The following discussion and analysis of our financial condition as of September 30, 2012 and results of operations for the three months ended September 30, 2012 and 2011 should be read together with our condensed consolidated financial statements and related notes included elsewhere in this report. Statements made in this Form 10-Q report that are not statements of historical fact are forward-looking statements and are subject to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this report relate, but are not limited, to:
expectations related to profitability and cash flows in fiscal 2013; sufficiency of cash resources and expected cash flows to fund future operations; expected uses of cash during fiscal 2013; the anticipated drivers of our future capital requirements; the impact of our recent sales reorganization on sales performance, particularly in the United States; anticipated increases in service revenue; the ongoing impact of purchase accounting adjustments; our expectations regarding the factors that will impact sales, competitive positioning and long-term success for our CyberKnife and TomoTherapy Systems; our expectations regarding the impact on our revenues and business of the introduction of our new CyberKnife and TomoTherapy Systems; and the anticipated risks associated with our foreign operations and fluctuations in the U.S. dollar. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations, including risks detailed from time to time under the heading "Risk Factors" in Part II, Item 1A of this report and in Part I, Item 1A of the Company's report on Form 10-K for fiscal year 2012. Forward-looking statements speak only as of the date the statements are made and are based on information available to the Company at the time those statements are made and/or management's good faith belief as of that time with respect to future events. The Company assumes no obligation to update forward-looking statements to reflect actual performance or results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. Accordingly, investors should not place undue reliance on any forward-looking statements.

In this report, "Accuray," the "Company," "we," "us," and "our" refer to Accuray Incorporated and its subsidiaries.

Overview

Products and Markets

We believe we are the premier radiation oncology company based on our history of rapid innovation and our leading edge technologies designed specifically to deliver radiosurgery, stereotactic body radiation therapy, intensity modulated radiation therapy, image guided radiation therapy and adaptive radiation therapy that is tailored to the specific needs of each patient. Our suite of products includes the CyberKnife® Systems and the TomoTherapy® Systems. The systems are highly complementary offerings, serving distinct patient populations treated by the same medical specialty.

The CyberKnife Systems are robotic systems designed to deliver radiosurgery treatments to cancer tumors anywhere in the body. They are the only dedicated, full body radiosurgery systems on the market. Radiosurgery is an alternative to traditional surgery for tumors and is performed on an outpatient basis in one to five treatment sessions. It allows for the treatment of patients who otherwise would not be treated with radiation, who may not be good candidates for surgery, or who desire non-surgical treatments. The use of radiosurgery with CyberKnife Systems to treat tumors throughout the body has grown significantly in recent years, but currently represents only a small portion of the patients who develop tumors treatable with CyberKnife Systems. A determination of when it may or may not be appropriate to use a CyberKnife System for treatment is at the discretion of the treating physician and depends on the specific patient. However, given the CyberKnife Systems' design to treat focal tumors, the CyberKnife Systems are generally not used to treat (1) very large tumors, which are considerably wider than the radiation beam that can be delivered by CyberKnife Systems,
(2) diffuse, wide-spread disease, as is often the case for late stage cancers, because they are not localized (though CyberKnife Systems might be used to treat a focal area of the disease) and (3) systemic disease, like leukemias and lymphomas, which are not localized to an organ, but rather involve cells throughout the body.

We believe that the long term success of the CyberKnife System is dependent on a number of factors including the following:

† Adoption of our recently launched new CyberKnife platform and receipt of regulatory clearances associated with such new platform;

† Change in medical practice to utilize radiosurgery more regularly as an alternative to surgery or other treatments;

† Greater awareness among doctors and patients of the benefits of radiosurgery with the CyberKnife Systems;

† Continued evolution in clinical studies demonstrating the safety, efficacy and other benefits of using the CyberKnife Systems to treat tumors in various parts of the body;

† Continued advances in technology that improve the quality of treatments and ease of use of the CyberKnife Systems;

† Improved access to radiosurgery with the CyberKnife Systems in various countries through regulatory approvals;

† Medical insurance reimbursement policies that cover CyberKnife System treatments; and

† Expansion of sales of CyberKnife Systems in countries throughout the world.

