##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended            June 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File No.: 0-51149
 Emageon Inc.
 
 (Exact name of registrant as specified in its charter)
 Delaware
    
    63-1240138(State of incorporation)
    
    (I.R.S. Employer Identification No.)1200 Corporate Drive, Suite 200Birmingham, Alabama
    
    35242(Address of principal executive offices)
    
    (zip code)
 (205) 980-9222
 
 þ o
 o þ




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TABLE OF CONTENTS
 PagePART I: FINANCIAL INFORMATIONItem 1: Financial Statements
    
    3Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    12Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    24Item 4: Controls and Procedures
    
    24PART II: OTHER INFORMATIONItem 1: Legal Proceedings
    
    26Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    26Item 6: Exhibits
    
    26SIGNATURES
    
    27EX-10.1 SUMMARY OF CASH INCENTIVE COMPENSATION CRITERIAEX-31.1 SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICEREX-31.2 SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICEREX-32.1 SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
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PART I: FINANCIAL INFORMATION
 
 ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
 EMAGEON INC.
 CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
 June 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,394
    
    
    $
    5,994Marketable securities
    
    
    44,229
    
    
    
    Trade accounts receivable, net of allowance for doubtful accounts of $100
and $75 at June 30, 2005 and December 31, 2004, respectively
    
    
    13,405
    
    
    
    14,255Prepaid expenses and other current assets
    
    
    2,420
    
    
    
    1,799Deferred offering costs
    
    
    
    
    
    
    1,326Unbilled revenue
    
    
    235
    
    
    
    302Third-party components to be sold to customers
    
    
    1,925
    
    
    
    1,422Total current assets
    
    
    80,608
    
    
    
    25,098Property and equipment, net
    
    
    10,754
    
    
    
    8,832Restricted cash
    
    
    532
    
    
    
    903Other noncurrent assets
    
    
    116
    
    
    
    62Intangible assets:Goodwill
    
    
    3,755
    
    
    
    3,755Acquired software, net
    
    
    2,430
    
    
    
    2,847Capitalized software development costs, net
    
    
    165
    
    
    
    21Trademark
    
    
    250
    
    
    
    250Total intangible assets
    
    
    6,600
    
    
    
    6,873Total assets
    
    $
    98,610
    
    
    $
    41,768LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    4,662
    
    
    $
    4,658Accrued payroll and related costs
    
    
    1,183
    
    
    
    1,557Deferred revenue
    
    
    19,172
    
    
    
    21,357Other accrued expenses
    
    
    2,093
    
    
    
    3,838Current portion of long-term debt
    
    
    1,927
    
    
    
    2,472Current portion of capital lease obligations
    
    
    649
    
    
    
    620Total current liabilities
    
    
    29,686
    
    
    
    34,502Long-term deferred revenue
    
    
    2,778
    
    
    
    2,796Deferred tax liability
    
    
    95
    
    
    
    95Long-term debt
    
    
    1,785
    
    
    
    5,528Capital lease obligations, less current portion
    
    
    538
    
    
    
    869Total liabilities
    
    
    34,882
    
    
    
    43,790Redeemable preferred stock:Series B redeemable preferred stock, $0.001 par value; 17,200,000 shares
authorized, no shares and 16,885,966 shares issued and outstanding at June
30, 2005 and December 31, 2004, respectively
    
    
    
    
    
    
    9,597Series B-1 redeemable preferred stock, $0.001 par value; 5,700,000 shares
authorized, no shares and 5,652,631 shares issued and outstanding at June
30, 2005 and December 31, 2004, respectively
    
    
    
    
    
    
    3,210Series C redeemable preferred stock, $0.001 par value; 27,500,000 shares
authorized, no shares and 27,433,370 shares issued and outstanding at June
30, 2005 and December 31, 2004, respectively
    
    
    
    
    
    
    11,620Series E redeemable preferred stock, $0.001 par value; 14,050,000 shares
authorized, no shares and 14,035,087 shares issued and outstanding at June
30, 2005 and December 31, 2004, respectively
    
    
    
    
    
    
    5,921Total redeemable preferred stock
    
    
    
