##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 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 number 029486
 MERGE HEALTHCARE INCORPORATED
  Wisconsin
(State or other jurisdiction 
of incorporation or organization)
    
    391600938
(I. R. S. Employer
Identification No.)
 6737 West Washington Street, Suite 2250, Milwaukee, Wisconsin 532145650    (414) 9774000
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $0.01 par value per share
    
    NASDAQ Global Market
 NONE
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



INDEX
 PART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    9Item 1B.
    
    Unresolved Staff Comments
    
    
    17Item 2.
    
    Properties
    
    
    17Item 3.
    
    Legal Proceedings
    
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    19Item 6.
    
    Selected Financial Data
    
    
    19Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    20Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 8.
    
    Financial Statements and Supplementary Data
    
    
    38Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    
    68Item 9A.
    
    Controls and Procedures
    
    
    68Item 9B.
    
    Other Information
    
    
    70PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    70Item 11.
    
    Executive Compensation
    
    
    71Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    71Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    71Item 14.
    
    Principal Accountant Fees and Services
    
    
    71PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    71EX-21 SUBSIDIARIES OF REGISTRANTEX-23.1 CONSENT OF KPMG LLPEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 302 CERTIFICATION OF THE CEO




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##### Table of Contents



PART I
 
 Item 1. BUSINESS
 Certain statements in this report that are not historical facts, including, without
limitation, statements that reflect our current expectations regarding our future growth, results
of operations, performance, business prospects and opportunities, constitute forwardlooking
statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. When used in
this report, the words believes, intends, anticipates, expects, will and similar
expressions are intended to identify forwardlooking statements, but are not the exclusive means of
identifying them. These statements are based on information currently available to us and are
subject to a number of risks and uncertainties that may cause our actual growth, results of
operations, financial condition, cash flows, performance, business prospects and opportunities and
the timing of certain events to differ materially from those expressed in, or implied by, these
statements. These risks, uncertainties and other factors include, without limitation, those matters
discussed in Item 1A, Risk Factors of this Annual Report on Form 10-K . Except as expressly
required by the federal securities laws, we undertake no obligation to publicly update these
factors or any of the forwardlooking statements to reflect future events, developments or changed
circumstances, or for any other reason.
 Overview
     1




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
    
    Two separate right-sizings and reorganizations, the most recent one announced in
February 2008 includes personnel terminations from all parts of the organization;
    
    Implementation of and significant changes to our onshore/offshore global software
engineering and support delivery model; and
    
    Our new teleradiology services offering announced in November of 2007.
  Business
   TM
   2




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Financial Information about Segments
 
 Markets
     3




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How We Benefit Our Customers
  
    
    Accelerated productivity gained by using a single integrated software solution for most
business and clinical workflow tools designed to automate operations, including digital
dictation, billing, registration and scheduling, productivity analysis, image and report
management, and storage and distribution;
    
    Increased accuracy through realtime patient demographic matching across all business
and clinical workflow tools;
    
    More accountability and convenience in working with one vendor who develops, installs
and supports the entire spectrum of radiology workflow tools and integration services;
    
    The creation of permanent electronic archives of diagnostic quality images that enable
the retrieval of prior and current images and reports;
    
    Improved productivity and reduced costs by providing the capability to centralize many
functions, such as scheduling, coding, transcription, billing and radiologist reading;
    
    Modular, flexible and costeffective systems that can expand as the imaging center,
hospital or clinics business grows;
    
    Networking of multiple image-producing and image-utilizing devices to eliminate
redundancies and to reduce the need for capital equipment expenditures or disaster
recovery; and
    
    Optimized imageviewing and diagnostic capabilities.
  
    
    Using our technologies and services to enhance the workflow capabilities of the OEMs solutions;
    
    Accelerating time-to-market in the development of new solutions;
    
    Reducing software research and development costs;
    
    Supporting greater scalability and flexibility in their development programs;
    
    Creating greater product differentiation compared to their competitors; and
    
    Leveraging our technical and deployment skills, thereby allowing the OEM to focus on
their core competencies.
 Strategy
  4




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
    
    Medical imaging innovation with our OEM partners, creating software applications,
technologies and tools that optimize the growing and evolving capabilities of imaging
acquisition devices such as multislice CT, PET, ultrasound and MRI;
    
    Enduser sales initiatives, including targeted sales/marketing activities designed to
achieve broader geographic coverage and expanded product purchases from current customers,
ongoing solution-selling training and investment in solution-selling tools such as our
returnoninvestment and costbenefit analyses;
    
    Teleradiology services and products for our RIS/PACS customers, including our Consult
PreRead service offering and our Merge TeleRead software that enable our customers to
efficiently send diagnostic images to designated workflow queues, either onshore or
offshore;
    
    Clinical application software and information systems development, both in partnership
with OEM and technology partners and on a direct basis to endusers, providing growth
opportunities globally and into new markets outside of radiology;
    
    Addressing more and more of our OEM customers software development needs through our
new capacity engineering service model in which we assign dedicated long term
onshore/offshore engineering teams to provide ongoing multi-project/product development
services;
    
    Creating enhanced product offerings such as Fusion PACS MX and Fusion RIS/PACS MX
that expand the functionality of RIS/PACS to clinical applications beyond radiology; and
    
    Innovating technologies and solutions to serve new markets such as orthopedic,
veterinary, pharmaceutical clinical trials and oncology.
  EndUser Products and Services Description
  5




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TM TM TM
 OEM Products, Technologies and Services Descriptions
  ®
   6




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Employees
  Sales, Marketing and Distribution
  Competition
      7




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Intellectual Property Rights
   Medical, Regulatory and Government Standards and Reforms
   
    
    Changes in Medicare and private insurance reimbursement rates may affect the financial
health of our customers businesses. For example, on February 8, 2006, the President
signed into law the DRA. Effective for services provided on or after January 1, 2007, the
DRA provided that reimbursement for the technical component for imaging services
(excluding diagnostic and screening mammography) in nonhospital based freestanding
facilities will be capped at the lesser of reimbursement under the Medicare Part B
physician fee schedule or the Hospital Outpatient Prospective Payment System (HOPPS)
schedule. The DRA also codifies the reduction in reimbursement for multiple images on
contiguous body parts previously announced by the Centers for Medicare and Medicaid
Services (CMS). Effective January 1, 2007, CMS is paying 100% of the technical
component of the higher-priced imaging procedure and 75% for the technical component of
each additional procedure for imaging procedures within a family of codes involving
contiguous body parts when the multiple procedures are performed in the same session.
There are additional cuts in Medicare imaging reimbursement being considered.
    
    The Health Insurance Portability and Accountability Act of 1996 (HIPAA) has mandated
the use of standard transactions and identifiers, proscribed security measures and other
provisions designed to simplify and secure the exchange of medical information. The
compliance dates for initial stages of the requirements phase began on April 14, 2003. We
have taken necessary measures to assist our customers to meet HIPAA compliance.
    
    The U.S. Food and Drug Administration (FDA), which is responsible for assuring the
safety and effectiveness of medical devices under the Federal Food, Drug and Cosmetic Act,
has regulatory jurisdiction over computer software applications when they are labeled or
intended to be used in the diagnosis of disease or other conditions. In Canada, medical
devices are regulated under Health Canadas Medical Devices
 8




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Regulations (Health Canada). Our ability to market new products and improvements to
existing products depends upon the timing of appropriate licenses, premarket clearance or
approval from the FDA, Health Canada, or other applicable foreign regulatory authorities.
    
    International sales of products outside of the U.S. are subject to foreign regulatory
requirements (in particular, the requirements of the European Union, where most of our
international sales are made) that can vary from country to country.
    
    Laws and regulations may be adopted to address Internet commerce such as online
content, user privacy, pricing and characteristics and quality of applications and
services.
  Available Information
  
 Item 1A. RISK FACTORS
 You should carefully consider the risks, uncertainties and other factors described below, in
addition to the other information set forth in this Annual Report on Form 10-K , because they could
materially and adversely affect our business, operating results, financial condition, cash flows
and prospects, as well as adversely affect the value of an investment in our Common Stock. Also,
you should be aware that the risks and uncertainties described below are not the only ones facing
us. Additional risks and uncertainties that we do not yet know of, or that we currently think are
immaterial, may also impair our business operations. You should also refer to the other information
contained in and incorporated by reference into this Annual Report on Form 10-K , including our
consolidated financial statements and the related notes.
 We may not be able to generate cash through operations, sales of assets or obtain financing
required to remain in business
  9




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
    
    we are losing customers and failing to attract certain new customers;
    
    employee morale is decreasing and attrition is increasing;
    
    vendors and suppliers are terminating their relationship with us or tightening credit;
and
    
    management is distracted from focusing on the business.
  Our new teleradiology product and service may not be successful
 
    
    the product and service may not be accepted by the marketplace, due to our intention of
initiating our service using radiologists located in India;
    
    we may have trouble recruiting and retaining qualified radiologists in India;
    
    we may face technical challenges, including problems with our product and service,
acquiring the necessary bandwidth to India and maintaining a reliable network;
    
    we face significant competition in the teleradiology industry from numerous parties,
many of whom are better capitalized and have a longer history of providing teleradiology
products and services;
    
    the teleradiology product and service may not generate returns that will meet our
financial targets or justify our investment; and
    
    any financial returns may take longer to generate than we anticipate.
 We have identified a material weakness in our disclosure controls and procedures and our
internal control over financial reporting, which, if not remedied effectively, could have an
adverse effect on the trading price of our Common Stock and could otherwise seriously harm our
business
 The actual costs and savings associated with our reorganization and rightsizing initiatives
may differ materially from the amounts we estimate
 10




