10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005

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.)

46421 Landing Parkway

Fremont, CA 94538

(Address of principal executive offices, including zip code)

510-771-0400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

As of October 31, 2005, there were 41,967,768 shares of the registrant’s common stock outstanding.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – September 30, 2005 (unaudited) and December 31, 2004	3
	Condensed Consolidated Statements of Operations – three and nine months ended September 30, 2005 and 2004 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows – nine months ended September 30, 2005 and 2004 (unaudited)	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Submission of Matters to a Vote of Security Holders	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
SIGNATURES		34
EXHIBIT INDEX		34

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

RITA MEDICAL SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	September 30, 2005 (unaudited)			December 31, 2004
Assets
Current assets:
Cash and cash equivalents	$	3,167		$	12,978
Marketable securities		—			880
Accounts and note receivable, net		6,805			6,410
Inventories		7,486			7,126
Prepaid and other current assets		1,361			792
Total current assets		18,819			28,186
Long term note receivable, net		96			177
Property and equipment, net		2,062			1,966
Goodwill		91,339			91,339
Intangible assets, net		29,758			30,600
Other assets		519			41
Total assets	$	142,593		$	152,309
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,927		$	2,572
Accrued liabilities		3,435			4,159
Current portion of long term debt		223			7,200
Total current liabilities		6,585			13,931
Long term debt, less current portion		9,700			9,632
Other long term liabilities		67			90
Total liabilities		16,352			23,653
Commitments and contingencies (see Note 17)		—			—
Stockholders’ equity
Common stock, $0.001 par value:
Authorized: 150,000 shares at September 30, 2005 Issued and outstanding: 41,906 shares at September 30, 2005 and 41,350 shares at December 31, 2004		42			41
Additional paid-in capital		218,255			216,893
Accumulated other comprehensive loss		—			(2	)
Accumulated deficit		(92,056	)		(88,276	)
Total stockholders’ equity		126,241			128,656
Total liabilities and stockholders’ equity	$	142,593		$	152,309

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

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RITA MEDICAL SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Sales	$	11,191		$	7,951		$	34,351		$	17,254
Cost of goods sold		4,522			2,821			13,950			6,106
Gross profit		6,669			5,130			20,401			11,148
Operating expenses:
Research and development		894			928			2,932			2,752
Selling, general and administrative		6,299			6,139			20,482			14,523
Restructuring charges		—			1,089			60			1,089
Total operating expenses		7,193			8,156			23,474			18,364
Loss from operations		(524	)		(3,026	)		(3,073	)		(7,216	)
Interest expense		(206	)		(242	)		(704	)		(242	)
Interest income and (other expense), net		25			10			(3	)		27
Net loss	$	(705	)	$	(3,258	)	$	(3,780	)	$	(7,431	)
Net loss per common share, basic and diluted	$	(0.02	)	$	(0.10	)	$	(0.09	)	$	(0.33	)
Shares used in computing net loss per common
share, basic and diluted		41,794			31,079			41,601			22,399

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

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RITA MEDICAL SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

	Nine months ended September 30,
	2005			2004
Cash flows from operating activities:
Net loss	$	(3,780	)	$	(7,431	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,939			1,587
Loss on disposal of property and equipment		—			23
Amortization of stock-based compensation		85			103
Allowance for doubtful accounts		30			(101	)
Provision for obsolete inventories		317			(117	)
Changes in operating assets and liabilities:
Accounts and note receivable, net		(455	)		(912	)
Inventories		(677	)		282
Prepaid and other current assets		(431	)		(6	)
Accounts payable		355			680
Accrued liabilities		(1,773	)		(226	)
Deferred revenue		(11	)		643
Net cash used in operating activities		(3,401	)		(5,475	)
Cash flows from investing activities:
Purchase of property and equipment		(913	)		(509	)
Purchase of marketable securities		(81	)		(697	)
Sales and maturities of marketable securities		963			5,404
Net cash used in merger with Horizon Medical Products, Inc.		—			(224	)
Cash used in acquistion of product license		(250	)		—
Note receivable, other assets and other long term liabilities		(93	)		117
Net cash provided by (used in) investing activities		(374	)		4,091
Cash flows from financing activities:
Proceeds from assumption of short term debt		—			503
Proceeds from issuance of convertible debt		9,700			—
Principal payments on debt		(16,609	)		(117	)
Proceeds from issuance of common stock, net of issuance costs		873			288
Net cash provided by (used in) financing activities		(6,036	)		674
Net decrease in cash and cash equivalents		(9,811	)		(710	)
Cash and cash equivalents at beginning of period		12,978			3,780
Cash and cash equivalents at end of period	$	3,167		$	3,070
Supplemental disclosure of non-cash investing and financing activities:
Accrued liability in conjunction with acquisition of product license	$	500		$	—
Equity issued in conjunction with acquisition of product license	$	404		$	—

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

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RITA MEDICAL SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by RITA Medical Systems, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information. These principles are consistent in all material respects with those applied in the Company’s financial statements contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004, as amended, and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. However, interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (all of which are of a normal recurring nature, including the elimination of intercompany accounts) necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods indicated. Interim results of operations are not necessarily indicative of the results to be expected for the full year or any other interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and footnotes thereto for the year ended December 31, 2004 contained in the Company’s annual report on Form 10-K as amended.

2. Business Combination

On July 29, 2004, the Company merged with Horizon Medical Products, Inc. (“Horizon”) in a transaction accounted for under the purchase method of accounting. None of Horizon’s results of operations prior to that date are included in the Company’s condensed consolidated statements of operations. However, the Company has prepared pro forma financial information showing sales and net loss for the combined entity for the three and nine month periods ended September 30, 2004, as if the merger occurred as of January 1, 2004. This unaudited pro forma financial information is presented below in comparison to the Company’s unaudited sales and net loss for the three and nine month periods ended September 30, 2005, but 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 January 1, 2004, 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):

	Three months ended September 30,						Nine months ended September 30,
	Actual 2005			Pro forma 2004			Actual 2005			Pro forma 2004
Sales	$	11,191		$	9,306		$	34,351		$	33,118
Net loss	$	(705	)	$	(6,453	)	$	(3,780	)	$	(11,981	)
Net loss per common share, basic and diluted	$	(0.02	)	$	(0.18	)	$	(0.09	)	$	(0.33	)

See also Note 13, “Restructuring”.

3. Liquidity

As of September 30, 2005, the Company’s total assets were $142.6 million, total tangible assets were $21.5 million, total liabilities were $16.4 million, working capital was $12.2 million and cash and cash equivalents totaled $3.2 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, together with a working capital line of credit that is currently being negotiated, will be sufficient to fund its operating needs for at least the next 12 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, including a working capital line of credit, will be available on terms acceptable to the Company, or at all. In addition, future equity financings could result in dilution to stockholders, 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.

4. Reclassifications

Certain prior year balances have been reclassified to conform to current year presentation.

6

In the Company’s quarterly report on Form 10-Q for the three month period ended September 30, 2004, investments in variable rate debt obligations featuring interest rate reset intervals of less than 90 days were classified as cash equivalents. The Company’s Consolidated Statement of Cash Flows for the nine months ended September 30, 2004 has 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 nine months ended September 30, 2004, net cash provided by investing activities increased by $800,000. The Company’s Consolidated Statements of Operations for the nine months ended September 30, 2005 and 2004 were not affected by this reclassification.

5. Net loss per share

Basic earnings per share figures are 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 effect of potentially dilutive securities consisting of stock options and warrants provided that the inclusion of such securities is not antidilutive; the Company has reported net losses and therefore has excluded such potentially dilutive securities from its calculation of diluted earnings per share. The following numbers of shares represented by outstanding stock options and warrants (prior to application of the treasury stock method) were excluded from the computation of diluted net loss per share as of September 30, 2005 and September 30, 2004 as their effect was antidilutive (in thousands):

	September 30,
	2005	2004
Effect of potentially dilutive securities:
Options	7,432	7,314
Warrants	3,350	78
Total potentially dilutive securities excluded from the computation of net loss
per common share as their effect was antidilutive	10,782	7,392

6. Accounting for stock-based compensation

During the year ended December 31, 2002, the Company adopted Statement of Financial Accounting Standards (“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” and Financial Accounting Standards Board Interpretations (“FIN”) No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.”

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 the 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 for the three and nine month periods ended September 30, 2005 and 2004, respectively, if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation granted under all of its stock option plans and its employee stock purchase plan (in thousands, except per share amounts):

	Three months ended						Nine months ended
	September 30,						September 30,
	2005			2004			2005			2004
Net loss, as reported	$	(705	)	$	(3,258	)	$	(3,780	)	$	(7,431	)
Add: Stock-based employee compensation expense included in reported net loss		51			2			85			103
Deduct: Total stock-based employee compensation
determined under the fair value based method for all awards		(619	)		(1,847	)		(1,624	)		(2,605	)
Net loss, pro forma	$	(1,273	)	$	(5,103	)	$	(5,319	)	$	(9,933	)
Basic and diluted net loss per common share:
As reported	$	(0.02	)	$	(0.10	)	$	(0.09	)	$	(0.33	)
Pro forma	$	(0.03	)	$	(0.16	)	$	(0.13	)	$	(0.44	)

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The determination of stock-based employee compensation, as relating to the Company’s stock option plans under the fair value based method, used the following weighted average assumptions:

	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
Volatility	78	%	76	%	78	%	76	%
Risk-free interest rate	3.83	%	3.57	%	3.83	%	3.55	%
Expected life	5 years		5 years		5 years		5 years
Expected dividends	0	%	0	%	0	%	0	%

The corresponding assumptions for the Company’s employee stock purchase plan were as follows:

	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
Volatility	60	%	60	%	60	%	60	%
Risk-free interest rate	2.77	%	1.18	%	2.22	%	1.10	%
Expected life	0.5 years		0.9 years		0.5 years		0.7 years
Expected dividends	0	%	0	%	0	%	0	%

7. Inventories

The components of the Company’s inventories at September 30, 2005 (unaudited) and December 31, 2004, respectively, were as follows (in thousands):

	September 30, 2005		December 31, 2004
Raw materials	$	3,107	$	2,776
Work-in-process		828		682
Finished goods		3,551		3,668
	$	7,486	$	7,126

8. Property and equipment and related depreciation

The components of the Company’s property and equipment and related accumulated depreciation at September 30, 2005 (unaudited) and December 31, 2004, respectively, were as follows (in thousands):

	September 30, 2005			December 31, 2004
Computer equipment and software	$	1,548		$	1,464
Furniture and fixtures		423			413
Leasehold improvements		1,394			1,289
Machinery and equipment		5,937			5,223
		9,302			8,389
Less: accumulated depreciation		(7,240	)		(6,423	)
	$	2,062		$	1,966

Depreciation expense was approximately $319,000 and $817,000 for the three and nine month periods ended September 30, 2005, respectively and approximately $270,000 and $781,000 for the three and nine month periods ended September 30, 2004, respectively. Depreciation expense for the year ended December 31, 2004 was approximately $1,074,000.

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9. Intangible assets and related amortization

The Company’s intangible assets and related accumulated amortization at September 30, 2005 (unaudited) and December 31, 2004, respectively, were as follows (in thousands):

	September 30, 2005							December 31, 2004
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Capitalized patent defense litigation costs	$	2,755	$	(776	)	$	1,979	$	2,755	$	(593	)	$	2,162
Capitalized patent license agreements		3,804		(829	)		2,975		2,650		(561	)		2,089
Loan closing costs of August, 2005 debt financing		127		(7	)		120		—		—			—
Intangible assets recorded at merger with Horizon:
Customer relationships		16,600		(1,291	)		15,309		16,600		(461	)		16,139
Product technology		6,900		(671	)		6,229		6,900		(239	)		6,661
Trademarks		3,000		(350	)		2,650		3,000		(125	)		2,875
Isomed distribution contract		700		(204	)		496		700		(73	)		627
Loan closing costs		73		(73	)		—		73		(32	)		41
Non-compete contracts		36		(36	)		—		36		(30	)		6
	$	33,995	$	(4,237	)	$	29,758	$	32,714	$	(2,114	)	$	30,600

The Company’s capitalized patent license agreements include a license acquired during the quarter ended June 30, 2005 from EMcision Limited Incorporated (“EMcision”). During the nine months ended September 30, 2005, in acquiring this license, the Company has made $250,000 in cash payments, assumed a liability to pay another $500,000 in cash and issued 150,000 shares of its common stock valued at $403,500.

The remaining amortization periods of the Company’s intangible assets as of September 30, 2005 are as follows:

	Amortization periods of intangible assets
Capitalized patent defense litigation costs	8 years
Capitalized patent license agreements	4 - 13 years
Customer relationships	14 years
Product technology	11 years
Trademarks	9 years
Isomed distribution contract	3 years
Loan closing costs	3 years

Aggregate amortization expense for the nine months ended September 30, 2005, estimated amortization expense for the three months ended December 31, 2005, and estimated amortization expense for each of the five years ended December 31, 2006 through 2010 is as follows (in thousands):

Aggregate amortization expense:
For the nine months ended September 30, 2005	$	2,122

Estimated amortization expense:
For the three months ended December 31, 2005	$	712
For the twelve months ended December 31, 2006	$	2,850
For the twelve months ended December 31, 2007	$	2,850
For the twelve months ended December 31, 2008	$	2,759
For the twelve months ended December 31, 2009	$	2,545
For the twelve months ended December 31, 2010	$	2,423

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10. Accrued liabilities

The components of the Company’s accrued liabilities as of September 30, 2005 (unaudited) and December 31, 2004 were as follows (in thousands):

	September 30, 2005		December 31, 2004
Payroll and related expenses	$	992	$	2,170
Accrued vacation		331		280
Accrued legal and audit expenses		197		491
Accrued sales and franchise taxes		317		403
Accrued financing of prepaid insurance		548		—
Other accrued liabilities		1,050		815
	$	3,435	$	4,159

11. Goodwill

In accordance with the Company’s policy, the potential impairment of the Company’s goodwill will be reviewed annually, or more often if changes in business conditions so dictate. The Company’s market capitalization as of September 30, 2005 was approximately $149.2 million, $23.1 million more than the carrying value of the Company’s net assets. As of December 31, 2004, the Company’s market capitalization exceeded the carrying value of its assets by $31.4 million. However, since July 29, 2004, the date of the Company’s merger with Horizon that gave rise to the Company’s goodwill asset, there have been dates as of which the Company’s market capitalization was less than the carrying value of its net assets. The Company believes that such results reflect only market uncertainty regarding the integration of operations following the merger with Horizon as well as generally lower valuations of companies in the Company’s market sector since July 2004. Further, the Company’s management continues to believe the price paid for Horizon to be fair, considering the fair value of net assets acquired and operational savings resulting from the merger and the anticipated performance of the Company.

For these reasons, and because the Company’s market capitalization is in excess of its net assets as of September 30, 2005 and also as of October 31, 2005, the Company believes it is not now confronted by an event or circumstance that would more likely than not reduce the fair value of the Company below the carrying amount. However, if in the future the Company’s market capitalization decreases below its net assets, the Company will perform a review to assess the potential impairment of its goodwill asset.

12. Debt

The Company is liable for a note payable for the Stepic business purchase (the “Stepic Note”). As of September 30, 2005, $223,162 was owed 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 due and scheduled to be fully repaid in March 2006.

On August 5, 2005, the Company completed a private placement of subordinated Senior Convertible Notes (the “New Notes”) with an aggregate principal amount of $9.7 million. The New Notes were issued pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) among the Company and Atlas Master Fund, Ltd., which is not related to the

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Company. No warrants or other securities were issued in conjunction with the Purchase Agreement and the Company incurred no financing costs other than normal and customary legal and other professional expenses. The New Notes are convertible into shares of common stock of the Company at an initial conversion price of $4.03 per share of common stock. The conversion price of $4.03 per share of common stock was greater than the per share fair market value of the Company’s common stock on the date of issuance of the New Notes. The conversion price is subject to adjustment in certain circumstances including common stock splits or like events. Until conversion or maturity, the New Notes bear interest at the rate of 6.5% per annum, payable semiannually in cash. Absent conversion, the New Notes mature on August 5, 2008 (the “Maturity Date”). If on the Maturity Date the closing price of the common stock has been at or above 102% of the then current conversion price for at least 10 consecutive business days immediately preceding the Maturity Date, then any remaining principal outstanding under the New Notes shall automatically be converted into common stock, subject to certain conditions. The issuance of the New Notes 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.

Pursuant to the Purchase Agreement, the Company was required to file a registration statement on Form S-3 within 30 days after the closing of the transaction for purposes of registering the resale of the shares of Common Stock issuable upon conversion of the Notes. Timely filing of such a registration statement on Form S-3 was made and the registration statement has been declared effective by the SEC.