    
    
    
    30,348Stockholders equity (deficit):Series A preferred stock, $0.001 par value; 5,965,000 shares authorized, no
shares and 5,965,000 shares issued and outstanding at June 30, 2005 and
December 31, 2004, respectively
    
    
    
    
    
    
    1,438Series D preferred stock, $0.001 par value; 18,000,000 shares authorized, no
shares and 13,727,358 shares issued and no shares and 12,354,620 outstanding
at June 30, 2005 and December 31, 2004, respectively
    
    
    
    
    
    
    5,868Common stock, $0.001 par value; 66,000,000 and 165,050,000 shares
authorized, 20,203,681 and 3,056,181 issued and 20,027,924 and 2,709,370
shares outstanding at June 30, 2005 and December 31, 2004, respectively
    
    
    20
    
    
    
    3Additional paid in capital
    
    
    113,312
    
    
    
    6,998Treasury stock, 175,757 shares, at cost
    
    
    (275
    )
    
    
    (275
    )Accumulated deficit
    
    
    (49,329
    )
    
    
    (46,402
    )Total stockholders equity (deficit)
    
    
    63,728
    
    
    
    (32,370
    )Total liabilities, redeemable preferred stock and stockholders equity (deficit)
    
    $
    98,610
    
    
    $
    41,768
 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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EMAGEON INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data and per share amounts)
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:System sales
    
    $
    13,402
    
    
    $
    8,761
    
    
    $
    21,121
    
    
    $
    13,670Support services
    
    
    5,168
    
    
    
    3,356
    
    
    
    8,785
    
    
    
    5,564Total revenue
    
    
    18,570
    
    
    
    12,117
    
    
    
    29,906
    
    
    
    19,234Cost of revenue:System sales
    
    
    5,753
    
    
    
    4,117
    
    
    
    10,576
    
    
    
    7,606Support services
    
    
    3,322
    
    
    
    2,414
    
    
    
    6,405
    
    
    
    4,693Total cost of revenue
    
    
    9,075
    
    
    
    6,531
    
    
    
    16,981
    
    
    
    12,299Gross profit
    
    
    9,495
    
    
    
    5,586
    
    
    
    12,925
    
    
    
    6,935Operating expenses:Research and development
    
    
    2,533
    
    
    
    1,303
    
    
    
    4,918
    
    
    
    2,573Sales and marketing
    
    
    2,521
    
    
    
    2,407
    
    
    
    5,210
    
    
    
    4,145General and administrative
    
    
    2,876
    
    
    
    1,832
    
    
    
    5,431
    
    
    
    3,573Total operating expenses
    
    
    7,930
    
    
    
    5,542
    
    
    
    15,559
    
    
    
    10,291Operating income (loss)
    
    
    1,565
    
    
    
    44
    
    
    
    (2,634
    )
    
    
    (3,356
    )Other income (expense):Interest income
    
    
    477
    
    
    
    2
    
    
    
    710
    
    
    
    3Interest expense
    
    
    (142
    )
    
    
    (190
    )
    
    
    (994
    )
    
    
    (383
    )Total other income (expense)
    
    
    335
    
    
    
    (188
    )
    
    
    (284
    )
    
    
    (380
    )Net income (loss)
    
    $
    1,900
    
    
    $
    (144
    )
    
    $
    (2,918
    )
    
    $
    (3,736
    )Net income (loss) per share  basic and diluted
    
    $
    0.09
    
    
    $
    (0.06
    )
    
    $
    (0.19
    )
    
    $
    (1.52
    )Weighted average common stock outstanding  basic
    
    
    20,027,665
    
    
    
    2,521,496
    
    
    
    15,707,613
    
    
    
    2,476,072Weighted average common stock outstanding  diluted
    
    
    21,493,240
    
    
    
    2,521,496
    
    
    
    15,707,613
    
    
    
    2,476,072
 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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EMAGEON INC.
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(Unaudited)
(in thousands, except for share data)
 Preferred Stock
    
    
    Common Stock
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    TotalCarrying
    
    
    
    
    
