls over the reconciliation of accrued expenses. Specifically, we failed to reconcile the supporting documentation for certain material expense accruals to the general ledger. Furthermore, we failed to maintain effective controls over the completeness of accounts payable. Specifically, we failed to identify and record, at year end, certain of the Company’s general operating obligations. These control deficiencies resulted in our inability to prevent and detect incomplete accounting and disclosure of accounts payable, accrued liabilities and the related general operating expenses. These control deficiencies also resulted in material audit adjustments to the financial statements for the fourth quarter of 2004. Additionally, these control deficiencies could result in

61

material misstatements to the annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that each of these control deficiencies individually represent material weaknesses. The existence of one or more material weaknesses at December 31, 2004 precludes management from concluding that the Company’s internal control over financial reporting was effective as of December 31, 2004, based on the criteria in the Internal Control—Integrated Framework.

The Company’s evaluation of its internal control over financial reporting as of December 31, 2004 is not complete. Further, there can be no assurance that as a result of the ongoing evaluation of internal control over financial reporting, additional deficiencies will not be identified or that any deficiencies identified, either alone or in combination with others, will not be considered a material weakness.

Securities and Exchange Commission Release No. 34-50754, subject to certain conditions, provides up to 45 additional days beyond the due date of this Annual Report on Form 10-K for the filing of management’s annual report on internal control over financial reporting required by Item 308(a) of Regulation S-K and the related attestation report of the independent registered public accounting firm required by Item 308(b) of Regulation S-K. Pursuant to the Release, management’s report on internal control over financial reporting and the associated report on the audit of management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 are not filed herein and are expected to be filed no later than May 2, 2005 with an amendment to this Annual Report on Form 10-K.

The Company expects that the material weaknesses identified will result in an adverse opinion by the Company’s independent registered public accounting firm on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004.

Changes in Internal Control Over Financial Reporting

As discussed above, management has not completed its assessment of the Company’s internal control over financial reporting. However, management is aware of material weaknesses, that have resulted in changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2004 that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

In connection with our July 2004 merger with Horizon Medical Products, we transferred most of our accounting function and processes from our headquarters in California to our Manchester, Georgia location during the fourth quarter of 2004. Accounting staff in our California location was reduced, but corresponding resources in Georgia had not been added as of December 31, 2004, resulting in lapses in review. Also, procedures governing transfer of invoices and other source documents from California to Georgia had not been finalized, which resulted in certain expenses related to 2004 not being properly accrued for during our internal accounting close at year-end. To address the material weaknesses identified, we have implemented the following remedial actions:

• Hired additional personnel, permitting enhanced segregation of duties and additional review;

• Completed additional training of staff;

• Engaged outside consultants to perform additional testing and to identify procedural improvements in our accounting processes;

• Changed procedures for timely submission of invoices, particularly those received in California, to our Georgia-based accounting department.

Other than the changes discussed above, there have been no changes to the Company’s internal control over financial reporting that occurred since the beginning of the Company’s fourth quarter of 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.    Other Information.

Not applicable.

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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 Independent Registered Accounting Firm on Financial Statements

	Page
Report of Independent Registered Public Accounting Firm on Financial Statements	37
Consolidated Balance Sheets	38
Consolidated Statements of Operations and Comprehensive Loss	39
Consolidated Statements of Stockholders’ Equity	40
Consolidated Statements of Cash Flows	41
Notes to Consolidated Financial Statements	42

(2) Financial statement schedules

All schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements or notes thereto.

(3) 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 current report on Form 8-K reporting Item 5.02 was filed with the SEC on October 15, 2004.

A current report on Form 8-K reporting Item 8.01 was filed with the SEC on October 29, 2004.

A current report on Form 8-K reporting Item 8.01 was filed with the SEC on November 3, 2004.

A current report on Form 8-K reporting Items 2.02 and 9.01 was filed with the SEC on November 4, 2004.

A current report on Form 8-K reporting Item 8.01 was filed with the SEC on November 10, 2004.

A current report on Form 8-K reporting Item 8.01 was filed with the SEC on November 12, 2004.

A current report on Form 8-K reporting Items 1.01, 3.02 and 8.01 was filed with the SEC on November 26, 2004.

A current report on Form 8-K reporting Item 8.01 was filed with the SEC on November 30, 2004.

A current report on Form 8-K reporting Item 8.01 was filed with the SEC on December 2, 2004.

A current report on Form 8-K reporting Items 8.01 and 9.01 was filed with the SEC on December 16, 2004.

(c) Exhibits:

Number		Description
2.1	(1)	Form of Agreement and Plan of Merger between the Company and RITA Medical Systems, Inc., a Delaware corporation.
2.2	(10)	Agreement and Plan of Merger by and among RITA Medical Systems, Inc., a Delaware corporation, Hornet Acquisition Corp., a Delaware corporation, and Horizon Medical Products, Inc., a Georgia corporation, dated as of May 12, 2004, including exhibits thereto.
3.2	(1)	Amended and Restated Certificate of Incorporation of RITA Medical Systems, Inc., a Delaware corporation.
3.3	(11)	Certificate of Amendment of Certificate of Incorporation of RITA Medical Systems, Inc.
3.4	(1)	Amended and Restated Bylaws of RITA Medical Systems, 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.

63

Number	Description
4.2(1)	Sixth Amended and Restated Shareholder Rights Agreement dated June 20, 2000 by and among RITA Medical Systems, Inc. and certain security holders.
4.3(7)	Stock Purchase Agreement with SF Capital Partners Ltd., dated January 24, 2003.
4.4(7)	Stock Purchase Agreement with RIVERVIEW GROUP, LLC, dated January 24, 2003.
4.5(7)	Stock Purchase Agreement with BAYSTAR CAPITAL GROUP II, dated January 24, 2003.
4.6(7)	Stock Purchase Agreement with BAYSTAR INTERNATIONAL II, Ltd., dated January 24, 2003.
4.7(11)	Warrant dated September 26, 2002 between Horizon Medical Products, Inc. and Epoch Financial Group.
4.8(11)	Warrant dated September 26, 2002 between Horizon Medical Products, Inc. and Lippert/Heilshorn & Associates, Inc.
4.9(11)	Warrant dated June 17, 2003 between Horizon Medical Products, Inc. and Lippert/Heilshorn & Associates, Inc.
4.10(12)	Form of Stock and Warrant Purchase Agreement, dated as of November 24, 2004, by and between RITA Medical Systems, Inc. and each of SF Capital Partners Ltd., BayStar Capital II, L.P., Walker Smith Capital, L.P., Walker Smith Capital (QP), L.P., Walker Smith International Fund, Ltd. and Capital Ventures International
4.11(12)	Form of Warrant dated as of November 24, 2004, issued to each of SF Capital Partners Ltd., BayStar Capital II, L.P., Walker Smith Capital, L.P., Walker Smith Capital (QP), L.P., Walker Smith International Fund, Ltd. and Capital Ventures International.
10.1(1)	Sixth Amended and Restated Shareholder Rights Agreement dated June 20, 2000 by and among the Company 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.
#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 Company 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.
10.18(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.

64

Number	Description
#10.23(6)	Form of Change of Control Agreement entered into between the Company and Trent Reutiman on November 16, 2001 and 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, 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.
#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(17)	Change of Control Agreement entered into between the Company and Juan J. Soto dated as of September 3, 2003.
#10.43(17)	Contract of Employment between RITA Medical Systems Netherlands BV of DeBoelelaan 7 and Juan J. Soto dated October 15, 2003.
#10.44(17)	Indemnification Agreement between the Company and Juan J. Soto dated November 1, 2003
#10.45(17)	Offer letter between the Company and Darrin Uecker dated January 9, 2004.
^10.46	Lease Agreement dated as of July 1, 1996 between The Development Authority of the City of Manchester and Horizon Medical Products, Inc., filed as Exhibit 10.9 to the Form S-1 of Horizon Medical Products, Inc. dated April 14, 1998 (SEC File No. 333-46349) and incorporated herein by reference.
^10.47	Amendment to Lease Agreement dated November 2, 1999 between The Development Authority of the City of Manchester and Horizon Medical Products, Inc., filed as Exhibit 10.10 to the Form 10-K of Horizon Medical Products, Inc. dated March 29, 2000 (SEC File No. 000-24025) and incorporated herein by reference.
^10.48	Lease Agreement dated as of August 29, 1997 between The Development Authority of the City of Manchester and Horizon Medical Products, Inc., filed as Exhibit 10.10 to the Form S-1 of Horizon Medical Products, Inc. dated April 14, 1998 (SEC File No. 333-46349) and incorporated herein by reference.

65

Number	Description
^10.49	1998 Stock Incentive Plan, filed as Exhibit 10.11 to the Form S-1 of Horizon Medical Products, Inc. dated April 14, 1998 (SEC File No. 333-46349) and incorporated herein by reference.
^10.50	Equity Agreement, dated as of February 17, 1993, by and between CarboMedics, Inc. and Horizon Medical Products, Inc., as amended, filed as Exhibit 10.23 to the Form S-1 of Horizon Medical Products, Inc. dated April 14, 1998 (SEC File No. 333-46349) and incorporated herein by reference.
^10.51	Second Amended License Agreement dated January 1, 1995 between Dr. Sakharam D. Mahurkar and NeoStar Medical® Technologies, filed as Exhibit 10.26 to the Form S-1 of Horizon Medical Products, Inc. dated April 14, 1998 (SEC File No. 333-46349) and incorporated herein by reference.
^10.52	License Agreement dated July 1995 between Dr. Sakharam D. Mahurkar and Strato®/Infusaid TM Inc., filed as Exhibit 10.27 to the Form S-1 of Horizon Medical Products, Inc. dated April 14, 1998 (SEC File No. 333-46349) and incorporated herein by reference.
^10.53	Additional License Agreement dated January 1, 1997 between Dr. Sakharam D. Mahurkar and Horizon Medical Products, Inc., filed as Exhibit 10.28 to the Form S-1 of Horizon Medical Products, Inc. dated April 14, 1998 (SEC File No. 333-46349) and incorporated herein by reference.
^10.54	Note Purchase Agreement among Horizon Medical Products, Inc., ComVest Venture Partners, L.P. and certain Additional Note Purchasers dated March 1, 2002, filed as Exhibit 10.1 to the Form 8-K/A of Horizon Medical Products, Inc., filed on July 3, 2002 (SEC File Number 001-15459) and incorporated herein by reference.
^10.55	Senior Subordinated Convertible Note payable by Horizon Medical Products, Inc. to ComVest Venture Partners, L.P., dated March 16, 2002, filed as Exhibit 10.57 to the Annual Report on Form 10-K of Horizon Medical Products, Inc. for the year ended December 31, 2001, dated April 16, 2002 (SEC File Number 001-15459) and incorporated herein by reference.
^10.56	Senior Subordinated Convertible Note payable by Horizon Medical Products, Inc. to Medtronic, Inc., dated March 16, 2002, filed as Exhibit 10.58 to the Annual Report on Form 10-K of Horizon Medical Products, Inc. for the year ended December 31, 2001, dated April 16, 2002 (SEC File Number 001-15459) and incorporated herein by reference.
^10.57	Form of Senior Subordinated Convertible Note payable by Horizon Medical Products, Inc. to certain additional parties, dated March 16, 2002, filed as Exhibit 10.59 to the Annual Report on Form 10-K of Horizon Medical Products, Inc. for the year ended December 31, 2001, dated April 16, 2002 (SEC File Number 001-15459) and incorporated herein by reference.
^10.58	Junior Subordinated Promissory Note payable by ComVest Venture Partners, L.P. to Bank of America, dated March 15, 2002 and assumed by Horizon Medical Products, Inc. on March 15, 2002, filed as Exhibit 10.60 to the Annual Report on Form 10-K of Horizon Medical Products, Inc. for the year ended December 31, 2001, dated April 16, 2002 (SEC File Number 001-15459) and incorporated herein by reference.
^10.59	Non-Qualified Stock Option Agreement between Horizon Medical Products, Inc. and Marshall B. Hunt, dated March 15, 2002, for the purchase of 1,000,000 shares of the common stock of Horizon Medical Products, Inc. at an option price of $0.45 per share, filed as Exhibit 10.66 to the Annual Report on Form 10-K of Horizon Medical Products, Inc. for the year ended December 31, 2001, dated April 16, 2002 (SEC File Number 001-15459) and incorporated herein by reference.
^10.60	Non-Qualified Stock Option Agreement between Horizon Medical Products, Inc. and Marshall B. Hunt, dated March 15, 2002, for the purchase of 2,500,000 shares of the common stock of Horizon Medical Products, Inc. at an option price of $0.45 per share, filed as Exhibit 10.67 to the Annual Report on Form 10-K of Horizon Medical Products, Inc. for the year ended December 31, 2001, dated April 16, 2002 (SEC File Number 001-15459) and incorporated herein by reference.