As of the issuance date of the New Notes, the Company also owed $8,262,000 plus accrued interest to holders of the Company’s Senior Subordinated Convertible Notes (the “Senior Notes”) and $1,392,500 plus accrued interest to the holder of the Company’s Junior Promissory Note (the “Junior Note”). Pursuant to the terms of the New Notes, the Company was required to repay the Senior Notes and the Junior Note within 21 days of the issuance of the New Notes, or August 26, 2005. The Senior Notes were repaid on August 9, 2005 and the Junior Note was repaid on August 11, 2005.

Future maturities of debt outstanding as of September 30, 2005 are as follows (in thousands):

Three months ending December 31, 2005	$	110
Three months ending March 31, 2006		113
Nine months ending December 31, 2006		—
Twelve months ending December 31, 2007		—
Twelve months ending December 31, 2008		9,700
	$	9,923

13. Restructuring

In the nine month period ended September 30, 2005, in connection with the merger of RITA and Horizon, the Company recorded a restructuring charge of $60,000 related to the termination of employees to eliminate certain duplicative activities, primarily in the sales, accounting and operations areas. The total of such charges since July 29, 2004, the day the merger was completed, is $1,369,000. These charges were accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” As of September 30, 2005, $1,299,000 of the accrued amount has been paid and $70,000 remains unpaid.

14. 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 the products sold by RITA prior to the merger, and specialty access catheter products, which are the products sold by Horizon prior to the merger.

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 is its President and Chief Executive Officer. 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, sales and marketing 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.

Sales for the Company’s two medical oncology product groups for the three and nine month periods ended September 30, 2005 and 2004 are as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
Radiofrequency ablation products	$	4,714	$	3,570	$	14,404	$	12,873
Specialty access catheter products		6,477		4,381		19,947		4,381
Total medical oncology product sales	$	11,191	$	7,951	$	34,351	$	17,254

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Sales for the Company’s domestic and international selling regions for the three and nine month periods ended September 30, 2005 and 2004 are as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
Domestic	$	9,608	$	6,828	$	28,994	$	14,222
International		1,583		1,123		5,357		3,032
Total medical oncology product sales	$	11,191	$	7,951	$	34,351	$	17,254

15. Comprehensive income (loss)

Comprehensive income (loss) generally represents all changes in stockholders’ equity except those resulting from investments or contributions by stockholders. The Company’s unrealized gains and losses on available-for-sale securities represent the only components of comprehensive loss that are excluded from the Company’s net loss. These components are not significant individually, or in the aggregate, and therefore, no separate statement of comprehensive loss has been presented.

16. Recent accounting pronouncements

In March 2004, the Financial Accounting Standards Board (“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.

Effective April 1, 2004, the SEC adopted Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (“SAB 105”). SAB 105 clarifies the requirements for the valuation of loan commitments that are accounted for as derivatives in accordance with SFAS 133. Management does not expect the implementation of this new bulletin to have any impact on the Company’s financial position, results of operations or cash flows. The Company does not have any loan commitments.

In July 2004, the EITF issued a draft abstract for EITF Issue No. 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (“EITF 04-08”). EITF 04-08 reflects the Task Force’s conclusion that contingently convertible debt should be included in diluted earnings per share computations regardless of whether the market price trigger has been met. EITF 04-08 is effective for reporting periods ending after December 15, 2004. Prior period earnings per share amounts presented for comparative purposes are required to be restated to conform to this consensus and the Company is required to include the shares issuable upon the conversion of the debt in the diluted earnings per share computation for all periods during which contingently convertible notes are outstanding. In August 2005, the Company issued contingently convertible debt. Although the Company has not yet quantified the impact of this standard on its financial statements, it is likely that adoption of this standard will have a material impact on the Company’s results of operations, financial position, and cash flows.

In November 2004, the FASB 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 FASB 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

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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. In April 2005, the SEC amended the compliance dates for SFAS No. 123R, to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. SFAS No. 123R is effective for the Company in the quarter ending March 31, 2006. Upon adoption of SFAS No. 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 by 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.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29,” which amends Opinion 29 by eliminating the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for fiscal years beginning after June 15, 2005, and implementation is done prospectively. Management does not expect the implementation of this new standard to have a material impact on the Company’s financial position, results of operations or cash flows.

In December 2004, the FASB issued and made effective two Staff Positions (FSP) that provide accounting guidance on how companies should account for the effect of the American Jobs Creation Act of 2004 that was signed into law on October 22, 2004. In FSP FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004,” the FASB concluded that the special tax deduction for domestic manufacturing, created by the new legislation, should be accounted for as a “special deduction” instead of a tax rate reduction. As such, the special tax deduction for domestic manufacturing is recognized no earlier than the year in which the deduction is taken on the tax return. FSP FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” allows additional time to evaluate the effects of the new legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The Company does not anticipate that this legislation will impact its results of operations or financial condition.

In March 2005, the SEC released Staff Accounting Bulletin No. 107 (“SAB 107”), “Share-Based Payment,” which provides interpretive guidance related to the interaction between SFAS No. 123R and certain SEC rules and regulations. It also provides the SEC staff’s views regarding valuation of share-based payment arrangements. Management is currently evaluating the impact SAB 107 will have on the Company’s consolidated financial statements.

In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations – An Interpretation of FASB Statement No. 143.” FIN No. 47 was issued to address diverse accounting practices regarding the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets when the timing or method of settlement of the related obligations are conditional on future events. FIN No. 47 concludes that liability should be recognized when incurred if the liability can be reasonably estimated. The Company does not believe the adoption of FIN No. 47 will have a material impact on its consolidated financial position, results of operations or cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements” and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 31, 2005. The Company does not believe the adoption of SFAS No. 154 will have a material effect on its consolidated financial position, results of operations or cash flows.

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In June 2005, the EITF issued a draft abstract for EITF Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination.” The conclusion of the EITF was that leasehold improvements placed in service significantly after and not contemplated at or near the beginning of the lease term should be amortized over the shorter of the useful life of the assets or a term that includes both required lease periods and renewals that are reasonably assured (as defined in paragraph 5 of Statement 13) as of the date the leasehold improvements are purchased. The Company does not believe the adoption of FIN No. 47 will have a material impact on its consolidated financial position, results of operations or cash flows.

17. Commitments and contingencies

The Company has commitments for operating leases related to facility rental and office equipment. Future minimum payments under operating leases are as follows (in thousands):

Three months ending December 31, 2005	$	114
Year ending December 31, 2006		404
Year ending December 31, 2007		383
Year ending December 31, 2008		350
Year ending December 31, 2009		355
Year ending December 31, 2010 and thereafter		116
Total of future minimum operating lease payments	$	1,722

The Company is, and may in the future be, 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.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this quarterly report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “should”, and similar expressions identify such forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or forecasted. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Factors That May Affect Future Results” and those appearing elsewhere in this quarterly report on Form 10-Q and in our annual report on Form 10-K for the fiscal year ended December 31, 2004, as amended. Readers are cautioned not to place undue reliance on these forward-looking statements that reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

Overview

We develop, manufacture and market innovative products for cancer patients, including radiofrequency ablation (RFA) 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 than it was with previous generations of our devices. In the second quarter of 2005, we introduced our HABIB^™ 4X bipolar resection device, which is part of our RFA product line, in our European markets, and in the third quarter of 2005 we received FDA approval for sale of the device in the United States.

On July 29, 2004, the Company merged with Horizon Medical Products, Inc. (“Horizon”) in a transaction accounted for under the purchase method of accounting. None of Horizon’s results of operations prior to that date are included in the Company’s condensed consolidated statements of operations. 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.

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 (collectively, “specialty access catheter” or “SAC” products). 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 $15.4 million using the Black-Scholes valuation model. Costs incurred to effect the merger and to be included as a component of purchase price were $2.3 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 due to a larger, more effective sales group, consolidation of manufacturing resulting in lower product costs, and reduced administrative expenses.

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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 three and nine month periods ended September 30, 2005 and 2004, and for the years ended December 31, 2004, 2003 and 2002, sets forth some of these measurements:

	Three months ended September 30,						Nine months ended September 30,						Years ended December 31,
	2005			2004			2005			2004			2004			2003			2002
Total sales (in thousands)	$	11,191		$	7,951		$	34,351		$	17,254		$	28,215		$	16,607		$	17,393
Percentage of sales: United States		86	%		86	%		84	%		82	%		84	%		80	%		74	%
Percentage of sales: International		14	%		14	%		16	%		18	%		16	%		20	%		26	%
Percentage of sales: Radiofrequency products		42	%		45	%		42	%		82	%		62	%		100	%		100	%
Percentage of sales: Specialty access catheters		58	%		55	%		58	%		18	%		38	%		0	%		0	%
Gross margin		60	%		65	%		59	%		65	%		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 must be used with caution, as they may not be indicative of future 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 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 for some time resulted in a growing percentage of radiofrequency ablation product sales derived from the domestic market. The specialty access catheter products acquired in the merger with Horizon are also heavily concentrated in the domestic market and we believe the merger permits wider and more efficient sales force coverage of the domestic market. We expect 2005 sales growth in the United States to continue to outpace international growth because we believe the principal impact of the Horizon merger will be upon the domestic market and because we expect initial sales of our HABIB^™ 4X bipolar resection device to be much larger in the United States than in international markets.

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 approximately 95% of our sales will be derived from our RFA and SAC disposable products, with the balance of our sales coming from hardware products. We believe that the broader product line and larger sales group resulting from the merger will enable us to increase the effectiveness of our selling effort in the future.

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 if our production volumes increase but our unit costs should increase if our production volumes decrease. The integration of our manufacturing operations in our Manchester, Georgia location, completed during the second quarter of 2005, 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 reflects amortization of intangible assets relating to product technology. We expect these amortization charges to continue through 2016. Our cost of goods sold also includes provisions to our reserve for excess and 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 product lines have changed. We may experience similar product changes and related obsolete inventory provisions in the future.

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Our gross margins reflect our selling prices, our domestic / international mix percentages, our product mix percentages, our production volumes, the prices we pay for vendor manufactured product and our provisions for obsolete inventory. Our gross margin for the quarter ended September 30, 2005 was 60%, compared to a gross margin of 65% for the quarter ended September 30, 2004. Historically, the gross margin rate for our specialty access catheter products has been lower than that of our radiofrequency ablation products, and our 2005 third quarter gross margin includes three months of sales of these specialty access products, compared to only two months in the 2004 third quarter because the Horizon merger was completed on July 29, 2004. In addition, we incurred costs related to integration of our manufacturing facilities in the first six months of 2005 and we believe we have not achieved optimal efficiency in the manufacture of our RFA products in our Manchester, Georgia location. Also, amortization of our product technology related intangible assets will negatively impact cost of goods sold. Future gross margins may, therefore, be lower than our historical gross margin rates because of inclusion of these products and expenses in our results.

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 Unaudited Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2005 and 2004, our Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002, our Unaudited Condensed Consolidated Balance Sheets as of September 30, 2005, June 30, 2005 and March 31, 2005, and our Consolidated Balance Sheets as of December 31, 2004, 2003 and 2002 (in thousands):

	Three months ended September 30,				Nine months ended September 30,				Years ended December 31,
	2005		2004		2005		2004		2004		2003		2002
Research and development expense	$	894	$	928	$	2,932	$	2,752	$	3,787	$	4,294	$	5,052
Selling, general and administrative expense		6,299		6,139		20,482		14,523		20,637		17,418		19,366
Restructuring charges		—		1,089		60		1,089		1,309		—		—
Total operating expenses	$	7,193	$	8,156	$	23,474	$	18,364	$	25,733	$	21,712	$	24,418

	September 30,		June 30,		March 31,		December 31,
	2005		2005		2005		2004		2003		2002
Cash and cash equivalents	$	3,167	$	4,262	$	5,906	$	12,978	$	3,780	$	4,438
Marketable securities, current and long term		—		—		251		880		5,755		8,397
Total cash and marketable securities	$	3,167	$	4,262	$	6,157	$	13,858	$	9,535	$	12,835

If we are to become profitable, we must appropriately 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 and development spending in the quarter ended September 30, 2005 was $0.9 million, compared to $0.9 million in the quarter ended September 30, 2004. Research spending in the fourth quarter of 2005 is expected to increase modestly, driven by programs aimed at technical innovation of our radiofrequency ablation products.

Selling, general and administrative expense in the quarter ended September 30, 2005 was $6.3 million, compared to $6.1 million in the quarter ended September 30, 2004. The primary reason for the increase was higher administrative expense, particularly a $0.2 million increase in our provision for uncollectible accounts. Generally, the key components of our selling, general and administrative expense are the costs of our sales group, our marketing expenses, amortization of intangibles created in the Horizon merger, costs of administrative personnel and public company costs, including expenses related to compliance with the Sarbanes-Oxley Act of 2002. We expect little or no growth in selling, general and administrative expenses in the fourth quarter of 2005. We incurred restructuring expenses of $60,000 during the nine months ended September 30, 2005, consisting of severance related to termination of employees to eliminate duplicative activities. The total of such restructuring charges since the merger is $1,369,000, and we believe our restructuring is now complete.

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In addition to management of our operating expenses, we must conserve our cash. Our combined total of cash and cash equivalents was $3.2 million as of September 30, 2005, compared to $13.9 million at December 31, 2004. Our net cash used in operating activities for the nine month period ended September 30, 2005 was $3.4 million. We had approximately $9.9 million in debt as of September 30, 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.

We incurred a net loss of $0.7 million for the quarter ended September 30, 2005 compared to $3.3 million for the quarter ended September 30, 2004. Future profitability depends on, among other things, our success in expanding product usage in our current markets and in developing new markets, our success in introducing new products to our various markets, and our ability to improve our gross margins and control our expenses. 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. Further, in the first quarter of 2006, we expect to implement SFAS No. 123R. We have not yet determined the impact of SFAS No. 123R on our results in 2006, or in subsequent years, but we expect to incur significant charges as a result of adoption of the standard.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates were discussed in our annual report on Form 10-K for the fiscal year ended December 31, 2004, as amended. All of the policies and estimates discussed at that time remain unchanged.

Results of Operations

The following table sets forth the percentage of net revenue represented by certain items in our Condensed Consolidated Statements of Operations for the quarter ended September 30, 2005 and the four preceding fiscal quarters:

	Q3 2005		Q2 2005		Q1 2005		Q4 2004		Q3 2004
Domestic sales	86	%	81	%	86	%	86	%	86	%
International sales	14	%	19	%	14	%	14	%	14	%
Total sales	100	%	100	%	100	%	100	%	100	%
Cost of goods sold	40	%	39	%	43	%	47	%	35	%
Gross profit	60	%	61	%	57	%	53	%	65	%
Operating expenses:
Research and development	8	%	8	%	9	%	9	%	11	%
Selling, general and administrative	56	%	62	%	60	%	56	%	78	%
Restructuring charges	0	%	0	%	1	%	2	%	14	%
Total operating expenses	64	%	70	%	70	%	67	%	103	%
Loss from operations	(5	)%	(9	)%	(13	)%	(14	)%	(38	)%
Interest expense	(2	)%	(2	)%	(3	)%	(3	)%	(3	)%
Interest income and other expense, net	1	%	(1	)%	1	%	0	%	0	%
Net loss	(6	)%	(12	)%	(15	)%	(17	)%	(41	)%

Three months ended September 30, 2005 and 2004

The following table, which sets forth key comparisons of our sales results for the third quarter of 2005 compared to the third quarter of 2004, provides additional information on the impact of the consolidation of our acquired specialty access catheter products upon our results (in thousands):

	Three months ended September 30,
	2005		2004		Growth		%
Domestic sales:
Radiofrequency ablation products	$	3,685	$	2,804	$	881	31	%
Specialty access catheter products		5,923		4,024		1,899	47	%
Total domestic sales	$	9,608	$	6,828	$	2,780	41	%
International sales:
Radiofrequency ablation products	$	1,029	$	766	$	263	34	%
Specialty access catheter products		554		357		197	55	%
Total international sales	$	1,583	$	1,123	$	460	41	%
Total radiofrequency ablation sales	$	4,714	$	3,570	$	1,144	32	%
Total specialty access catheter products		6,477		4,381		2,096	48	%
Total sales	$	11,191	$	7,951	$	3,240	41	%

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For the quarter ended September 30, 2005, sales totaled $11.2 million, an increase of 41% or $3.2 million from $8.0 million in the third quarter of 2004. Sales of specialty access catheter products acquired in the merger with Horizon explained most of this increase, adding $2.1 million to our sales, although we note that the 2004 period included only two months of Horizon’s results. Sales of our radiofrequency ablation products increased $1.1 million or 32% compared to the quarter ended September 30, 2004. Domestic sales of radiofrequency ablation products were 31% higher in the 2005 quarter than in the 2004 quarter. International sales of radiofrequency ablation products were 34% higher in the 2005 quarter than in the 2004 quarter. For the quarter ended September 30, 2005, domestic sales represented 86% of total sales, compared to 86% in the third quarter of 2004. Sales for the quarter ended September 30, 2005 were lower than sales for the quarter ended June 30, 2005 by $0.8 million due to a $0.5 million decrease in sales in our international markets, and a $0.3 million decrease in our domestic market, primarily reflecting lower sales volumes of our RFA product line. We believe the international decrease to be primarily attributable to seasonal factors. We believe the domestic decrease was at least in part attributable to the impact of hurricane Katrina on our hospital customers in the southeastern United States, an impact that is likely to continue for several quarters.