    
    Par
    
    
    Paid in
    
    
    Treasury
    
    
    Accumulated
    
    
    Stockholders'Shares
    
    
    Value
    
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    Equity (Deficit)Balance at
December 31, 2004
    
    
    19,692,358
    
    
    $
    7,306
    
    
    
    3,056,181
    
    
    $
    3
    
    
    $
    6,998
    
    
    $
    (275
    )
    
    $
    (46,402
    )
    
    $
    (32,370
    )Exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    503
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Exercise of stock
warrants
    
    
    105,703
    
    
    
    58
    
    
    
    16,504
    
    
    
    
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    117Exercise of
mandatorily
redeemable stock
warrants in
connection with
initial public
offering
    
    
    
    
    
    
    
    
    
    
    537,082
    
    
    
    1
    
    
    
    735
    
    
    
    
    
    
    
    
    
    
    
    736Proceeds from
initial public
offering, net of
issuance costs
    
    
    
    
    
    
    
    
    
    
    5,750,000
    
    
    
    6
    
    
    
    67,195
    
    
    
    
    
    
    
    
    
    
    
    67,201Automatic
conversion of
non-redeemable
preferred stock
into common stock
in connection
with initial
public offering
    
    
    (19,798,061
    )
    
    
    (7,364
    )
    
    
    2,402,898
    
    
    
    2
    
    
    
    7,362
    
    
    
    
    
    
    
    
    
    
    
    Automatic
conversion of
redeemable
preferred stock
into common stock
in connection
with initial
public offering
    
    
    
    
    
    
    
    
    
    
    8,440,513
    
    
    
    8
    
    
    
    30,348
    
    
    
    
    
    
    
    
    
    
    
    30,356Stock based
compensation -
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    613
    
    
    
    
    
    
    
    
    
    
    
    613Accretion of
redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,918
    )
    
    
    (2,918
    )Balance at
June 30, 2005
    
    
    
    
    
    $
    
    
    
    
    20,203,681
    
    
    $
    20
    
    
    $
    113,312
    
    
    $
    (275
    )
    
    $
    (49,329
    )
    
    $
    63,728
 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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EMAGEON INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 For the Six Months EndedJune 30,2005
    
    
    2004Operating activitiesNet loss
    
    $
    (2,918
    )
    
    $
    (3,736
    )Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:Depreciation
    
    
    1,221
    
    
    
    651Depreciation of property and equipment at contracted customer sites
    
    
    1,336
    
    
    
    1,368Amortization of acquired software
    
    
    417
    
    
    
    417Amortization of capitalized software development costs
    
    
    31
    
    
    
    177Bad debt expense
    
    
    20
    
    
    
    Interest income on restricted cash
    
    
    (3
    )
    
    
    (3
    )Sales discount from issuance of warrants
    
    
    62
    
    
    
    20Consulting expense for options issued to non-employees
    
    
    41
    
    
    
    Amortization and write off of subordinated debt discount
    
    
    646
    
    
    
    Stock based compensation expense
    
    
    572
    
    
    
    171Changes in operating assets and liabilities:Trade accounts receivable
    
    
    830
    
    
    
    (1,010
    )Prepaid expenses and other current assets
    
    
    (683
    )
    
    
    (529
    )Unbilled revenue
    
    
    67
    
    
    
    (1,372
    )Other noncurrent assets
    
    
    (54
    )
    
    
    Third-party components to be sold to customers
    
    
    (503
    )
    
    
    (1,105
    )Accounts payable
    
    
    4
    
    
    
    159Accrued payroll and related costs
    
    
    (375
    )
    
    
    90Other accrued expenses
    
    
    (1,745
    )
    
    
    846Deferred revenue
    
    
    (2,203
    )
    
    
    8,496Net cash (used in) provided by operating activities
    
    
    (3,237
    )
    
    
    4,640Investing activitiesPurchases of property and equipment for internal purposes
    
    
    (3,317
    )
    
    
    (575
    )Purchases of third-party components to be located at contracted
customer sites
    
    
    (1,168
    )
    
    
    (1,131
    )Sales of third-party components leased to customers
    
    
    