The TomoTherapy Systems are advanced, fully integrated and versatile radiation therapy systems for the treatment of a wide range of cancer types. We began selling TomoTherapy Systems after our acquisition of TomoTherapy Incorporated on June 10, 2011. Radiation therapy is used in a variety of ways, often to treat tissue surrounding a tumor area after surgical removal of the tumor and also as the primary treatment for tumors. Radiation therapy treatments impact both cancer cells as well as healthy tissue; therefore the total prescribed radiation dose is divided into many fractions and delivered in an average of 25 to 35 treatment sessions over several weeks. Radiation therapy has been widely available and used in developed countries for decades, though many developing countries do not currently have a sufficient number of radiation therapy systems to adequately treat their domestic cancer patient populations. The number of radiation therapy systems in use and sold each year is currently many times larger than the number of radiosurgery systems. Large companies, including Varian Medical Systems, Inc. and Elekta AB, generate most sales in this market. We believe the TomoTherapy Systems offer clinicians and patients significant benefits over other radiation therapy systems in the market. We believe our ability to capture more sales in this established market will be influenced by a number of factors including the following:

† Adoption of our recently launched new TomoTherapy platform and receipt of regulatory clearances associated with such new platform;

† Greater awareness among doctors and patients of the benefits of radiation therapy using TomoTherapy Systems;

† Advances in technology which improve the quality of treatments and ease of use of TomoTherapy Systems;

† Greater awareness among doctors of the improvement in reliability of TomoTherapy Systems; and

† Expansion of TomoTherapy System sales in countries throughout the world.

Sale of Our Products

Generating revenue from the sale of our systems is a lengthy process. Selling our systems, from first contact with a potential customer to a signed sales contract that meets backlog criteria, generally spans six months to two years. The time from receipt of a signed contract to revenue recognition is governed generally by the time required by the customer to build, renovate or prepare the treatment room for installation of the system. This time varies significantly, generally from six to twenty-four months.

In the United States, we market to customers, including hospitals and stand-alone treatment facilities, directly through our sales organization. Outside the United States, we market to customers in over 80 countries directly and through distributors. We have sales and service offices in Japan and many countries in Europe and Asia.

The following table shows the number of systems installed by geographic region as of September 30, 2012:

Americas                                376
Europe, Middle East, India and Africa   150
Asia (excluding Japan)                   86
Japan                                    55
Total                                   667

International sales of our products account for a significant and growing portion of our total net revenue. Revenue derived from sales outside of the United States was $46.9 million and $51.6 million for the three months ended September 30, 2012 and 2011, respectively, and represented 57% and 51% of our net sales during these periods, respectively.

Backlog

We report backlog in the following manner:

† Products: Orders for systems, upgrades, and our shared ownership program are reported in backlog, excluding amounts attributable to PCS (warranty period services and post warranty services), installation, training and professional services.

† Service: Orders for PCS, installation services, training and professional services are not reported in backlog.

For orders that cover both products and services, only the portion of the order that is recognized as product revenue is reported as backlog. The portion of the order that is recognized as service revenue (for example, PCS) is not included in reported backlog. Additionally, orders for TomoTherapy Systems made on or before June 30, 2011, that met the historical TomoTherapy backlog criteria have been grandfathered into, and are included in, our backlog, with the exception of orders that would have "aged out" as of June 30, 2011. TomoTherapy previously did not have an "age out" criteria, so we have adjusted the TomoTherapy backlog to age out orders where 2.5 years have passed from the time the order entered TomoTherapy's backlog. As of September 30, 2012, product only backlog was $294.3 million as compared to $270.8 million as of September 30, 2011.