Cost of goods sold for the quarter ended September 30, 2005 was $4.5 million, up from $2.8 million for the quarter ended September 30, 2004. Cost of goods sold of specialty access catheter products acquired in the merger with Horizon explained most of this increase, adding $1.1 million to our cost of goods sold, although we note that the 2004 period included only two months of Horizon’s results. Cost of goods sold for the quarter ended September 30, 2005 also reflects a $0.3 million increase in patent-related amortization and $0.4 million in net costs associated with provisions to our reserve for obsolete inventory. Our gross margin rate was 60% in the third quarter of 2005, compared to 65% in the quarter ended September 30, 2004. Historically, the gross margin rate for our specialty access catheter products has been lower than that of our radiofrequency ablation products, and our 2005 third quarter gross margin includes three months of sales of these specialty access products, compared to only two months in the 2004 third quarter because the Horizon merger was completed on July 29, 2004. In addition, we believe we have not achieved optimal efficiency in the manufacture of our RFA products in our Manchester, Georgia location. Also, amortization of our product technology related intangible assets will negatively impact cost of goods sold. Future gross margins may, therefore, be lower than our historical gross margin rates because of inclusion of these products and expenses in our results.

Research and development expenses for the third quarter ended September 30, 2005 were $0.9 million, equal to the $0.9 million of research and development expense we incurred in the third quarter of 2004. In the 2005 quarter, spending on our RFA related development work decreased modestly compared to the 2004 quarter, offset by small increases in SAC project spending. In the fourth quarter, we expect that research and development expenses will show a small increase due to higher activity and spending in our RFA development project area, with essentially flat spending elsewhere.

Selling, general and administrative expenses for the quarter ended September 30, 2005 were $6.3 million, compared to $6.1 million in the third quarter of 2004. Sales and marketing expenses for the 2005 quarter were essentially flat at $3.4 million. General and administrative expenses rose from $2.7 million in the third quarter of 2004 to $2.9 million in the third quarter of 2005 primarily on higher expense associated with provisions to our allowance for doubtful accounts and, to a lesser extent, higher amortization expense associated with merger-related intangible assets.

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Interest expense, net of interest and other income, for the third quarter ended September 30, 2005 was $0.2 million, essentially equal to net interest expense in the third quarter of 2004.

Nine months ended September 30, 2005 and 2004

The following table, which sets forth key comparisons of our sales results for the first nine months of 2005 compared to the first nine months of 2004, provides additional information on the impact of the consolidation of our acquired specialty access catheter products upon our results (in thousands):

	Nine months ended September 30,
	2005		2004		Growth		%
Domestic sales:
Radiofrequency ablation products	$	11,178	$	10,198	$	980	10	%
Specialty access catheter products		17,817		4,024		13,793	343	%
Total domestic sales	$	28,995	$	14,222	$	14,773	104	%
International sales:
Radiofrequency ablation products	$	3,226	$	2,675	$	551	21	%
Specialty access catheter products		2,130		357		1,773	497	%
Total international sales	$	5,356	$	3,032	$	2,324	77	%
Total radiofrequency ablation sales	$	14,404	$	12,873	$	1,531	12	%
Total specialty access catheter products		19,947		4,381		15,566	355	%
Total sales	$	34,351	$	17,254	$	17,097	99	%

For the nine months ended September 30, 2005, sales totaled $34.4 million, an increase of 99%, or $17.1 million, from $17.3 million in the first nine months of 2004. Sales of specialty access catheter products acquired in the merger with Horizon explained most of this increase, adding $13.8 million to our sales, while sales of our radiofrequency ablation products increased $1.5 million or 12% compared to the nine months ended September 30, 2004. Domestic sales of radiofrequency ablation products were 10% higher in the first nine months of 2005 than in the first nine months of 2004. International sales of radiofrequency ablation products were 21% higher in the first nine months of 2005 than in the first nine months of 2004. For the nine months ended September 30, 2005, domestic sales represented 84% of total sales, compared to 82% in the first nine months of 2004.

Cost of goods sold for the nine months ended September 30, 2005 was $14.0 million, up $7.9 million from $6.1 million for the first nine months ended September 30, 2004, primarily reflecting inclusion of $6.8 million in cost associated with the specialty access catheter products acquired in the merger with Horizon. Cost of goods sold for the nine months ended September 30, 2005 also reflects a $0.5 million increase in patent-related amortization expenses, a $0.3 million increase in our provision for obsolete inventory and, generally, the costs of integration of our manufacturing operations into our Manchester, Georgia location. Our gross margin rate was 59% in the first nine months of 2005, compared to 65% in the prior period. Historically, the gross margin rate for our specialty access catheter products has been lower than that of our radiofrequency ablation products, and our gross margin for the nine months ended September 30, 2005 includes nine months of sales of these specialty access products, compared to only two months in the nine month period ended September 30, 2004 because the Horizon merger was completed on July 29, 2004. In addition, we incurred costs related to integration of our manufacturing facilities in the first six months of 2005 and we believe we have not achieved optimal efficiency in the manufacture of our RFA products in our Manchester, Georgia location. Also, amortization of our product technology related intangible assets will negatively impact cost of goods sold. Future gross margins may, therefore, be lower than our historical gross margin rates because of inclusion of these products and expenses in our results.

Research and development expense for the nine months ended September 30, 2005 was $2.9 million, approximately $0.2 million higher than the $2.75 million of research and development expense we incurred in the first nine months of 2004. Inclusion of research and development expenses for specialty access products added $0.3 million to our research and development expense for the first nine months of 2005, compared to the prior period, and expenses associated with clinical

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trial work, specifically investigations into the use of our technology in the fields of kidney and breast cancer, also increased by $0.2 million. The impact of these new expenses was offset by $0.1 million in reduced legal expense relating to our patents and by a $0.2 million reduction in expense for RFA product development.

Selling, general and administrative expenses for the nine months ended September 30, 2005 were $20.4 million, compared to $14.5 million in the first nine months of 2004. Increased sales and marketing expenses reflecting headcount increases and programs after the Horizon merger totaled $2.4 million for the first nine months of 2005. Similarly, following the Horizon merger, corporate expenses in our administrative functions, including payroll, insurance, rent and public company costs, increased $2.7 million over the nine months ended September 30, 2004. Another $0.8 million of the increase for the period resulted from amortization of merger-related intangible assets.

Interest expense, net of interest and other income, for the nine months ended September 30, 2005 was $0.7 million, compared to $0.2 million for the nine months ended September 30, 2004.

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 and warrants to purchase our common shares. As of September 30, 2005, we had $3.2 million of cash and cash equivalents and $12.2 million of working capital.

For the nine months ended September 30, 2005, net cash used in operating activities was $3.4 million principally due to our net loss of $3.8 million, offset by non-cash charges of $3.4 million, including depreciation and amortization, stock-based compensation and provisions to reserves for uncollectible accounts receivable and inventory. Approximately $3.0 million in cash was used in the nine month period by changes in working capital accounts, including a $0.5 million increase in accounts and notes receivable, a $0.7 million increase in inventory and a $0.4 million increase in prepaid expenses and other current assets. Accounts payable and accrued liabilities, in aggregate, decreased by $1.4 million. For the nine months ended September 30, 2005, $0.4 million was provided by investing activities, with net sales of marketable securities providing $0.9 million offset by $0.9 million used in purchase of property and equipment and $250,000 used in the acquisition of a patent license from EMcision Limited Incorporated (“EMcision”). The acquisition of the EMcision license further required the Company to commit to payment of an additional $500,000 in the future and to issue 150,000 of its common shares valued at $403,500. Financing activities for the nine months ended September 30, 2005 used $6.0 million in cash, reflecting $6.9 million in debt payments made during the period offset by $0.9 million raised by the issuance of common stock in conjunction with the exercise of stock options.

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 $10.0 million as of June 30, 2005. During the three months ended September 30, 2005, we refinanced almost all of the debt acquired in the course of the Horizon merger. As of September 30, 2005, the balance of our outstanding debt was $9.9 million. As of September 30, 2005, we had no future minimum payments due under capital leases. Future minimum payments due under our operating leases and debt agreements were as follows (in thousands):

	Operating Leases		Debt		Total
Three months ending December 31, 2005	$	114	$	110	$	224
Year ending December 31, 2006		404		113		517
Year ending December 31, 2007		383		—		383
Year ending December 31, 2008		350		9,700		10,050
Year ending December 31, 2009		355		—		355
Year ending December 31, 2010 and thereafter		116		—		116
Total of future minimum operating lease payments	$	1,722	$	9,923	$	11,645

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 $3.4 million for the nine month period ended September 30, 2005. Our balance of cash and cash

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equivalents at September 30, 2005 was $3.2 million. In August of 2005, the Company completed a private placement of Senior Convertible Notes (the “New Notes”, as defined below in “Private Placement of Convertible Debt”). The terms of the New Notes required the Company to pay the unpaid balances of the Senior Notes (as defined below) and such payment reduced the Company’s interest expense by approximately $600,000 on an annualized basis. Additionally, the Securities Purchase Agreement pursuant to which the New Notes were issued allows for subordination of the New Notes to certain working capital indebtedness. As a result, we are currently negotiating for a working capital line of credit to support our working capital needs. Although it is difficult for us to predict future liquidity requirements with certainty, we believe that our current balances of cash and cash equivalents and the successful negotiation and execution of a working capital line of credit 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 and/or we are unsuccessful in obtaining a working capital line of credit, 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 cash generated by future operations will increase. Further, 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 Convertible Debt

On August 5, 2005, we completed a private placement of subordinated Senior Convertible Notes (the “New Notes”) with an aggregate principal amount of $9.7 million. The New Notes were issued pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) among us and Atlas Master Fund, Ltd., which is not related to the Company. No warrants or other securities were issued in conjunction with the Purchase Agreement and we incurred no financing costs other than normal and customary legal and other professional expenses. The New Notes are convertible into shares of our common stock at an initial conversion price of $4.03 per share of common stock. The conversion price of $4.03 per share of common stock was greater than the per share fair market value of the Company’s common stock on the date of issuance of the New Notes. The conversion price is subject to adjustment in certain circumstances, including common stock splits or like events. Until conversion or maturity, the New Notes bear interest at the rate of 6.5% per annum, payable semiannually in cash. Absent conversion, the New Notes mature on August 5, 2008 (the “Maturity Date”). If on the Maturity Date the closing price of the common stock has been at or above 102% of the then current conversion price for at least 10 consecutive business days immediately preceding the Maturity Date, then any remaining principal outstanding under the New Notes shall automatically be converted into common stock, subject to certain conditions. The issuance of the New Notes 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.

Pursuant to the Purchase Agreement, we were required to file a registration statement on Form S-3 within 30 days after the closing of the transaction for purposes of registering the resale of the shares of common stock issuable upon conversion of the Notes. Timely filing of such a registration statement on Form S-3 was made and the registration statement has been declared effective by the SEC.

As of the issuance date of the New Notes, we also owed $8,262,000 plus accrued interest to holders of our Senior Subordinated Convertible Notes (the “Senior Notes”) and $1,392,500 plus accrued interest to the holder of the Company’s Junior Promissory Note (the “Junior Note”). Pursuant to the terms of the New Notes, we were required to repay the Senior Notes and the Junior Note within 21 days of the issuance of the New Notes, or August 26, 2005. The Senior Notes were repaid on August 9, 2005 and the Junior Note was repaid on August 11, 2005.

Recent Accounting Pronouncements

In March 2004, the Financial Accounting Standards Board (“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.

Effective April 1, 2004, the SEC adopted Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (“SAB 105”). SAB 105 clarifies the requirements for the valuation of loan commitments that are accounted for as derivatives in accordance with SFAS No. 133. Management does not expect the implementation of this new bulletin to have any impact on our financial position, results of operations and cash flows. We do not have any loan commitments.

In July 2004, the EITF issued a draft abstract for EITF Issue No. 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (“EITF 04-08”). EITF 04-08 reflects the Task Force’s conclusion that contingently

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convertible debt should be included in diluted earnings per share computations regardless of whether the market price trigger has been met. EITF 04-08 is effective for reporting periods ending after December 15, 2004. Prior period earnings per share amounts presented for comparative purposes are required to be restated to conform to this consensus and the Company is required to include the shares issuable upon the conversion of the notes in the diluted earnings per share computation for all periods during which contingently convertible notes are outstanding. In August 2005, we issued contingently convertible debt (see above, “Private Placement of Convertible Debt”). Although we have not yet quantified the impact of this standard on its financial statements, it is likely that adoption of this standard will have a material impact on the Company’s results of operations.

In November 2004, the FASB 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 FASB 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. In April 2005, the SEC amended the compliance dates for SFAS No. 123R, to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. SFAS No. 123R is effective for the Company in the quarter ending March 31, 2006. Upon adoption of SFAS No. 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 methodology 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.

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 153, “Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29,” which amends Opinion 29 by eliminating the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for fiscal years beginning after June 15, 2005, and implementation is done prospectively. Management does not expect the implementation of this new standard to have a material impact on our financial position, results of operations or cash flows.

In December 2004, the FASB issued and made effective two Staff Positions (FSP) that provide accounting guidance on how companies should account for the effect of the American Jobs Creation Act of 2004 that was signed into law on October 22, 2004. In FSP FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004,” the FASB concluded that the special tax deduction for domestic manufacturing, created by the new legislation, should be accounted for as a “special deduction” instead of a tax rate reduction. As such, the special tax deduction for domestic manufacturing is recognized no earlier than the year in which the deduction is taken on the tax return. FSP FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” allows additional time to evaluate the effects of the new legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. We do not anticipate that this legislation will impact our results of operations or financial condition.

In March 2005, the SEC released Staff Accounting Bulletin No. 107 (“SAB 107”), “Share-Based Payment,” which provides interpretive guidance related to the interaction between SFAS No. 123R and certain SEC rules and regulations. It also provides the SEC staff’s views regarding valuation of share-based payment arrangements. Management is currently evaluating the impact SAB 107 will have on our consolidated financial statements.

In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations – An Interpretation of FASB Statement No. 143.” FIN No. 47 was issued to address diverse accounting practices regarding the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets when the timing or method of settlement of the related obligations are conditional on future events. FIN No. 47 concludes that liability should be recognized when incurred if the liability can be reasonably estimated. The Company does not believe the adoption of FIN No. 47 will have a material impact on its consolidated financial position, results of operations or cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes,” and

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FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements” and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 31, 2005. We do not believe the adoption of SFAS No. 154 will have a material effect on our consolidated financial position, results of operations or cash flows.

In June 2005, the EITF issued a draft abstract for EITF Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination.” The conclusion of the EITF was that leasehold improvements placed in service significantly after and not contemplated at or near the beginning of the lease term should be amortized over the shorter of the useful life of the assets or a term that includes both required lease periods and renewals that are reasonably assured (as defined in paragraph 5 of Statement 13) as of the date the leasehold improvements are purchased. The Company does not believe the adoption of FIN No. 47 will have a material impact on its consolidated financial position, results of operations or cash flows.

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 are dependent on one third-party contractor for the supply of our HABIB^™ 4X bipolar resection device, and any failure to deliver this product to us could result in lower than expected sales.

We are dependent on one supplier to manufacture our HABIB^™ 4X bipolar device. In the quarter ended September 30, 2005, we received reports that the sterile packaging of some HABIB^™ 4X bipolar resection devices delivered to customers in the United States had been compromised during shipping. We inspected the first manufacturing lots received in the U.S. from our supplier and determined that a problem existed. As a result, we rejected subsequent product shipments from the manufacturer and requested that all products previously shipped to U.S. customers be returned for replacement. As a result, we were not able to sell as many HABIB^™ 4X bipolar resection devices in the third quarter of 2005 as we had expected. We do not plan on resuming shipment of HABIB^™ 4X bipolar resection devices in the United States until a packaging redesign is implemented and validated by the manufacturer, and approved by us. This and any other future delay or failure in shipments of HABIB^™ 4X bipolar resection devices to us has resulted in, and in the future may result in, our failure to ship the products to customers, resulting in lower than expected sales.

We may need to obtain additional capital to improve our cash liquidity to continue present operations and such additional capital could result in dilution to our stockholders or additional debt repayment obligations.

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 a 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, including a working capital line of credit, may not be available in amounts or on terms acceptable to us, or 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.

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 in our annual report on Form 10-K, as amended, for the year ended December 31, 2004 for further discussion of these material weaknesses.

We have limited experience manufacturing our RFA and SAC 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 have consolidated 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

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assembly, if demand for our system increases we will need to hire additional personnel and may need to purchase additional equipment. If we are unable to sufficiently staff and equip our manufacturing operations, or are otherwise unable to meet customer demand for our products, our business could suffer.