    
    
    
    1,501Purchases of marketable securities
    
    
    (59,229
    )
    
    
    Proceeds from maturities of marketable securities
    
    
    15,000
    
    
    
    Capitalized software development costs
    
    
    (175
    )
    
    
    (10
    )Net cash used in investing activities
    
    
    (48,889
    )
    
    
    (215
    )Financing activitiesProceeds from issuance of common stock, net of issuance costs
    
    
    69,328
    
    
    
    7Proceeds from issuance of preferred stock, net of issuance costs
    
    
    58
    
    
    
    Payments on capital lease obligations
    
    
    (301
    )
    
    
    (279
    )Payments of loans
    
    
    (4,933
    )
    
    
    (868
    )Proceeds from loans, net of issuance costs
    
    
    
    
    
    
    3,980Additions to restricted cash to secure letter of credit
    
    
    
    
    
    
    (96
    )Cash released from restriction
    
    
    374
    
    
    
    Net cash provided by financing activities
    
    
    64,526
    
    
    
    2,744Net increase in cash
    
    
    12,400
    
    
    
    7,169Cash at beginning of period
    
    
    5,994
    
    
    
    2,340Cash at end of period
    
    $
    18,394
    
    
    $
    9,509
 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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EMAGEON INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   Securities Held-to-Maturity
 Accounting for Certain Investments in Debt and
Equity Securities
 Income Taxes
   Indemnification Provisions
 Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others
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For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Net income (loss)
    
    $
    1,900
    
    
    $
    (144
    )
    
    $
    (2,918
    )
    
    $
    (3,736
    )Accretion of redemption value related to
redeemable preferred stock
    
    
    
    
    
    
    (17
    )
    
    
    (9
    )
    
    
    (33
    )Net income (loss) allocable to common stockholders
    
    $
    1,900
    
    
    $
    (161
    )
    
    $
    (2,927
    )
    
    $
    (3,769
    )Denominator:Common stock outstanding at beginning of period
    
    
    20,027,621
    
    
    
    2,430,648
    
    
    
    2,709,370
    
    
    
    2,429,742Weighted average effect of the release of
escrowed common stock
    
    
    
    
    
    
    90,242
    
    
    
    
    
    
    
    45,121Weighted average effect of the conversion of
preferred stock to common stock
    
    
    
    
    
    
    
    
    
    
    8,147,536
    
    
    
    Weighted average effect of the issuance of
common stock in initial public offering
    
    
    
    
    
    
    
    
    
    
    4,303,867
    
    
    
    Weighted average effect of the issuance of
common stock and preferred stock pursuant to
stock option and warrant exercises
    
    
    44
    
    
    
    606
    
    
    
    418,315
    
    
    
    1,209Weighted average effect of the release of
escrowed common stock upon completion of
initial public offering
    
    
    
    
    
    
    
    
    
    
    128,525
    
    
    
    Weighted average shares of common stock  basic
    
    
    20,027,665
    
    
    
    2,521,496
    
    
    
    15,707,613
    
    
    
    2,476,072Effect of dilutive stock options and warrants
    
    
    1,465,575
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares of common stock  diluted
    
    
    21,493,240
    
    
    
    2,521,496
    
    
    
    15,707,613
    
    
    
    2,476,072Net income (loss) per share  basic
    
    $
    0.09
    
    
    $
    (0.06
    )
    
    $
    (0.19
    )
    
    $
    (1.52
    )Net income (loss) per share  diluted
    
    $
    0.09
    
    
    $
    (0.06
    )
    
    $
    (0.19
    )
    
    $
    (1.52
    )
   Accounting for Stock Issued to Employees Accounting
for Stock-Based Compensation, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services.
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For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Actual net income (loss)
    
    $
    1,900
    
    
    $
    (144
    )
    
    $
    (2,918
    )
    
    $
    (3,736
    )Deduct: Accretion of redemption value related
to redeemable preferred stock
    
    
    
    
    
    
    (17
    )
    
    
    (8
    )
    
    
    (33
    )Add: Total stock-based employee compensation
expense determined under APB 25
    