66

Number	Description
^10.61	Non-Qualified Stock Option Agreement between Horizon Medical Products, Inc. and William E. Peterson, Jr., dated March 15, 2002, for the purchase of 1,000,000 shares of the common stock of Horizon Medical Products, Inc. at an option price of $0.45 per share, filed as Exhibit 10.69 to the Annual Report on Form 10-K of Horizon Medical Products, Inc. for the year ended December 31, 2001, dated April 16, 2002 (SEC File Number 001-15459) and incorporated herein by reference.
^10.62	Agreement between Horizon Medical Products, Inc., Steven Picheny and Howard Fuchs, dated March 14, 2002, filed as Exhibit 10.71 to the Annual Report on Form 10-K of Horizon Medical Products, Inc. for the year ended December 31, 2001, dated April 16, 2002 (SEC File Number 001-15459) and incorporated herein by reference.
^10.63	Amendment No. 1 to Note Purchase Agreement, dated as of June 10, 2002, by and among Horizon Medical Products, Inc., ComVest Venture Partners, L.P. and the Additional Note Purchasers (incorporated by reference to Exhibit 10.2 to the Form 10-Q of Horizon Medical Products, Inc. for the three months ended June 30, 2002).
^10.64	Amendment No. 2 to Note Purchase Agreement, dated as of July 29, 2002, by and among Horizon Medical Products, Inc., ComVest Venture Partners, L.P. and the Additional Note Purchasers (incorporated by reference to Exhibit 10.3 to the Form 10-Q of Horizon Medical Products, Inc. for the three months ended June 30, 2002).
^10.65	Common Stock Purchase Warrant, dated as of September 26, 2002, by and between Horizon Medical Products, Inc. and Epoch Financial Group, Inc. (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Horizon Medical Products, Inc. dated November 14, 2002).
^10.66	Common Stock Purchase Warrant, dated as of September 26, 2002, by and between Horizon Medical Products, Inc. and Lippert/Heilshorn & Associates, Inc. (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Horizon Medical Products, Inc. dated November 14, 2002).
^10.67	Amendment to Option Agreement, dated November 15, 2002, between Horizon Medical Products, Inc. and Marshall B. Hunt (incorporated by reference to Exhibit 10.43 to the Annual Report on Form 10-K of Horizon Medical Products, Inc. dated March 28, 2003).
^10.68	Lease Agreement, entered into as of December 15, 2000, by and between The Development Authority of the City of Manchester and Horizon Medical Products, Inc. (incorporated by reference to Exhibit 10.48 to the Annual Report on Form 10-K of Horizon Medical Products, Inc. dated March 28, 2003).
^10.69	Exclusive Distribution Agreement, dated April 15, 2003, between Horizon Medical Products, Inc. and Medtronic, Inc. (incorporated by reference to Exhibit 10.2 of the Quarterly Report filed on Form 10-Q of Horizon Medical Products, Inc. dated August 14, 2003).
^10.70	Common Stock Purchase Warrant between Lippert/Heilshorn & Associates, Inc., dated June 30, 2003 (incorporated by reference to Exhibit 10.5 of the Quarterly Report filed on Form 10-Q of Horizon Medical Products, Inc. dated August 14, 2003).
^10.71	Amendment No. 1 to Note Purchase Agreement, dated October 21, 2003, by and among Horizon Medical Products, Inc., ComVest Venture Partners, L.P., Medtronic, Inc., and certain Additional Note Purchasers (incorporated by reference to Exhibit 10.1 of the Current Report filed on Form 8-K of Horizon Medical Products, Inc. dated November 12, 2003).
^10.72	Amended and Restated Securityholders Agreement, dated October 21, 2003, by and among Horizon Medical Products, Inc., ComVest Venture Partners, L.P., Medtronic, Inc., Standard Federal Bank National Association and Marshall B. Hunt (incorporated by reference to Exhibit 10.2 of the Current Report filed on Form 8-K of Horizon Medical Products, Inc. dated November 12, 2003).

67

Number	Description
^10.73	Stock Option Agreement, dated October 21, 2003, between Horizon Medical Products, Inc. and Marshall Hunt (incorporated by reference to Exhibit 10.5 of the Current Report filed on Form 8-K of Horizon Medical Products, Inc. dated November 12, 2003).
^10.74	Stock Option Agreement, dated October 21, 2003, between Horizon Medical Products, Inc. and Robert Wenzel (incorporated by reference to Exhibit 10.6 of the Current Report filed on Form 8-K of Horizon Medical Products, Inc. dated November 12, 2003).
^10.75	Form of Bonus Agreement dated November 1, 2003, between Horizon Medical Products, Inc. and Robert Singer, L. Bruce Maloy and Elaine Swygert (incorporated by reference to Exhibit 10.61 to the Annual Report on Form 10-K of Horizon Medical Products, Inc. for the year ended December 31, 2003).
10.76(13)	Separation Agreement and Release of Claims, executed on or about August 20, 2004, between the Company, Horizon Medical Products, Inc. and Robert J. Wenzel.
10.77(13)	Amendment to Agreement, dated August 6, 2004, among the Company, Horizon Medical Products, Inc., Steven Picheny and Howard Fuchs.
^10.78	Equity Agreement, dated as of February 17, 1993, by and between CarboMedics, Inc. and Horizon Medical Products, Inc., as amended, filed as Exhibit 10.23 to the Form S-1 of Horizon Medical Products, Inc. dated April 14, 1998 (SEC File No. 333-46349) and incorporated herein by reference.
10.79(14)	Waiver and Amendment Agreement dated as of December 23, 2004 by and among RITA Medical Systems, Inc., SF Capital Partners Ltd. and BayStar Capital II, L.P.
10.80(15)	Consent and Waiver Agreement dated as of January 6, 2005, by and among Horizon Medical Products, Inc., ComVest Venture Partners, L.P., and Medtronic, Inc.
10.81(10)	Form of Voting Agreement entered into by RITA Medical Systems, Inc., a Delaware corporation, with each of Vincent Bucci, Joseph DeVivo, John Gilbert, Scott Halsted, Wesley E. Johnson, Jr., Randy Lindholm, Donald Stewart, Darrin Uecker, Lynn Saccoliti, Stephen Pedroff, Juan Soto and Morgan Stanley Venture Partners.
10.82(10)	Form of Lock-Up Agreement entered into by into by RITA Medical Systems, Inc., a Delaware corporation, and Horizon Medical Products, Inc., a Georgia corporation, with Morgan Stanley Venture Partners.
10.83(10)	Form of Lock-Up Agreement entered into by into by RITA Medical Systems, Inc., a Delaware corporation, and Horizon Medical Products, Inc., a Georgia corporation, with each of ComVest Venture Partners, L.P., Marshall B. Hunt and Medtronic, Inc.
10.84(16)	Form of Voting Agreement, dated as of May 12, 2004, between RITA Medical Systems, Inc., Horizon Medical Products, Inc. and certain shareholders of Horizon Medical Products, Inc.
10.85(16)	Amendment No. 4 to Note Purchase Agreement, dated as of May 12, 2004, by and among Horizon Medical Products, Inc., ComVest Venture Partners, L.P, and the Additional Note Purchasers (as defined therein).
10.86(16)	Amendment No. 1 to Amended and Restated Securityholders Agreement, dated as of May 12, 2004, by and among Horizon Medical Products, Inc., ComVest Venture Partners, L.P., Medtronic, Inc. and Marshall Hunt.
10.87	Standard Industrial/Commercial Multi-Tenant Lease Modified Net, dated as of January 25, 2005, by and between Fremont Ventures LLC and RITA Medical Systems, Inc.
23.1	Consent of PricewaterhouseCoopers LLP.

68

Number	Description
24.1	Power of Attorney (See Signature Page).
31.1	Certification of Chief Executive Officer.
31.2	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 Financial 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.

^ Incorporated by reference to reports previously filed by Horizon Medical Products, Inc., which merged with the Company on July 29, 2004. The specific report filed by Horizon Medical Products, Inc. to which reference is made is set forth above.

(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.

(10) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on May 14, 2004.

(11) Incorporated by reference to our Post-Effective Amendment on Form S-3 to Registration Statement on Form S-4 (File No. 333-116378) filed with the SEC on August 9, 2004.

(12) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on November 26, 2004.

(13) Incorporated by reference to our report on Form 10-Q (File No. 000-30959) filed with the SEC on November 9, 2004.

(14) Incorporated by reference to our Current Report on Form 8-K/A filed with the SEC on January 31, 2005

(15) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 7, 2005

(16) Incorporated by reference to our Registration Statement on Form S-4 (File No. 333-116378) filed with the SEC on June 10, 2004.

(17) Incorporated by reference to our report on Form 10-K (File No. 000-30959) filed with the SEC on March 15, 2004.

69

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 31, 2005	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 31, 2005
/s/    DONALD STEWART         Donald Stewart	Chief Financial Officer and Vice President, Finance and Administration (Principal Financial and Accounting Officer)	March 31, 2005
/s/    VINCENT BUCCI         Vincent Bucci	Director	March 31, 2005
/s/    RANDY LINDHOLM         Randy Lindholm	Director	March 31, 2005
/s/    JAMES E. BRANDS         James E. Brands	Director	March 31, 2005
/s/    THOMAS J. DUGAN         Thomas J. Dugan	Director	March 31, 2005
/s/    ROBERT TUCKER         Robert Tucker	Director	March 31, 2005
/s/    SCOTT HALSTED         Scott Halsted	Director	March 31, 2005
/s/    WESLEY JOHNSON         Wesley Johnson	Director	March 31, 2005

70

EX-10.87

Exhibit 10.87

STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE MODIFIED NET

1. Basic Provisions (“Basic Provision”).

1.1 Parties: This Lease (“Lease”), dated for reference purposes only, January 25, 2005, is made by and between Fremont Ventures, LLC (“Landlord”) and Rita Medical Systems, Inc. (“Tenant”), (collectively the “Parties,” or individually a “Party”).