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We grew our India operations rapidly, and these operations are subject to regulatory, economic
and political uncertainties
   Antioutsourcing legislation, if adopted, could adversely affect our business, financial
condition and results of operations and could impair our ability to service our customers and
develop products
 Our recent headcount reductions have placed additional strain on our resources, may impair our
operations and may adversely impact our ability to attract and retain qualified technical,
managerial and sales personnel
 Changes in the healthcare industry, including the changes to reimbursement schedules under the
Deficit Reduction Act of 2005, are expected to continue to negatively impact our business
 11




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Litigation or regulatory actions could adversely affect our financial condition
   Our ability to obtain directors and officers liability insurance in the future and to
maintain coverage under existing policies may be adversely affected by the lawsuits and regulatory
actions against us and certain of our executive officers
 Our performance and future success depends on our ability to attract, integrate and retain
qualified technical, managerial and sales personnel
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Relationships with our customers, potential customers and suppliers have been adversely
affected, and our competitors competitive position improved, by our restatement of our financial
results, related litigation and regulatory proceedings and management turnover
 Our quarterly net sales may vary significantly
 The length of our sales and implementation cycles may adversely affect our future operating
results
 We face aggressive competition in many areas of our business, and our business will be harmed
if we fail to compete effectively
  13




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Our proprietary technology may be subject to infringement claims or may be infringed upon
which could result in additional costs or lost sales
   We depend on licenses from third parties for rights to some technology we use, and if we are
unable to continue these relationships and maintain our rights to this technology, our business
could suffer
 14




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We are subject to government regulation, changes to which could negatively impact our
business
 
    
    requiring us to receive FDA clearance of a premarket notification submission
demonstrating substantial equivalence to a device already legally marketed, or to obtain
FDA approval of a premarket approval application establishing the safety and
effectiveness of the software;
    
    requiring us to comply with rigorous regulations governing the preclinical and
clinical testing, manufacture, distribution, labeling and promotion of medical devices;
and
    
    requiring us to comply with the Act regarding general controls, including establishment
registration, device listing, compliance with good manufacturing practices, reporting of
specified malfunctions and adverse device events.
  Changes in federal and state regulations relating to patient data could depress the demand for
our software and impose significant software redesign costs on us
 The complexity presented by international operations could negatively affect our business
 
    
    the need to conform with local business and market norms;
    
    difficulties managing and integrating new international facilities;
 15




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
    
    greater difficulty in collecting accounts receivable and longer collection periods;
    
    potentially unfavorable economic conditions outside of the U.S.;
    
    changes in local currencies may impact the attractiveness of our product as we invoice
most of our net sales in U.S. Dollars;
    
    certification requirements;
    
    lack of, or limited protection of intellectual property rights in some countries;
    
    potentially adverse tax consequences;
    
    wage pressures, particularly in India, where wages are generally rising at a faster
rate than in the United States;
    
    political instability;
    
    trade protection measures and other regulatory requirements;
    
    service provider and government spending patterns;
    
    potential adverse impact on the demand for products and services of U.S.based
businesses due to perceptions regarding U.S. foreign policy;
    
    natural disasters, war or terrorist acts;
    
    ineffective strategic relationships with international partners; and
    
    political conditions which may threaten the safety of our employees or the employees of
our customers or our continued presence in foreign countries, particularly civil unrest
and hostilities among neighboring countries in South Asia, including India and Pakistan.
  We provide our customers with certain warranties which could result in higher costs than we
anticipate
 Product liability suits against us could result in expensive and time consuming litigation,
payment of substantial damages and an increase in our insurance rates
 Healthcare industry consolidation could impose pressure on our software prices, reduce our
potential client base and reduce demand for our software
 16




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The trading price of our Common Stock has been volatile and may fluctuate substantially in the
future
 
    
    our ability to meet or exceed the expectations of analysts or investors;
    
    changes in our own forecasts or earnings estimates by analysts;
    
    quartertoquarter variations in our operating results;
    
    announcements regarding clinical activities or new products by our competitors or us;
    
    general conditions in the healthcare IT industry;
    
    governmental regulatory action and healthcare reform measures, including changes in
reimbursement rates for imaging procedures;
    
    rumors about our performance or software solutions;
    
    uncertainty regarding our financial situation and ability to continue as a going
concern;
    
    inability to raise additional capital;
    
    price and volume fluctuations in the overall stock market, which have particularly
affected the market prices of many software, healthcare and technology companies; and
    
    general economic conditions.
  Antitakeover provisions in our governing documents and under Wisconsin law and our
shareholders rights plan could make an acquisition of us, which may be beneficial to our
shareholders, more difficult
 
 Item 1B. UNRESOLVED STAFF COMMENTS
  
 Item 2. PROPERTIES
  17




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Item 3. LEGAL PROCEEDINGS
     18




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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 
   Common Stock Market Prices
 4th Quarter
    
    3rd Quarter
    
    2nd Quarter
    
    1st Quarter2007High
    
    $
    4.43
    
    
    $
    6.61
    
    
    $
    7.25
    
    
    $
    6.73Low
    
    $
    0.98
    
    
    $
    3.88
    
    
    $
    4.78
    
    
    $
    3.622006High
    
    $
    8.14
    
    
    $
    8.17
    
    
    $
    16.06
    
    
    $
    27.37Low
    
    $
    5.72
    
    
    $
    6.43
    
    
    $
    11.31
    
    
    $
    15.01
  Dividend Policy
  Recent Sales of Unregistered Securities
   
 Item 6. SELECTED FINANCIAL DATA
  19




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Years Ended December 31,2007
    
    2006
    
    2005(1)
    
    2004
    
    2003(in thousands, except for share and per share data)Statements of Operations Data:Net sales
    
    $
    59,572
    
    
    $
    74,322
    
    
    $
    82,538
    
    
    $
    25,477
    
    
    $
    24,268Operating income (loss)(2)(3)
    
    
    (171,238
    )
    
    
    (252,087
    )
    
    
    4,377
    
    
    
    (250
    )
    
    
    3,064Income (loss) before income taxes
    
    
    (171,808
    )
    
    
    (249,473
    )
    
    
    5,113
    
    
    
    219
    
    
    
    2,962Income tax expense (benefit)
    
    
    (240
    )
    
    
    9,450
    
    
    
    8,373
    
    
    
    (1,444
    )
    
    
    (1,325
    )Net income (loss)
    
    
    (171,568
    )
    
    
    (258,923
    )
    
    
    (3,260
    )
    
    
    1,663
    
    
    
    4,287Earnings (loss) per share:Basic
    
    $
    (5.06
    )
    
    $
    (7.68
    )
    
    $
    (0.13
    )
    
    $
    0.13
    
    
    $
    0.37Diluted
    
    
    (5.06
    )
    
    
    (7.68
    )
    
    
    (0.13
    )
    
    
    0.12
    
    
    
    0.34Weighted average shares outstanding:Basic
    
    
    33,913,379
    
    
    
    33,701,735
    
    
    
    24,696,762
    
    
    
    13,013,927
    
    
    
    11,566,054Diluted
    
    
    33,913,379
    
    
    
    33,701,735
    
    
    
    24,696,762
    
    
    
    13,827,522
    
    
    
    12,586,900
 As of December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(in thousands)Balance Sheet Data:Working capital
    
    $
    878
    
    
    $
    27,101
    
    
    $
    56,964
    
    
    $
    22,786
    
    
    $
    18,165Total assets
    
    
    61,635
    
    
    
    234,875
    
    
    
    500,045
    
    
    
    85,853
    
    
    
    66,110Longterm debt obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    24,405
    
    
    
    189,925
    
    
    
    442,592
    
    
    
    54,949
    
    
    
    50,709
 
 (1)
    
    Includes the results of Cedara Software Corp. from June 1, 2005, the date of our business
combination.(2)
    
    For the year ended December 31, 2005 we incurred a charge for acquired inprocess research
and development of $13.0 million.(3)
    
    For the years ended December 31, 2007 and 2006, we incurred charges of $122.4 million and
$214.1 million, respectively, related to the impairment of goodwill. 
 Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The discussion below contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section 21E of the
Exchange Act. We have used words such as believes, intends, anticipates, expects and
similar expressions to identify forward-looking statements. These statements are based on
information currently available to us and are subject to a number of risks and uncertainties that
may cause our actual results of operations, financial condition, cash flows, performance, business
prospects and opportunities and the timing of certain events to differ materially from those
expressed in, or implied by, these statements. These risks, uncertainties and other factors
include, without limitation, those matters discussed in Item 1A. of Part I of this Annual Report
on Form 10-K . Except as expressly required by the federal securities laws, we undertake no
obligation to update such factors or to publicly announce the results of any of the forward-looking
statements contained herein to reflect future events, developments, or changed circumstances, or
for any other reason. The following discussion should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K and
Item 1A  Risk Factors.
  