In order for the product portion of a sales agreement to be counted as backlog, it must meet the following criteria:

† The contract is signed and properly executed by both the customer and us. A customer purchase order that is signed and incorporates the terms of our contract quote will be considered equivalent to a signed and executed contract;

† The contract is non-contingent-it either has cleared all its contingencies or contains no contingencies when signed;

† We have received a minimum deposit or a letter of credit; the sale is a direct channel sale to a government entity, or the product has shipped to a customer with credit sufficient to cover the minimum deposit;

† The specific end customer site has been identified by the customer in the written contract or written amendment; and

† Less than 2.5 years have passed since the contract met all the criteria above.

Although our backlog includes only contractual agreements from our customers to purchase CyberKnife Systems or TomoTherapy Systems, we cannot provide assurance that we will convert backlog into recognized revenue due to factors outside our control, which includes, without limitation, changes in customers' needs or financial condition, changes in government or health insurance reimbursement policies, changes to regulatory requirements, or other reasons for cancellation of orders.

We also use book-to-bill ratios to assess the quality and growth of our backlog. The ratio is calculated for a period as new orders booked and included in backlog upon meeting criteria described above less any orders cancelled from backlog, and the resultant net orders being divided by total product revenue recognized during that period.

Results of Operations

Three months ended September 30, 2012 compared to three months ended September 30, 2011

Net Revenue



                           Three Months Ended
                             September 30,                    Variance in
(Dollars in thousands)      2012        2011      Variance      Percent
Products                 $   40,628   $  56,174   $ (15,546 )         -28 %
Services                     42,120      43,401      (1,281 )          -3 %
Other                             -         876        (876 )        -100 %
Net Revenue              $   82,748   $ 100,451   $ (17,703 )         -18 %

Total product revenues during the three months ended September 30, 2012 decreased by 28% from the three months ended September 30, 2011 primarily due to a lower number of unit sales, which was partially offset by higher revenue per unit and decreases in revenue deferrals for units sold with extended payment terms. We recognized revenues on 15 units during the three months ended September 30, 2012 as compared to 24 units during the three months ended September 30, 2011.

Services revenues during the three months ended September 30, 2012 decreased by $1.3 million from the three months ended September 30, 2011. Service revenues were higher in the three months ended September 30, 2011 due to inclusion of $5.1 million of service revenues arising from purchase accounting adjustments related to the TomoTherapy acquisition which was completed in June 2011. Such purchase accounting adjustments were not material during the three months ended September 30, 2012. Excluding such adjustments, service revenues increased by $3.8 million during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 due to increases in our installed base. We expect our service revenue to increase as our installed base continues to grow.

Gross Profit



                         Three Months Ended September 30,
                         2012                        2011
                (Dollars in    (% of net    (Dollars in    (% of net
                thousands)     revenue)     thousands)     revenue)
Gross profit   $      23,676        28.6 % $      24,428        24.3 %
Products              16,619        40.9 %        17,801        31.7 %
Services               7,057        16.8 %         6,052        13.9 %
Other                      -         0.0 %           575        65.6 %

Gross margins during the three months ended September 30, 2012 improved by 4.3 percentage points as compared to the three months ended September 30, 2011. Product margins were higher during the three months ended September 30, 2012 primarily due to the favorable impact of a net reduction in purchase accounting adjustments resulting from the acquisition of TomoTherapy on June 10, 2011. Service margins were higher during the three months ended September 30, 2012 primarily due to improvements in the reliability of the TomoTherapy Systems, partially offset by the unfavorable impact of a net reduction in purchase accounting adjustments resulting from the acquisition of TomoTherapy on June 10, 2011.