1.2(a) Premises: That certain portion of the Building comprising approximately 14,480 sq. ft. of space, including all improvements therein or to be provided by Landlord under the terms of this Lease, commonly known by the street address of 46421 Landing Parkway, located in the City of Fremont, County of Alameda, State of California, as outlined on Exhibit A attached hereto (“Premises”). The “Building” is that certain building containing the Premises and generally described as building F of the Fremont Technology Park. In addition to Tenant’s rights to use and occupy the Premises as hereinafter specified, Tenant shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.6 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the “Industrial Center.” (Also see Paragraph 2.)

1.2(b) Parking: 58 unreserved vehicle parking spaces (“Unreserved Parking Spaces”); and no reserved vehicle parking spaces (“Reserved Parking Spaces”). (Also, see Paragraph 2.6)

1.3 Term: Five years and one month (“Original Term”) commencing April 15, 2005 (“Commencement Date”) and ending May 14, 2010 (“Expiration Date”). (Also Paragraph 3.)

1.4 Early Possession: Upon Lease Execution (“Early Possession Date”). (Also Paragraphs 3.2 and 3.3.)

1.5 Base rent: $12,163 per month (“Base Rent”), payable on the first day of each month commencing May 15, 2005 (Also see Paragraph 1.6(a) and Paragraph 4.) Base Rent to be adjusted as follows:

Months 13-24	$	12,597 per month
Months 25-36	$	13,032 per month
Months 37-48	$	13,466 per month
Months 49-60	$	13,900 per month

1.6(a) Base Rent Paid Upon Execution: $12,163 as Base Rent for the period May 15, 2005 through June 14,2005.

1.6(b) Tenant’s Share of Common Area Operating Expenses: 9.31 % (“Tenant’s Share”) as determined by prorata square footage of the Premises as compared to the total square footage of the Building.

1.7 Security Deposit: $13,900 in cash and ($83,400 in additional security in either a letter of credit or cash which shall decrease by 20% on each one year anniversary of the Commencement Date of the Lease assuming Tenant is not in default and which shall be waived entirely upon Tenant having their second consecutive profitable quarter (“Security Deposit”). (Also see Paragraph 5)

1.8 Permitted Use: general office, manufacturing, sales and marketing, R&D and R&D of medical devices (“Permitted Use”) (Also see Paragraph 5.)

1.9 Insuring Party. Landlord is the “Insuring Party.” (Also see Paragraph 8)

1.10(a) Real Estate Brokers. The following real estate broker(s) (collectively, the “Brokers”) and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes):

x CB Commercial represents Landlord exclusively (“Landlord’s Broker”);

x Cresa Partners represents Tenant exclusively (“Tenant’s Broker”); or

¨ ***** represents both Landlord and Tenant (“Dual Agency”), (/also see Par. 15.)

1.10(b) Payment to Brokers. Upon the execution of this Lease by both Parties, Landlord shall pay to said Broker(s) according to separate written agreement between Landlord and said Broker(s).

1.11 [Intentionally Deleted].

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2. Premises, Parking and Common Areas.

2.1 Letting. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. The leaseable area is measured to the outside edge of the outside walls and drip lines to the centerline of any demising walls, including a pro rata share of the electrical room and other common spaces. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental and/or Common Area Operating Expenses, is an approximation which Landlord and Tenant agree is reasonable and the rental and Tenant’s Share (as defined in Paragraph 1.6(b) based thereon is not subject to revision whether or not the actual square footage is more or less.

2.2 Condition. Landlord shall deliver the Premises to Tenant clean and free of debris on the Commencement Date and warrants to Tenant that the Premises and the plumbing, electrical systems, fire sprinkler system, lighting, air conditioning and heating systems and loading doors, if any, in the Premises, other than those constructed by Tenant, shall be, on the Commencement Date, in good operating condition and in compliance with all laws, including, without limitation, The Americans With Disabilities Act of 1990 and its California counterpart (together with the regulations promulgated pursuant thereto). If a non-compliance with said warranty exists as of the Commencement Date, Landlord shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Tenant setting forth with specificity the nature and extent of such non-compliance, rectify same at Landlord’s expense. If Tenant does not give Landlord written notice of a non-compliance with this warranty within sixty (60) days after the Commencement Date, correction of that non-compliance shall be the obligation of Tenant at Tenant’s sole cost and expense.

2.3 Warranties. Tenant acknowledges that neither landlord nor any of its agents made any representations or warranties respecting the project, the buildings, or the leased premises, upon which Tenant relied in entering into this Lease, which are not expressly set forth in this Lease. Tenant further acknowledges that neither Landlord nor any of its agents made any representations as to (i) whether the leased premises may be used for Tenant’s intended use under existing law or; (ii) the suitability of the leased premises for the conduct of Tenant’s business or; (iii) the exact square footage of the leased premises; that Tenant relied solely upon its own investigations-respecting said premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, seismic and earthquake requirements, and compliance with the American with Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record (collectively, “Applicable Laws”) and that upon its execution of this Lease, accepts the leaseable area as specified herein. Tenant expressly waives any and all claims for damage by reason of any statement, representation, warranty, promise or other agreement of landlord or landlord’s agent(s), if any, not. contained in this Lease or in any addenda hereto.

2.4 Tenant as Prior Owner/Occupant. The warranties made by Landlord in this Paragraph 2.2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Tenant was the owner or occupant of the Premises. In such event, Tenant shall, at Tenant’s sole cost and expense, correct any non-compliance of the Premises with said warranties.

2.5 Vehicle Parking. Tenant shall be entitled, at no additional charge at any time, to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Landlord for parking. Tenant shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks, herein called “Permitted Size Vehicles.” Vehicles other than Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Landlord in the Rules and Regulations (as defined in Paragraph 40) issued by Landlord. (Also see Paragraph 2.9.)

(a) Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant’s employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Landlord for such activities.

(b) If Tenant permits or allows any of the prohibited activities described in this Paragraph 2.6, then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Tenant, which cost shall be immediately payable upon demand by Landlord.

(c) Landlord shall at the Commencement Date of this Lease, provide the parking facilities required by Applicable Law.

2.6 Common Areas - Definition. The term “Common Areas” is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and Interior utility raceways within the Premises that are provided and designated by the Landlord from time to time for the general non-exclusive use of Landlord, Tenant and other tenants of the Industrial Center and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas.

2.7 Common Areas - Tenant’s Rights. Landlord hereby grants to Tenant, for the benefit of Tenant and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Landlord under the terms hereof or under the terms of

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any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Landlord or Landlord’s designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Tenant, which cost shall be immediately payable upon demand by Landlord.

2.8 Common Areas - Rules and Regulations. Landlord or such other person(s) as Landlord may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 40. Tenant agrees to abide by and conform to all such Rules and Regulations and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Landlord shall not be responsible to Tenant for the non-compliance with said rules and regulations by other tenants of the Industrial Center.

2.9 Common Areas - Changes. Landlord shall have the right, in Landlord’s sole discretion, from time to time:

(a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways;

(b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available and such closure does not interfere with Tenant’s business operations;

(c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas;

(d) To add additional buildings and improvements to the Common Areas;

(e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and

(f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Landlord may, in the exercise of sound business judgment, deem to be appropriate.

3. Term.

3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.

3.2 Early Possession. If an Early Possession Date is specified in Paragraph 1.4 and if Tenant totally or partially occupies the Premises after the Early Possession Date but prior to the Commencement Date, the obligation to pay Base Rent and Tenant’s Share of Common Area Operating Expenses shall be abated for the period of such early occupancy. All other terms of this Lease, however, (including but not limited to the obligations to carry the insurance required by Paragraph 8) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term.

3.3 Delay in Possession. If for any reason Landlord cannot deliver possession of the Premises to Tenant by the Early Possession Date, if one is specified in Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement Date, Landlord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Tenant hereunder, or extend the term hereof, but in such case, Tenant shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Tenant under the terms of this Lease until Landlord delivers possession of the Premises to Tenant. If possession of the Premises is not delivered to Tenant within sixty (60) days after the Commencement Date, Tenant may, at its option, by notice in writing to Landlord within ten (10) days after the end of sixty (60) day period, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Tenant is not received by Landlord within said ten (10) day period, Tenant’s right to cancel this Lease hereunder shall terminate and be of no further force or effect.

4. Rent

4.1 Base Rent. Tenant shall pay Base Rent and other rent or charges, as the same may be adjusted from time to time, to Landlord in lawful money of the United States, without offset or deduction, on or before the 1^st day of each month. Base Rent and all other rent and charges for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Landlord at its address stated herein or to such other persons or at such other addresses as Landlord may from time to time designate in writing to Tenant.

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4.2 Common Area Operating Expenses. Tenant shall pay to Landlord during the term hereof, in addition to the Base Rent, Tenant’s Share (as specified in Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions:

(a) “Common Area Operating Expenses” are defined, for purposes of this Lease, as all costs incurred by Landlord relating to the ownership and operation of the Industrial Center, including, but not limited to, the following:

(i) The operation, repair and maintenance, in neat, clean, good order and condition, of the following:

(aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, fences and gates, elevators and roof.

(bb) Exterior signs and any tenant directories.

(cc) Fire detection and sprinkler systems.

(ii) The cost of water, gas, electricity and telephone to service the Common Areas.

(iii) Trash disposal, actual property management fees not to exceed 4% of the gross monthly rental and security services and the costs of any environmental inspections.

(iv) Reserves set aside for maintenance and repair of Common Areas.

(v) Real Property Taxes (as defined in Paragraph 10.2) to be paid by Landlord for the Building and the Common Areas under Paragraph 10 hereof.

(vi) The cost of the premiums for the insurance policies maintained by Landlord under Paragraph 8 hereof.

(vii) Any deductible portion of an insured loss concerning the building or the Common Areas.

(viii) Any other services to be provided by Landlord that are stated elsewhere in this Lease to be a Common Area Operating Expense.

(b) Notwithstanding anything to the contrary contained in subparagraph (a) above, Common Area Operating Expenses shall not include, without limitation:

(i) Costs paid for directly by Tenant or any other tenant of the Building.

(ii) The cost of additional or extraordinary services provided to other tenants of the Building.

(iii) Principal and interest payments on loans secured by deeds of trust recorded against the Premises.

(iv) Real estate sale or leasing brokerage commissions.

(v) Executive salaries of off-site personnel employed by Landlord except for the charge (or pro rata share) of the manager of the Premises.

(vi) Costs paid by proceeds of insurance or other third parties,

(vii) The cost of capital improvements, except as set forth above.

(viii) The cost of repairs or other work to the extent Landlord is reimbursed by insurance or condemnation proceeds.

(c) Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable to the Building or to any other building in the industrial Center or to the operation, repair and maintenance thereof, shall be allocated entirely to the Building or to such other building. However, any Common Area Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Landlord to all buildings in the Industrial Center.

(d) The inclusion of the improvements, facilities and services set forth in subparagraph 4.2(a) shall not be deemed to impose an obligation upon Landlord to either have said improvements or facilities or to provide those services unless the Industrial Center already has the same, Landlord already provides the services, or Landlord has agreed elsewhere in this Lease to provide the same or some of them.