If we become unable to meet customer demand through disruption of manufacturing operations, our business could suffer.

We have transitioned our California-based manufacturing operations for our RFA products to our Manchester, Georgia location. Our initial production of RFA products in that location has resulted in relatively low product yields and relatively high unit costs. If we become unable to meet customer demand for our products, or if the high initial costs associated with manufacture of our RFA products in Georgia do not abate, our business could suffer. Additionally, we expect to begin manufacture of the HABIB^™ 4X bipolar resection device in Manchester in 2006. It is possible that initial production of this product could similarly result in low yields or high unit costs, and, if so, our business could suffer.

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

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

• coordinating geographically disparate organizations, systems and facilities;

• 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.

We believe that the integration of the two companies was essentially complete as of June 30, 2005. However, as of September 30, 2005, we have only slightly more than a full year of combined operations, and we may, in the future, encounter again any or all of the difficulties in operational integration we have faced in the period since the merger. These difficulties could include an interruption of, or loss of momentum in, the activities of the combined company’s business and the loss of key personnel. Further, the diversion of our management’s attention and any delays or difficulties encountered in connection with the operation of our geographically disparate organization could harm our business, results of operations, financial condition or prospects.

We will be heavily dependent on the RITA system, our line of specialty access catheters and introduction of new products, including the HABIB^™ 4X bipolar resection device, in order to achieve our sales goals and our profitability targets. Failure to achieve and grow market acceptance for either product line or for new products 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 primarily depend upon physician adoption and patient awareness of these products for existing indications or, presuming FDA approval, new indications. We also expect sales from new products, such as the HABIB^™ 4X bipolar resection device, and our financial performance will suffer if physician adoption and patient awareness of these new products do not meet our expectations.

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

We incurred net losses of $3.8 million during the first nine months of 2005, $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 September 30, 2005, we had an accumulated deficit of $92.1 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.

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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 our radiofrequency ablation system or our implantable specialty access 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 products or to have less severe side effects than those resulting from our products, physician adoption of our products could be negatively affected and our sales could decline.

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 patent applications 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, such as by filing a lawsuit, 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

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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 sales, which account for a significant portion of our total sales, 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;

• the risk of establishing and maintaining a direct sales force if any of our existing distributor agreements are terminated;

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

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

• longer accounts receivable collection time;

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

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

• contractual provisions governed by foreign laws.

We are substantially dependent on our Italian distributor and if we lose this distributor, or if this distributor significantly reduces its product demand, our international and total sales could decline.

We are substantially dependent on M.D.H. s.r.l. Forniture Ospedaliere, our distributor in Italy, which accounted for 15% of our international sales in the first nine months of 2005 and 19% of our international sales for the year ended December 31, 2004. International sales accounted for 16% of our total sales in the first nine months of 2005 and 16% of our total sales for the year ended December 31, 2004. The loss of this distributor, or a significant decrease in demand from this distributor, could cause our sales to decline substantially.

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

We currently 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. We may in the future terminate distributor agreements with the intent to locate new distributors or with the intent to initiate direct sales efforts in specific markets. 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 or in establishing a direct sales force, and our sales could decrease during any related transition period.

We are aware that some of our distributors have, in the past, 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 has remained stable in 2004 and 2005, we may encounter new

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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 our distributors, 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 or increase our losses.

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 sales.

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 the use of our products will continue at current levels, or that future reimbursement policies of third-party payors will not adversely affect our ability to sell our 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 as well as key staff in the areas of finance, operations and research and development. During our second quarter ended June 30, 2005, our then Chief Financial Officer announced his resignation effective as of October 2005. His replacement began service with the Company in October 2005. 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 qualified 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.

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

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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 increase our sales, lower our costs and expenses and manage our cash. 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 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 RFA 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 due to lower sales or higher costs.

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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 RFA 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.

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;

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• 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.

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 4.5% of our outstanding common stock as of September 30, 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 3. Quantitative and Qualitative Disclosures About Market Risk

We assumed fixed rate borrowings in conjunction with our merger with Horizon Medical Products. Essentially all of these borrowings were refinanced in August of 2005 (see Private Placement of Convertible Debt). Also, changes in interest rates will affect the fair market value of these borrowings. As of September 30, 2005 the Company’s borrowings and related interest rates were as follows:

	Balance Oustanding		Interest Rate
Senior convertible notes	$	9,700,000	6.5	%
Note payable		223,162	8.0	%
Total borrowings outstanding and weighted average interest rate	$	9,923,162	6.5	%

Except for these factors, our market risk disclosures have not changed significantly from those set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2004, as amended.

Item 4. 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 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 the material weaknesses discussed in the Company’s annual report on Form 10-K for the year ended December 31, 2004, as amended, have not yet been fully remediated. In light of these material weaknesses, 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.

Changes in Internal Control Over Financial Reporting

The material weaknesses identified and discussed in the Company’s annual report on Form 10-K for the year ended December 31, 2004, as amended, have resulted in changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2005, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Although not yet complete, during the quarter ended September 30, 2005, we continued the following actions to remediate the material weaknesses we identified to be present as of December 31, 2004:

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

• Additional training of staff;

• Identification of procedural improvements in our accounting processes;

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings. Not applicable.

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

On August 5, 2005, the Company completed a private placement of subordinated Senior Convertible Notes (the “New Notes”) with an aggregate principal amount of $9.7 million. The New Notes were issued pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) among the Company and Atlas Master Fund, Ltd., which is not related to the Company. No warrants or other securities were issued in conjunction with the Purchase Agreement and the Company incurred no financing costs other than normal and customary legal and other professional expenses. The New Notes are convertible into shares of common stock of the Company at an initial conversion price of $4.03 per share of common stock. The conversion price is subject to adjustment in certain circumstances. Until conversion or maturity, the New Notes bear interest at the rate of 6.5% per annum, payable semiannually in cash. Absent conversion, the New Notes mature on August 5, 2008 (the “Maturity Date”). If on the Maturity Date the closing price of the common stock has been at or above 102% of the then current conversion price for at least 10 consecutive business days immediately preceding the Maturity Date, then any remaining principal outstanding under the New Notes shall automatically be converted into common stock, subject to certain conditions. The issuance of the New Notes 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.

Pursuant to the Purchase Agreement, the Company was required to file a registration statement on Form S-3 within 30 days after the closing of the transaction for purposes of registering the resale of the shares of Common Stock issuable upon conversion of the Notes. Timely filing of such a registration statement on Form S-3 was made and the registration statement has been declared effective by the SEC.

As of the issuance date of the New Notes, the Company also owed $8,262,000 plus accrued interest to holders of the Company’s Senior Subordinated Convertible Notes (the “Senior Notes”) and $1,392,500 plus accrued interest to the holder of the Company’s Junior Promissory Note (the “Junior Note”). Pursuant to the terms of the New Notes, the Company was required to repay the Senior Notes and the Junior Note within 21 days of the issuance of the New Notes, or August 26, 2005. The Senior Notes were repaid on August 9, 2005 and the Junior Note was repaid on August 11, 2005.

Item 3. Defaults Upon Senior Securities. Not applicable.

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

Item 5. Other Information.

As previously disclosed by the Company, Michael D. Angel commenced employment with the Company on October 17, 2005 in the position of Chief Financial Officer and Vice President. Effective as of October 17, 2005, Mr. Angel will act as the Principal Financial Officer and Principal Accounting Officer of the Company. As a result, Rich DeYoung, the Company’s Vice President of Finance, will no longer act as the Company’s Principal Financial Officer and Principal Accounting Officer as of such date.

As previously disclosed by the Company, on October 19, 2005, Donald Stewart resigned as Chief Financial Officer and Vice President, Finance and Administration of the Company on October 19, 2005.

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Exhibit 10.91 to the Company’s current report on Form 8-K originally filed with the SEC on August 9, 2005 is being filed with this quarterly report on Form 10-Q solely for the purpose of correcting a clerical error to the Form of Note included in such exhibit.

Item 6. Exhibits.

(a) Exhibits:

10.91	Securities Purchase Agreement dated August 5, 2005, among the Company and the Purchasers, including Form of Note
10.92(1)	Offer letter to Mario Martinez dated July 25, 2005
10.93(2)	Approval and consent dated as of September 23, 2005 by and among the Company, SF Capital Partners, Ltd., Baystar Capital II, L.P., Walker Smith Capital (and its affiliates) and Capital Ventures International
10.94(3)	Offer letter to Michael D. Angel dated October 11, 2005
31.1	Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer

(1) Incorporated by reference to our current report on Form 8-K filed with the SEC on August 22, 2005.

(2) Incorporated by reference to our current report on Form 8-K filed with the SEC on September 29, 2005.

(3) Incorporated by reference to our current report on Form 8-K filed with the SEC on October 19, 2005.

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SIGNATURES

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

RITA MEDICAL SYSTEMS, INC
By:	/s/ Joseph DeVivo
	Joseph DeVivo President and Chief Executive Officer

Date: November 8, 2005

EXHIBIT INDEX

10.91	Securities Purchase Agreement dated August 5, 2005, among the Company and the Purchasers, including Form of Note
10.92(1)	Offer letter to Mario Martinez dated July 25, 2005
10.93(2)	Approval and consent dated as of September 23, 2005 by and among the Company, SF Capital Partners, Ltd., Baystar Capital II, L.P., Walker Smith Capital (and its affiliates) and Capital Ventures International
10.94(3)	Offer letter to Michael D. Angel dated October 11, 2005
31.1	Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer

(1) Incorporated by reference to our current report on Form 8-K filed with the SEC on August 22, 2005.

(2) Incorporated by reference to our current report on Form 8-K filed with the SEC on September 29, 2005.

(3) Incorporated by reference to our current report on Form 8-K filed with the SEC on October 19, 2005.

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EX-10.91

Exhibit 10.91

RITA MEDICAL SYSTEMS, INC. SECURITIES PURCHASE AGREEMENT

This SECURITIES PURCHASE AGREEMENT (this “Agreement”), is made and entered into as of August 5, 2005, by and among RITA Medical Systems, Inc., a Delaware corporation (the “Company”), and the purchasers listed on Schedule A attached hereto (collectively, the “Purchasers” and individually, a “Purchaser”).

1. Authorization of Sale of the Securities. Subject to the terms and conditions of this Agreement, the Company has authorized the sale of the senior convertible notes of the Company in the form attached hereto as Exhibit A (together with any senior convertible notes issued in replacement thereof in accordance with the terms thereof, the “Notes”), which Notes shall be convertible into shares of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”) (as converted, the “Conversion Shares”), in accordance with the terms of the Notes. The Notes and the Conversion Shares are hereinafter referred to as the “Securities.”

2. Agreement to Sell and Purchase the Securities.

2.1 Purchase and Sale. Subject to the terms and conditions of this Agreement, each Purchaser severally agrees to purchase, and the Company agrees to sell and issue to each Purchaser, at the Closing (as defined below) a principal amount of Notes set forth opposite such Purchaser’s name on Schedule A attached hereto (which aggregate principal amount for all Purchasers shall be $9,700,000).

2.2 Purchase Price. The purchase price for each Purchaser (the “Purchase Price”) of the Notes to be purchased by each such Purchaser at the Closing shall be equal to $1.00 for each $1.00 of principal amount of Notes being purchased by such Purchaser at the Closing.

2.3 Form of Payment. On the Closing Date, (i) each Purchaser shall pay its Purchase Price to the Company for the Notes to be issued and sold to such Purchaser at the Closing, by wire transfer of immediately available funds in accordance with the Company’s written wire instructions, and (ii) the Company shall deliver to each Purchaser the Notes (in the principal amounts as such Purchaser shall request or, if no such request is made, a single Note with a principal amount equal to the aggregate principal amount of Notes to be purchased by such Purchaser) which such Purchaser is then purchasing, duly executed on behalf of the Company and registered in the name of such Purchaser or its designee.

2.4 Closing Date. The Closing shall occur on the date hereof (the “Closing Date”).

2.5 Legends. Certificates evidencing the Securities will contain the following legend, as applicable, until such time as they are not required:

[NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION OR EXERCISE OF THESE SECURITIES HAVE BEEN REGISTERED] [THESE SECURITIES HAVE NOT BEEN REGISTERED] WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN

EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. [THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OR EXERCISE OF THESE SECURITIES] [THESE SECURITIES] MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

3. Representations, Warranties and Covenants of the Company. The Company hereby represents and warrants to the Purchasers as follows:

3.1 Organization. The Company is duly organized and validly existing in good standing under the laws of the jurisdiction of its organization. Each of the Company and its Subsidiaries (as defined in Rule 405 under the Securities Act) has full power and authority to own, operate and occupy its properties and to conduct its business as presently conducted and as described in the documents filed by the Company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), since the end of its most recently completed fiscal year through the date hereof (the “Exchange Act Documents”) and is registered or qualified to do business and in good standing in each jurisdiction in which the nature of the business conducted by it or the location of the properties owned or leased by it requires such qualification and where the failure to be so qualified would have a material adverse effect upon the condition (financial or otherwise) of the Company and its Subsidiaries, considered as one enterprise (a “Material Adverse Effect”), and no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification.

3.2 Due Authorization and Valid Issuance. The Company has all requisite power and authority to execute, deliver and perform its obligations under the Transaction Documents, and the Transaction Documents have been duly authorized and validly executed and delivered by the Company and constitute legal, valid and binding agreements of the Company enforceable against the Company in accordance with their terms, except as rights to indemnity and contribution may be limited by state or federal securities laws or the public policy underlying such laws, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ and contracting parties’ rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). The issuance of the Notes is duly authorized and, upon issuance of the Notes in accordance with the terms hereof, the Notes shall be free from all taxes, liens and charges with respect to the issue thereof. As of the Closing, a number of shares of Common Stock shall have been duly authorized and reserved for issuance equal to the maximum number of shares issuable upon conversion of the Notes to be issued at Closing. Upon conversion or issuance in accordance with the Notes, the Conversion Shares will be validly issued, fully-paid and nonassessable.

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3.3 Non-Contravention. The execution and delivery of the Transaction Documents and the consummation of the transactions contemplated hereby and thereby will not (A) conflict with or constitute a violation of, or default (with the passage of time or otherwise) under, (i) any contract, agreement or other instrument filed or incorporated by reference as an exhibit to any of the Exchange Act Documents (any such contract, agreement or instrument, an “Exchange Act Exhibit”) except for the Note Purchase Agreement by and among the Company, ComVest Venture Partners, L.P. and the Additional Note Purchasers dated as of March 1, 2002, as amended (the “ComVest Notes”), (ii) the charter, by-laws or other organizational documents of the Company or any Subsidiary, or (iii) any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority applicable to the Company or any Subsidiary or their respective properties, except in the case of clauses (i) and (iii) for any such conflicts, violations or defaults which are not reasonably likely to have a Material Adverse Effect or (B) result in the creation or imposition of any lien, encumbrance, claim, security interest or restriction whatsoever upon any of the material properties or assets of the Company or any Subsidiary (except as contemplated hereby) or an acceleration of indebtedness pursuant to any obligation, agreement or condition contained in any Exchange Act Exhibit, except that the transactions contemplated by the Transaction Documents may result in an event of default under the ComVest Notes. Except for (i) the filing of a Form 8-K in connection with the transactions contemplated by the Transaction Documents and (ii) the Registration Statement, Form D and any related state “Blue Sky” filings required to be filed with respect to the Securities pursuant to Section 6 hereof, no consent, approval, authorization or other order of, or registration, qualification or filing with, any regulatory body, administrative agency, or other governmental body in the United States or any other person is required for the execution and delivery of the Transaction Documents, and the valid issuance and sale of the Securities to be sold pursuant to this Agreement, and the valid issuance of the Conversion Shares in accordance with the Notes, other than such as have been made or obtained, and except for any post-closing securities filings or notifications required to be made under federal or state securities laws.

3.4 Capitalization. The capitalization of the Company as of March 31, 2005 is as set forth in the most recent applicable Exchange Act Documents, increased as set forth in the next sentence. The Company has not issued any capital stock since that date other than pursuant to (i) employee benefit plans disclosed in the Exchange Act Documents, or (ii) outstanding warrants, options or other securities disclosed in the Exchange Act Documents; furthermore there are warrants to purchase 3,272,724 shares of Common Stock as described in the Company’s annual report filed on Form 10-K, as amended (the “Warrants”). The outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and were not issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. Except as set forth in or contemplated by the Exchange Act Documents and for the Warrants, there are no outstanding rights (including, without limitation, preemptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any unissued shares of capital stock or other equity interest in the Company or any Subsidiary, or any contract, commitment, agreement, understanding or arrangement of any kind to which the Company is a party or of which the Company has knowledge and relating to the issuance or sale of any capital stock of the Company or any Subsidiary, any such convertible or exchangeable securities or any such rights, warrants or options. Without limiting the foregoing, no preemptive right, co-sale right, right of first refusal, registration right, or other similar

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right exists with respect to the Securities or the issuance and sale thereof. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the Securities. The Company owns the entire equity interest in each of its Subsidiaries, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than as described in the Exchange Act Documents. Except as disclosed in the Exchange Act Documents, there are no stockholders agreements, voting agreements or other similar agreements with respect to the Common Stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.