    
    Overview
    
    Liquidity and Capital Resources
    
    Revenues and Expenses
    
    Critical Accounting Policies
    
    Results of Operations
    
    Material Off Balance Sheet Arrangements
 20




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Overview
      
    
    Two separate right-sizings and reorganizations, the most recent one announced in
February 2008 includes personnel terminations from all parts of the organization;
    
    Implementation of and significant changes to our onshore/offshore global software
engineering and support delivery model; and
    
    Our new teleradiology services offering announced in November of 2007.
   21




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Liquidity and Capital Resources
  Operating Cash Flows
    Investing Cash Flows
  Financing Cash Flows
  Contractual Obligations
  Payment due by periodLess than
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    1 Year
    
    1  3 Years
    
    3  5 Years
    
    5 YearsOperating leases
    
    $
    7,237
    
    
    $
    2,497
    
    
    $
    2,902
    
    
    $
    978
    
    
    $
    860
  22




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General
   Revenues and Expenses
  Net Sales
  Cost of Sales
  23




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Sales and Marketing Expense
  Research and Development Expense
 Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed
 General and Administrative Expense
  Acquired InProcess Research and Development
   Goodwill and Trade Name Impairment, Restructuring and Other Expenses
  Depreciation, Amortization and Impairment
  Other Income (Expense)
  Critical Accounting Policies
   24




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Revenue Recognition
 Software Revenue Recognition Revenue Arrangements with Multiple Deliverables
 . Modification of SOP No. 972, Software Revenue
Recognition, With Respect to Certain Transactions . Revenue
Recognition
    Accounting for
Performance on ConstructionType and Certain ProductionType Contracts
 25




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Income
Statement Characterization of Reimbursements Received for OutofPocket Expenses Incurred Accounting for Shipping and Handling Fees , How Sales Taxes Collected from Customers and Remitted to Governmental Authorities
Should be Presented in the Income Statement (That Is, Gross Versus Net Presentation)
 Allowance for Doubtful Accounts and Sales Returns
 Revenue Recognition
When the Right of Return Exists
 Software Capitalization
  Other LongLived Assets
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Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets,
 Sharebased Compensation Expense
 ShareBased Payment
(SFAS No. 123(R)) Accounting for StockBased Compensation Accounting for Stock Issued to Employees)
 Income Taxes
 Accounting for
Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109 Accounting for Income Taxes. Definition of Settlement in FASB
Interpretation No. 48
  27




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Guarantees
 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
   Loss Contingencies
  28




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Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Accounting for Advance Payments for Goods or
Services to Be Used in Future Research and Development Activities
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51
 Results of Operations
 Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
  29




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##### Table of Contents



Years Ended December 31,
    
    
    Change2007
    
    
    %
    (1)
    
    2006
    
    
    %
    (1)
    
    $
    
    
    %Net sales:Software and other
    
    $
    29,590
    
    
    
    49.7
    %
    
    $
    40,275
    
    
    
    54.2
    %
    
    $
    (10,685
    )
    
    
    -26.5
    %Services and maintenance
    
    
    29,982
    
    
    
    50.3
    %
    
    
    34,047
    
    
    
    45.8
    %
    
    
    (4,065
    )
    
    
    -11.9
    %Total net sales
    
    
    59,572
    
    
    
    100.0
    %
    
    
    74,322
    
    
    
    100.0
    %
    
    
    (14,750
    )
    
    
    -19.8
    %Cost of sales:Software and other
    
    
    6,722
    
    
    
    22.7
    %
    
    
    10,651
    
    
    
    26.4
    %
    
    
    (3,929
    )
    
    
    -36.9
    %Services and maintenance
    
    
    14,089
    
    
    
    47.0
    %
    
    
    14,472
    
    
    
    42.5
    %
    
    
    (383
    )
    
    
    -2.6
    %Amortization and related impairment
    
    
    8,537
    
    
    NM(2)
    
    
    5,532
    
    
    NM(2)
    
    
    3,005
    
    
    
    54.3
    %Total cost of sales
    
    
    29,348
    
    
    
    49.3
    %
    
    
    30,655
    
    
    
    41.2
    %
    
    
    (1,307
    )
    
    
    -4.3
    %Gross marginSoftware and other
    
    
    14,331
    
    
    
    48.4
    %(3)
    
    
    24,092
    
    
    
    59.8
    %(3)
    
    
    (9,761
    )
    
    
    -40.5
    %Services and maintenance
    
    
    15,893
    
    
    
    53.0
    %
    
    
    19,575
    
    
    
    57.5
    %
    
    
    (3,682
    )
    
    
    -18.8
    %Total gross margin
    
    
    30,224
    
    
    
    50.7
    %
    
    
    43,667
    
    
    
    58.8
    %
    
    
    (13,443
    )
    
    
    -30.8
    %Operating expenses:Sales and marketing
    
    
    18,565
    
    
    
    31.2
    %
    
    
    20,100
    
    
    
    27.0
    %
    
    
    (1,535
    )
    
    
    -7.6
    %Product research and development
    
    
    21,065
    
    
    
    35.4
    %
    
    
    19,364
    
    
    
    26.1
    %
    
    
    1,701
    
    
    
    8.8
    %General and administrative
    
    
    29,492
    
    
    
    49.5
    %
    
    
    28,752
    
    
    
    38.7
    %
    
    
    740
    
    
    
    2.6
    %Goodwill and trade name impairment,
restructuring and
other expenses
    
    
    124,131
    
    
    
    208.4
    %
    
    
    223,505
    
    
    
    300.7
    %
    
    
    (99,374
    )
    
    
    -44.5
    %Depreciation, amortization and impairment
    
    
    8,209
    
    
    
    13.8
    %
    
    
    4,033
    
    
    
    5.4
    %
    
    
    4,176
    
    
    
    103.5
    %Total operating costs and expenses
    
    
    201,462
    
    
    
    338.2
    %
    
    
    295,754
    
    
    
    397.9
    %
    
    
    (94,292
    )
    
    
    -31.9
    %Operating loss
    
    
    (171,238
    )
    
    
    -287.4
    %
    
    
    (252,087
    )
    
    
    -339.2
    %
    
    
    80,849
    
    
    
    32.1
    %Other income (expense), net
    
    
    (570
    )
    
    
    -1.0
    %
    
    
    2,614
    
    
    
    3.5
    %
    
    
    (3,184
    )
    
    
    -121.8
    %Loss before income taxes
    
    
    (171,808
    )
    
    
    -288.4
    %
    
    
    (249,473
    )
    
    
    -335.7
    %
    
    
    77,665
    
    
    
    31.1
    %Income tax expense
    
    
    (240
    )
    
    
    -0.4
    %
    
    
    9,450
    
    
    
    12.7
    %
    
    
    (9,690
    )
    
    
    -102.5
    %Net loss
    
    $
    (171,568
    )
    
    
    -288.0
    %
    
    $
    (258,923
    )
    
    
    -348.4
    %
    
    $
    87,355
    
    
    
    33.7
    %
 
 (1)
    
    Percentages are of total net sales, except for cost of sales and gross margin, which are based
upon related net sales.(2)
    
    NM denotes percentage is not meaningful.(3)
    
    Gross margin for software and other sales includes amortization expense recorded in cost of
sales. Net Sales
  Years Ended December 31,
    
    
    Change2007
    
    
    %
    
    
    2006
    
    
    %
    
    
    $
    
    
    %Cedara:Software and other
    
    $
    12,919
    
    
    
    21.7
    %
    
    $
    11,922
    
    
    
    16.0
    %
    
    $
    997
    
    
    
    8.4
    %Services and maintenance
    
    
    8,797
    
    
    
    14.8
    %
    
    
    8,154
    
    
    
    11.0
    %
    
    
    643
    
    
    
    7.9
    %Total net sales
    
    
    21,716
    
    
    
    36.5
    %
    
    
    20,076
    
    
    
    27.0
    %
    
    
    1,640
    
    
    
    8.2
    %Merge Healthcare North AmericaSoftware and other
    
    
    14,473
    
    
    
    24.3
    %
    
    
    26,816
    (1)
    
    
    36.1
    %
    
    
    (12,343
    )
    
    
    -46.0
    %Services and maintenance
    
    
    19,575
    
    
    
    32.9
    %
    
    
    25,142
    (2)
    
    
    33.8
    %
    
    
    (5,567
    )
    
    
    -22.1
    %Total net sales
    
    
    34,048
    
    
    
    57.2
    %
    
    
    51,958
    
    
    
    69.9
    %
    
    
    (17,910
    )
    
    
    -34.5
    %Merge Healthcare EMEASoftware and other
    
    
    2,198
    
    
    
    3.7
    %
    
    
    1,537
    
    
    
    2.1
    %
    
    
    661
    
    
    
    43.0
    %Services and maintenance
    
    
    1,610
    
    
    
    2.8
    %
    
    
    751
    
    
    
    1.0
    %
    
    
    859
    
    
    
    114.4
    %Total net sales
    
    
    3,808
    
    
    
    6.4
    %
    
    
    2,288
    
    
    
    3.1
    %
    
    
    1,520
    
    
    
    66.4
    %Total net sales
    
    $
    59,572
    
    
    
    
    
    
    $
    74,322
    
    
    
    
    
    
    $
    (14,750
    )
 30




---



##### Table of Contents



(1)
    
    Amount includes $11,485 of revenue related to ultimate delivery of certain software product
functionality on customer contracts entered into in previous years.(2)
    
    Amount includes $4,791 of revenue related to ultimate delivery of certain software product
functionality on customer contracts entered into in previous years. Software and Other Sales.
 Service and Maintenance Sales.
 Gross Margin
 Gross Margin  Software and Other Sales
 31




---



##### Table of Contents



Gross Margin  Services and Maintenance Sales
 Sales and Marketing
  Product Research and Development
  General and Administrative
  32




---



##### Table of Contents



Goodwill and Trade Name Impairment, Restructuring and Other Expenses
  Depreciation, Amortization and Impairment
  Other Income (Expense), Net
  Income Tax Expense (Benefit)
  Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
  Years Ended December 31,
    
    
    Change2006
    
    
    %
    (1)
    
    2005
    
    
    %
    (1)
    
    $
    
    
    %Net sales:Software and other
    
    $
    40,275
    
    
    
    54.2
    %
    
    $
    60,019
    
    
    
    72.7
    %
    
    $
    (19,744
    )
    
    
    -32.9
    %Services and maintenance
    
    
    34,047
    
    
    
    45.8
    %
    
    
    22,519
    
    
    
    27.3
    %
    
    
    11,528
    
    
    
    51.2
    %Total net sales
    
    
    74,322
    
    
    
    100.0
    %
    
    
    82,538
    
    
    
    100.0
    %
    
    
    (8,216
    )
    
    
    -10.0
    %
 33




---



##### Table of Contents



Years Ended December 31,
    
    
    Change2006
    
    
    %
    (1)
    
    2005
    
    
    %
    (1)
    