(e) Tenant’s Share of Common Area Operating Expenses shall be payable by Tenant within thirty (30) days after a reasonably detailed statement of actual expenses is presented to Tenant by Landlord. At Landlord’s option, however, an amount may be estimated by Landlord from time to time of Tenant’s Share of annual Common Area Operating Expenses and the same shall be payable monthly or quarterly, as Landlord shall designate, during each 12-month period of the Lease term, on the same day as the Base Rent is due hereunder.

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Landlord shall deliver to Tenant within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Tenant’s Share of the Common Area Operating Expenses incurred during the preceding year (“Landlord’s Statement”). If Tenant’s payments under this Paragraph 4.2(e) during said preceding year exceed Tenant’s Share as indicated on the Landlord’s Statement, Landlord shall be credited the amount of such over-payment against Tenant’s Share of Common Area Operating Expenses next becoming due. If Tenant’s payments under this Paragraph 4.2(e) during said preceding year were less than Tenant’s Share as indicated on the Landlord’s Statement, Tenant shall pay to Landlord the amount of the deficiency within thirty (30) days after delivery by Landlord to Tenant of the Landlord’s Statement.

(f) Tenant may designate, by written notice to Landlord within ninety (90) days after receipt of the Landlord’s Statement, an independent certified public accountant to inspect Landlord’s books and records for such 12-month period. Landlord shall provide Tenant’s certified public accountant access to Landlord’s books and records during Landlord’s regular business hours and upon reasonable prior notice. Tenant’s accountant must be a member of a nationally or regionally recognized accounting firm and must not be retained on a contingency fee basis. If after Tenant’s accountant’s inspection, Tenant disputes the Landlord’s Statement, a final and conclusive certification of the proper amount shall be made, at Tenant’s expense, by an independent certified public accountant designated by Landlord. If the certification shows that the actual Tenant’s Share of Common Area Operating Expenses was less than reported in the Landlord’s Statement, Tenant shall be credited against the next installment of Base Rent in the amount of any overpayment by Tenant. Likewise, if the certification shows that the actual Tenant’s Share of Common Area Operating Expenses was greater than reported in the Landlord’s Statement, Tenant shall pay Landlord the amount of any underpayment within thirty (30) days. If the certification shows that Landlord overstated Tenant’s Share of Common Area Operating Expenses by five percent (5%) or more in the Landlord’s Statement, Landlord shall pay the costs related to such certification plus the out-of pocket fees incurred by Tenant in its original audit. Tenant shall keep any information gained from the inspection of Landlord’s books and records confidential and shall not disclose it to any other party, except as may be required by law.

5. Security Deposit. Tenant shall deposit with Landlord upon Tenant’s execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Tenant’s faithful performance of Tenant’s obligations under this Lease. Tenant is to deposit with landlord an additional security deposit of $83,400 in either cash or an irrevocable letter of credit from an institution acceptable to landlord naming Landlord as beneficiary and guaranteeing the full and faithful performance of all of the terms and conditions of this Lease including any re-tenanting costs if need be. Provided Tenant is not in default of the terms and conditions of the Lease, Tenant may reduce the amount of the additional security by 20% on each one year anniversary from the commencement date assuming that Tenant is not in default of the Lease. Upon Tenant becoming profitable for two consecutive quarters said additional security deposit shall be waived. If Tenant fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Landlord may use, apply or retain all or any portion of said Security Deposit, Tenant shall within ten (10) days after written request therefore deposit monies with Landlord sufficient to restore said Security Deposit to the full amount required by this Lease. Landlord shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Landlord shall, at the expiration or earlier termination of the term hereof and after Tenant has vacated the Premises, return to Tenant (or, at Landlord’s option, to the last assignee, if any, of Tenant’s interest herein), that portion of the Security Deposit not used or applied by Landlord. Unless otherwise expressly agreed in writing by Landlord, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any monies to be paid by Tenant under this Lease.

6. Use.

6.1 Permitted Use.

(a) Tenant shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8, or any other legal use which is reasonably comparable thereto, and for no other purpose. Tenant shall not use or permit the use of the Premises in a manner that is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties.

(b) Landlord hereby agrees to not unreasonably withhold or delay its consent to any written request by Tenant, Tenant’s assignees or subtenants, and by prospective assignees and subtenants of Tenant, its assignees and subtenants, for a modification of said Permitted Use, so long as the same will not impair the structural integrity of the improvements on the Premises or in the Building or the mechanical or electrical systems therein, does not conflict with uses by other Tenants, is not significantly more burdensome to the Premises or the Building and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Landlord elects to withhold such consent, Landlord shall within five (5) business days after such request give a written notification of same, which notice shall include an explanation of Landlord’s reasonable objections to the change in use.

6.2 Hazardous Substances.

(a) Reportable Uses Require Consent. The term “Hazardous Substance” as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Landlord to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Tenant shall not engage in any activity in or

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about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Landlord and compliance in a timely manner (at Tenant’s sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3). “Reportable Use” shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Tenant may, without Landlord’s prior consent, but upon notice to Landlord and in compliance with all Applicable requirements, use any ordinary and customary materials reasonably required to be used by Tenant in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Landlord to any liability therefor. In addition, Landlord may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance by Tenant upon Tenant’s giving Landlord such additional assurances as Landlord, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefor, including but not limited to the installation (and, at Landlord’s option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof.

(b) Duty to Inform Landlord. If Tenant knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Landlord, Tenant shall immediately give Landlord written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any governmental authority or private party concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Tenant shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the prompting or sanitary sewer system).

(c) Indemnification. Tenant shall indemnify, protect, defend and hold Landlord, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys’ and consultants’ fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Tenant or by anyone under Tenant’s control. Tenant’s obligations under this paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Tenant, and the cost of investigation (including consultants’ and attorneys’ fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Landlord and Tenant shall release Tenant from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Landlord in writing at the time of such agreement.

6.3 Tenant’s Compliance with Requirements. Tenant shall, at Tenant’s sole cost and expense, fully, diligently and in a timely manner, comply with all “Applicable Requirements,” which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Landlord’s engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and ground water conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance), now in effect or which may hereafter come into effect. Tenant shall, within five (5) days after receipt of Landlord’s written request, provide Landlord with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Tenant’s compliance with any applicable Requirements specified by Landlord, and shall immediately upon receipt, notify Landlord in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Tenant or the Premises to comply with any Applicable Requirements.

6.4 Inspection; Compliance with Law. Landlord, Landlord’s agents, employees, contractors and designated representatives, and the holders of any mortgages, deeds of trust or ground leases on the Premises (“Lenders”) shall have the right to enter the Premises at any time in the case of an emergency, and otherwise after 24 hours’ notice, for the purpose of inspecting the condition of the Premises and for verifying compliance by Tenant with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Landlord shall be entitled to employ experts and/or consultants in connection therewith to advise Landlord with respect to Tenant’s activities, including but not limited to Tenant’s installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease by Tenant or a violation of Applicable Requirements or a contamination, caused or materially contributed to by Tenant, is found to exist or to be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Tenant shall upon request reimburse Landlord or Landlord’s Lender, as the case may be, for the costs and expenses of such inspections.

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7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations.

7.1 Tenant’s Obligations.

(a) Subject to the provision of Paragraphs 2.2 (Condition), 7.2 (Landlord’s Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Tenant shall, at Tenant’s sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Tenant, and whether or not the need for such repairs occurs as a result of Tenant’s use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, and plate glass, but excluding any items which are the responsibility of Landlord pursuant to Paragraph 7.2 below. Tenant, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Tenant’s obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair.

(b) Tenant shall, at Tenant’s sole cost and expense, procure and maintain a contract, with copies to Landlord, in customary form and substance for and with a contractor specializing and experienced in the inspection, maintenance and service of the heating, air conditioning and ventilation system for the Premises. However, Landlord reserves the right, upon notice to Tenant, to procure and maintain the contract for the heating, air conditioning and ventilating systems, and if Landlord so elects, Tenant shall reimburse Landlord, upon demand, for the cost thereof.

(c) If Tenant fails to perform Tenant’s obligations under this Paragraph 7.1, Landlord may enter upon the Premises after ten (10) days’ prior written notice to Tenant (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Tenant’s behalf, and put the Premises in good order, condition and repair, in accordance with Paragraph 13.2 below.

7.2 Landlord’s Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 4.2 (Common Area Operating Expenses), 7 (Use), 7.1 (Tenant’s Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Landlord, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if located in the Common Areas) or other automatic fire extinguishing system including fire alarm and/or smoke detection systems and equipment, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Landlord shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Landlord be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Tenant expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Tenant the right to make repairs at Landlord’s expense or terminate this Lease because of Landlord’s failure to keep the Building, Industrial Center or Common Areas in good order, condition and repair.

7.3 Utility Installations, Trade Fixtures, Alterations.

(a) Definitions; Consent Required. The term “Utility Installations” is used in this Lease to refer to all air lines, power panels, electrical distribution, security, fire protections systems, communications systems, lighting fixtures, heating, ventilating and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term “Trade Fixtures” shall mean Tenant’s machinery and equipment which can be removed without doing material damage to the Premises. The term “Alterations” shall mean any modification of the improvements on the Premises which are provided by Landlord under the terms of this Lease, other than Utility Installations or Trade Fixtures. “Tenant-Owned Alterations and/or Utility Installations” are defined as Alterations and/or Utility Installations made by Tenant that are not yet owned by Landlord pursuant to Paragraph 7.4(a). Tenant shall not make nor cause to be made any Alterations or Utility Installations in, on, under or about the Premises without Landlord’s prior written consent. Tenant may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without Landlord’s consent but upon notice to Landlord, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the roof or any existing walls, or changing or interfering with the fire sprinkler or fire detection systems and the cumulative cost thereof during the term of this Lease as extended does not exceed $2,500.00.

(b) Consent. Any Alterations or Utility Installations that Tenant shall desire to make and which require the consent of the Landlord shall be presented to Landlord in written form with detailed plans. All consents given by Landlord, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall state whether Landlord expects such Alterations or Utility Installations to be removed by Tenant at the expiration or earlier termination of this Lease, and shall be deemed conditioned upon: (i) Tenant’s acquiring all applicable permits required by governmental authorities; (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Landlord prior to commencement of the work thereon; and (iii) the compliance by Tenant with all conditions of said permits in a prompt and expeditious manner. Any Alterations of Utility Installations by Tenant during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and be in compliance with all Applicable Requirements. Tenant shall promptly upon completion thereof furnish Landlord with as-built plans and specifications therefor. Landlord may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $2,500.00 or more upon Tenant’s providing Landlord with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation.

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(c) Lien Protection. Tenant shall pay when due all claims for labor or materials furnished or alleged to have been furnished to or for Tenant at or for use on the Premises, which claims are or may be secured by any mechanic’s or materialmen’s lien against the Premises or any interest therein. Tenant shall give Landlord not less than ten (10) days’ notice prior to the commencement of any work in, on, or about the Premises, and Landlord shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Tenant shall, in good faith, contest the validity of any such lien, claim or demand, then Tenant shall, at its sole expense, defend and protect itself, Landlord and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Landlord or the Premises. If Landlord shall require, Tenant shall furnish to Landlord a surety bond satisfactory to Landlord in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Landlord against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Landlord may require Tenant to pay Landlord’s attorneys’ fees and costs in participating in such action if Landlord shall decide it is to its best interest to do so.