    
    290
    
    
    
    112
    
    
    
    572
    
    
    
    171Deduct: Total stock-based employee compensation
expense determined under fair value method for
all awards (net of tax)
    
    
    (559
    )
    
    
    (132
    )
    
    
    (1,085
    )
    
    
    (206
    )Pro forma net income (loss) allocable to common
stockholders
    
    $
    1,631
    
    
    $
    (181
    )
    
    $
    (3,439
    )
    
    $
    (3,804
    )Denominator:Weighted average shares of common stock  basic
    
    
    20,027,665
    
    
    
    2,521,496
    
    
    
    15,707,613
    
    
    
    2,476,072Effect of dilutive stock options and warrants
    
    
    1,252,575
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares of common stock  diluted
    
    
    21,280,240
    
    
    
    2,521,496
    
    
    
    15,707,613
    
    
    
    2,476,072Pro forma net income (loss) per share  basic
    
    $
    0.08
    
    
    $
    (0.07
    )
    
    $
    (0.22
    )
    
    $
    (1.54
    )Pro forma net income (loss) per share  diluted
    
    $
    0.08
    
    
    $
    (0.07
    )
    
    $
    (0.22
    )
    
    $
    (1.54
    )
       June 30,
    
    
    December 31,2005
    
    
    2004U.S. government agency securities
    
    $
    34,404
    
    
    $
    Corporate commercial paper
    
    
    9,825
    
    
    
    Total held-to-maturity securities
    
    $
    44,229
    
    
    $
    
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Share-Based Payment
 Accounting Changes and Error Corrections Accounting Changes Reporting Changes in
Interim Financial Statements
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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Company Overview
  Summary
    Critical Accounting Policies and Estimates
   12




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Revenue Recognition and Deferred Revenue
 Software Revenue Recognition
      
    
    Persuasive evidence of an arrangement exists:Before we recognize revenue, we conduct
an assessment to determine whether a binding arrangement exists with the customer
counterparty. To this end, it is our customary practice to have a written contract, which
is signed by both the customer and us, or a purchase order from those customers that have
previously negotiated a standard end-user license arrangement, prior to recognizing revenue
on an arrangement.
    
    Delivery has occurred:Before we recognize revenue under any arrangement, we determine
whether our software has been actually delivered to the customer counterparty. It is our
customary practice to obtain formal acceptance for our software, which is evidenced by
written customer acknowledgement. In the event that we grant a customer the right to
specified upgrades, we defer recognition of the entire arrangement fee until we deliver the
specified upgrades as we have not established vendor-specific objective evidence (VSOE) of
fair value for specified upgrades. Specified upgrades include, but are not limited to,
future software deliverables that are stated in the customer contract.
    
    The customers payment is deemed fixed or determinable:If we find that an arrangement
exists and that delivery has occurred, before we recognize revenue in respect of any
particular customer, we assess whether fees are fixed or determinable and free of
contingencies or significant uncertainties at the time of sale and recognize revenue when
all other applicable revenue recognition requirements are met. While our standard payment
terms are net 30 days, we have, on a few occasions, extended payment terms beyond 30 days
(but none greater than six months) to creditworthy customers. We have established a
successful history of collection, without concessions, on these receivables; therefore
satisfying the required criteria for revenue recognition. If the fee is determined not to
be fixed or determinable, we recognize revenue as the amounts become due and payable.
    
    Collection is probable:In addition to the three foregoing factors which we review for
each customer arrangement, before we recognize any revenue for any particular customer, we
also conduct an assessment of the likelihood of collection from that customer. Both new
and existing customers are subjected to a credit review that evaluates such customers
financial position and ultimately its ability to pay. For follow-on sales to existing
customers, prior payment history is also used to evaluate probability of collection. If it
is determined from the outset of the arrangement that collection is not probable based upon
our credit review
 13




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i.e. i.e.
    Accounting for Revenue Arrangements with Multiple
Deliverables
   14




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Capitalization of Software Development Costs
   15




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Intangible and Other Long-Lived Assets
 Business Combinations Goodwill
and Other Intangible Assets
 Change in Financial Position
  
    
    We issued 10,843,411 shares of common stock upon the automatic conversion of
outstanding shares of preferred stock into shares of common stock.
    