    $
    
    
    %Cost of sales:Software and other
    
    
    10,651
    
    
    
    26.4
    %
    
    
    7,411
    
    
    
    12.3
    %
    
    
    3,240
    
    
    
    43.7
    %Services and maintenance
    
    
    14,472
    
    
    
    42.5
    %
    
    
    11,087
    
    
    
    49.2
    %
    
    
    3,385
    
    
    
    30.5
    %Amortization and related impairment
    
    
    5,532
    
    
    
    NM
    (2)
    
    
    7,740
    
    
    
    NM
    (2)
    
    
    (2,208
    )
    
    
    -28.5
    %Total cost of sales
    
    
    30,655
    
    
    
    41.2
    %
    
    
    26,238
    
    
    
    31.8
    %
    
    
    4,417
    
    
    
    16.8
    %Gross marginSoftware and other
    
    
    24,092
    
    
    
    59.8
    %(3)
    
    
    44,868
    
    
    
    74.8
    %(3)
    
    
    (20,776
    )
    
    
    -46.3
    %Services and maintenance
    
    
    19,575
    
    
    
    57.5
    %
    
    
    11,432
    
    
    
    50.8
    %
    
    
    8,143
    
    
    
    71.2
    %Total gross margin
    
    
    43,667
    
    
    
    58.8
    %
    
    
    56,300
    
    
    
    68.2
    %
    
    
    (12,633
    )
    
    
    -22.4
    %Operating expenses:Sales and marketing
    
    
    20,100
    
    
    
    27.0
    %
    
    
    13,646
    
    
    
    16.5
    %
    
    
    6,454
    
    
    
    47.3
    %Product research and development
    
    
    19,364
    
    
    
    26.1
    %
    
    
    9,444
    
    
    
    11.4
    %
    
    
    9,920
    
    
    
    105.0
    %General and administrative
    
    
    28,752
    
    
    
    38.7
    %
    
    
    11,709
    
    
    
    14.2
    %
    
    
    17,043
    
    
    
    145.6
    %Acquired in-process research and
Development
    
    
    
    
    
    
    0.0
    %
    
    
    13,046
    
    
    
    15.8
    %
    
    
    (13,046
    )
    
    
    -100.0
    %Goodwill and trade name impairment,
restructuring and
other expenses
    
    
    223,505
    
    
    
    300.7
    %
    
    
    530
    
    
    
    0.6
    %
    
    
    222,975
    
    
    
    NM
    (2)Depreciation, amortization and impairment
    
    
    4,033
    
    
    
    5.4
    %
    
    
    3,548
    
    
    
    4.3
    %
    
    
    485
    
    
    
    13.7
    %Total operating costs and expenses
    
    
    295,754
    
    
    
    397.9
    %
    
    
    51,923
    
    
    
    62.9
    %
    
    
    243,831
    
    
    
    469.6
    %Operating loss
    
    
    (252,087
    )
    
    
    -339.2
    %
    
    
    4,377
    
    
    
    5.3
    %
    
    
    (256,464
    )
    
    
    NM
    (2)Other income, net
    
    
    2,614
    
    
    
    3.5
    %
    
    
    736
    
    
    
    0.9
    %
    
    
    1,878
    
    
    
    255.2
    %Loss before income taxes
    
    
    (249,473
    )
    
    
    -335.7
    %
    
    
    5,113
    
    
    
    6.2
    %
    
    
    (254,586
    )
    
    
    NM
    (2)Income tax expense
    
    
    9,450
    
    
    
    12.7
    %
    
    
    8,373
    
    
    
    10.1
    %
    
    
    1,077
    
    
    
    12.9
    %Net loss
    
    $
    (258,923
    )
    
    
    -348.4
    %
    
    $
    (3,260
    )
    
    
    -3.9
    %
    
    $
    (255,663
    )
    
    
    NM
    (2)
 
 (1)
    
    Percentages are of total net sales, except for cost of sales and gross margin, which are based
upon related net sales.(2)
    
    NM denotes percentage is not meaningful.(3)
    
    Gross margin for software and other sales includes amortization expense recorded in cost of
sales. Net Sales
 Software and Other Sales.
 Service and Maintenance Sales.
 34




---



##### Table of Contents



Gross Margin
 Gross Margin  Software and Other Sales
 Gross Margin  Services and Maintenance Sales
 Sales and Marketing
  Product Research and Development
  General and Administrative
  35




---



##### Table of Contents



Acquired InProcess Research and Development
  Goodwill and Trade Name Impairment, Restructuring and Other Expenses
  Depreciation, Amortization and Impairment
  Other Income, Net
  Income Tax Expense
  Material Off Balance Sheet Arrangements
  
 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
  36




---



##### Table of Contents



Foreign Currency Exchange Risk
  37




---



##### Table of Contents



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Report of Independent Registered Public Accounting Firm
 
    Accounting for Uncertainty in Income Taxes Share-Based Payment
  Internal
Control  Integrated Framework
  
 38




---



##### Table of Contents



MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
 December 31,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,000
    
    
    $
    45,945Accounts receivable, net of allowance for doubtful accounts and sales returns of $2,209
and $2,553 at December 31, 2007 and December 31, 2006, respectively
    
    
    11,810
    
    
    
    16,427Inventory
    
    
    1,754
    
    
    
    2,164Prepaid expenses
    
    
    1,970
    
    
    
    1,660Deferred income taxes
    
    
    260
    
    
    
    196Other current assets
    
    
    771
    
    
    
    812Total current assets
    
    
    30,565
    
    
    
    67,204Property and equipment:Computer equipment
    
    
    6,776
    
    
    
    5,017Office equipment
    
    
    2,270
    
    
    
    1,919Leasehold improvements
    
    
    2,000
    
    
    
    1,46011,046
    
    
    
    8,396Less accumulated depreciation
    
    
    6,415
    
    
    
    4,456Net property and equipment
    
    
    4,631
    
    
    
    3,940Purchased and developed software, net of accumulated amortization of $10,452 and
$11,235 at December 31, 2007 and December 31, 2006, respectively
    
    
    8,932
    
    
    
    16,628Customer relationships, net of accumulated amortization of $259 and $3,966 at
December 31, 2007 and December 31, 2006, respectively
    
    
    3,291
    
    
    
    9,511Goodwill
    
    
    
    
    
    
    122,371Trade names
    
    
    1,060
    
    
    
    1,860Deferred income taxes
    
    
    4,585
    
    
    
    4,326Investments
    
    
    8,156
    
    
    
    8,361Other assets
    
    
    415
    
    
    
    674Total assets
    
    $
    61,635
    
    
    $
    234,875LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    7,114
    
    
    $
    8,284Accrued wages
    
    
    2,752
    
    
    
    6,162Income taxes payable
    
    
    
    
    
    
    4,398Other accrued liabilities
    
    
    2,920
    
    
    
    3,196Deferred revenue
    
    
    16,901
    
    
    
    18,063Total current liabilities
    
    
    29,687
    
    
    
    40,103Deferred income taxes
    
    
    257
    
    
    
    502Deferred revenue
    
    
    1,787
    
    
    
    3,712Income taxes payable
    
    
    5,338
    
    
    
    Other
    
    
    161
    
    
    
    633Total liabilities
    
    
    37,230
    
    
    
    44,950Shareholders equity:Preferred stock, $0.01 par value: 2,999,997 shares authorized; zero shares
issued and outstanding at December 31, 2007 and December 31, 2006
    
    
    
    
    
    
    Series A Preferred Stock, $0.01 par value: 1,000,000 shares authorized; zero shares
issued and outstanding at December 31, 2007 and December 31, 2006
    
    
    
    
    
    
    Series B Preferred Stock, $0.01 par value: 1,000,000 shares authorized; zero shares
issued and outstanding at December 31, 2007 and December 31, 2006
    
    
    
    
    
    
    Series 3 Special Voting Preferred Stock, no par value: one share authorized; one share
issued and outstanding at December 31, 2007 and December 31, 2006
    
    
    
    
    
    
    Common stock, $0.01 par value: 100,000,000 shares authorized: 32,237,700 shares and
29,291,030 shares issued and outstanding at December 31, 2007 and December 31, 2006, respectively
    
    
    322
    
    
    
    293Common stock subscribed; 0 shares and 5,242 shares at December 31, 2007
and December 31, 2006, respectively
    
    
    
    
    
    
    33Additional paid-in capital
    
    
    456,371
    
    
    
    451,130Accumulated deficit
    
    
    (434,958
    )
    
    
    (263,390
    )Accumulated other comprehensive income
    
    
    2,670
    
    
    
    1,859Total shareholders equity
    
    
    24,405
    
    
    
    189,925Total liabilities and shareholders equity
    
    $
    61,635
    
    
    $
    234,875
  39




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##### Table of Contents



MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share and per share data)
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Net sales:Software and other
    
    $
    29,590
    
    
    $
    40,275
    
    
    $
    60,019Services and maintenance
    
    
    29,982
    
    
    
    34,047
    
    
    
    22,519Total net sales
    
    
    59,572
    
    
    
    74,322
    
    
    
    82,538Cost of sales:Software and other
    
    
    6,722
    
    
    
    10,651
    
    
    
    7,411Services and maintenance
    
    
    14,089
    
    
    
    14,472
    
    
    
    11,087Amortization and related impairment
    
    
    8,537
    
    
    
    5,532
    
    
    
    7,740Total cost of sales
    
    
    29,348
    
    
    
    30,655
    
    
    
    26,238Gross margin
    
    
    30,224
    
    
    
    43,667
    
    
    
    56,300Operating costs and expenses:Sales and marketing
    
    
    18,565
    
    
    
    20,100
    
    
    
    13,646Product research and development
    
    
    21,065
    
    
    
    19,364
    
    
    
    9,444General and administrative
    
    
    29,492
    
    
    
    28,752
    
    
    