7.4 Ownership, Removal, Surrender, and Restoration.

(a) Ownership. Subject to Landlord’s right to require their removal and to cause Tenant to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Installations made to the Premises by Tenant shall be the property of and owned by Tenant, but considered a part of the Premises. Landlord may, at any time and at its option, elect in writing to Tenant to be the owner of all or any specified part of the Tenant-Owned Alterations and Utility Installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Tenant-Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Landlord and remain upon the Premises and be surrendered with the Premises by Tenant.

(b) Removal. Unless otherwise agreed in writing, Landlord may require that any or all Tenant-Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding that their installation may have been consented to by Landlord. Landlord may require the removal at any time of all or any part of any Alterations or Utility Installations made without the required consent of Landlord.

(c) Surrender/Restoration. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or subtenancies, or may, at the option of Landlord, operate as an assignment to Landlord of any or all such subleases or subtenancies. Immediately prior to the expiration or sooner termination of this Lease, Tenant shall remove all of Tenant’s signs from the exterior of the Building and shall remove all of Tenant’s equipment, trade fixtures, furniture, supplies, wall decorations and other personal property from the Premises, and shall vacate and surrender the Premises to Landlord in broom clean condition, normal wear and tear excepted. Additionally, Tenant shall, prior to the expiration or sooner termination of this Lease, remove any Alterations or Utility Installments constructed or installed by Tenant that Landlord previously requested be removed when it gave its consent to such Alterations or Utility Installments, and Tenant shall repair all damage caused by such removal. If the Premises are not surrendered to Landlord in the condition required by this Paragraph 7.4(c) at the expiration or sooner termination of this Lease, Landlord may, at Tenant’s expense, so remove Tenant’s signs, property and/or improvements not so removed and make such repairs and replacements not so made or hire, at Tenant’s expenses, independent contractors to perform such work. Tenant shall be liable to Landlord for all costs incurred by Landlord in returning the Premises to the required condition and Tenant shall be deemed to have impermissibly held over until such time as such required work is completed.

8. Insurance; Indemnity.

8.1 Payment of Premiums. The cost of the premiums for the insurance policies maintained by Landlord under this Paragraph 8 shall be a Common Area Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date or Expiration Date.

8.2 Liability Insurance.

(a) Carried by Tenant. Tenant shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Tenant, Landlord and any Lender(s) whose names have been provided to Tenant in writing (as additional insureds) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an “Additional Insured-Managers or Landlords of Premises: endorsement and contain the “Amendment of the Pollution Exclusion” endorsement for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an “insured contract” for the performance of Tenant’s indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Tenant shall not, however, limit the liability of Tenant nor relieve Tenant of any obligation hereunder. All insurance to be required by this Lease or as carried by Tenant shall not, however, limit the liability of Tenant nor relieve Tenant of any obligation hereunder. All insurance to be carried by Tenant shall be primary to and not contributory with any similar insurance carried by Landlord, whose insurance shall be considered excess insurance only.

(b) Carried by Landlord. Landlord shall also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Tenant. Tenant shall not be named as an additional insured therein.

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8.3 Property Insurance-Building, Improvements and Rental Value.

(a) Building and Improvements. Landlord shall obtain and keep in force during the term of this Lease a policy or policies in the name of Landlord, with loss payable to Landlord and to any Lender(s), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Tenant-Owned Alterations and Utility Installations, Trade Fixtures and Tenant’s personal property shall be insured by Tenant pursuant to Paragraph 8.4. If the coverage is available and commercially appropriate, Landlord’s policy or policies shall insure against all risks of direct physical loss or damage (and at Landlord’s option the perils of flood and/or earthquake), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss, but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located.

(b) Rental Value. Landlord shall also obtain and keep in force during the term of this Lease a policy or policies in the name of Landlord, with loss payable to Landlord and any Lender(s), insuring the loss of the full rental and other charges payable by all tenants of the Building to Landlord for at least one year (including all Real Property Taxes, insurance costs, all Common Area Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year’s loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, Real Property Taxes, insurance premium costs and other expenses, if any, otherwise payable, for the next 12-month period. Common Area Operating Expenses shall include any deductible amount in the event of such loss.

(c) Adjacent Premises. Tenant shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Industrial Center if said increase is caused by Tenant’s acts, omissions, use or occupancy of the Premises.

(d) Tenant’s Improvements. Since Landlord is the Insuring Party, Landlord shall not be required to insure Tenant-Owned Alterations and Utility Installations unless the item in question has become the property of Landlord under the terms of this Lease.

8.4 Tenant’s Property Insurance. Subject to the requirements of Paragraph 8.5, Tenant at its cost shall either by separate policy or, at Landlord’s option, by endorsement to a policy already carried, maintain insurance coverage on all of Tenant’s personal property, Trade Fixtures and Tenant-Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by Landlord as the Insuring Party under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a deductible not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Tenant for the replacement of personal property and the restoration of Trade Fixtures and Tenant-Owned Alterations and Utility Installations. Upon request from Landlord, Tenant shall provide Landlord with written evidence that such insurance is in force.

8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a “General Policyholders Rating” of at least B+, V, or such other rating as may be required by a Lender, as set forth in the most current issue of “Best’s Insurance Guide.” Tenant shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Tenant shall cause to be delivered to Landlord, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days’ prior written notice to Landlord. Tenant shall at least thirty (30) days prior to the expiration of such policies, furnish Landlord with evidence of renewals or “insurance binders” evidencing renewal thereof, or Landlord may order such insurance and charge the cost thereof to Tenant, which amount shall be payable by Tenant to Landlord upon demand.

8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Tenant and Landlord each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss or damage to their property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. Landlord and Tenant agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Landlord or Tenant, as the case may be, so long as the insurance is not invalidated thereby.

8.7 Indemnity. Tenant, shall, during the term of this Lease, indemnify and save harmless Landlord and any agents of Landlord from any and all loss, damage, claims of damage, obligations, cause or causes of

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action, or liabilities of any kind or nature (including reasonable costs of attorney’s fees if Landlord is made a party to any action which Tenant’s indemnity runs hereunder) by reason of injury or death of any person or persons or damage to any property of any kind and to whomsoever belonging, including injury or death to the person or damage to the property of Tenant, Tenant’s officers, directors, employees, agents, guests, subtenants and assignees, concessionaires and licensees, and any other person, firm or corporation selling or manufacturing merchandise or services upon or from the demised premises, or any part thereof, from any cause or cause whatsoever which result from Tenant’s use or from any other activity done, permitted or suffered by Tenant. As a material part of the consideration to Landlord, Tenant hereby assumes all risk of damage to property or injury to persons in or about the Premises from any cause whatsoever (except that which is caused by the sole active negligence or willful misconduct by Landlord or its Agents or by the failure of Landlord to observe any of the terms and conditions of this Lease). Tenant’s obligations under this paragraph shall survive the termination of this Lease.

8.8 Exemption of Landlord from Liability. Landlord shall not be liable for injury or damage which may be sustained by Tenant or to the person or goods, wares, merchandise or other property of Tenant, Tenant’s employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, earthquake, steam, electricity, gas, water or rain, which may leak or from or into any part of the premises or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of preparing the same is accessible or not. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant of Landlord nor from the failure by Landlord to enforce the provisions of any other lease in the Industrial Center. Notwithstanding the foregoing, Landlord shall indemnify and save harmless Tenant and any agents of Tenant from all damages caused by its sole active negligence or willful misconduct. Landlord’s obligations under this paragraph shall survive the termination of this Lease.

9. Damage or Destruction.

9.1 Definitions.

(a) “Premises Partial Damage” shall mean damage or destruction to the Premises, other than Tenant-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than fifty percent (50%) of the then Replacement Cost (as defined in Paragraph 9.1 (d) of the Premises (excluding the Tenant-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction.

(b) “Premises Total Destruction” shall mean damage or destruction to the Premises, other than Tenant-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Tenant-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. In addition, damage or destruction to the Building, other than Tenant-Owned Alterations and Utility Installations and Trade Fixtures of any tenants of the Building, the cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost (excluding Tenant-Owned Alterations and Utility Installations and Trade Fixtures of any Tenants of the Building) of the Building shall, at the option of Landlord, be deemed to be Premises total Destruction.

(c) “Industrial Center Total Destruction” shall mean damage or destruction to the Industrial Center or the Building in which the premises are located, regardless of the damage to the premises. The cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost of the Industrial Center or the Building (excluding Tenant-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction.

(d) “Insured Loss” shall mean damage or destruction to the Premises, other than Tenant-Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved.

(e) “Replacement Cost” shall mean the cost to repair or rebuild the improvements owned by Landlord at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation.

(f) “Hazardous Substance Condition” shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises.

9.2 Premises Partial or Total Damage - Insured Loss. If Premises Partial or Total Damage that is an Insured Loss occurs, then Landlord shall, at Landlord’s expense, repair such damage (but not Tenant’s Trade Fixtures or Tenant-Owned Alterations and Utility Installations) as soon as reasonably possible, but only to the extent of the available insurance proceeds, and this Lease shall continue in full force and effect. In the event, however, that there is a shortage of insurance proceeds and such shortage is due to any reason some but not all of which may include the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available, then Landlord shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Tenant provides Landlord with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of

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written notice of such shortage and request therefor. If Landlord receives said funds or adequate assurance thereof within said ten (10) day period, Landlord shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Landlord does not receive such funds or assurance within said period, Landlord may nevertheless elect by written notice to Tenant within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Landlord paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Landlord does not receive such funds or assurance within such ten (10) day period, and if Landlord does not so elect to restore and repair, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Tenant shall in no event have any right to reimbursement from Landlord for any funds contributed by Tenant to repair any such damage or destruction.

9.3 Premises Partial or Total Damage - Uninsured Loss. If Premises Partial or Total Damage that is not an Insured Loss occurs, Landlord may at Landlord’s option, either (i) repair such damage as soon as reasonably possible at Landlord’s expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Tenant within thirty (30) days after receipt by Landlord of knowledge of the occurrence of such damage of Landlord’s desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Landlord elects to give such notice of Landlord’s intention to terminate this Lease, Tenant shall have the right within ten (10) days after the receipt of such notice give written notice to Landlord of Tenant’s commitment to pay for the repair of such damage totally at Tenant’s expense and without reimbursement from Landlord. Tenant shall provide Landlord with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Tenant. In such event this Lease shall continue in full force and effect, and Landlord shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Tenant does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Landlord’s notice of termination.

9.4 Industrial Center Destruction. Notwithstanding any other provision hereof, if the Industrial Center in which the Premises are located suffers Total Destruction (including any destruction required by any authorized public authority), this Lease at Landlord’s option shall terminate sixty (60) days following the date of such Total Destruction, whether or not the damage or destruction affected the premises.

9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one month’s Base Rent, whether or not an Insured Loss, Landlord or Tenant may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to the other Party of its election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, that if Landlord elects to end the Lease pursuant to this Paragraph 9.5 but Tenant at that time has an exercisable option to extend this Lease, then Tenant may preserve this Lease by (a) exercising such option, and (b) providing Landlord with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Tenant’s receipt of Landlord’s written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Tenant duly exercises such option during such period and provides Landlord with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Landlord shall, at Landlord’s expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Tenant fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5.

9.6 Abatement of Rent; Tenant’s Remedies.

(a) In the event of (i) Premises Partial Damage or (ii) Hazardous Substance Condition for which Tenant is not legally responsible, the Base Rent, Common Area Operating Expenses and other charges, if any, payable by Tenant hereunder for the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Tenant’s use of the Premises is impaired. Except for abatement of Base Rent, Common Area Operating Expenses and other charges, if any, as aforesaid, all other obligations of Tenant hereunder shall be performed by Tenant, and Tenant shall have no claim against Landlord for any damage suffered by reason of any such damage, destruction, repair, remediation or restoration.