3.5 Legal Proceedings. There is no material legal or governmental proceeding pending or, to the knowledge of the Company, threatened to which the Company or any Subsidiary is or may be a party or of which the business or property of the Company or any Subsidiary is subject that is not disclosed in the Exchange Act Documents, and which proceeding, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect. There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise between the accountants, auditors and lawyers formerly or presently employed by the Company.

3.6 No Violations. Neither the Company nor any Subsidiary is (i) in violation of its charter, bylaws, or other organizational document, (ii) in violation of any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority applicable to the Company or any Subsidiary, which violation, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect, or (iii) in default (and there exists no condition which, with the passage of time or otherwise, would constitute a default) in any material respect in the performance of any Exchange Act Exhibit, which would be reasonably likely to have a Material Adverse Effect, except that the transactions contemplated by the Transaction Documents may result in an event of default under the ComVest Notes.

3.7 Governmental Permits, Etc. With the exception of the matters which are dealt with separately in Sections 3.1, 3.12, 3.13, and 3.14, each of the Company and its Subsidiaries has all necessary franchises, licenses, certificates and other authorizations from any foreign, federal, state or local government or governmental agency, department, or body that are currently necessary for the operation of the business of the Company and its Subsidiaries as currently conducted and as described in the Exchange Act Documents except where the failure to currently possess could not reasonably be expected to have a Material Adverse Effect.

3.8 Intellectual Property. Except as specifically disclosed in the Exchange Act Documents (i) each of the Company and its Subsidiaries owns or possesses sufficient rights to use all material patents, patent rights, trademarks, copyrights, licenses, inventions, trade secrets, trade names and know-how (collectively, “Intellectual Property”) described or referred to in the Exchange Act Documents as owned or possessed by it or that are necessary for the conduct of its business as now conducted or as proposed to be conducted as described in the Exchange Act Documents except where the failure to currently own or possess would not have a Material Adverse Effect, (ii) to the knowledge of the Company, neither the Company nor any of its Subsidiaries is infringing any rights of a third party with respect to any Intellectual Property that, individual or in the aggregate, would have a Material Adverse Effect, (iii) neither the Company nor any of its Subsidiaries has received any notice of, or has any knowledge of, any asserted infringement by the Company or any of its

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Subsidiaries of, any rights of a third party with respect to any Intellectual Property that, individually or in the aggregate, would have a Material Adverse Effect if determined adversely to the Company and (iv) neither the Company nor any of its Subsidiaries has received any notice of, or has any knowledge of, infringement by a third party with respect to any Intellectual Property rights of the Company or of any Subsidiary that, individually or in the aggregate, would have a Material Adverse Effect.

3.9 Financial Statements. The financial statements of the Company and the related notes contained in the Exchange Act Documents present fairly, in accordance with generally accepted accounting principles, the financial position of the Company and its Subsidiaries as of the dates indicated, and the results of its operations and cash flows for the periods therein specified consistent with the books and records of the Company and its Subsidiaries except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which are not expected to be material in amount. Such financial statements (including the related notes) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods therein specified, except as may be disclosed in the notes to such financial statements, or in the case of unaudited statements, as may be permitted by the SEC on Form 10-Q under the Exchange Act and except as disclosed in the Exchange Act Documents. The other financial information contained in the Exchange Act Documents has been prepared on a basis consistent with the financial statements of the Company.

3.10 No Material Adverse Change. Except as disclosed in the Exchange Act Documents, since March 31, 2005, there has not been (i) any event affecting the Company or its Subsidiaries that has had a Material Adverse Effect, (ii) any obligation, direct or contingent, that is material to the Company and its Subsidiaries considered as one enterprise, incurred by the Company, except obligations incurred in the ordinary course of business, (iii) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its Subsidiaries, or (iv) any loss or damage (whether or not insured) to the physical property of the Company or any of its Subsidiaries which has been sustained which has a Material Adverse Effect; provided, however, that changes in the ordinary course of business, including but not limited to the use of cash and increases in liabilities in the ordinary course of business, shall not be deemed to be a material adverse change or to have a Material Adverse Effect.

3.11 Disclosure. The representations and warranties of the Company contained in this Section 3 and the Other Information (as defined below) as of the date hereof do not and as of the Closing Date will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Except with respect to (i) the material terms and conditions of the transaction contemplated by the Transaction Documents, which shall be publicly disclosed by the Company on a Form 8-K, and (ii) such other information that is being provided to the Purchasers that the Company covenants it shall publicly disclose no later than August 9, 2005 (the “Other Information”), the Company confirms that neither it nor any person acting on its behalf has provided the Purchasers with any information that the Company believes constitutes material, non-public information. The Company understands and confirms that the Purchasers will rely on the foregoing representations in effecting transactions in the securities of the Company after the public disclosures referenced in (i) and (ii) in the immediately preceding sentence.

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3.12 NASDAQ Compliance. The Company’s Common Stock is registered pursuant to Section 12(g) of the Exchange Act and is listed on The Nasdaq Stock Market, Inc. National Market (the “Nasdaq National Market”), and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or de-listing the Common Stock from the Nasdaq National Market, nor has the Company received any notification that the SEC or the National Association of Securities Dealers, Inc. (“NASD”) is currently contemplating terminating such registration or listing.

3.13 Reporting Status. The Company has filed in a timely manner all documents that the Company was required to file under the Exchange Act during the 12 months preceding the date of this Agreement. Pursuant to General Instruction I.B.3 of Form S-3, the Company is eligible to use Form S-3 to register the Conversion Shares to be offered for the account of the Purchasers. The following documents complied in all material respects with the SEC’s requirements as of their respective filing dates, and the information contained therein as of the date thereof did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading:

(a) Annual Report on Form 10-K for the year ended December 31, 2004, as amended, and Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, and Forms 8-K filed on January 7, 2005, January 21, 2005, February 16, 2005, April 4, 2005, April 7, 2005, April 20, 2005, May 10, 2005, May 24, 2005, May 26, 2005, May 27, 2005, June 9, 2005, June 24, 2005, July 5, 2005, July 28, 2005, and Form 8-K/A filed on January 31, 2005, and Proxy Statement on Schedule 14A filed on May 2, 2005; and

(b) all other documents, if any, filed by the Company with the SEC during the one-year period preceding the date of this Agreement pursuant to the reporting requirements of the Exchange Act.

3.14 Listing. The Company shall comply with all requirements of the NASD with respect to the issuance of the Conversion Shares, and the listing of the Conversion Shares on the Nasdaq National Market.

3.15 No Manipulation of Stock. The Company has not taken and will not, in violation of applicable law, take, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Notes or the Conversion Shares.

3.16 Foreign Corrupt Practices. Neither the Company, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company, has (i) directly or indirectly, used any corrupt funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or

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domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is in violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.

3.17 Taxes. The Company has filed all necessary federal, state and foreign income and franchise tax returns and has paid or accrued all taxes shown as due thereon, except where failure to so file or to so pay would not have a Material Adverse Effect and the Company has no knowledge of a tax deficiency which has been or might be asserted or threatened against it which would have a Material Adverse Effect.

3.18 Private Offering. Assuming the correctness of the representations and warranties of the Purchasers set forth in Section 4 hereof, the offer and sale of Notes hereunder is and, in accordance with the terms of the Notes, the issuance of the Conversion Shares will be exempt from registration under the Securities Act. The Company has not distributed and will not distribute prior to the Closing Date any offering material in connection with this Offering and sale of the Securities other than the Transaction Documents of which this Agreement is a part or the Exchange Act Documents. The Company has not in the past nor will it hereafter take any action to sell, offer for sale or solicit offers to buy any securities of the Company which would bring the offer, issuance or sale of the Securities as contemplated by this Agreement, or the issuance of the Conversion Shares in accordance with the terms of the Notes, within the provisions of Section 5 of the Securities Act, unless such offer, issuance or sale was or shall be within the exemptions of Section 4 of the Securities Act. Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising. The Company has offered the Securities for sale only to the Purchasers and certain other “accredited investors” within the meaning of Rule 501 under the Securities Act.

3.19 Transactions With Affiliates. Except as disclosed in the Exchange Act Documents, none of the current officers or directors of the Company is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer or director or, to the knowledge of the Company, any entity in which any officer or director has a substantial interest or is an officer, director, trustee or partner.

3.20 No Registration Rights. Other than the Purchasers, no person has the right, which right has not been waived, to require the Company or any Subsidiary to register any securities for sale under the Securities Act by reason of the filing of the Registration Statement with the SEC or the issuance and sale of the Notes or Conversion Shares.

3.21 Ranking of Notes. Except for the Senior Debt (as defined in the form of Note attached as Exhibit A hereto), no indebtedness of the Company is senior to or ranks pari passu with the Notes in right of payment, whether with respect of payment of redemptions, interest damages or upon liquidation or dissolution or otherwise.

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3.22 ComVest Notes. The Company covenants that it will repay the ComVest Notes within 21 days of the date hereof (the “Prepayment”), and the Company represents that it will have no further obligations under the ComVest Notes after the Prepayment is complete.

4. Representations, Warranties and Covenants of the Purchasers.

4.1 Securities Law Representations and Warranties. Each Purchaser severally and not jointly represents, warrants and covenants to the Company as follows:

(a) The Purchaser is knowledgeable, sophisticated and experienced in making, and is qualified to make, decisions with respect to investments in securities representing an investment decision like that involved in the purchase of the Securities, including investments in securities issued by the Company, and has requested, received, reviewed and considered all information it deems relevant in making an informed decision to purchase the Securities.

(b) The Purchaser is acquiring the principal amount of Notes set forth in Section 2 above in the ordinary course of its business and for its own account for investment only and has no present intention of distributing any of the Securities nor any arrangement or understanding with any other persons regarding the distribution of such Securities within the meaning of Section 2(11) of the Securities Act, except as contemplated in Section 6 of this Agreement; provided, however, that in making such representation, such Purchaser does not agree to hold the Securities for any minimum or specific term and reserves the right to sell, transfer or otherwise dispose of the Securities at any time in accordance with the provisions of this Agreement and with Federal and state securities laws applicable to such sale, transfer or disposition.

(c) The Purchaser will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Securities except in compliance with the Securities Act and the rules and regulations promulgated thereunder (the “Rules and Regulations”).

(d) The Purchaser has completed or caused to be completed the Investor Questionnaire and the Selling Stockholder Notice and Questionnaire, attached to this Agreement as Appendices I and II, for use in preparation of the Registration Statement (the “Investor Questionnaire” and the “Selling Stockholder Questionnaire,” respectively), and the answers to the Questionnaires are true and correct in all material respects as of the date of this Agreement and will be true and correct as of the Closing Date and the effective date of the Registration Statement; provided that the Purchasers shall be entitled to update such information by providing notice thereof to the Company before the effective date of such Registration Statement.

(e) The Purchaser has, in connection with its decision to purchase the principal amount of Notes set forth in Section 2 above, relied solely upon the Exchange Act Documents and the representations and warranties of the Company contained in this Agreement.

(f) The Purchaser believes it has received all information it considers necessary or appropriate for deciding whether to purchase the Securities. The Purchaser further represents that it has had an opportunity to ask questions and receive answers from the Company

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regarding the terms and conditions of the offering of the Securities and the business, properties, prospects and financial condition of the Company. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 3 of this Agreement or the right of the Purchasers to rely on such representations and warranties.

(g) As of the date hereof, in the event of the conversion of the Notes, each Purchaser would own that number of shares of Common Stock noted in Schedule A hereto.

(h) The Purchaser is an “accredited investor” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act.

4.2 Resales of Securities. Each Purchaser agrees to the following:

(a) If the Purchaser shall propose to sell any Securities, the Purchaser shall notify the Company of its intent to do so on or before one (1) business day prior to the date of such sale (the “Notice of Sale”), and the provision of the Notice of Sale to the Company shall conclusively be deemed to establish an agreement by such Purchaser to comply with the registration provisions herein described. The Notice of Sale shall be deemed to constitute a representation that any information previously supplied by such Purchaser is accurate as of the date of such Notice of Sale.

(b) The Notice of Sale in substantially the form attached as Exhibit I to Appendix II shall be given in accordance with the provisions of Section 4.2(a) hereof. However, the Purchaser may give the Notice of Sale orally by telephoning the current Chief Financial Officer at the Company at 510-771-0400. An oral Notice of Sale shall be deemed to have been received only at such time as the selling Purchaser speaks directly with the current Chief Financial Officer. In addition, an oral Notice of Sale shall only be deemed effective if it is followed by a written Notice of Sale received by the Company by personal delivery or facsimile within 24 hours after giving the oral Notice of Sale.

(c) The Company may refuse to permit the Purchaser to resell any Securities for a period of time not to exceed 30 days; provided, however, that in order to exercise this right, the Company must deliver a certificate in writing to the Purchaser to the effect that the Registration Statement in its then current form contains an untrue statement of material fact or omits to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. During any suspension period (each a “Suspension”) as contemplated by this Section 4.2(c), of which there shall be no more than two in any 12-month period, the Company will not allow any of its officers or directors to buy or sell shares of the Company’s securities.

4.3 Certain Trading Limitations. Each Purchaser represents and warrants that it has not directly or indirectly, nor has any person or entity acting on behalf of or pursuant to any understanding with such Purchaser, engaged in any purchases or sales in the securities of the Company (including, without limitations, any short sales involving the Company’s securities) since the date on which such Purchaser entered into a confidentiality or similar agreement or understanding with the Company in connection with such Purchaser’s participation in the transactions contemplated by this Agreement.

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4.4 Due Execution, Delivery and Performance. Each Purchaser represents and warrants that:

(a) This Agreement has been duly executed and delivered by the Purchaser and constitutes a valid and binding obligation of the Purchaser and the Company, enforceable against the Purchaser in accordance with its terms.

(b) The execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated hereby and thereby and the fulfillment of the terms of the Transaction Documents have been duly authorized by all necessary corporate or LLC action and will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Purchaser pursuant to, any contract, indenture, mortgage, loan agreement, deed, trust, note, lease, sublease, voting agreement, voting trust or other instrument or agreement to which the Purchaser is a party or by which it may be bound, or to which any of the property or assets of the Purchaser is subject, nor will such action result in any violation of the provisions of the charter or bylaws, or other organizational documents, of the Purchaser or any applicable statute, law, rule, regulation, ordinance, decision, directive or order applicable to the Purchaser or its property or assets.

5. Survival of Representations, Warranties and Agreements. Notwithstanding any investigation made by any party to this Agreement, all representations and warranties made by the Company and the Purchasers in this Agreement shall survive for one (1) year from the execution of this Agreement.

6. Form D Filing; Registration; Compliance with the Securities Act; Covenants.

6.1 Form D Filing; Registration of Shares.

6.1.1 Registration Statement; Expenses. The Company shall:

(a) file as soon as practicable, but in no event later than 15 days after the date of the Closing, a Form D relating to the sale of the Securities under this Agreement, pursuant to Regulation D under the Securities Act.

(b) as soon as practicable after the Closing Date, but in no event later than the 30th day following the Closing Date, prepare and file with the Commission a Registration Statement on Form S-3 (or, if the Company is ineligible to use Form S-3, then on Form S-1) relating to the sale of the Conversion Shares (and all shares issuable in respect thereof, whether as stock dividends, pursuant to Section 6.1.2 or otherwise) by the Purchasers from time to time on the Nasdaq National Market (or the facilities of any national securities exchange on which the Company’s Common Stock is then traded) or in privately negotiated transactions (the “Registration Statement”);

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(c) the Company shall use its best efforts to cause such Registration Statement to become effective, and, keep such Registration Statement effective for a period of up to two years from the Closing Date, or such lesser period of time as all of the Conversion Shares have been sold or can be sold without restriction under Rule 144;

(d) subject to receipt of necessary information from the Purchasers, use its best efforts to cause the Commission to notify the Company of the Commission’s willingness to declare the Registration Statement effective on or before 60 days (or 120 days in the event the Registration Statement is reviewed by the Commission) after the initial filing of the Registration Statement (the “Required Effectiveness Date”);

(e) notify Purchasers promptly upon the Registration Statement, or any post-effective amendment thereto, being declared effective by the Commission;

(f) prepare and file with the Commission such amendments and supplements to the Registration Statement and the Prospectus (as defined in Section 6.3.1 below) and take such other action, if any, as may be necessary to keep the Registration Statement effective until the earlier of (i) the second anniversary of the Closing Date and (ii) the date on which the Conversion Shares can be sold by non-affiliates of the Company without registration under Rule 144(k) under the Securities Act (such period, the “Effectiveness Period”);

(g) promptly furnish to the Purchasers with respect to the Conversion Shares registered under the Registration Statement such reasonable number of copies of the Prospectus, including any supplements to or amendments of the Prospectus, in order to facilitate the public sale or other disposition of all or any of the Shares by the Purchasers;

(h) during the period when copies of the Prospectus are required to be delivered under the Securities Act or the Exchange Act, will file all documents required to be filed with the Commission pursuant to Section 13, 14 or 15 of the Exchange Act within the time periods required by the Exchange Act and the rules and regulations promulgated thereunder;

(i) file documents required of the Company for customary Blue Sky clearance in all states requiring Blue Sky clearance; provided, however, that the Company shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented; and

(j) bear all expenses of the Company in connection with the procedures in paragraphs (a) through (i) of this Section 6.1.1 and the registration of the Conversion Shares pursuant to the Registration Statement.