    11,709Acquired in-process research and development
    
    
    
    
    
    
    
    
    
    
    13,046Goodwill and trade name impairment, restructuring and other
expenses
    
    
    124,131
    
    
    
    223,505
    
    
    
    530Depreciation, amortization and impairment
    
    
    8,209
    
    
    
    4,033
    
    
    
    3,548Total operating costs and expenses
    
    
    201,462
    
    
    
    295,754
    
    
    
    51,923Operating loss
    
    
    (171,238
    )
    
    
    (252,087
    )
    
    
    4,377Other income (expense):Interest expense
    
    
    (89
    )
    
    
    (67
    )
    
    
    (38
    )Interest income
    
    
    1,233
    
    
    
    2,548
    
    
    
    1,061Other, net
    
    
    (1,714
    )
    
    
    133
    
    
    
    (287
    )Total other income (expense)
    
    
    (570
    )
    
    
    2,614
    
    
    
    736Loss before income taxes
    
    
    (171,808
    )
    
    
    (249,473
    )
    
    
    5,113Income tax expense
    
    
    (240
    )
    
    
    9,450
    
    
    
    8,373Net loss
    
    $
    (171,568
    )
    
    $
    (258,923
    )
    
    $
    (3,260
    )Net loss per share  basic
    
    $
    (5.06
    )
    
    $
    (7.68
    )
    
    $
    (0.13
    )Weighted average number of common shares outstanding  basic
    
    
    33,913,379
    
    
    
    33,701,735
    
    
    
    24,696,762Net loss per share  diluted
    
    $
    (5.06
    )
    
    $
    (7.68
    )
    
    $
    (0.13
    )Weighted average number of common shares outstanding  diluted
    
    
    33,913,379
    
    
    
    33,701,735
    
    
    
    24,696,762
  40




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##### Table of Contents



MERGE HEALTHCARE INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 2005, 2006 and 2007
(in thousands, except for share data)
 Preferred Stock
    
    
    Common Stock
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    Deferred
    
    
    
    
    
    
    Other
    
    
    TotalShares
    
    
    Issued
    
    
    Shares
    
    
    Subscribed
    
    
    Shares
    
    
    Issued
    
    
    Paidin
    
    
    Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    ShareholdersIssued
    
    
    Amount
    
    
    Subscribed
    
    
    Amount
    
    
    Issued
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Deficit
    
    
    Income
    
    
    EquityBalance at December 31, 2004
    
    
    
    
    
    $
    
    
    
    
    817
    
    
    $
    14
    
    
    
    13,186,185
    
    
    $
    132
    
    
    $
    55,418
    
    
    $
    
    
    
    $
    (1,207
    )
    
    $
    592
    
    
    $
    54,949Cedara Exchange of share rights into Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,080,922
    
    
    
    61
    
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock issued and options granted for
acquisitions, net of costs to issue shares
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,581,517
    
    
    
    56
    
    
    
    380,794
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    380,850Shares retired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90,000
    )
    
    
    (1
    )
    
    
    (1,603
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,604
    )Stock issued under ESPP
    
    
    
    
    
    
    
    
    
    
    (111
    )
    
    
    3
    
    
    
    3,573
    
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,737,943
    
    
    
    17
    
    
    
    9,491
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,508Sharebased compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    (1,245
    )
    
    
    
    
    
    
    
    
    
    
    (1,153
    )Legal fees S3/S8 filings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )Nasdaq fees for increased trading shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Tax benefit on exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,811
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,811Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,260
    )
    
    
    
    
    
    
    (3,260
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,476
    
    
    
    1,476Balance at December 31, 2005
    
    
    1
    
    
    $
    
    
    
    
    706
    
    
    $
    17
    
    
    
    26,500,140
    
    
    $
    265
    
    
    $
    445,954
    
    
    $
    (1,245
    )
    
    $
    (4,467
    )
    
    $
    2,068
    
    
    $
    442,592Cedara Exchange of share rights into Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,561,085
    
    
    
    26
    
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock issued under ESPP
    
    
    
    
    
    
    
    
    
    
    4,536
    
    
    
    16
    
    
    
    706
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229,099
    
    
    
    2
    
    
    
    469
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    471Sharebased compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,961
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,961Reduction of deferred stock compensation for
application of FAS 123R
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,245
    )
    
    
    1,245
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258,923
    )
    
    
    
    
    
    
    (258,923
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (209
    )
    
    
    (209
    )Balance at December 31, 2006
    
    
    1
    
    
    $
    
    
    
    
    5,242
    
    
    $
    33
    
    
    
    29,291,030
    
    
    $
    293
    
    
    $
    451,130
    
    
    $
    
    
    
    $
    (263,390
    )
    
    $
    1,859
    
    
    $
    189,925Cedara Exchange of share rights into Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,879,672
    
    
    
    29
    
    
    
    (29
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock issued under ESPP
    
    
    
    
    
    
    
    
    
    
    (5,242
    )
    
    
    (33
    )
    
    
    21,494
    
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,504
    
    
    
    
    
    
    
    126
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126Sharebased compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,023
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,023Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (171,568
    )
    
    
    
    
    
    
    (171,568
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    811
    
    
    
    811Balance at December 31, 2007
    
    
    1
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    32,237,700
    
    
    $
    322
    
    
    $
    456,371
    
    
    $
    
    
    
    $
    (434,958
    )
    
    $
    2,670
    
    
    $
    24,405
  41




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##### Table of Contents



MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (171,568
    )
    
    $
    (258,923
    )
    
    $
    (3,260
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation, amortization and related impairment
    
    
    16,746
    
    
    
    9,565
    
    
    
    11,288Share-based compensation
    
    
    5,009
    
    
    
    5,961
    
    
    
    979In-process research and development
    
    
    
    
    
    
    
    
    
    
    13,046Goodwill and trade name impairment charge
    
    
    123,171
    
    
    
    218,810
    
    
    
    Other-than-temporary impairment on equity investments
    
    
    1,166
    
    
    
    186
    
    
    
    Provision for doubtful accounts receivable and sales returns, net of recoveries
    
    
    1,100
    
    
    
    829
    
    
    
    978Deferred income taxes
    
    
    (202
    )
    
    
    11,160
    
    
    
    7,661Changes in operating assets and liabilities:Accounts receivable
    
    
    3,517
    
    
    
    6,038
    
    
    
    (5,421
    )Inventory
    
    
    410
    
    
    
    276
    
    
    
    (439
    )Prepaid expenses
    
    
    (310
    )
    
    
    986
    
    
    
    (76
    )Accounts payable
    
    
    (1,170
    )
    
    
    2,370
    
    
    
    (3,474
    )Accrued wages
    
    
    (3,410
    )
    
    
    268
    
    
    
    765Deferred revenue
    
    
    (3,087
    )
    
    
    (13,040
    )
    
    
    6,789Other accrued liabilities
    
    
    (750
    )
    
    
    (780
    )
    
    
    (19
    )Other
    
    
    787
    
    
    
    1,334
    
    
    
    (5,215
    )Net cash provided by (used in) operating activities
    
    
    (28,591
    )
    
    
    (14,960
    )
    
    
    23,602Cash flows from investing activities:Cash acquired in acquisitions, net of cash paid
    
    
    
    
    
    
    
    
    
    
    9,644Purchases of property, equipment, and leasehold improvements
    
    
    (2,665
    )
    
    
    (1,252
    )
    
    
    (2,996
    )Purchased technology
    
    
    
    
    
    
    (367
    )
    
    
    Capitalized software development
    
    
    (817
    )
    
    
    (2,257
    )
    
    
    (3,621
    )Net cash provided by (used in) investing activities
    
    
    (3,482
    )
    
    
    (3,876
    )
    
    
    3,027Cash flows from financing activities:Proceeds from exercise of stock options and employee stock purchase plan
    
    
    214
    
    
    
    504
    
    
    
    9,573Net cash provided by financing activities
    
    
    214
    
    
    
    504
    
    
    
    9,573Effect of exchange rates on cash and cash equivalents
    
    
    (86
    )
    
    
    (1
    )
    
    
    9Net increase (decrease) in cash and cash equivalents
    
    
    (31,945
    )
    
    
    (18,333
    )
    
    
    36,211Cash and cash equivalents, beginning of period
    
    
    45,945
    
    
    
    64,278
    
    
    
    28,067Cash and cash equivalents, end of period
    
    $
    14,000
    
    
    $
    45,945
    
    
    $
    64,278Supplemental Disclosures of Cash Flow Information:Cash paid for income taxes, net of refunds
    
    $
    (247
    )
    
    $
    69
    
    
    $
    286Equity securities received in sales transactions
    
    $
    
    
    
    $
    2,010
    
    
    $
    4,606Non-cash Investing and Financing activities:Value of Common Stock and options issued for acquisitions
    
    $
    
    
    
    $
    
    
    
    $
    381,689
  42




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##### Table of Contents



MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Net loss
    
    $
    (171,568
    )
    
    $
    (258,923
    )
    
    $
    (3,260
    )Translation adjustment, net of income taxes
    
    
    (152
    )
    
    
    (89
    )
    
    
    815Unrealized gain (loss) on marketable
securities, net of income taxes
    
    
    961
    
    
    
    (58
    )
    
    
    79Comprehensive net loss
    
    $
    (170,759
    )
    
    $
    (259,070
    )
    
    $
    (2,366
    )
  43




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements
 (In thousands, except for share and per share data)
 (1) Basis of Presentation and Significant Accounting Policies
 Nature of Operations
  Liquidity
  Principles of Consolidation
    Reporting Periods Presented
  Use of Estimates
  44




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 Reclassifications
  Segment Reporting
 Disclosures about Segments of an Enterprise and Related Information
  Functional Currency
   Fair Value of Financial Instruments
  Derivative Financial Instruments
 Accounting for Derivative Instruments and Hedging
Activities
 45