(b) If Landlord shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within forty-five (45) days after such obligation shall accrue, Tenant may, at any time prior to the commencement of such repair or restoration, give written notice to Landlord and to any Lenders of which Tenant has actual notice of Tenant’s election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Tenant gives such notice to Landlord and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Landlord or a Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this Lease shall continue in full force and effect. “Commence” as used in this Paragraph 9.6 shall mean the beginning of the actual work on the Premises.

9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition occurs, unless Tenant is legally responsible therefor (in which case Tenant shall make the investigation and remediation thereof required by Applicable Requirements and this Lease shall continue in full force and effect, but subject to Landlord’s rights under Paragraph 6.2(c) and Paragraph 13), Landlord may at Landlord’s option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Landlord’s expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $50,000, whichever is greater, give written notice to Tenant within thirty (30) days after receipt by Landlord of knowledge of the occurrence of such Hazardous

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Substance Condition of Landlord’s desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Landlord elects to give such notice of Landlord’s intention to terminate this Lease, Tenant shall have the right within ten (10) days after receipt of such notice to give written notice to Landlord of Tenant’s commitment to pay for the excess costs of (a) investigation and remediation of such Hazardous Substance Condition to the extent required by Applicable Requirements, over (B) an amount equal to twelve (12) times the then monthly Base Rent or $50,000 whichever is greater. Tenant shall provide Landlord with the funds required of Tenant or satisfactory assurance thereof within thirty (30) days following said commitment by Tenant. In such event this Lease shall continue in full force and effect, and Landlord shall proceed to make such investigation and remediation as soon as reasonably possible after the required funds are available. If Tenant does not give such notice and provide the required funds or assurance thereof within the time period specified above, this Lease shall terminate as of the date specified in Landlord’s notice of termination.

9.8 Termination - Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, Landlord shall return to Tenant any advance payment made by Tenant to Landlord and so much of Tenant’s Security Deposit as has not been, or is not then required to be, used by Landlord under the terms of this Lease.

9.9 Waiver of Statutes. Landlord and Tenant agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith.

10. Real Property Taxes.

10.1 Payment of Taxes. Landlord shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Industrial Center, and except as otherwise provided in Paragraph 10.3, any such amounts shall be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2.

10.2 Real Property Tax Definition. As used herein, the term “Real Property Taxes” shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Landlord in the Industrial Center or any portion thereof, Landlord’s right to rent or other income therefrom, and/or Landlord’s business of leasing the Premises. The term “Real Property Taxes” shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Industrial Center or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common.

10.3 Additional Improvements. Tenant shall pay to Landlord the Common Area Operating Expenses as payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Tenant or at Tenant’s request.

10.4 Joint Assessment. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed or the industrial center, such proportion to be determined by Landlord from the respective valuations assigned in the assessor’s work sheets or such other information as may be reasonably available. Landlord’s reasonable determination thereof, in good faith, shall be conclusive.

10.5 Tenant’s Property Taxes. Tenant shall pay prior to delinquency all taxes assessed against and levied upon Tenant-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Tenant contained in the Premises or stored within the Industrial Center. When possible, Tenant shall cause its Tenant-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Landlord. If any of Tenant’s said property shall be assessed with Landlord’s real property, Tenant shall pay Landlord the taxes attributable to Tenant’s property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Tenant’s property.

11. Utilities. Tenant shall pay directly for all utilities and services supplied to the Premises, including but not limited to electricity, telephone, security, gas, trash removal and cleaning of the Premises, together with any taxes thereon. If any such utilities or services are not separately metered to the Premises or separately billed to the Premises, Tenant shall pay to Landlord a reasonable proportion to be determined by Landlord of all such charges jointly metered or billed with other premises in the Building, in the manner and within the time periods set forth in Paragraph 4.2(d). Landlord shall not be liable to Tenant for injury, damage, loss of Tenant’s business or profits, from any failure, interruption, rationing or other curtailment in the supply of electric, gas, water or other utilities from whatever cause.

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12. Assignment and Subletting.

12.1 Landlord’s Consent Required.

(a) Tenant shall not assign this Lease, nor any right hereunder, nor sublet the premises, nor any part thereof, without the prior written consent of Landlord, which shall not be unreasonably withheld. In exercising its reasonable discretion Landlord may consider all commercially relevant factors involved in the leasing of the premises including but not limited to the a) the creditworthiness and financial stability of the prospective assignee or subtenant; b) references of prior landlords; c) the past history of such subtenant, with respect to involvement in litigation and bankruptcy proceedings; d) the impact of said subtenant or assignee and proposed use of the premises on pedestrian and vehicular traffic, other tenants, and parking; e) the use, generation or disposal of hazardous materials. The presence of one negative factor enumerated above shall be deemed reasonable justification for Landlord’s withholding consent.

(b) A change in the control of Tenant shall constitute an assignment requiring Landlord’s consent. The transfer, on a cumulative basis, of fifty percent (50%) or more of the voting control of Tenant shall constitute a change in control for this purpose.

(c) The involvement of Tenant or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Tenant’s assets occurs, which results or will result in a reduction of the Net Worth of Tenant, as hereinafter defined, by an amount equal to or greater than fifty percent (50%) of such Net Worth of Tenant as it was represented to Landlord at the time of full execution and delivery of this Lease or at the time of the most recent assignment to which Landlord has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Tenant was or is greater, shall be considered an assignment of this Lease by Tenant to which Landlord may reasonably withhold its consent. “Net Worth of Tenant” for purposes of this Lease shall be the net worth of Tenant (excluding any Guarantors) established under generally accepted accounting principles consistently applied.

(d) Tenant’s remedy for any breach of this Paragraph 12.1 by Landlord shall be limited to compensatory damages and/or injunctive relief.

(e) Notwithstanding anything contained herein to the contrary Tenant shall have the right without Landlord’s consent to assign all or any portion of its interest under this Lease or sublet all or any portion of the Premises without Landlord’s consent to any parent, subsidiary or affiliate of Tenant; or any party which results from any merger or consolidation of Tenant; and/or any party which acquires all or substantially all the assets or stock of Tenant. In all events Tenant shall remain liable for the terms and conditions of this Lease.

12.2 Terms and Conditions Applicable to Assignment and Subletting.

(a) Regardless of Landlord’s consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee or subtenant of the obligations of Tenant under this Lease, (ii) release Tenant of any obligations hereunder, nor (iii) alter the primary liability of Tenant for the payment of Base Rent and other sums due Landlord hereunder or for the performance of any other obligations to be performed by Tenant under this Lease.

(b) Landlord may accept any rent or performance of Tenant’s obligations from any person other than Tenant pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver or estoppel of Landlord’s right to exercise its remedies for the Default or Breach by Tenant of any of the terms, covenants or conditions of this Lease.

(c) The consent of Landlord to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Tenant or to any subsequent or successive assignment or subletting by the assignee or subtenant. However, Landlord may consent to subsequent or successive assignment or subletting by the assignee or subtenant. However, Landlord may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Tenant or anyone else liable under this Lease or the sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or the sublease.

(d) In the event of any Default or Breach of Tenant’s obligation under this Lease, Landlord may proceed directly against Tenant, any guarantors or anyone else responsible for the performance of the Tenant’s obligations under this Lease, including any subtenant, without first exhausting Landlord’s remedies against any other person or entity responsible therefor to Landlord, or any security held by Landlord.

(e) Any assignee of, or subtenant under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Landlord, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Tenant during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Landlord has specifically consented in writing.

(f) If Tenant desires to Sublet or Assign the entire premises prior to the expiration of the term of the Lease and obtains an acceptable subtenant or assignee, then the Landlord shall have the option prior to the execution of the sublease or assignment agreement to cancel this Lease. Landlord, in Landlord’s sole discretion, may then enter into a new lease with any prospective subtenant as the substitute Tenant.

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12.3 Additional Terms and Conditions Applicable to Assignment and Subletting. The following terms and conditions shall apply to any subletting or assignment by Tenant of all or any part of the Premises and shall be deemed included in all subleases and assignments under this Lease whether or not expressly incorporated therein:

(a) Tenant hereby assigns and transfers to Landlord all of Tenant’s interest in Said sublease, rentals, income or other consideration arising from any sublease or assignment of all or a portion of the Premises heretofore or hereafter made by Tenant, and Landlord may collect such sums and apply same toward Tenant’s obligations under this Lease. In addition Tenant shall pay to Landlord 50% of any additional sublease rent in excess of the base rent payable by Tenant under the Lease after first deducting any tenant improvements paid for by Tenant and new Tenant Improvements for a subtenant amortized over the sublease term and all leasing commissions and legal fees. Landlord shall not, by reason of the foregoing provision or any other assignment of such sublease to Landlord, nor by reason of the collection of the rents from a subtenant, be deemed liable to the subtenant for any failure of Tenant to perform and comply with any of Tenant’s obligations to such subtenant under such Sublease. Tenant hereby irrevocably authorizes and directs any such subtenant, upon receipt of a written notice from Landlord, to pay to Landlord the rents and other charges due and to become due under the sublease. Subtenant shall rely upon any such statement and request from Landlord and shall pay such rents and other charges to Landlord without any obligation or right to inquire as to whether any Breach exists and notwithstanding any notice from or claim from Tenant to the contrary. Tenant shall have no right or claim against such subtenant, or, until the Breach has been cured, against Landlord, for any such rents and other charges so paid by said subtenant to Landlord.

(b) In the event of a Breach by Tenant in the performance of its obligations under this Lease, Landlord, at its option and without any obligation to do so, may require any subtenant to attorn to Landlord, in which event Landlord shall undertake the obligations of the sub landlord under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Landlord shall not be liable for any prepaid rents or security deposit paid by such subtenant to such sub landlord or for any other prior defaults or breaches of such sub landlord under such sublease.

(c) Any matter or thing requiring the consent of the sub landlord under a sublease shall also require the consent of Landlord herein.

(d) No subtenant under a sublease or assignee approved by Landlord shall further assign or sublet all or any part of the Premises without Landlord’s prior written consent.

(e) Landlord shall deliver a copy of any notice of Default or Breach by Tenant to the subtenant, who shall have the right to cure the Default of Tenant within the grace period, if any, specified in such notice. The subtenant shall have a right of reimbursement and offset from and against Tenant for any such Defaults cured by the subtenant.

13. Default; Breach; Remedies.

13.1 Default; Breach. Landlord and Tenant agree that if any attorney is consulted by Landlord in connection with a Tenant Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Landlord may include the cost of such services and costs in said notice as rent due and payable to cure said default, a “Default” by Tenant is defined as a failure by Tenant to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Tenant under this Lease. A “Breach” by Tenant is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Tenant to cure such Default prior to the expiration of the applicable grace period, and shall entitle Landlord to pursue the remedies set forth in Paragraphs 13.2.

(a) The vacating of the Premises, or the abandonment of the Premises.

(b) Except as expressly otherwise provided in this Lease, the failure by Tenant to make any payment of Base Rent, Tenant’s Share of Common Area Operating Expenses, or any other monetary payment required to be made by Tenant hereunder as and when due, the failure by Tenant to provide Landlord with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Tenant to fulfill any obligation under this Lease which endangers or threatens life or property, where any such failure continues for a period of three (3) days following written notice thereof by or on behalf of Landlord to Tenant.