6.1.2 The Company hereby agrees that the following circumstances shall constitute an Event of Default as set forth in Section 4 of the Form of Convertible Senior Note attached hereto as Exhibit A and that the Purchaser shall be entitled to the remedy set forth therein: (a) if the Registration Statement is not filed by the Company on or prior to 30 days after the Closing Date (such an event, a “Filing Default”); (b) if the Registration Statement is not declared effective by the SEC by the Required Effectiveness Date (either such event, an “Effectiveness Default”); or (c) if

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the Registration Statement (after its effectiveness date) ceases to be effective and available to the Purchaser for any reason without being succeeded within ten trading days by an amendment to such Registration Statement or by a subsequent Registration Statement filed with and declared effective by the Commission (such an event, a “Suspension Default” and together with a Filing Default, an Effectiveness Default and a Suspension Default, a “Registration Default”); provided, however, that in the event of a Suspension as contemplated in Section 4.2(c), a Suspension Default shall be deemed to have occurred only once (i) more than two Suspensions have occurred in any 12-month period, or (ii) any single Suspension exceeds 30 days. Notwithstanding the foregoing, all periods shall be tolled in the event of any delays directly caused by the action or inaction of a Purchaser to return an Investor Questionnaire or Selling Stockholder Questionnaire, and the Company shall have no liability to any Purchaser in respect of any such delay. Notwithstanding the foregoing, the Purchaser shall be entitled to specific performance and any other remedies at law or in equity in the event the Company fails to comply with the provisions of Section 6.1.1 or 6.2. Additionally, in the event of an Effectiveness Default, the Company hereby agrees pay a fee to the Purchaser, for each 30-day period of an Effectiveness Default, in an amount in cash equal to 1% of the aggregate purchase price paid by the Purchaser for the Securities pursuant to this Agreement (the “Default Fee”); provided that in no event shall the aggregate amount of cash to be paid as Default Fees pursuant to this Section 6.1.2 exceed 12% of the aggregate purchase price paid by the Purchaser for the Securities. Such payments shall be in partial compensation to the Purchasers and shall not constitute the Purchaser’s exclusive remedy for such events. The Default Fee payable herein shall apply on a pro rata basis for any portion of a 30-day period of Effectiveness Default, and shall be paid by the Company on the 30th day of such Effectiveness Default or, in the event such Effectiveness Default is cured prior to the end of a 30-day period, within 3 business days of such cure.

6.2 Transfer of Conversion Shares After Registration. Each Purchaser agrees that it will not effect any disposition of the Securities that would constitute a sale within the meaning of the Securities Act, except as contemplated in the Registration Statement referred to in Section 6.1 or as otherwise permitted by, or exempted by, law (including Rule 144 or any exemption from registration), and that it will promptly notify the Company of any changes in the information set forth in the Registration Statement regarding the Purchaser or its plan of distribution.

6.3 Indemnification. For the purpose of this Section 6.3, the term “Registration Statement” shall include any preliminary or final prospectus, exhibit, supplement or amendment included in or relating to the Registration Statement referred to in Section 6.1.

6.3.1 Indemnification by the Company. The Company will indemnify and hold harmless each of the Purchasers and each person, if any, who controls any Purchaser within the meaning of the Securities Act, against any actual and direct losses, claims, direct damages, liabilities or reasonable expenses, joint or several, to which such Purchasers or such controlling person become subject, under the Securities Act, the Exchange Act, or any other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company, which consent shall not be unreasonably withheld), insofar as such actual and direct losses, claims, direct damages, liabilities or reasonable expenses (or actions in respect thereof as contemplated below) (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the

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Registration Statement, including the Prospectus, financial statements and schedules, and all other documents filed as a part thereof, as amended at the time of effectiveness of the Registration Statement, including any information deemed to be a part thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A, or pursuant to Rule 434, of the Rules and Regulations, or the prospectus, in the form first filed with the Commission pursuant to Rule 424(b) of the Regulations, or filed as part of the Registration Statement at the time of effectiveness if no Rule 424(b) filing is required (the “Prospectus”), or any amendment or supplement thereto, or (ii) arise out of or are based upon the omission or alleged omission to state in any of them a material fact required to be stated therein or necessary to make the statements in any of them, in light of the circumstances under which they were made, not misleading, or (iii) arise out of or are based in whole or in part on any inaccuracy in the representations and warranties of the Company contained in this Agreement, or any failure of the Company to perform its obligations under this Agreement or under law (the events in clauses (i), (ii), or (iii), collectively are referred to herein as the “Company Indemnification Events”), and shall reimburse each Purchaser and each such controlling person as the case may be, for the indemnifiable amounts provided for herein on demand as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon any Purchaser Indemnification Event (as defined below).

6.3.2 Indemnification by the Purchaser. The Purchaser will indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act, against any actual and direct losses, claims, direct damages, liabilities or reasonable expenses to which the Company, each of its directors, each of its officers who signed the Registration Statement or controlling person become subject, under the Securities Act, the Exchange Act, or any other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Purchaser, which consent shall not be unreasonably withheld) insofar as such actual and direct losses, claims, direct damages, liabilities or reasonable expenses (or actions in respect thereof as contemplated below) arise out of or are based upon (i) the failure of such Purchaser to comply with the covenants and agreements contained in Sections 4.2 or 6.2 of this Agreement respecting the sale of the Securities or (ii) the inaccuracy of any representation made by such Purchaser in this Agreement or the Questionnaires or (iii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus, or any amendment or supplement to the Registration Statement or Prospectus, or arise out of or are based upon the omission or alleged omission to state therein a fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Purchaser expressly for use therein (the events in clauses (i), (ii), or (iii), collectively are referred to herein as the “Purchaser Indemnification Events”), and shall reimburse the Company or such officer, director or controlling person, as the case may be, for the indemnifiable amounts provided for herein on demand as such expenses are incurred; provided, however, that the Purchaser shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon any Company Indemnification Event. Notwithstanding the foregoing, the Purchaser’s aggregate obligation to indemnify the Company and such officers, directors and controlling persons shall be limited to the net amount received by the Purchaser from the sale of the Securities.

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6.3.3 Indemnification Procedure.

(a) Promptly after receipt by an indemnified party under this Section 6.3 of notice of the threat or commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 6.3, promptly notify the indemnifying party in writing of the claim; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise under the indemnity agreement contained in this Section 6.3 or to the extent it is not prejudiced as a result of such failure.

(b) In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be a conflict between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it or other indemnified parties that are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action, the indemnifying party will not be liable to such indemnified party under this Section 6.3 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless:

(i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, approved by such indemnifying party representing all of the indemnified parties who are parties to such action) or

(ii) the indemnifying party shall not have employed Heller Ehrman LLP or other counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of action, in each of which cases the reasonable fees and expenses of counsel shall be at the expense of the indemnifying party. Notwithstanding the provisions of this Section 6.3, the Purchaser shall not be liable for any indemnification obligation under this Agreement in excess of the amount of net proceeds received by the Purchaser from the sale of the Securities, unless such obligation has resulted from the gross negligence or willful misconduct of the Purchaser.

6.3.4 Contribution. If a claim for indemnification under this Section 6.3 is unavailable to an indemnified party (by reason of public policy or otherwise), then each

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indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of any losses, claims, damages, liabilities or expenses referred to in this Agreement, in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions, statements or omissions that resulted in such losses, claims, damages, liabilities or expenses as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any losses, claims, damages, liabilities or expenses shall be deemed to include, subject to the limitations set forth in this Section 6.3, any reasonable attorneys’ or other reasonable fees or expenses incurred by such party in connection with any proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.

The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6.3 were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 6.3, no Purchaser shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Purchaser from the sale of Securities exceeds the amount of any damages that such Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No party to this Agreement guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any other party to this Agreement who was not guilty of such fraudulent misrepresentation.

6.4 Termination of Conditions and Obligations. The restrictions imposed by Section 4 or this Section 6 upon the transferability of the Securities shall cease and terminate as to any particular number of the Securities upon the passage of two years from the Closing Date or at such time as an opinion of counsel satisfactory in form and substance to the Company shall have been rendered to the effect that such conditions are not necessary in order to comply with the Securities Act.

6.5 Rule 144 Information. For two years after the date of this Agreement, the Company shall use its best efforts to file all reports required to be filed by it under the Securities Act, the Rules and Regulations and the Exchange Act and shall take such further action to the extent required to enable the Purchasers to sell the Securities pursuant to Rule 144 under the Securities Act (as such rule may be amended from time to time).

6.6 Legend Removal. The Company shall, and shall use its best efforts to cause its transfer agent to, promptly process requests for transfer or de-legending of Securities or certificates representing Conversion Shares in compliance with this Agreement.

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7. Notices. All notices, requests, consents and other communications under this Agreement shall be in writing, shall be mailed by first-class registered or certified airmail, confirmed facsimile or nationally recognized overnight express courier postage prepaid, and shall be delivered as addressed as follows:

(a) if to the Company, to:

RITA Medical Systems, Inc. 46421 Landing Parkway

Fremont, CA 94538

Fax: (510) 771-0460

Attn: Chief Financial Officer

with a copy to:

Heller Ehrman LLP

275 Middlefield Road

Menlo Park, CA 94025-3056

Fax: (650) 324-0638

Attn: Amy Paye

or to such other person at such other place as the Company shall designate to the Purchaser in writing; and

(b) if to a Purchaser, at its address as set forth on Schedule A to this Agreement, or at such other address or addresses as may have been furnished to the Company in writing.

Such notice shall be deemed effectively given upon confirmation of receipt by facsimile, or two business days after deposit with such overnight courier.

8. Modification; Amendment. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and Purchasers holding at least a majority of the Securities issued and sold pursuant to this Agreement (excluding Securities that have been resold to the public or otherwise transferred by the Purchasers).

9. Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement.

10. Severability. If any provision contained in this Agreement should be held to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained in this Agreement shall not in any way be affected or impaired thereby.

11. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the state of New York, without reference to conflict of laws, and the federal law of the United States of America.

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12. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original (whether an actual original or a facsimile), but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party to this Agreement and delivered to the other parties.

13. 8-K Filing and Publicity. Following the Closing Date, the Company shall file a Current Report on Form 8-K with the SEC describing the terms of the transactions contemplated by this Agreement and attaching this Agreement and the press release referred to below as exhibits to such filing (the “8-K Filing”). Neither the Company nor any Purchaser shall issue any press releases or any other public statements with respect to the transactions contemplated by this Agreement; provided, however, that the Company shall be entitled, without the prior approval of any Purchaser, to make any press release or other public disclosure with respect to such transactions (i) in substantial conformity with the 8-K Filing and contemporaneously therewith and (ii) as required by applicable law.

14. Stock Splits, Dividends and other Similar Events. The provisions of this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend, reorganization or other similar event that may occur with respect to the Company after the date hereof.

[Signature pages follow]

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IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written.

RITA MEDICAL SYSTEMS, INC.
By:	/s/ Joseph DeVivo
Name:	Joseph DeVivo
Its:	President and Chief Executive Officer
Fax No:	(510) 771-0461

[Signature Page to RITA Medical Systems, Inc. Securities Purchase Agreement]

IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written.

ATLAS MASTER FUND, LTD.
By:	/s/ Scott H. Schroeder
Name:	Scott H. Schroeder
Its:	Authorized Signatory

[Signature Page to RITA Medical Systems, Inc. Securities Purchase Agreement]

Schedule A

PURCHASERS

Name and Address of Purchaser	Principal Amount of Notes		Aggregate Purchase Price
Atlas Master Fund, Ltd.*	$	9,700,000	$	9,700,000
c/o Balyasny Asset Management L.P.
650 Madison Avenue – 19th Floor
New York, NY 10022
Attention: Legal Dept.
Total	$	9,700,000	$	9,700,000

* As of the date hereof, the total number of shares of Common Stock that will be owned by the Purchaser upon the Conversion of the Notes is: 3,743,231

Exhibit A

FORM OF NOTE

FORM OF SENIOR CONVERTIBLE NOTE

NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION OR EXERCISE OF THESE SECURITIES HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OR EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3 AND 14 HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

RITA MEDICAL SYSTEMS, INC.

SENIOR CONVERTIBLE NOTE

Issuance Date: August 5, 2005 Principal: U.S. $            

FOR VALUE RECEIVED, RITA MEDICAL SYSTEMS, INC., a Delaware corporation (the “Company”), hereby promises to pay to the order of Atlas Master Fund, Ltd. or registered assigns (“Holder”) the amount set out above as the Principal (as reduced pursuant to the terms hereof pursuant to redemption, conversion or otherwise, the “Principal”) when due, whether upon the Maturity Date (as defined below), acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay interest (“Interest”) on any outstanding Principal at the rate of 6.5% per annum, subject to periodic adjustment pursuant to Section 2 (the “Interest Rate”), from the date set out above as the Issuance Date (the “Issuance Date”) until the same becomes due and payable, whether upon an Interest Date (as defined below), the Maturity Date, acceleration, conversion, redemption or otherwise (in each case in accordance with the terms hereof). This Senior Convertible Note (including all Senior Convertible Notes issued in exchange, transfer or replacement hereof, this “Note”) is one of an issue of Senior Convertible Notes (collectively, the “Notes” and such other Senior Convertible Notes, the “Other Notes”) issued on the Issuance Date pursuant to the Securities Purchase Agreement (as defined below). Certain capitalized terms are defined in Section 23.

1. MATURITY. On the Maturity Date, the Holder shall surrender this Note to the Company and the Company shall pay to the Holder an amount in cash representing all outstanding Principal and accrued and unpaid Interest, if any. The “Original Maturity Date” shall be August 5, 2008, as may be adjusted at the option of the Holder in the event that, and for so long as, an Event of Default (as defined in Section 4(a)) shall have occurred and be continuing or any event shall have occurred and be continuing which with the passage of time and the failure to cure would result in a Conversion Failure.

2. INTEREST; INTEREST RATE. Interest on this Note shall commence accruing on the Issuance Date and shall be computed on the basis of a 365/366-day year and actual days elapsed and shall be payable in arrears semi-annually and on the Maturity Date during the period beginning on the Issuance Date and ending on, and including, the Maturity Date (each, an “Interest Date”) with the first Interest Date being December 15, 2005. Interest shall be payable on each Interest Date in cash. Prior to the payment of Interest on an Interest Date, Interest on this Note shall accrue at the Interest Rate. From and after the occurrence of an Event of Default, the Interest Rate shall be increased to 12%. In the event that such Event of Default is subsequently cured, the adjustment referred to in the preceding sentence shall cease to be effective as of the date of such cure; provided that the Interest as calculated at such increased rate during the continuance of such Event of Default shall continue to apply to the extent relating to the days after the occurrence of such Event of Default through and including the date of cure of such Event of Default.

3. CONVERSION OF NOTES. This Note shall be convertible into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), on the terms and conditions set forth in this Section 3.

(a) Conversion Right. Subject to the provisions of Section 3(d), at any time or times on or after the Issuance Date, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount (as defined below) into fully paid and nonassessable shares of Common Stock in accordance with Section 3(c), at the Conversion Rate (as defined below). The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall pay to the Holder an amount in cash equal to the value of such fractional share based on the closing price of the Common Stock on the last trading day prior to the conversion. The Company shall pay any and all documentary, stamp and similar taxes that may be payable with respect to the issuance and delivery of Common Stock upon conversion of any Conversion Amount. The Company shall not, however, be required to pay any such tax which may be payable in respect of any transfer of Securities involved in the issue and delivery of the Common Stock in any name other than that of the Holder. Upon conversion, the Company shall pay all accrued and unpaid Interest on the Conversion Amount being converted.

(b) Conversion Rate. The number of shares of Common Stock issuable upon conversion of any Conversion Amount pursuant to Section 3(a) shall be determined by dividing (x) such Conversion Amount by (y) the Conversion Price (the “Conversion Rate”).

(i) “Conversion Amount” means the Principal to be converted, redeemed or otherwise with respect to which this determination is being made.

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(ii) “Conversion Price” means, as of any Conversion Date (as defined below) or other date of determination, and subject to adjustment as provided herein, $4.03.

(c) Mechanics of Conversion.