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 Cash and Cash Equivalents
  Inventory
  Property and Equipment
   LongLived Assets
 Accounting for the
Impairment or Disposal of LongLived Assets
 Developed Software
 Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed
  Investments
  46




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets
 Warranties
  Guarantees
 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
   Income Taxes
 Accounting for Uncertainty in Income Taxesan
Interpretation of FASB Statement No. 109 Accounting for Income Taxes.
 47




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
  Definition of Settlement in FASB
Interpretation No. 48 FSP FIN No. 48-1.
 Accounting for Income Taxes
   Revenue Recognition
  48




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 Software Revenue Recognition Revenue Arrangements with Multiple Deliverables
 . Modification of SOP No. 972, Software Revenue
Recognition, With Respect to Certain Transactions . Revenue
Recognition
    Accounting for
Performance on ConstructionType and Certain ProductionType Contracts
  49




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
   Revenue Recognition When the Right of Return Exists
  Income
Statement Characterization of Reimbursements Received for OutofPocket Expenses Incurred Accounting for Shipping and Handling Fees How Sales Taxes Collected from Customers and Remitted to Governmental Authorities
Should be Presented in the Income Statement (That Is, Gross Versus Net Presentation)
 ShareBased Compensation
 ShareBased Payment Accounting for StockBased Compensation Accounting for Stock Issued to Employees (APB No. 25)
  Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 50




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
  Accounting for Advance Payments for Goods or
Services to Be Used in Future Research and Development Activities
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51
 (2) Goodwill and Other Intangibles
   51




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
       WeightedAverage
    
    
    December 31, 2007
    
    
    December 31, 2006Remaining
    
    
    Gross
    
    
    
    
    
    
    GrossAmortization
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedPeriod (Years)
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationPurchased technology
    
    
    3.3
    
    
    $
    12,571
    
    
    $
    (5,518
    )
    
    $
    16,990
    
    
    $
    (6,130
    )Customer
relationships
    
    
    3.4
    
    
    
    3,550
    
    
    
    (259
    )
    
    
    13,477
    
    
    
    (3,966
    )Patents
    
    
    0.0
    
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    (10
    )Total
    
    
    
    
    
    $
    16,121
    
    
    $
    (5,777
    )
    
    $
    30,584
    
    
    $
    (10,106
    )
  52




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
   For the year ended December 31:
    
    
    2008
    
    
    $
    3,1182009
    
    
    
    3,0662010
    
    
    
    2,9402011
    
    
    
    1,2202012
    
    
    
    
  (3) Earnings Per Share
  Years Ended December 31,2007
    
    
    2006
    
    
    2005Numerator:Net loss
    
    $
    (171,568
    )
    
    $
    (258,923
    )
    
    $
    (3,260
    )Denominator:Weighted average
number of shares of
Common Stock
outstanding
    
    
    33,913,379
    
    
    
    33,701,735
    
    
    
    24,696,762Net loss per share  basic and diluted
    
    $
    (5.06
    )
    
    $
    (7.68
    )
    
    $
    (0.13
    )
   53




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
   2007
    
    
    2006
    
    
    2005Stock options
    
    
    4,081,060
    
    
    
    3,571,799
    
    
    
    2,979,139Restricted stock awards
    
    
    1,699,995
    
    
    
    
    
    
    
    Exchangeable shares
    
    
    1,688,483
    
    
    
    4,568,155
    
    
    
    7,129,2467,469,538
    
    
    
    8,139,954
    
    
    
    10,108,385
 (4) ShareBased Compensation
  Years Ended December 31,2007
    
    
    2006Share-based compensation expense included in the statement of operations:Services and maintenance (cost of sales)
    
    $
    414
    
    
    $
    542Sales and marketing
    
    
    1,188
    
    
    
    1,047Product research and development
    
    
    1,071
    
    
    
    1,186General and administrative
    
    
    2,336
    
    
    
    3,136Total
    
    
    5,009
    
    
    
    5,911Tax benefit
    
    
    
    
    
    
    1,368Share-based compensation expense, net of tax
    
    $
    5,009
    
    
    $
    4,543Increase in basic loss per share
    
    $
    0.15
    
    
    $
    0.13Increase in diluted loss per share
    
    $
    0.15
    
    
    $
    0.13
   54




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 Years Ended December 31,2007
    
    
    2006
    
    
    2005(Pro Forma)Net loss(1)
    
    $
    (171,568
    )
    
    $
    (258,923
    )
    
    $
    (3,260
    )Sharebased employee
compensation expense included
in reported net loss, net of
tax effect(2)
    
    
    N/A
    
    
    
    N/A
    
    
    
    587Sharebased employee
compensation expense
determined under fair value
method for all awards, net of
tax effect(2)
    
    
    N/A
    
    
    
    N/A
    
    
    
    (4,101
    )Net loss, including the effect
of sharebased employee
compensation expense
    
    $
    (171,568
    )
    
    $
    (258,923
    )
    
    $
    (6,774
    )Net loss per shareBasic:Net loss as reported(1)
    
    $
    (5.06
    )
    
    $
    (7.68
    )
    
    $
    (0.13
    )Net loss, including the effect
of sharebased employee
compensation expense
    
    
    N/A
    
    
    
    N/A
    
    
    $
    (0.27
    )Net loss per shareDiluted:Net loss as reported(1)
    
    $
    (5.06
    )
    
    $
    (7.68
    )
    
    $
    (0.13
    )Net loss, including the effect
of sharebased employee
compensation expense
    
    
    N/A
    
    
    
    N/A
    
    
    $
    (0.27
    )
 
 (1)
    
    Net loss and net loss per share prior to 2006 do not include sharebased employee
compensation expense under SFAS No. 123, as we had only adopted the disclosure provisions of
SFAS No. 123.(2)
    
    Sharebased employee compensation expense prior to 2006 was calculated in accordance with
SFAS No. 123. Share-Based Compensation Plans
     55




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
   Stock Options
  Years Ended December 31,2007
    
    2006
    
    2005Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    55%-65
    %
    
    
    50%-60
    %
    
    
    30%-50
    %Riskfree interest rate
    
    
    4.2%-4.9
    %
    
    
    4.3%-4.8
    %
    
    
    2.8%-4.3
    %Expected term (in years)
    
    
    3.5-4.0
    
    
    
    3.5-4.0
    
    
    
    0.2-3.5Weightedaverage grant date fair value
    
    $
    3.91
    
    
    $
    3.98
    
    
    $
    5.34
    WeightedAverageRemainingNumber
    
    Weighted
    
    Contractual
    
    AggregateOf
    
    Average
    
    Term
    
    IntrinsicOptions
    
    Exercise Price
    
    (In Years)
    
    ValueOptions outstanding, December 31, 2006
    
    
    3,571,799
    
    
    $
    10.48
    
    
    
    5.0
    
    
    $
    1,035Options granted
    
    
    1,471,483
    
    
    $
    5.34Options exercised
    
    
    (46,129
    )
    
    $
    2.85Options forfeited and expired
    
    
    (916,093
    )
    
    $
    11.22Options outstanding, December 31, 2007
    
    
    4,081,060
    
    
    $
    8.52
    
    
    
    4.8
    
    
    $
    1Options exercisable, December 31, 2007
    
    
    1,831,917
    
    
    $
    10.08
    
    
    
    4.6
    
    
    $
    1Options exercisable, December 31, 2006
    
    
    1,382,857
    
    
    $
    10.60
    
    
    
    4.8
    
    
    $
    697Options exercisable, December 31, 2005
    
    
    1,040,883
    
    
    $
    11.84
    
    
    
    4.6
    
    
    $
    13,735
 56




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
   Years Ended December 31,2007
    
    2006
    
    2005Total fair value of stock options vested
    
    $
    3,155
    
    
    $
    7,289
    
    
    $
    5,894Total intrinsic value of stock options exercised
    
    $
    108
    
    
    $
    1,446
    
    
    $
    24,469
  Options Outstanding
    
    Options ExercisableWeightedAverageremaining
    
    Weighted
    
    
    
    
    
    WeightedNumber of
    
    Contractual life
    
    average
    
    Number of
    
    AverageRange of exercise prices
    
    shares
    
    in years
    
    exercise price
    
    shares
    
    exercise price$1.00  $4.54
    
    
    230,708
    
    
    
    2.3
    
    
    $
    3.75
    
    
    
    210,708
    
    
    $
    3.73$4.69  $6.00
    
    
    925,709
    
    
    
    5.1
    
    
    
    5.10
    
    
    
    42,500
    
    
    
    5.73$6.01  $7.87
    
    
    1,263,661
    
    
    
    5.9
    
    
    
    6.30
    
    
    
    496,584
    
    
    
    6.34$8.05  $12.49
    
    
    860,127
    
    
    
    4.5
    
    
    
    8.22
    
    
    
    485,815
    
    
    
    8.36$12.96  $24.88
    
    
    800,855
    
    
    
    3.7
    
    
    
    17.66
    
    
    
    596,310
    
    
    
    17.154,081,060
    
    
    
    4.8
    
    
    $
    8.52
    
    
    
    1,831,917
    
    
    $
    10.08
 Restricted Stock Awards
    WeightedAverageRemainingNumber
    
    WeightedAverage
    
    VestingOf
    
    Grant-date
    
    TermShares
    
    Fair Value
    
    (In Years)Restricted stock outstanding, December 31, 2006
    
    
    
    
    
    $
    
    
    
    
    Restricted stock granted
    
    
    1,699,995
    
    
    
    1.50
    
    
    
    2.9Restricted stock forfeited
    
    
    
    
    
    
    
    
    
    
    Restricted stock outstanding, December 31, 2007
    
    
    1,699,995
    
    
    $
    1.50
    
    
    