(c) Except as expressly otherwise provided in this Lease, the failure by Tenant to provide Landlord with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Tenant’s obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Landlord may reasonably require of Tenant under the terms of this Lease, where any such failure continues for a period of five (5) days following written notice by or on behalf of Landlord to Tenant.

(d) A Default by Tenant as to the terms covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Tenant,

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other than those described in Subparagraphs 13.1 (a), (b), or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Landlord to Tenant; provided however, that if the nature of Tenant’s Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Tenant if Tenant commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion.

(e) The occurrence of any of the following events; (i) the making by Tenant of any general arrangement or assignment for the benefit of creditors; (ii) Tenant’s becoming a “debtor” as defined in 11 U.S. Code Section 101 or any successor statute thereto (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions.

(f) The discovery by Landlord that any financial statement of Tenant or of any Guarantor, given to Landlord by Tenant or any Guarantor, was materially false.

13.2 Remedies. If Tenant fails to perform any affirmative duty or obligation of Tenant under this Lease, within ten (10) days after written notice to Tenant (or in case of an emergency, without notice), Landlord may at its option (but without obligation to do so), perform such duty or obligation on Tenant’s behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Landlord shall be due and payable by Tenant to Landlord upon invoice therefor. If any check given to Landlord by Tenant shall not be honored by the bank upon which it is drawn, Landlord, at its own option, may require all future payments to be made under this Lease by Tenant to be made only by cashier’s check. In the event of a Breach of this Lease by Tenant (as defined in Paragraph 13.1), with or without further notice or demand, and without limiting Landlord in the exercise of any right or remedy which Landlord may have by reason of such Breach, Landlord may:

(a) Terminate Tenant’s right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event Landlord shall be entitled to recover from Tenant: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Tenant proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Tenant proves could be reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by the Tenant’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys’ fees, and that portion of any leasing commission paid by Landlord in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%). Efforts by Landlord to mitigate damages caused by Tenant’s Default or Breach of this Lease shall not waive Landlord’s right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Landlord shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Landlord may reserve the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under Subparagraph 13.1 (b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Tenant under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by Subparagraph 13.1 (b), (c) or (d). In such case, the applicable grace period under the unlawful detainer statue shall run concurrently after the one such statutory notice, and the failure of Tenant to cure the Default within the greater of the two (2) such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Landlord to the remedies provided for in this Lease and/or by said statute.

(b) Continue the Lease and Tenant’s right to possession in effect (in California under California Civil Code Section 1951.4) after Tenant’s Breach and recover the rent as it becomes due, provided Tenant has the right to sublet or assign, subject only to reasonably limitations. Landlord and Tenant agree that the limitations on assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Landlord’s interest under this Lease, shall not constitute a termination of the Tenant’s right to possession.

(c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state wherein the Premises are located.

(d) The expiration or termination of this Lease and/or the termination of Tenant’s right to possession shall not relieve Tenant from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Tenant’s occupancy of the Premises.

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13.3 Late Charges. Tenant hereby acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Landlord by the terms of any ground lease, mortgage or deed of trust covering the Premises. Accordingly, if any installment of rent or other sum due from Tenant shall not be received by Landlord or Landlord’s designee within five (5) days after such amount shall be due, then, without any requirement for notice to Tenant, Tenant shall pay to Landlord a late charge equal to ten percent (10%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge be Landlord shall in no event constitute a waiver of Tenant’s Default or Breach with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Landlord’s option, become due and payable quarterly in advance.

13.4 Breach by Landlord. Landlord shall not be deemed in breach of this Lease unless Landlord fails within a reasonable time to perform an obligation required to be performed by Landlord. For purposes of this Paragraph 13.4, a reasonable time shall in no event be less than thirty (30) days after receipt by Landlord, and by any Lender(s) whose name and address shall have been furnished to Tenant in writing for such purpose, of written notice specifying wherein such obligation of Landlord has not been performed; provided, however, that if the nature of Landlord’s obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Landlord shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion.

14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called “condemnation”), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than twenty five percent (25%) of the floor area of the Premises, or more than twenty-five percent (25%) of the portion of the Common Areas designated for Tenant’s parking, is taken by condemnation, Tenant may, at Tenant’s option, to be exercised in writing within ten (10) days after Landlord shall have given Tenant written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Tenant does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. No reduction of the Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Landlord, whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Tenant shall be entitled to any compensation, separately awarded to Tenant for Tenant’s relocation expenses and/or loss of Tenant’s Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Landlord shall to the extent of its net severance damages received, over and above Tenant’s Share of the legal and other expenses incurred by Landlord in the condemnation matter, repair any damage to the Premises caused by such condemnation authority. Tenant shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair.

15. Broker’s Fees.

15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the procuring cause of this Lease.

15.2 Additional Terms. Unless Landlord and Broker(s) have otherwise agreed in writing, Landlord agrees that: (a) if Tenant exercises any Option (as defined in Paragraph 39.1) granted under this Lease or any Option subsequently granted, or (b) if Tenant acquires any rights to the Premises or other premises in which Landlord has an interest, or (c) if Tenant remains in possession of the Premises with the consent of Landlord after the expiration of the term of this Lease after having failed to exercise an Option, or (d) if said Brokers are the procuring cause of any other lease or sale entered into between the Parties pertaining to the Premises and/or any adjacent property in which Landlord has an interest, or (e) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then as to any of said transactions, Landlord shall not be liable to said Broker(s) to pay a fee.

15.3 Assumption of Obligations. Any buyer or transferee of Landlord’s interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Landlord’s obligation under this Paragraph 15.

15.4 Representations and Warranties. Tenant and Landlord each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder other than as named in Paragraph 1.10(a) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Broker(s) is entitled to any commission or finder’s fee in connection with said transaction. Tenant and Landlord do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, and/or attorneys’ fees reasonably incurred with respect thereto.

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16. Tenancy and Financial Statements.

16.1 Tenancy Statement. Each Party (as “Responding Party”) shall within ten (10) days after written notice from the other Party (the “Requesting Party”) execute, acknowledge and deliver to the Requesting Party a statement in writing in a form similar to the then most current “Tenancy Statement” form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.

16.2 Financial Statement. If Landlord desires to finance, refinance, or sell the Premises or the Building, or any part thereof, Tenant and all the Guarantors shall deliver to any potential lender or purchaser designated by Landlord such financial statements of Tenant and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Tenant’s financial statements for the past three (3) years. All such financial statements shall be received by Landlord and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.

17. Landlord’s Liability. The term “Landlord” as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Landlord’s title or interest in the Premises or in this Lease, Landlord shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Landlord at the time of such transfer or assignment. Except as provided in Paragraph 15.3, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Landlord shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by Landlord. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Landlord shall be binding only upon the Landlord as herein above defined. Notwithstanding any other terms or provisions of this Lease, Tenant agrees that in the event of any default or breach by Landlord with respect to any of the terms of the Lease to be observed and performed by Landlord (a) Tenant shall look solely to the estate and property (which is the subject of this Lease) of Landlord or any successor in interest in the property and the Building, for the satisfaction of Tenant’s remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord; (b) no other property or assets of Landlord, its partners, members, shareholders, officers or any successor in interest shall be subject to levy, execution or other enforcement procedure for the satisfaction if Tenant’s remedies; (c) no personal liability shall at any time be asserted or enforceable against Landlord, it’s partner’s, members or successors in interest (except to the extent permitted in (a) above), and no judgment will be taken against any partner, member, shareholder, officer or director of Landlord. The provisions of this section shall apply only to the Landlord and the parties herein described, and shall not be for the benefit of any insurer nor any other third party.

18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.

19. Interest on Past-Due Obligations. Any monetary payment due Landlord hereunder, other than late charges, not received by Landlord within ten (10) days following the date on which it was due, shall bear interest from the date due at the prime rate charged by the largest state chartered bank in the state in which the Premises are located plus four percent (4%) per annum, but not exceeding the maximum rate allowed by law, in addition to the potential late charge provided for in Paragraph 13.3.

20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.

21. Rent Defined. All monetary obligations of Tenant to Landlord under the terms of this Lease are deemed to be rent.

22. No Prior or other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Landlord and Tenant each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. Each Broker shall be an intended third party beneficiary of the provisions of this Paragraph 22.

23. Notices.

23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission during normal business hours, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party’s signature on this Lease shall be that Party’s address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Tenant’s taking possession of the Premises, the Premises shall constitute Tenant’s address for the purpose of mailing or delivering notices to Tenant. A copy of all notices required or permitted to be given to Landlord hereunder shall be concurrently transmitted to such party or parties at such addresses as Landlord may from time to time hereafter designate by written notice to Tenant.

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23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail, the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone or facsimile confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day.

24. Waivers. No waiver by Landlord of the Default or Breach of any term covenant or condition hereof by Tenant, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Tenant of the same or any other term, covenant or condition hereof. Landlord’s consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of Landlord’s consent to, or approval of, any subsequent or similar act by Tenant, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Landlord’s knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Landlord shall not be a waiver of any Default or Breach by Tenant of any provision hereof. Any payment given Landlord by Tenant may be accepted by Landlord on account of moneys or damages due Landlord, notwithstanding any qualifying statements or conditions made by Tenant in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Landlord at or before the time of deposit of such payment.

25. Recording. Either Landlord or Tenant shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto.

26. No Right To Holdover. Tenant has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Tenant holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent by Landlord to any holding over by Tenant.

27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

28. Covenants and Conditions. Al provisions of this Lease to be observed or performed by Tenant are both covenants and conditions.

29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located.

30. Subordination; Attornment; Non-Disturbance.

30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, “Security Device”), now or hereafter placed by Landlord upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Tenant agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Landlord under this Lease, but that in the event of Landlord’s default with respect to any such obligation, Tenant will give any Lender whose name and address have been furnished Tenant in writing for such purpose notice of Landlord’s default pursuant to Paragraph 13.4. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Tenant, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.

30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Tenant agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior Landlord or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Tenant might have against any prior Landlord, or (iii) be bound by prepayment of more than one month’s rent.

30.3 Non-Disturbance. With respect to Security Devices entered into by Landlord after the execution of this Lease, Tenant’s subordination of this Lease shall be subject to receiving assurance (a “non-disturbance agreement”) from the Lender that Tenant’s possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Tenant is not in Breach hereof and attorns to the record owner of the Premises. Landlord shall obtain such subordination for Tenant from Lender by the Commencement Date.

30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Landlord or a Lender in connection with a sale, financing or refinancing of Premises, Tenant and Landlord shall execute such further writings

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as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein.

31. Attorneys’ Fees. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys’ fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term “Prevailing Party” shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys’ fee award shall not be computed in accordance with any court fee schedule, but shall be such as to full reimburse all attorneys fees reasonably incurred. Landlord shall be entitled to attorneys’ fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. Broker(s) shall be intended third party beneficiaries of this Paragraph 31.

32. Landlord’s Access; Showing Premises; Repairs. Landlord and Landlord’s agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or tenants, and make such alterations, repairs, improvements or additions to the Premises or to the Building, as Landlord may reasonably deem necessary. Landlord may at any time place on or about the Premises or Building any ordinary “For Sale” signs and Landlord may at any time during the last one hundred eighty (180) days of the term hereof place on or about the Premises any ordinary “For Lease” signs. All such activities of Landlord shall be without abatement of rent or liability to Tenant.