(i) Optional Conversion. To convert any Conversion Amount into shares of Common Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice of conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if required by Section 3(c)(iii), deliver this Note to a common carrier for delivery to the Company as soon as practicable on or following such date (or an indemnification undertaking with respect to this Note in the case of its loss, theft or destruction). On or before the close of the business on the first Business Day following the date of receipt of a Conversion Notice, the Company shall transmit by facsimile a confirmation of receipt of such Conversion Notice to the Holder and the Company’s transfer agent (the “Transfer Agent”). On or before the second Business Day following the date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company’s transfer agent shall issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled. If this Note is physically surrendered for conversion as required by Section 3(c)(iii) and the outstanding Principal of this Note is greater than the Principal being converted, then the Company shall as soon as practicable and in no event later than three Business Days after receipt of this Note and at its own expense, issue and deliver to the Holder a new Note representing the outstanding Principal not converted. The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of this Note shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.

(ii) Company’s Failure to Timely Convert. If the Company shall fail (other then by operation of Section 3(d)) to issue a certificate to the Holder or credit the Holder’s balance account with DTC for the number of shares of Common Stock to which the Holder is entitled upon conversion of any Conversion Amount on or prior to the date which is three (3) Business Days after the Conversion Date (a “Conversion Failure”), then (A) the Company shall pay damages to the Holder for each day of such Conversion Failure in an amount equal to 5.0% of the product of (I) the number of shares of Common Stock not issued to the Holder on or prior to the Share Delivery Date and to which the Holder is entitled, times (II) the Closing Sale Price of the Common Stock on the Share Delivery Date and (B) the Holder, upon written notice to the Company, may void its Conversion Notice with respect to, and retain or have returned, as the case may be, any portion of this Note that has not been converted pursuant to such Conversion Notice; provided that the voiding of any conversion notice shall halt the accrual of any claims for damages pursuant to this Section 3(c)(ii); provided, further, that the voiding of a Conversion Notice shall not affect the Company’s obligations to make any payments which have accrued prior to the date of such notice pursuant to this Section 3(c)(ii) or otherwise.

(iii) Book-Entry. Notwithstanding anything to the contrary set forth herein, upon conversion of any portion of this Note in accordance with the terms hereof, the

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Holder shall not be required to physically surrender this Note to the Company unless (A) the full Conversion Amount represented by this Note is being converted or (B) the Holder has provided the Company with prior written notice (which notice may be included in a Conversion Notice) requesting physical surrender and reissue of this Note. The Holder and the Company shall maintain records showing the Principal converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Note upon conversion.

(d) Limitations on Conversions.

(i) Principal Market Regulation. The Company shall not be obligated to issue any shares of Common Stock upon conversion of this Note if the issuance of such shares of Common Stock would exceed that number of shares of Common Stock which the Company may issue upon conversion of the Notes without breaching the Company’s obligations under the rules or regulations of the Principal Market (the “Exchange Cap”), except that such limitation shall not apply in the event that the Company (A) obtains the approval of its stockholders as required by the applicable rules of the Principal Market for issuances of Common Stock in excess of such amount (Company shall be required to obtain such approval if the issuance would exceed that number of shares of Common Stock which the Company may issue upon conversion of the Notes if it breaches the Company’s obligations under the Exchange Cap) or (B) obtains a written opinion from outside counsel to the Company that such approval is not required, which opinion shall be reasonably satisfactory to the holders of the Notes representing at least a majority of the principal amounts of the Notes then outstanding. Company shall use its best efforts to obtain such approval or written opinion. Until such approval or written opinion is obtained, no purchaser of the Notes pursuant to the Securities Purchase Agreement (the “Purchasers”) shall be issued, upon conversion of Notes, shares of Common Stock in an amount greater than the product of the Exchange Cap multiplied by a fraction, the numerator of which is the principal amount of Notes issued to such Purchaser pursuant to the Securities Purchase Agreement on the Issuance Date and the denominator of which is the aggregate principal amount of all Notes issued to the Purchasers pursuant to the Securities Purchase Agreement on the Issuance Date (with respect to each Purchaser, the “Exchange Cap Allocation”). In the event that any Purchaser shall sell or otherwise transfer any of such Purchaser’s Notes, the transferee shall be allocated a pro rata portion of such Purchaser’s Exchange Cap Allocation, and the restrictions of the prior sentence shall apply to such transferee with respect to the portion of the Exchange Cap Allocation allocated to such transferee.

(e) Mandatory Conversion. If on the Maturity Date the closing price of the Common Stock has been at or above 102% of the Conversion Price for at least 10 consecutive Business Days immediately preceding the Maturity Date, then the Holder shall convert any remaining Principal into Common Stock in accordance with this Section 3; provided that Holder shall not have to complete such conversion will until such time as (i) the amount of Common Stock outstanding is equal to the Required Reserve Amount, and (ii) conversion would not be impaired pursuant to Section 3(d) hereof.

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4. RIGHTS UPON EVENT OF DEFAULT.

(a) Event of Default. Each of the following events shall constitute an “Event of Default”:

(i) a Registration Default as set forth in the Securities Purchase Agreement;

(ii) default in the payment of the Principal and unpaid accrued Interest of this Note within two (2) Business Days of becoming due and payable;

(iii) any other default by the Company of the performance of any of its obligations or any breach by the Company of any representations or covenants (provided that a default of any such covenant is not otherwise defined as an Event of Default under this Section 4(a)) hereunder or under the Securities Purchase Agreement (provided that the representations and warranties under the Securities Purchase Agreement shall only survive for one year from the date of execution of the Securities Purchase Agreement) upon 10 days notice from the Holder to the Company;

(iv) the Company shall make an assignment for the benefit of creditors, file a petition in bankruptcy, consent to entry of an order for relief against it in an involuntary case, be adjudicated insolvent or bankrupt, petition or apply to any tribunal for the appointment of any receiver, trustee or similar official for it or a substantial part of its assets, or commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; there shall occur the appointment of a receiver, trustee, assignee, liquidator, custodian or similar official of it or a substantial part of its assets; or there shall have been filed any such petition or application or any such proceeding shall have been commenced against it, which remains undismissed for a period of 60 days or more; the Company by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or the appointment of any trustee for it or any substantial part of any of its properties;

(v) a court of competent jurisdiction shall enter an order or decree under any Bankruptcy Law that is for relief against the Company in an involuntary case, appoints a receiver, trustee, assignee, liquidator or similar official of the Company or for any substantial part of its property, or orders the liquidation of the Company; and the order or decree remains unstayed and in effect for 30 days;

(vi) if at any time while any of the Notes remain outstanding the Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon conversion of the Notes at least a number of shares of Common Stock equal to the Required Reserve Amount (as defined below);

(vii) the Company fails to repay all Senior Debt other than the Remaining Senior Debt as set forth in Section 11(a) hereof within 21 days of the Issuance Date; or

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(viii) the Company fails to comply with Sections 13(a) or (13(b) hereof.

(b) Redemption Right Upon Event of Default. Promptly after the occurrence of an Event of Default with respect to this Note or any Other Note, the Company shall deliver written notice thereof via facsimile and overnight courier (an “Event of Default Notice”) to the Holder and the holders of the Other Notes. At any time after the earlier of the Holder’s receipt of an Event of Default Notice and the Holder becoming aware of an Event of Default, the Holder may require the Company to redeem all or any portion of the Notes by delivering written notice thereof (the “Event of Default Redemption Notice”) to the Company, which Event of Default Redemption Notice shall indicate the portion of the Notes that the Holder is electing to cause to be redeemed.

5. RIGHTS UPON CERTAIN CORPORATE EVENTS. Prior to the consummation of any recapitalization, reorganization, consolidation, merger, spin-off or other business combination (including, without limitation, a Change of Control) pursuant to which holders of Common Stock are entitled to receive securities or other assets with respect to or in exchange for Common Stock (a “Corporate Event”), the Company shall make appropriate provision at the Holder’s option to insure that the Holder will thereafter have the right to receive upon a conversion of this Note, (i) in addition to the shares of Common Stock receivable upon such conversion, such securities or other assets to which the Holder would have been entitled with respect to such shares of Common Stock had such shares of Common Stock been held by the Holder upon the consummation of such Corporate Event (without taking into account any limitations or restrictions on the convertibility of this Note) or (ii) in lieu of the shares of Common Stock otherwise receivable upon such conversion, such securities or other assets received by the holders of Common Stock in connection with the consummation of such Corporate Event in such amounts as the Holder would have been entitled to receive had this Note initially been issued with conversion rights for the form of such consideration (as opposed to shares of Common Stock) at a conversion rate for such consideration commensurate with the Conversion Rate. Provision made pursuant to the preceding sentence shall be in a form and substance satisfactory to the Holders with Notes representing a majority in interest of the Principal outstanding (the “Required Holders”). The provisions of this Section shall apply similarly and equally to successive Corporate Events and shall be applied without regard to any limitations on the conversion or redemption of this Note. Each of the following events shall constitute a “Change of Control”:

(i) any sale of all or substantially all of the assets of the Company to a third party;

(ii) any merger of the Company with or into another corporation in which holders of Common Stock immediately prior to the consummation of the merger do not control 50% of the voting power of the surviving corporation; or

(iii) the acquisition by any “person” or “group” of persons (as such terms are used in Section 13(d) and 14(d) of the Securities and Exchange Act of 1934, as amended, and the related regulations) who have an expressed intent to control the affairs of the Company of more than 50% of the outstanding Common Stock of the Company.

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6. RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

(a) Adjustment of Conversion Price upon Subdivision or Combination of Common Stock. If the Company at any time on or after the Closing Date subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time on or after the Closing Date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination will be proportionately increased.

(b) Other Events. If any event occurs of the type contemplated by the provisions of this Section 6 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company’s Board of Directors will make an appropriate adjustment in the Conversion Price so as to protect the rights of the Holder under this Note; provided that no such adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 6.

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7. PREPAYMENT. With respect to each Holder, this Note may only be prepaid in whole or in part upon the consent of such Holder (the “Prepayment Consent”), which shall be in such Holder’s absolute discretion; provided, however, that if the Holder consents to such prepayment, the Company shall pay to the Holder a fee equal to 10% of the Principal then outstanding and prepaid (the “Prepayment Fee”). Notwithstanding the foregoing, in the event of a Change of Control, no Prepayment Consent shall be required; provided, however, that in such an event, the Company shall be entitled to prepay this Note so long as the following conditions are met (i) the Company provides each Holder with at least 14 days’ notice of its intent to prepay the Note, (ii) the amount of Common Stock outstanding is equal to the Required Reserve Amount, (iii) conversion would not be impaired pursuant to Section 3(d) hereof, and (iv) the Company pays the Prepayment Fee to the Holder upon prepaying the Note.

8. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, and will at all times in good faith carry out all of the provisions of this Note and take all action as may be required to protect the rights of the Holder of this Note.

9. RESERVATION OF AUTHORIZED SHARES. The Company shall initially reserve out of its authorized and unissued Common Stock a number of shares of Common Stock for each of the Notes equal to 100% of the Conversion Rate with respect to the Principal of each such Note as of the Issuance Date. Thereafter, the Company, so long as any of the Notes are outstanding, shall take all action necessary to reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Notes, 100% of the number of shares of Common Stock as shall from time to time be necessary to effect the conversion of all of the Notes then outstanding (the “Required Reserve Amount”).

10. HOLDER’S REDEMPTIONS. In the event that the Holder has sent an Event of Default Redemption Notice to the Company pursuant to Section 4(b) (a “Redemption Notice”), the Holder shall promptly submit this Note to the Company. The Company shall deliver the applicable Event of Default Redemption Price to the Holder within 10 Business Days after the Company’s receipt of the Holder’s Redemption Notice. In the event of a redemption of less than all of the Conversion Amount of this Note, the Company shall promptly cause to be issued and delivered to the Holder a new Note representing the outstanding Principal which has not been redeemed. In the event that the Company does not pay the Event of Default Redemption Price (the “Redemption Price”), to the Holder (or deliver any Common Stock to be issued pursuant to a Redemption Notice) within the time period required, at any time thereafter and until the Company pays such unpaid Redemption Price (and issues any Common Stock required pursuant to a Redemption Notice) in full, the Holder shall have the option, in lieu of redemption, to require the Company to promptly return to the Holder all or any portion of this Note representing the Conversion Amount that was submitted for redemption and for which the applicable Redemption Price (or any Common Stock required to be issued pursuant to a Redemption Notice) has not been paid. Upon the Company’s receipt of such notice, (x) the Redemption Notice shall be null and void with respect to such Conversion Amount and (y) the Company shall immediately return this Note, or issue a new Note to the Holder representing such Conversion Amount.

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11. STATUS OF DEBT.

(a) Agreement to Eliminate Senior Debt to Third Parties. By issuing this Note, the Company for itself and its successors and assigns, and for its Subsidiaries and the successors and assigns of such Subsidiaries, agrees, and the Holder, by its acceptance of this Note, shall be deemed to have agreed, that this Note shall be subject to the provisions of this Section 11 and, to the extent and in the manner hereinafter set forth in this Section 11, the indebtedness represented by this Note and the payment of the Principal and Interest, any redemption amount, liquidated damages, fees, expenses or any other amounts in respect of this Note are subordinate in right of payment only to the prior payment in full in cash of (i) all Senior Debt now outstanding and (ii) the Future Permitted Senior Debt (as defined below). The Holder shall be entitled to receive payment in full in cash of all Subordinated Indebtedness or any other Indebtedness save Senior Debt or Future Permitted Senior Debt (including interest after the commencement of any proceeding under any Bankruptcy Law at the agreed upon rate before any other creditor or Credit Party shall be entitled to receive any payment with respect to any indebtedness other than the Senior Debt or the Future Permitted Senior Debt (“Holder’s Rights”). The Company shall promptly (and in no event later than 21 days) repay the currently outstanding Senior Debt after the Closing Date to remove all outstanding Senior Debt owed to third parties other than debt pursuant to the Agreement by and among Steven Picheny, Howard Fuchs and the Company, dated as of March 14, 2002, as amended (the “Remaining Senior Debt”).

(b) Liquidation; Dissolution; Bankruptcy.

(i) The holders of Senior Debt and Future Permitted Senior Debt shall be entitled to receive payment in full in cash of all Senior Debt or Future Permitted Senior Debt (including interest after the commencement of any proceeding under any Bankruptcy Law at the rate specified in the documentation for the applicable Senior Debt or Future Permitted Senior Debt) before the Holder shall be entitled to receive any payment with respect to any indebtedness other than the Senior Debt or the Future Permitted Senior Debt (the “Subordinated Indebtedness”), however, the Holder shall be entitled to the Holder’s Rights in the event of any distribution to creditors of any of the Company or its Subsidiaries (each, a “Credit Party”) in (A) any sale, liquidation, winding-up or dissolution of such Credit Party; (B) any bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to such Credit Party or its property; (C) any assignment by such Credit Party for the benefit of its creditors; or (D) any marshaling of any Credit Party’s assets and liabilities (each a “Bankruptcy Event”).

(ii) In the event of any distribution, division or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of any Credit Party or the proceeds thereof to creditors of any Credit Party upon any Indebtedness of such Credit Party, by reason of any Bankruptcy Event, then and in any such event, any payment or distribution of any kind or character, either in cash, securities or other property, which shall be payable or deliverable to the Holder upon or with respect to any or all Subordinated Indebtedness shall be paid or delivered directly to an agent for the Senior Debt or Future Permitted Senior Debt (the “Agent”) for application against the Senior Debt or Future Permitted Senior Debt, whether due or not due, in a manner which the Agent, in its sole discretion, shall determine, until such Senior Debt or Future Permitted Senior Debt shall have been fully paid in cash and all commitments thereunder have terminated. The Holder hereby

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irrevocably authorizes and empowers the Agent to ask for, demand, sue for, collect, and receive for every such payment or distribution and give acquittance therefor, and to file claims (and proofs of claims) and take such other actions in the Agent’s own name or in the name of the Holder as the Agent may deem necessary or advisable for the enforcement of the terms of this Section 11.

(iii) The Holder agrees to execute, verify, deliver and file any proofs of claim in respect of Subordinated Indebtedness requested by the Agent in connection with any Bankruptcy Event and hereby irrevocably authorizes, empowers and appoints Agent as its agent and attorney-in-fact to (i) execute, verify, deliver and file such proofs of claim upon the failure of the Holder promptly to do so prior to 5 Business Days before the expiration of the time to file any such proof of claim and (ii) vote such claim in any such Bankruptcy Event upon the failure of the Holder to do so prior to 5 Business Days before the expiration of the time to vote any such claim; provided the Agent shall have no obligation to execute, verify, deliver, file and/or vote any such proof of claim. In the event that the Agent votes any claim in accordance with the authority granted hereby, the Holder shall not be entitled to change or withdraw such vote.

(c) Redemption upon Event of Default. The Holder shall give the Agent at least 3 Business Days’ prior notice of its intention to exercise its redemption rights upon the occurrence of an Event of Default.