In accordance with purchase accounting standards, a number of adjustments were recorded to the value of assets and liabilities of TomoTherapy as of the closing of the acquisition on June 10, 2011. These included the write-up of inventory based on selling price rather than cost of manufacturing, the write-down of deferred product revenue, the write-up of deferred service revenue, and the recording of intangible assets related to developed technology and to backlog existing at the time of the acquisition. On the acquisition date, deferred service and product revenues were valued at cost plus a reasonable margin. Purchase accounting adjustments reduced gross profit for the three months ended September 30, 2011 by $9.2 million as follows: Product revenues were reduced by $0.5 million while product cost of revenues was increased by $11.4 million; Services revenues were increased by $5.1 million while services cost of revenues was increased by $2.4 million. Purchase accounting adjustments reduced gross profit for the three months ended September 30, 2012 by $3.6 million resulting primarily from the reduction of product revenue by $0.3 million and increases in product cost of revenues by $3.4 million. The impact of purchase accounting adjustments, other than the amortization of intangible assets assigned to developed technology, are expected to be significantly smaller during the rest of fiscal 2013 and subsequent years.

Selling and Marketing



                              Three Months Ended
                                September 30,                     Variance in
(Dollars in thousands)         2012         2011      Variance      Percent
Selling and marketing       $    12,889   $ 13,581   $     (692 )          -5 %
Percentage of net revenue          15.6 %     13.5 %

Selling and marketing expenses decreased by $0.7 million during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 primarily due to decreases in travel, tradeshow and other operational related expenses of $1.0 million due to cost control initiatives, which was partially offset by increases in compensation and facilities related expenses of $0.4 million due to increases in headcount.

Research and Development



                              Three Months Ended
                                September 30,                     Variance in
(Dollars in thousands)         2012         2011      Variance      Percent
Research and development    $    20,209   $ 20,565   $     (356 )          -2 %
Percentage of net revenue          24.4 %     20.5 %

Research and development expenses decreased by $0.4 million during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 primarily due to decreases in project related consulting and travel costs of $1.2 million due to cost control initiatives, which was partially offset by increases in compensation, employee related costs and facilities related expenses of $0.7 million due to increases in headcount.

General and Administrative



                               Three Months Ended
                                 September 30,                    Variance in
(Dollars in thousands)          2012         2011     Variance      Percent
General and administrative   $    13,269   $ 14,969   $  (1,700 )         -11 %
Percentage of net revenue           16.0 %     14.9 %

General and administrative expenses decreased by $1.7 million during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 primarily due to lower consulting, legal and accounting related expenses of $1.5 million.

Impairment of indefinite lived intangible assets

We incurred $12.2 million of impairment charges related to the write-down of our in-process research and development (IPR&D) asset during the three months ended September 30, 2012 based on results of research and development work carried out by CPAC, a variable interest entity consolidated by us. See Note 3, "Goodwill and Intangible Assets" for details.

Other Income (Expense), Net

Other income (expense), net, was $0.7 million of net other expense for the three months ended September 30, 2012, compared to net other expense of $2.9 million for the three months ended September 30, 2011. During the three months ended September 30, 2012, we incurred interest expense of $2.1 million related to our 3.75% Convertible Senior Notes due August 1, 2016 (the "Convertible Notes"). This was partially offset by gains of $0.9 million from foreign currency transactions primarily due to the appreciation of the Japanese Yen against the U.S. Dollar and recognition of a $0.7 million gain on our previously held equity interest in Morphormics, Inc., resulting from our acquisition of Morphormics on July 16, 2012. See Note 6, "Acquisition" for further details.

During the three months ended September 30, 2011, we incurred interest expense of $1.3 million related to our Convertible Notes which were issued on August 1, 2011, and foreign currency transaction losses of $1.5 million.

Provision for Incomes Taxes



                                       Three Months Ended
                                         September 30,                             Variance in
(Dollars in thousands)                2012            2011          Variance         Percent
Provision for income taxes        $        597    $        538    $          59             11 %
Percentage of loss before
provision for income taxes                -1.7 %          -2.0 %

On a quarterly basis, we provide for income taxes based upon an estimated annual effective income tax rate. For the three months ended September 30, 2012 and 2011, we recorded income tax expense of $0.6 million and $0.5 million, respectively. The increase was primarily due to increased earnings in international locations.