    We issued 5,750,000 shares of common stock in connection with the initial public
offering.
    
    We issued 537,082 shares of common stock upon exercise of mandatorily redeemable
warrants in conjunction with the initial public offering.
    
    We received total cash proceeds from the initial public offering (net of
underwriting discount and offering expenses) of $67.2 million.
    
    With a portion of the proceeds from the offering, we repaid $4.0 million of our
subordinated debt.
    
    We invested the remaining proceeds from the offering in cash equivalents and
short-term marketable securities.
  Results of Operations
  16




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##### Table of Contents



For the Three Months EndedJune 30,
    
    
    Variances2005
    
    
    2004
    
    
    $
    
    
    %(in thousands)Revenue:System sales
    
    $
    13,402
    
    
    $
    8,761
    
    
    $
    4,641
    
    
    
    53.0
    %Support services
    
    
    5,168
    
    
    
    3,356
    
    
    
    1,812
    
    
    
    54.0Total revenue
    
    
    18,570
    
    
    
    12,117
    
    
    
    6,453
    
    
    
    53.3Cost of revenue:System sales
    
    
    5,753
    
    
    
    4,117
    
    
    
    1,636
    
    
    
    39.7Support services
    
    
    3,322
    
    
    
    2,414
    
    
    
    908
    
    
    
    37.6Total cost of revenue
    
    
    9,075
    
    
    
    6,531
    
    
    
    2,544
    
    
    
    39.0Gross profit
    
    
    9,495
    
    
    
    5,586
    
    
    
    3,909
    
    
    
    70.0Operating expenses:Research and development
    
    
    2,533
    
    
    
    1,303
    
    
    
    1,230
    
    
    
    94.4Sales and marketing
    
    
    2,521
    
    
    
    2,407
    
    
    
    114
    
    
    
    4.7General and administrative
    
    
    2,876
    
    
    
    1,832
    
    
    
    1,044
    
    
    
    57.0Total operating expenses
    
    
    7,930
    
    
    
    5,542
    
    
    
    2,388
    
    
    
    43.1Operating income
    
    
    1,565
    
    
    
    44
    
    
    
    1,521
    
    
    NMOther income (expense):Interest income
    
    
    477
    
    
    
    2
    
    
    
    475
    
    
    NMInterest expense
    
    
    (142
    )
    
    
    (190
    )
    
    
    48
    
    
    
    25.3Total other income (expense).
    
    
    335
    
    
    
    (188
    )
    
    
    523
    
    
    
    278.2Net income (loss)
    
    $
    1,900
    
    
    $
    (144
    )
    
    $
    2,044
    
    
    NM
 For the Six Months EndedJune 30,
    
    
    Variances2005
    
    
    2004
    
    
    $
    
    
    %(in thousands)Revenue:System sales
    
    $
    21,121
    
    
    $
    13,670
    
    
    $
    7,451
    
    
    
    54.5
    %Support services
    
    
    8,785
    
    
    
    5,564
    
    
    
    3,221
    
    
    
    57.9Total revenue
    
    
    29,906
    
    
    
    19,234
    
    
    
    10,672
    
    
    
    55.5Cost of revenue:System sales
    
    
    10,576
    
    
    
    7,606
    
    
    
    2,970
    
    
    
    39.0Support services
    
    
    6,405
    
    
    
    4,693
    
    
    
    1,712
    
    
    
    36.5Total cost of revenue
    
    
    16,981
    
    
    
    12,299
    
    
    
    4,682
    
    
    
    38.1Gross profit
    
    
    12,925
    
    
    
    6,935
    
    
    
    5,990
    
    
    
    86.4Operating expenses:Research and development
    
    
    4,918
    
    
    
    2,573
    
    
    
    2,345
    
    
    
    91.1Sales and marketing
    
    
    5,210
    
    
    
    4,145
    
    
    
    1,065
    
    
    
    25.7General and administrative
    
    
    5,431
    
    
    