    2.9
 57




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
  Employee Stock Purchase Plan
    (5) Shareholders Equity
 Common Stock Repurchase Plan
  Special Voting Preferred Stock
  Series 2 Special Voting Preferred Stock
  Series 3 Special Voting Preferred Stock
  Series B Junior Participating Preferred Stock
  58




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
   Exchangeable Shares
   (6) Income Taxes
  2007
    
    
    2006
    
    
    2005United States
    
    $
    (135,575
    )
    
    $
    (218,274
    )
    
    $
    (4,037
    )Foreign
    
    
    (36,233
    )
    
    
    (31,199
    )
    
    
    9,150$
    (171,808
    )
    
    $
    (249,473
    )
    
    $
    5,113
  2007
    
    
    2006
    
    
    2005Current:Federal
    
    $
    88
    
    
    $
    313
    
    
    $
    2,816State
    
    
    14
    
    
    
    (60
    )
    
    
    963Foreign
    
    
    
    
    
    
    28
    
    
    
    669Total current
    
    
    102
    
    
    
    281
    
    
    
    4,448
 59




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 2007
    
    
    2006
    
    
    2005Deferred:Federal
    
    
    (97
    )
    
    
    8,332
    
    
    
    1,588State
    
    
    (35
    )
    
    
    1,619
    
    
    
    (299
    )Foreign
    
    
    (210
    )
    
    
    (782
    )
    
    
    2,636Total deferred
    
    
    (342
    )
    
    
    9,169
    
    
    
    3,925Total provision
    
    $
    (240
    )
    
    $
    9,450
    
    
    $
    8,373
  Years Ended December 31,2007
    
    
    2006
    
    
    2005Expected tax expense (benefit)
    
    $
    (58,415
    )
    
    $
    (84,820
    )
    
    $
    1,789Total increase in income taxes resulting from:Nondeductible amortization and acquired inprocess technology
    
    
    
    
    
    
    
    
    
    
    4,566Nondeductible impairment of goodwill
    
    
    41,606
    
    
    
    72,793
    
    
    
    Change in valuation allowance allocated to income tax expense
    
    
    16,120
    
    
    
    21,339
    
    
    
    Extraterritorial income tax benefit
    
    
    
    
    
    
    (219
    )
    
    
    (323
    )Research and experimentation credit
    
    
    
    
    
    
    (209
    )
    
    
    Employee stock options
    
    
    829
    
    
    
    896
    
    
    
    Nondeductible expenses
    
    
    120
    
    
    
    175
    
    
    
    484Foreign income taxes, net of federal income tax benefit
    
    
    
    
    
    
    7
    
    
    
    (407
    )State and local income taxes, net of federal income tax benefit
    
    
    (498
    )
    
    
    (229
    )
    
    
    441Foreign income tax rate differential
    
    
    560
    
    
    
    (753
    )
    
    
    149Business combination tax restructuring
    
    
    
    
    
    
    
    
    
    
    1,308Other
    
    
    (562
    )
    
    
    470
    
    
    
    366Actual income tax expense (benefit)
    
    $
    (240
    )
    
    $
    9,450
    
    
    $
    8,373
  December 31,2007
    
    
    2006Deferred tax assets:Accrued wages
    
    $
    668
    
    
    $
    1,175Deferred revenue
    
    
    767
    
    
    
    437Depreciation
    
    
    3,191
    
    
    
    1,086Research and experimentation credit carry forwards
    
    
    4,173
    
    
    
    4,140Other credit carry forwards
    
    
    1,853
    
    
    
    1,515Net operating loss carry forwards
    
    
    17,056
    
    
    
    11,872Foreign net operating loss carry forwards
    
    
    17,007
    
    
    
    19,168Nonqualified stock options
    
    
    2,388
    
    
    
    1,381Other
    
    
    2,496
    
    
    
    2,876Total gross deferred tax assets
    
    
    49,599
    
    
    
    43,650Less: asset valuation allowance
    
    
    (40,925
    )
    
    
    (30,018
    )Net deferred tax asset
    
    
    8,674
    
    
    
    13,632Deferred tax liabilities:Software development costs and intangible assets
    
    
    (1,615
    )
    
    
    (5,198
    )
 60




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 December 31,2007
    
    
    2006Intangiblescustomer contracts & tradenames
    
    
    (1,126
    )
    
    
    (3,554
    )Other
    
    
    (1,345
    )
    
    
    (860
    )Total gross deferred liabilities
    
    
    (4,086
    )
    
    
    (9,612
    )Net deferred tax asset
    
    $
    4,588
    
    
    $
    4,020Included on balance sheet:Current assets: Deferred income taxes
    
    $
    260
    
    
    $
    196Noncurrent asset: Deferred income taxes
    
    
    4,585
    
    
    
    4,326Noncurrent liabilities: Deferred income taxes
    
    
    (257
    )
    
    
    (502
    )Net deferred income taxes
    
    $
    4,588
    
    
    $
    4,020
      i.e.
  61




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
   Balance at January 1, 2007
    
    $
    5,747Gross increases  tax positions in current year
    
    
    323Balance at December 31, 2007
    
    $
    6,070
    (7) Accounts Receivable
    AdditionsBalance at
    
    Additions
    
    charged tobeginning of
    
    due to
    
    revenue and
    
    
    
    
    
    Balance atDescription
    
    period
    
    acquisitions
    
    expenses
    
    Deductions
    
    end of periodFor year ended December 31, 2007:Allowance for doubtful accounts and sales returns
    
    $
    2,553
    
    
    $
    
    
    
    $
    1,100
    
    
    $
    (1,444
    )
    
    $
    2,209For year ended December 31, 2006:Allowance for doubtful accounts and sales returns
    
    $
    2,222
    
    
    $
    
    
    
    $
    829
    
    
    $
    (498
    )
    
    $
    2,553For year ended December 31, 2005:Allowance for doubtful accounts and sales returns
    
    $
    525
    
    
    $
    719
    
    
    $
    1,267
    
    
    $
    (289
    )
    
    $
    2,222
 (8) Commitments and Contingencies
  62




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
     63




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
  (9) Leases
   2008
    
    
    2,4972009
    
    
    1,9912010
    
    
    9112011
    
    
    6362012
    
    
    342Thereafter
    
    
    860Total minimum lease payments
    
    $
    7,237
 (10) Restructuring
    AccruedRestructuringBalance at December 31, 2004
    
    $
    Charges to expense
    
    
    530Payments
    
    
    (338
    )Balance at December 31, 2005
    
    $
    192Charges to expense
    
    
    2,725Payments
    
    
    (920
    )Balance at December 31, 2006
    
    $
    1,997Charges to expense
    
    
    960Payments
    
    
    (2,826
    )Balance at December 31, 2007
    
    $
    131
 64




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
  (11) Employee Benefit Plan
  (12) Segment Information
   Year Ended December 30, 2007Merge Healthcare
    
    
    
    
    
    
    Merge HealthcareNorth America
    
    
    Cedara Software
    
    
    EMEA
    
    
    TotalNet sales:Software and other
    
    $
    14,473
    
    
    $
    12,919
    
    
    $
    2,198
    
    
    $
    29,590Service and maintenance
    
    
    19,575
    
    
    
    8,797
    
    
    
    1,610
    
    
    
    29,982Total net sales
    
    $
    34,048
    
    
    $
    21,716
    
    
    $
    3,808
    
    
    $
    59,572
 Year Ended December 30, 2006Merge Healthcare
    
    
    
    
    
    
    Merge HealthcareNorth America
    
    
    Cedara Software
    
    
    EMEA
    
    
    TotalNet sales:Software and other
    
    $
    26,816
    
    
    $
    11,922
    
    
    $
    1,537
    
    
    $
    40,275Service and maintenance
    
    
    25,142
    
    
    
    8,154
    
    
    
    751
    
    
    
    34,047Total net sales
    
    $
    51,958
    
    
    $
    20,076
    
    
    $
    2,288
    
    
    $
    74,322
 Cash in Excess of Federally Insured Amount
  Net Sales and Accounts Receivable
  65




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
     Net Sales2007
    
    
    2006
    
    
    2005United States of America
    
    $
    46,330
    
    
    $
    60,660
    
    
    $
    49,181Japan
    
    
    3,232
    
    
    
    3,394
    
    
    
    24,377Europe
    
    
    7,244
    
    
    
    7,024
    
    
    
    6,626Canada
    
    
    1,236
    
    
    
    2,139
    
    
    
    1,877Other
    
    
    1,530
    
    
    
    1,105
    
    
    
    477Total net sales
    
    $
    59,572
    
    
    $
    74,322
    
    
    $
    82,538
 Long-Lived Assets2007
    
    2006United States of America
    
    $
    3,044
    
    
    $
    2,576Canada
    
    
    816
    
    
    
    1,096Europe
    
    
    221
    
    
    
    231India
    
    
    510
    
    
    
    Other
    
    
    40
    
    
    
    37
  (13) Quarterly Results (unaudited)
 2007 Quarterly ResultsMarch 31
    
    June 30
    
    September 30
    
    December 31Net sales
    
    $
    15,874
    
    
    $
    14,036
    
    
    $
    14,054
    
    
    $
    15,608Loss before income taxes
    
    
    (9,707
    )
    
    
    (10,729
    )
    
    
    (141,840
    )
    
    
    (9,532
    )Net loss
    
    
    (9,721
    )
    
    
    (10,740
    )
    
    
    (141,554
    )
    
    
    (9,553
    )Basic loss per share
    
    $
    (0.29
    )
    
    $
    (0.32
    )
    
    $
    (4.17
    )
    
    $
    (0.28
    )Diluted loss per share
    
    
    (0.29
    )
    
    
    (0.32
    )
    
    
    (4.17
    )
    