Investments in CPAC

The condensed consolidated financial statements include the results of a variable interest entity, Compact Particle Acceleration Corporation ("CPAC"), since we are deemed to be the primary beneficiary of that entity. Also refer to Note 9, "Investment in CPAC", for additional details. At September 30, 2012, our equity investment in CPAC was $4.3 million and our outstanding receivables from CPAC were $2.6 million, which includes $1.9 million of the principal portion of a revolving promissory note issued by CPAC. Our equity investment and the outstanding receivables are eliminated in consolidation. If CPAC is not successful in raising additional funds to continue its development efforts, or if it is not successful in development of the compact proton accelerator technology, or if it is not successful in commercialization of the technology, or if we are not in a position to finance our option to purchase CPAC or to become a supplier or distributor of its technology, we may need to write down or write off our equity investments and outstanding receivables.

Performance-based Awards

During fiscal 2012, the Compensation Committee of our Board of Directors of the Company approved the granting of Performance-Based Stock Units ("PSUs") to employees of the Company which vest only upon meeting certain financial performance criteria during the performance period commencing on the first day of our 2012 fiscal year and ending on the last day of our 2013 fiscal year. In the event that the PSUs do not become vested as a result of the Company's performance during the performance period, all PSUs are automatically forfeited by the participants effective as of the last day of the performance period. During fiscal 2012, approximately 1.0 million PSUs were granted to employees valued at approximately $3.9 million which was based on the fair value of the Company's common stock on the grant date and will be recognized over the requisite performance period based on our assessment of the probability of achieving the performance criteria. Approximately 0.9 million PSUs are outstanding as of September 30, 2012.

As of September 30, 2012, we have assessed that it was not probable that the performance criteria would be met during the performance period and accordingly, no compensation cost has been recognized for the PSUs to date or during the three months ended September 30, 2012. If in a future period management revises its assessment and concludes that it is probable that the performance criteria will be met, we will record a cumulative catch up compensation charge for the PSUs in that period. Remaining compensation charges for the PSUs would be recognized ratably over the remaining performance period.

Market Stock Unit ("MSU") program

In October 2012, the Compensation Committee approved a new performance equity program, referred to as the market stock unit program ("MSU Program"). The program uses the Russell 2000 index as a performance benchmark and requires that the Company's total stockholder return exceed that of the Russell 2000. Based on a sliding scale of how much the Russell 2000 benchmark is exceeded, participating executives can earn up to a maximum of 150% of the target number of shares over two measurement periods, one at the end of fiscal 2014 and another at the end of fiscal 2015.

Liquidity and Capital Resources

At September 30, 2012, we had $121.9 million in cash and cash equivalents. We expect to use cash for the balance of fiscal 2013 driven primarily by operating losses and capital expenditures. We anticipate that we will begin to generate positive cash flow in the later part of fiscal 2013. Cash from operations could be affected by various risks and uncertainties, including, but not limited to the risks included in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A titled "Risk Factors" of Form 10-K for the year ended June 30, 2012. Also refer to Note 8, "Debt" to the condensed consolidated financial statements for discussion of the Convertible Notes. Based on our current business plan and revenue prospects, we believe that we will have sufficient cash resources and anticipated cash flows to fund our operations for at least the next 12 months.

Cash Flows From Operating Activities

Net cash used in operating activities was $13.2 million for the three months ended September 30, 2012 which was attributable to a net loss of $36.2 million, offset by $22.6 million of non-cash charges and cash provided by working capital changes of $0.5 million. Non-cash charges primarily included $12.2 million of impairment charges related to in-process research and development assets, depreciation and

amortization expenses of $7.8 million, share-based compensation expenses of $1.8 million and accretion of interest expense on the Convertible Notes of $1.0 million. Cash provided by working capital was primarily attributed to decreases in accounts receivable of $10.8 million due to higher collections and lower billings and increases in accounts payable of $9.8 million due to timing of . . .