    3,573
    
    
    
    1,858
    
    
    
    52.0Total operating expenses
    
    
    15,559
    
    
    
    10,291
    
    
    
    5,268
    
    
    
    51.2Operating loss
    
    
    (2,634
    )
    
    
    (3,356
    )
    
    
    722
    
    
    
    21.5Other income (expense):Interest income
    
    
    710
    
    
    
    3
    
    
    
    707
    
    
    NMInterest expense
    
    
    (994
    )
    
    
    (383
    )
    
    
    (611
    )
    
    
    (159.5
    )Total other expense
    
    
    (284
    )
    
    
    (380
    )
    
    
    96
    
    
    
    25.3Net loss
    
    $
    (2,918
    )
    
    $
    (3,736
    )
    
    $
    818
    
    
    
    21.9
    %
 17




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For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:System sales
    
    
    72.2
    %
    
    
    72.3
    %
    
    
    70.6
    %
    
    
    71.1
    %Support services
    
    
    27.8
    
    
    
    27.7
    
    
    
    29.4
    
    
    
    28.9Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenue:System sales
    
    
    42.9
    
    
    
    47.0
    
    
    
    50.1
    
    
    
    55.6Support services
    
    
    64.3
    
    
    
    71.9
    
    
    
    72.9
    
    
    
    84.3Total cost of revenue
    
    
    48.9
    
    
    
    53.9
    
    
    
    56.8
    
    
    
    63.9Gross profit
    
    
    51.1
    
    
    
    46.1
    
    
    
    43.2
    
    
    
    36.1Operating expenses:Research and development
    
    
    13.6
    
    
    
    10.7
    
    
    
    16.4
    
    
    
    13.4Sales and marketing
    
    
    13.6
    
    
    
    19.9
    
    
    
    17.4
    
    
    
    21.5General and administrative
    
    
    15.5
    
    
    
    15.1
    
    
    
    18.2
    
    
    
    18.6Total operating expenses
    
    
    42.7
    
    
    
    45.7
    
    
    
    52.0
    
    
    
    53.5Operating income (loss)
    
    
    8.4
    
    
    
    0.4
    
    
    
    (8.8
    )
    
    
    (17.4
    )Other income (expense):Interest income
    
    
    2.6
    
    
    
    0.0
    
    
    
    2.4
    
    
    
    0.0Interest expense
    
    
    (0.8
    )
    
    
    (1.6
    )
    
    
    (3.3
    )
    
    
    (2.0
    )Total other income (expense).
    
    
    1.8
    
    
    
    (1.6
    )
    
    
    (0.9
    )
    
    
    (2.0
    )Net income (loss)
    
    
    10.2
    %
    
    
    (1.2
    )%
    
    
    (9.7
    )%
    
    
    (19.4
    )%
 Revenue
    18




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Cost of Revenue
    Gross Margin Percentage
  19




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Research and Development
  Sales and Marketing
   General and Administrative
  20




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Operating Income (Loss)
  Interest Income and Expense
   Liquidity and Capital Resources
  Operating Activities
  21




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Investing Activities
    Financing Activities
    22




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Recently Issued Accounting Pronouncements
  Accounting Changes and Error Corrections Accounting Changes Reporting Changes in
Interim Financial Statements
 Forward Looking Statements; Important Factors Affecting Future Results
  23




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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4: CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  24




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Changes in Internal Control over Financial Reporting
  25




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PART II: OTHER INFORMATION
 
 ITEM 1: LEGAL PROCEEDINGS
  
 ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Unregistered Sales of Equity Securities
  Use of Proceeds from Initial Public Offering
   
 ITEM 6: EXHIBITS
  Exhibit No.
    
    Description10.1
    
    Summary of Cash Incentive Compensation Criteria31.1
    
    Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 193432.1
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
  Emageon Inc.By:
    /s/ Charles A. Jett. Jr.Charles A. Jett, Jr.Chief Executive Officer

(principal executive officer)By:
    /s/ W. Randall PittmanW. Randall PittmanChief Financial Officer and Treasurer

(principal accounting and financial officer) 27