33. Auctions. Tenant shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Landlord’s prior written consent. Notwithstanding anything to the contrary in this Lease, Landlord shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent.

34. Signs. Tenant shall not place any sign upon the exterior of the Premises or the Building, except that Tenant may, with Landlord’s prior written consent, which shall not be unreasonably withheld, install (but not on the roof) such signs as are reasonably required to advertise Tenant’s own business so long as such signs are in a location designated by Landlord and comply with Applicable Requirements and the signage criteria established for the Industrial Center by Landlord. The installation of any sign on the Premises by or for Tenant shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Landlord reserves all rights to the use of the roof of the Building and the right to install advertising signs on the Building, including the roof, which do not unreasonably interfere with the conduct of Tenant’s business; Landlord shall be entitled to all revenues from such advertising signs.

35. Termination; Merger. Unless specifically stated otherwise in writing by Landlord, the voluntary or other surrender of this Lease by Tenant, the mutual termination or cancellation hereof, or a termination hereof by Landlord for Breach by Tenant, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Landlord shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Landlord’s failure within ten (10) days of following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Landlord’s election to have such event constitute the termination of such interest.

36. Consents.

(a) Except for Paragraph 12 (subleases) and Paragraph 33 (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Landlord’s actual reasonable costs and expenses (including but not limited to architects’, attorneys’, engineers’ and other consultants’ fees) incurred in the consideration of, or response to, a request by Tenant for any Landlord consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment a subletting or the presence or use of a Hazardous Substance, shall be paid by Tenant to Landlord upon receipt of an invoice and supporting documentation therefor. Landlord may, as condition to considering any such request by Tenant, require that Tenant deposit with Landlord an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Landlord to represent the cost Landlord will incur in considering and responding to Tenant’s request. Any unused portion of said deposit shall be refunded to Tenant without interest. Landlord’s consent to any act, assignment of this Lease or subletting of the Premises by Tenant shall not constitute an acknowledgment that no Default or Breach by Tenant of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Landlord at the time of such consent.

(b) All conditions to Landlord’s consent authorized by this Lease are acknowledged by Tenant as being reasonable. The failure to specify herein any particular condition to Landlord’s consent shall not preclude the impositions by Landlord at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given.

37. [Intentionally Deleted].

38. Quiet Possession. Upon payment by Tenant of the rent for the Premises and the performance of all of the covenants, conditions and provisions on Tenant’s part to be observed and performed under this Lease, Tenant shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease.

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39. Options.

39.1 Definition. As used in this Lease, the word “Option” has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Tenant has on other property of Landlord.

39.2 Options Personal to Original Tenant. Each Option granted to Tenant in this Lease is personal to the original Tenant named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Tenant while the original Tenant is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Tenant are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise.

39.3 Multiple Options. In the event that Tenant has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised.

39.4 Effect of Default on Options.

(a) Tenant shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Landlord from Tenant is unpaid (without regard to whether notice thereof is given Tenant), or (iii) during the time Tenant is in Breach of this Lease, or (iv) in the event that Landlord has given to Tenant three (3) or more notices of separate Defaults under Paragraph 13.1 during the twelve (12) month period immediately preceding the exercise of the Option, whether or not the Defaults are cured.

(b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Tenant’s inability to exercise an Option because of the provisions of Paragraph 39.4(a)

(c) All rights of Tenant under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Tenant’s due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Tenant fails to pay to Landlord a monetary obligation of Tenant for a period of thirty (30) days after such obligation becomes due, or (ii) Landlord gives to Tenant three (3) or more notices of separate Defaults under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Tenant commits a Breach of this Lease.

40. Rules and Regulations. Tenant agrees that it will abide by, and keep and observe all reasonable rules and regulations (“Rules and Regulations”) which Landlord may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees.

41. Security Measures. Tenant hereby acknowledges that the rental payable to Landlord hereunder does not include the cost of guard service or other security measures, and that Landlord shall have no obligation whatsoever to provide same. Tenant assumes all responsibility for the protection of the Premises, Tenant, its agents and invitees and their property from the acts of third parties.

42. Reservations. Landlord reserves the right, from time to time, to grant, without the consent or joinder of Tenant, such easements, rights of way, utility raceways, and dedications that Landlord deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility raceways, dedications, maps and restrictions do not reasonably interfere with the use of the Premises by Tenant. Tenant agrees to sign any documents reasonably requested by Landlord to effectuate any such easement rights, dedication, map or restrictions.

43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment “under protest” and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease.

44. Authority. If either Party hereto is a corporation, trust, limited liability company, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on it’s behalf and that such entity is duly authorized and existing and qualified to do business in California and that Tenant has the full right and legal authority to enter into this Lease.

45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.

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46. Offer. Preparation of this Lease by either Landlord or Tenant or Landlord’s agent or Tenant’s agent and submission of same to Tenant or Landlord shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto.

47. Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Tenant’s obligations hereunder, Tenant agrees to make such reasonable non-monetary modification to this Lease as may be reasonably required by an institutional insurance company or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part.

48. Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Landlord or Tenant, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Landlord or Tenant.

49. Tenant Improvements. Landlord at Landlord’s sole cost and expense shall do the tenant improvements listed below and as further defined in the space plan done by Landlord dated February 3, 2005 as outlined on Exhibit “B”, and additional details included in the attached Exhibit “C”, both attached hereto.

12 total offices, 3 total conference rooms, a board room, a mail area—three labs with VCT flooring (one with a sink located above the sanitary line), a repair shop and warehouse with concrete flooring, a men’s and women’s shower, a janitors closet, a lunch room with a sink and lower cabinets with VCT flooring, a server room with separate HVAC. All improvements shall be done using the same finishes as is currently in the space except only offices and conference rooms will have sidelights.

In addition Tenant shall have the use of 30 cubicles currently in the premises at no additional charge. Said cubicles shall be left in the premises upon the termination of the Lease.

Landlord to make available Landlord’s architect for space planning services.

Any additional items shall be paid for by Tenant including any upgrades in finishes, specialized items including any additional electric or HVAC.

50. Option. Subject to the terms and conditions set forth below, Tenant may at its option extend the Terms of this Lease for (2) periods of five (5) years each. Such periods are called the “Renewal Terms.” The Renewal Terms shall be upon the same terms contained in this Lease, except that (i) Landlord shall have no obligation to provide Tenant with any Tenant Improvement Allowance or Free Rent in connection with the Renewal Term, (ii) the Base Rental during the Renewal Term shall be calculated as set forth below, and (iii) any reference in the Lease to the “Term” of the Lease shall be deemed to include the Renewal Term and apply thereto, unless it is expressly provided otherwise. Tenant shall have no additional extension options.

A. The Base Rent during the Renewal Term shall be 95% of the then fair market rate (defined hereinafter) and shall increase 3% per year for such space for a term commencing of the first day of the Renewal Term. “Market Rate” shall mean the then prevailing market rate for a comparable term commencing on the first day of the Renewal Term for tenants of comparable size and creditworthiness for comparable space in the Building and other first class R&D/Office buildings in the Fremont area. In no event shall the rent be less than the last year of the previous term.

B. To exercise any option, Tenant must deliver a binding written notice to Landlord not sooner than ten (10) months nor later than six (6) months prior to the expiration of the initial Term of this Lease for the first option period or prior to the expiration of the first option period in order to exercise the second option period. Thereafter, the Market Rate for the Renewal Term shall be calculated pursuant to Subsection A above and Landlord shall inform Tenant of the Market Rate. If the parties cannot agree on the Market Rate, the parties shall each appoint a real estate broker or appraiser (with at least 10 years experience in R&D leasing in Silicon Valley) to determine the Market Rate. If the lower of the two is within 90% of the higher of the two valuations, then the Market Rent shall be the average of the two. If the lower of the two valuations is less than 90% of the higher valuation, then the two brokers/appraisers originally selected by the parties shall select a third broker/appraiser who shall determine the Market Rate, which shall not be higher than the higher of the two original valuations or lower than the lower of the two original valuations. The determination of the third broker/appraiser shall be binding on the parties. The market rent shall be determined within 60 days of the date of Tenant’s exercise of its option. In no event shall the rent be less than the last year of the previous term. If Tenant fails to timely give its notice of exercise, Tenant will be deemed to have waived its option to extend.

51. Counterparts. This Lease may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which, taken together, shall constitute one and the same instrument.

LANDLORD AND TENANT HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LANDLORD AND TENANT WITH RESPECT TO THE PREMISES.

THIS LEASE PREPARED FOR YOUR ATTORNEY’S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO THE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL

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IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.

The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures.

Executed at:		Executed at:
on:		on:
By Landlord:		By Tenant:
Fremont Ventures LLC		Rita Medical Systems, Inc.
by D&M Ventures LP
its Managing Member
by David Dollinger Living Trust
its General Partner
by Dave Dollinger, Trustee
By:	/s/ Illegible	By:	/s/ Illegible
Name Printed: Illegible		Name Printed: Illegible
Title: Trustee		Title: CEO
Address: 555 Twin Dolphin Dr. #600		Address:
	Redwood City, Ca. 94065
Telephone: (650) 508-8666		Telephone: (        )
Facsimile: (650) 508-8686		Facsimile: (        )

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Exhibit C

PROPOSED - NEW FACILITY Requirements	Qty
Conference Rooms
...Board Room	1
Glass side wall (one side) with blinds
counter tops (one side facing front; corner side as coffee table)
construct capability for Tenant to install phone & network lines underneath carpet to come up on table
construct capability for Tenant to install phone & network lines on wall by counter top facing front
...Conf Rm#1	1
construct capability for Tenant to install phone & network lines underneath carpet to come up on table
...Conf Rm#2
construct capability for Tenant to install phone & network lines underneath carpet to come up on table
Exec Offices	5
CEO’s office need door to access next office
Regular Offices	11
Cube Offices	28
Marketing & Sales Storage room	1
Media Room	1
install at least 15 electrical outlets along walls
Eng’g Hardware & Software Labs	1
VCT flooring
Glass side wall (one side)
need sink, water, sanitary line
need fume extractor (hood) installed above counter top (close to sink)
counter tops & cabinets
need compressed air line

Machine Shop	1
sealed concrete flooring
need 220V outlets on wall (7 minimum)
regular 110V outlets on wall (6 minimum)
need compressed air line
Lobby & Reception Area	1
need counter tops & cabinets for receptionist
Mailroom	1
counter tops & cabinets
Telco & network eqpt room	1
separate HVAC
Lunchroom	1
Tile flooring
Glass side wall (one side)
Cabinets & counter tops
Bathrooms with showers	2
need dressing room with privacy
need lockers, 15 min on each side

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-121013 and 333-102896), Form S-4 (No. 333-116378) and Form S-8 (Nos. 333-119094, 333-118058, 333-106383, 333-66346 and 333-43612) of RITA Medical Systems, Inc. of our report dated March 28, 2005 relating to the consolidated financial statements, which appears in this Form 10-K.

/s/    PRICEWATERHOUSECOOPERS LLP

San Jose, California

March 28, 2005

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 31, 2005

/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 31, 2005

/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, 2004 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 31, 2005

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, 2004, 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 and

Vice President, Finance and Administration

March 31, 2005