(d) No Amendment of Subordinated Indebtedness. Neither the Holder nor any Credit Party will, without the prior written consent of the Agent, amend or modify (i) this Section 11 or the definition of any capitalized term used in this Section 11 or (ii) any provision of the Securities Purchase Agreement or the other Securities Purchase Documents if such amendment or modification would (A) move forward the date of any redemption or payment or increase the principal amount of or the rate of interest applicable to the Subordinated Indebtedness or (B) result in the covenants contained therein being materially more restrictive in the aggregate on the Holder or any Credit Party prior to the effectiveness of such amendment or modification.

(e) No Impairment of Subordination. No right of the Agent, Holder, any lender or any future holder of any Senior Debt or Future Permitted Senior Debt to enforce the subordination as provided in this Section 11 shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Holder or any Credit Party or any act or failure to act by the Agent, any lender or any such holder, or by any noncompliance by any Credit Party with the terms of this Section 11, regardless of any knowledge thereof which the Agent or any lender may have or with which it may otherwise be charged.

(f) Subrogation. Subject to payment in full in cash of all Senior Debt and Future Permitted Senior Debt and the termination of all commitments thereunder, the rights of the Holder shall be subrogated to the rights of the holders of Senior Debt and Future Permitted Senior Debt to receive payments or distributions of the assets of any Credit Party made on such Senior Debt or Future Permitted Senior Debt until all principal and interest on this Note shall be paid in full in cash; and for purposes of such subrogation, no payments or distributions to the holders of Senior Debt or Future Permitted Senior Debt of any cash, property or securities to which the Holder would be entitled except for the subordination provisions of this Section 11

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shall, as between the Holder and the Company and/or its creditors other than the holders of the Senior Debt or Future Permitted Senior Debt, be deemed to be a payment on account of the Senior Debt or Future Permitted Senior Debt.

(g) Conversion Rights. Nothing contained in this Section 11 or elsewhere in this Note is intended to or shall impair, as among the Company, its creditors, including the holders of Senior Debt and Future Permitted Senior Debt, and the Holder, the right, which is absolute and unconditional, of the Holder to convert this Note into shares of Common Stock or rights to acquire shares of Common Stock in accordance with the terms hereof.

(h) Rights of Holder Unimpaired. The provisions of this Section 11 are and are intended solely for the purposes of defining the relative rights of the Holder and the holders of Senior Debt and Future Permitted Senior Debt and nothing in this Section 11 shall impair, as between the Company and the Holder, the obligation of the Company, which is unconditional and absolute, to pay to the Holder the Principal (and premium, if any) and Interest, in accordance with the terms of this Note.

(i) Subordination May Not Be Impaired by any Credit Party. No right of any holder of Permitted Indebtedness to enforce the subordination of the Subordinated Indebtedness shall be impaired by any act or failure to act by any Credit Party or the Holder or by the failure of any Credit Party or the Holder to comply with the terms of this Section 11.

(j) Reliance by Holder. Upon any payment or distribution of assets of any Credit Party referred to in this Section 11, the Holder shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of the Agent or of the liquidating trustee or agent or other Person making any distribution to the Holder for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Permitted Indebtedness and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 11.

(k) Reliance by Holders of Senior Debt and Future Permitted Senior Debt. The Holder acknowledges and agrees that (i) each holder of Senior Debt and Future Permitted Senior Debt is an intended third-party beneficiary of the terms of the Section 11 and (ii) the foregoing provisions of this Section 11 are, and are intended to be, an inducement and consideration to each holder of Senior Debt and Future Permitted Senior Debt, whether such Senior Debt or Future Permitted Senior Debt was created or acquired before or after the date hereof, to acquire or continue to hold such Senior Debt or Future Permitted Senior Debt and such holder of Senior Debt or Future Permitted Senior Debt shall be deemed conclusively to have relied on such provisions in acquiring or continuing to hold such Senior Debt or Future Permitted Senior Debt.

(l) Applicability. The terms of this Section 11 shall be applicable both before and after the filing of any petition by or against any Credit Party under any Bankruptcy Law, and all allocations of payments between the holders of the Senior Debt and Future Permitted Senior Debt, on the one hand, and the Holder, on the other hand, shall continue to be made after the filing thereof in accordance with this Section 11.

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12. VOTING RIGHTS. The Holder shall have no voting rights as the holder of this Note, except as required by law, including but not limited to the General Corporation Law of the State of Delaware, and as expressly provided in this Note.

13. RANK; ADDITIONAL INDEBTEDNESS.

(a) Rank. All payments due under this Note (i) shall be subordinate in right of payment to the prior payment of all existing Senior Debt and the Future Permitted Senior Debt, without duplication, and (ii) shall be senior to all other Indebtedness of the Company and its Subsidiaries. The Holder agrees and covenants that this Note will be subordinate to the Future Permitted Senior Debt, as contemplated in Section 13(b) below, and the Holder further agrees and covenants to enter into a subordination agreement in connection with any such working capital facility. The Company agrees that other than the Senior Debt, the Future Permitted Senior Debt, any liens permitted under the Future Permitted Senior Debt (provided that in no event shall the amount of Future Permitted Senior Debt plus the amount of liens permitted under the Future Permitted Senior Debt be greater than $11 million), or as required by law, no current or future note holder, purchaser or entity has or will have a security interest, lien or levy upon any assets, intellectual property, real property or any other property or receivables of the Company which shall be senior to that of the Holder. Holder acknowledges that it does not currently have a security interest in any of the assets or property of the Company.

(b) Incurrence of Senior Debt. So long as this Note is outstanding, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness which shall rank senior to the Notes other than Senior Debt or any indebtedness in connection with one or more working capital facilities secured by the Company’s assets; provided, that the aggregate of all such facilities shall not exceed $10 million (the “Future Permitted Senior Debt”).

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14. TRANSFER. This Note may be offered, sold, assigned or transferred by the Holder in minimum denominations of $250,000 without the consent of the Company, subject to the Securities Act of 1933, as amended, and the Rules and Regulations promulgated thereunder and the Securities Purchase Agreement; provided however that this Note may not be transferred to any person who (a) is a competitor of the Company or (b) is engaged in or has threatened material litigation against the Company, in each case as determined by the Board of Directors of the Company in good faith. Notwithstanding the foregoing, in case of an Event of Default, this Note may be transferred without regard to any of the foregoing limitations.

15. VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting, of the Required Holders, shall be required for any change, amendment or waiver related to this Note or the Other Notes; provided, however, that no such change, amendment or waiver, as applied to any particular holder of Notes, shall, (i) without the consent of that particular holder, extend the maturity of the Note, reduce the interest rate, extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption or repurchase thereof or affect any amounts due to any holder or (ii) without the consent of the holders of all Notes then outstanding, reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such change, amendment or waiver.

16. REISSUANCE OF THIS NOTE.

(a) Transfer. If this Note is to be transferred, the Holder shall surrender this Note to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Note, registered as the Holder may request, representing the outstanding Principal being transferred by the Holder and, if less then the entire outstanding Principal is being transferred, a new Note to the Holder representing the outstanding Principal not being transferred. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of Section 3(c)(iii) and this Section 16(a), following conversion or redemption of any portion of this Note, the outstanding Principal represented by this Note may be less than the Principal stated on the face of this Note. The Company shall not be obligated to pay any documentary, stamp or similar taxes that may be payable with respect to any transfer under this Section 16(a).

(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of an indemnification undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this Note, the Company shall execute and deliver to the Holder a new Note representing the outstanding Principal.

(c) Note Exchangeable for Different Denominations. This Note is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes (in principal amounts of at least $100,000) representing in the aggregate the outstanding Principal of this Note, and each such new Note will represent such portion of such outstanding Principal as is designated by the Holder at the time of such surrender.

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(d) Issuance of New Notes. Whenever the Company is required to issue a new Note pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii) shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or in the case of a new Note being issued pursuant to Section 16(a) or Section 16(c), the Principal designated by the Holder which, when added to the principal represented by the other new Notes issued in connection with such issuance, does not exceed the Principal remaining outstanding under this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as indicated on the face of such new Note, which is the same as the Issuance Date of this Note, (iv) shall have the same rights and conditions as this Note, and (v) shall represent accrued Interest on the Principal and Interest of this Note, from the Issuance Date.

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17. REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and the Securities Purchase Agreement, at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder’s right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Note. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required. The Company shall pay the Holder for any costs associated in obtaining such injunction or remedy if the Holder successfully prevails in obtaining such injunction or other remedy, and the Holder shall pay the Company for any costs associated in defending such injunction or remedy if the Company successfully prevails in defending such injunction or other remedy.

18. PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting Company creditors’ rights and involving a claim under this Note, then the Company shall pay the costs incurred by the Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, but not limited to, attorneys’ fees and disbursements.

19. CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by the Company and all the Purchasers (as defined in the Securities Purchase Agreement) and shall not be construed against any person as the drafter hereof. The headings of this Note are for convenience of reference and shall not form part of, or affect the interpretation of, this Note.

20. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

21. NOTICES; PAYMENTS.

(a) Notices. Whenever notice is required to be given under this Note, unless otherwise provided herein, such notice shall be given in accordance with Section 8 of the Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Note, including in reasonable detail a description of such action and the reason therefore. Without limiting the generality of the foregoing, the

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Company will give written notice to the Holder (i) immediately upon any adjustment of the Conversion Price (the “Conversion Price Notice”), setting forth in reasonable detail, and certifying, the calculation of such adjustment, which shall be conclusive absent manifest error, as commercially reasonably determined by the Holder in good faith, and provided that if the Holder determines any manifest error, the Holder shall provide written notice of such error within two Business Days of receiving the Conversion Price Notice, and (ii) at least 20 days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Change of Control, dissolution or liquidation, provided in each case that such information shall be made known to the public prior to or in conjunction with such notice being provided to the Holder.

(b) Payments. Whenever any payment of cash is to be made by the Company to any Person pursuant to this Note, such payment shall be made in lawful money of the United States of America via wire transfer of immediately available funds pursuant to the Holder’s wire transfer instructions, which are being provided to the Company on the Issuance Date. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a Business Day, the same shall instead be due on the next succeeding day which is a Business Day and, in the case of any Interest Date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of Interest due on such date.

22. CANCELLATION. After all Principal, accrued Interest and other amounts at any time owed on this Note have been paid in full, this Note shall automatically be deemed canceled, shall be surrendered to the Company for cancellation and shall not be reissued.

23. WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the Securities Purchase Agreement.

24. GOVERNING LAW. This Note shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Note shall be governed by, the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.

25. CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall have the following meanings:

(a) “Bankruptcy Code” means Title 11 of the United States Code (11 U.S.C. 101 et seq.), as amended from time to time (including any successor statute) and all rules and regulations promulgated thereunder.

(b) “Bankruptcy Law” means the Bankruptcy Code of the United States and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors,

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moratorium, rearrangement, receivership, insolvency, fraudulent conveyance or transfer, reorganization, or similar state or Federal debtor relief laws, statutes, rules, regulations, orders, or ordinances of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.

(c) “Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.

(d) “Equity Interests” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.

(e) “GAAP” means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession in the United States, that are applicable to the circumstances as of the date of determination, consistently applied.

(f) “Guarantee” means, as to any Person, (a) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation payable or performable by another Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of assuring the obligee in respect of such Indebtedness or other obligation of the payment or performance of such Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity or level of income or cash flow of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, or (iv) entered into for the purpose of assuring in any other manner the obligee in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such obligee against loss in respect thereof (in whole or in part), or (b) any Lien on any assets of such Person securing any Indebtedness or other obligation of any other Person, whether or not such Indebtedness or other obligation is assumed by such Person (or any right, contingent or otherwise, of any holder of such Indebtedness to obtain any such Lien). The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith.

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(g) “Indebtedness” means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP:

(i) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments;

(ii) all direct or contingent obligations of such Person arising under letters of credit, bankers’ acceptances, bank guaranties, surety bonds and similar instruments;

(iii) net obligations of such Person under any Swap Contract;

(iv) all obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business);

(v) indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse;

(vi) capitalized leases and Off-Balance Sheet Obligations;

(vii) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interest in such Person or any other Person, valued, in the case of a redeemable preferred interest, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; and

(viii) all Guarantees of such Person in respect of any of the foregoing.

For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer in an amount proportionate to such Person’s interest therein, unless such Indebtedness is expressly made non-recourse to such Person or except to the extent such Indebtedness is owed by such partnership or joint venture to such Person; provided that the pledge of any Equity Interest in such joint venture shall not constitute recourse to such Person for the purposes of this definition. The amount of any net obligation under any Swap Contract on any date shall be deemed to be the Swap Termination Value thereof as of such date. The amount of any capitalized lease or Off-Balance Sheet Obligation as of any date shall be deemed to be the amount of attributable Indebtedness in respect thereof as of such date.

(h) “Issuance Date” means August 5, 2005.

(i) “Off-Balance Sheet Obligation” means the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person,

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would be characterized as the indebtedness of such Person (without regard to accounting treatment). No monetary obligations under true operating leases shall be included in Off-Balance Sheet Obligations.

(j) “Permitted Indebtedness” means (i) this Note, (ii) the Senior Debt and (iii) the Future Permitted Senior Debt.

(k) “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.

(l) “Principal Market” means The Nasdaq National Market.

(m) “SEC” means the United States Securities and Exchange Commission.

(n) “Securities Purchase Agreement” means that certain securities purchase agreement between the Company and the Holders of the Notes pursuant to which the Company issued the Note.

(o) “Securities Purchase Documents” means that the Securities Purchase Agreement, this Note, and all other agreements, documents and instruments executed from time to time in connection therewith, as the same may be amended, restated, supplemented or otherwise modified from time to time.

(p) “Senior Debt” means all obligations, liabilities and indebtedness of every nature of the Company from time to time owed to the other parties to the following agreements: (i) the Note Purchase Agreement by and among the Company, ComVest Venture Partners, L.P. and the Additional Note Purchasers dated as of March 1, 2002, as amended; (ii) the Agreement by and among Steven Picheny, Howard Fuchs and the Company dated as of March 14, 2002, as amended; (iii) the Promissory Note by and among ComVest Venture Partners, L.P. and Banc of America Commercial Finance Corporation dated as of March 15, 2002.

(q) “Subsidiary” of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned by such Person.

(r) “Swap Contract” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, rate hedging agreements, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are

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subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement, including any such obligations or liabilities under any Master Agreement.

(s) “Swap Termination Value” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include any lender or any affiliate of a lender).

(t) “Trading Day” means any day on which the Common Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then traded; provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York Time).

[Signature Page Follows]

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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the Issuance Date set out above.

RITA MEDICAL SYSTEMS, INC.
By:
Name:	Joseph DeVivo
Title:	President and Chief Executive Officer

EXHIBIT I to

Form of Note

RITA MEDICAL SYSTEMS, INC.

CONVERSION NOTICE

Reference is made to the Senior Convertible Note (the “Note”) issued to the undersigned by RITA Medical Systems, Inc. (the “Company”). In accordance with and pursuant to the Note, the undersigned hereby elects to convert the Conversion Amount (as defined in the Note) of the Note indicated below into shares of Common Stock, par value $0.001 per share (the “Common Stock”), of the Company as of the date specified below.

Date of Conversion: _________________________________________________________________________

Aggregate Conversion Amount to be converted:____________________________________________________

Please confirm the following information:

Conversion Price: ____________________________________________________________________________

Number of shares of Common Stock to be issued:____________________________________________________

Please issue the Common Stock into which the Note is being converted in the following name and to the following address:

Issue to:___________________________________________________________________________________

_________________________________________________________________________________________

_________________________________________________________________________________________

_________________________________________________________________________________________

Facsimile Number:___________________________________________________________________________

Authorization: :_____________________________________________________________________________

By:______________________________________________________________________________________

Title _____________________________________________________________________________________

Dated:________________________________________________________________________________________

ACKNOWLEDGMENT

The Company hereby acknowledges this Conversion Notice and hereby directs U.S. Stock Transfer Corporation to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions, dated             , 200    , from the Company and acknowledged and agreed to by U.S. Stock Transfer Corporation.

RITA MEDICAL SYSTEMS, INC.

By:

Name:

Title:

EX-31.1

Exhibit 31.1

Rule 13a-14(a) Section 302 Certification

CERTIFICATIONS

I, Joseph DeVivo, certify that:

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

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15a-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2005

/s/ Joseph DeVivo

Joseph DeVivo

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Rule 13a-14(a) Section 302 Certification

CERTIFICATIONS

I, Michael D. Angel, certify that:

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

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15a-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2005

/s/ Michael D. Angel

Michael D. Angel

Chief Financial Officer and Vice President

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 Quarterly Report of RITA Medical Systems, Inc. (the “Company”) on Form 10-Q for the three months ended September 30, 2005, 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

November 8, 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 Quarterly Report of RITA Medical Systems, Inc. (the “Company”) on Form 10-Q for the three months ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael D. Angel, Chief Financial Officer and Vice President 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/ Michael D. Angel

Michael D. Angel

Chief Financial Officer and Vice President

November 8, 2005