    
    (0.28
    )
 2006 Quarterly ResultsMarch 31
    
    June 30
    
    September 30
    
    December 31Net sales
    
    $
    16,140
    
    
    $
    31,437
    
    
    $
    13,889
    
    
    $
    12,856Loss before income taxes
    
    
    (6,820
    )
    
    
    (209,404
    )
    
    
    (10,080
    )
    
    
    (23,169
    )Net loss
    
    
    (5,320
    )
    
    
    (211,019
    )
    
    
    (11,205
    )
    
    
    (31,379
    )Basic loss per share
    
    $
    (0.16
    )
    
    $
    (6.27
    )
    
    $
    (0.33
    )
    
    $
    (0.93
    )Diluted loss per share
    
    
    (0.16
    )
    
    
    (6.27
    )
    
    
    (0.33
    )
    
    
    (0.93
    )
 66




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 (14)
    
    Subsequent Events
   67




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##### Table of Contents



Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
   Item 9A. CONTROLS AND PROCEDURES
 (a) Disclosure Controls and Procedures
   (b) Managements Report on Internal Control Over Financial Reporting
   Internal ControlIntegrated Framework
   68




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##### Table of Contents



(c) Report of Independent Registered Public Accounting Firm
 
 Internal Control  Integrated
Framework
      Internal Control  Integrated Framework
  
 69




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##### Table of Contents



(d) Changes in Internal Control Over Financial Reporting
  (e) Remediation Efforts to Address Material Weakness in Internal Control Over Financial Reporting
  
 Item 9B. OTHER INFORMATION
  
 PART III
  
 Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 Executive Officers
  Name
    
    Age
    
    PositionKenneth D. Rardin
    
    
    57
    
    
    President and Chief Executive Officer, DirectorGary D. Bowers
    
    
    55
    
    
    President, Merge Healthcare North AmericaJacques F. Cornet
    
    
    52
    
    
    President, Merge Healthcare EMEASteven R. Norton
    
    
    46
    
    
    Executive Vice President and Chief Financial OfficerLoris Sartor
    
    
    50
    
    
    President, Cedara Software
 Kenneth D. Rardin,
 Gary D. Bowers
 70




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##### Table of Contents



Jacques F. Cornet
 Steven R. Norton
 Loris Sartor
  
 Item 11. EXECUTIVE COMPENSATION
  
 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
 STOCKHOLDER MATTERS
  
 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  
 PART IV
 
 Item 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
 71




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##### Table of Contents



(a)
    
    The following documents are filed as part of this annual report:
  
    
    Consolidated Balance Sheets at December 31, 2007 and December 31, 2006;
    
    Consolidated Statements of Operations for each of the three years ended
December 31, 2007, December 31, 2006 and December 31, 2005;
    
    Consolidated Statements of Shareholders Equity for each of the three years ended
December 31, 2007, December 31, 2006 and December 31, 2005;
    
    Consolidated Statements of Cash Flows for each of the three years ended
December 31, 2007, December 31, 2006 and December 31, 2005;
    
    Consolidated Statements of Comprehensive Income (Loss) for each of the three years
ended December 31, 2007, December 31, 2006 and December 31, 2005; and
    
    Notes to Consolidated Financial Statements.
 (b)
    
    See Exhibit Index that follows.
 
 Exhibit Index
 3.1
    
    Articles of Incorporation of Registrant(A), Articles of Amendment as filed on December 28,
1998 (B) Articles of Amendment as filed on September 2, 1999(C), Articles of Amendment as
filed on February 23, 2001(C), Articles of Amendment as filed on August 9, 2002(D), Articles
of Amendment as filed on May 27, 2005(E), Articles of Amendment as filed on September 6,
2006(F), and Articles of Amendment filed on February 21, 2008 (G)3.2
    
    Amended and Restated Bylaws of Registrant(F)4.1
    
    Rights Agreement, dated as of September 6, 2006, between the Registrant and American Stock
Transfer & Trust Co.(F)10.1
    
    Employment Agreement entered into as of March 1, 2004, between Registrant and Richard A.
Linden(D)*10.2
    
    Employment Agreement entered into as of March 1, 2004, between Registrant and William C.
Mortimore(D)*10.3
    
    Employment Agreement entered into as of March 1, 2004, between Registrant and Scott T.
Veech(D)*10.4
    
    Letter Agreement dated May 12, 2006, between Registrant and Scott T. Veech(H)*10.5
    
    Employment Agreement entered into as of April 1, 2006, between Registrant and David M.
Noshay(I)*10.6
    
    Key Officer Agreement entered into as of October 12, 2005, by and between Registrant and
Steven M. Oreskovich(J)*10.7
    
    Letter Agreement dated July 2, 2006 by and between Registrant and Steven M. Oreskovich(K)*10.8
    
    1996 Stock Option Plan for Employees of Registrant dated May 13, 1996(D), as amended and
restated in its entirety as of September 1, 2003(L)*10.9
    
    Employment Agreement entered into as of September 6, 2006, between the Registrant and
Kenneth D. Rardin (F), as amended December 27, 2007 (M)*10.10
    
    Employment Agreement entered into as of January 8, 2007 between the Registrant and Steven R.
Norton(N)*10.11
    
    Employment Agreement entered into as of February 5, 2007 between the Registrant and Gary
Bowers(O)*10.12
    
    1998 Stock Option Plan For Directors(P)*10.13
    
    2003 Stock Option Plan of Registrant dated June 24, 2003, and effective July 17, 2003(L)*10.14
    
    2005 Equity Incentive Plan adopted March 4, 2005, and effective May 24, 2005(Q)*10.15
    
    Form of NonQualified Stock Option Agreement under Registrants 2005 Equity Incentive Plan(J)*10.16
    
    Form of Employee Incentive Stock Option Agreement under Registrants 2005 Equity Incentive
Plan(J)*




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10.17
    
    Form of Director NonQualified Stock Option Agreement under Registrants 2005 Equity
Incentive Plan(J)*14.1
    
    Code of Ethics(D)14.2
    
    Whistleblower Policy(D)21
    
    Subsidiaries of Registrant23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certification of Chief Executive Officer (principal executive officer) Pursuant to
Rule 13a14(a) under the Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer (principal accounting officer) Pursuant to
Rule 13a14(a) under the Securities Exchange Act of 193432
    
    Certification of Chief Executive Officer (principal executive officer) and Chief Financial
Officer (principal accounting officer) Pursuant to Section 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the SarbanesOxley Act of 200299
    
    Amended and Restated Audit Committee Charter(M)
 
 (A)
    
    Incorporated by reference from Registration Statement on Form SB2 (No. 33339111), effective
January 29, 1998.(B)
    
    Incorporated by reference from Quarterly Report on Form 10QSB for the three months ended
March 31, 1999.(C)
    
    Incorporated by reference from Annual Report on Form 10KSB for the year ended December 31,
2000.(D)
    
    Incorporated by reference from Annual Report on Form 10K for the year ended December 31,
2003.(E)
    
    Incorporated by reference from Current Report on Form 8K dated June 7, 2005.(F)
    
    Incorporated by reference from Current Report on Form 8K dated September 6, 2006.(G)
    
    Incorporated by reference from Quarterly Report on Form 10Q for the three months ended
September 30, 2007.(H)
    
    Incorporated by reference from Current Report on Form 8K dated May 12, 2006.(I)
    
    Incorporated by reference from Current Report on Form 8K dated April 1, 2006.(J)
    
    Incorporated by reference from Annual Report on Form 10K for the year ended December 31,
2005.(K)
    
    Incorporated by reference from Current Report on Form 8K dated June 29, 2006.(L)
    
    Incorporated by reference from Quarterly Report on Form 10Q for the three months ended
September 30, 2003.(M)
    
    Incorporated by reference from Quarterly Report on Form 10Q for the three months ended
June 30, 2007.(N)
    
    Incorporated by reference from the Registrants Current Report on Form 8K dated January 16,
2007.(O)
    
    Previously filed and incorporated by reference from Annual Report on Form 10-K for the year
ended December 31, 2006.(P)
    
    Incorporated by reference from Annual Report on Form 10KSB for the fiscal year ended
December 31, 1997.(Q)
    
    Incorporated by reference from Registration Statement on Form S8 (No. 333125386) effective
June 1, 2005.*
    
    Management contract, or compensatory plan, or arrangement, required to be filed as an exhibit
to this Annual Report on Form 10-K.




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##### Table of Contents



SIGNATURES
  Merge Healthcare IncorporatedDate: April 1, 2008
    By:
    /s/ Kenneth D. RardinKenneth D. RardinPresident and Chief Executive Officer
(principal executive officer) Date: April 1, 2008
    By:
    /s/ Steven R. NortonSteven R. NortonExecutive Vice President & Chief Financial Officer
(principal financial officer and
principal accounting officer)  Date: April 1, 2008
    By:
    /s/ Michael D. DunhamMichael D. DunhamChairman of the Board Date: April 1, 2008
    By:
    /s/ Robert A. BarishRobert A. Barish, M. D.Director Date: April 1, 2008
    By:
    /s/ Dennis BrownDennis BrownDirector Date: April 1, 2008
    By:
    /s/ Robert T. GerasRobert T. GerasDirector Date: April 1, 2008
    By:
    /s/ Anna Marie HajekAnna Marie HajekDirector Date: April 1, 2008
    By:
    /s/ R. Ian LennoxR. Ian LennoxDirector Date: April 1, 2008
    By:
    /s/ Kevin E. MoleyKevin E. MoleyDirector




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##### Table of Contents



Date: April 1, 2008
    By:
    /s/ Kevin G. QuinnKevin G. QuinnDirector Date: April 1, 2008
    By:
    /s/ Ramamritham RamkumarRamamritham RamkumarDirector Date: April 1, 2008
    By:
    /s/ Kenneth D. RardinKenneth D. RardinDirector Date: April 1, 2008
    By:
    /s/ Richard A. ReckRichard A. ReckDirector