##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K/A
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 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 TECHNOLOGIES INCORPORATED
  Wisconsin
    
    391600938(State or other jurisdiction 
of incorporation or organization)
    
    (I. R. S. Employer
Identification No.)
 6737 West Washington Street, Suite 2250, Milwaukee, Wisconsin 532145650
 (414) 9774000
  Common
Stock, $0.01 par value per share
 NONE
  o þ
  o þ
 o þ
 o
  o þ o
  o þ




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##### 



INDEX
 Explanatory Note  Restatement of Financial Information
    
    iiPART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    12Item 1B.
    
    Unresolved Staff Comments
    
    
    22Item 2.
    
    Properties
    
    
    22Item 3.
    
    Legal Proceedings
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    23PART IIItem 5.
    
    Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
    
    
    24Item 6.
    
    Selected Financial Data
    
    
    25Item 7.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    27Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 8.
    
    Financial Statements and Supplementary Data
    
    
    47Item 9.
    
    Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
    
    
    104Item 9A.
    
    Controls and Procedures
    
    
    104Item 9B.
    
    Other Information
    
    
    109PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    109Item 11.
    
    Executive Compensation
    
    
    110Item 12.
    
    Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    110Item 13.
    
    Certain Relationships and Related Transactions
    
    
    110Item 14.
    
    Principal Accountant Fees and Services
    
    
    110PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    111EX-23.1 CONSENT OF KPMG LLPEX-31.1 SECTION 302 CERTIFICATION OF THE PEOEX-31.2 SECTION 302 CERTIFICATION OF THE PFOEX-32 SECTION 906 CERTIFICATIONS OF THE PEO AND PFO




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MERGE TECHNOLOGIES INCORPORATED
 
 EXPLANATORY NOTE  RESTATEMENTS OF FINANCIAL INFORMATION
 This Annual Report on Form 10-K/A for the year ended December 31, 2006, includes (1) a
restated balance sheet as of December 31, 2005 and 2006 (2) restated consolidated statements of
operations, consolidated statements of cash flows, consolidated statements of shareholders equity,
and consolidated statements of comprehensive income (loss) for the years ended December 31, 2004,
2005, and 2006 and (3) restated quarterly financial information for the quarters ended March 31,
2006 and 2005, June 30, 2006 and 2005, September 30, 2006 and 2005, and December 31, 2006 and 2005.
The Company will not file amended periodic reports for any of those affected quarterly periods. The
restatement relates primarily to software license arrangements with 12 customers entered into prior
to January 1, 2006 and net deferred income tax liabilities assumed in the acquisition of Cedara
Software Corp. in June 2005. The contracts at issue include a license of software, installation
services, and related maintenance and support obligations. Management and the Audit Committee
determined that, with respect to these contracts, the Company should recognize the entire value of
the bundled contracts as revenue over the period for which maintenance and support may be provided
to the customer since fair value of the maintenance on a stand-alone basis could not be determined.
This approach is different from the Companys historical practice of recognizing the fair value of
the software over the period of installation and the fair value of the maintenance over the
maintenance period when fair value of the maintenance on a stand-alone basis can be determined.
The Companys restated financial statements reflect the revised method of accounting for these
contracts, income tax adjustments and other adjustments. The following items of the Form 10-K
have been modified or revised in this Amendment No. 1 to Form 10K/A to reflect the restatements:
 Part II, Item 6. Selected Financial Data;
 Part II, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations;
 Part II, Item 8. Financial Statements and Supplementary Data;
 Part II, Item 9A. Controls and Procedures; and
 Part IV, Item 15. Exhibits and Financial Statement Schedules.
 This amended Annual Report on Form 10-K/A sets forth the original Annual Report on Form 10-K
in its entirety, except as required to reflect the effects of the restatements. Except for
disclosures affected by the restatements, this amended Annual Report on Form 10-K/A speaks as of
the original filing date of March 8, 2007 and does not modify or update disclosures in the Form
10-K, including the nature and character of such disclosures, to reflect events occurring or items
discovered after the original filing date of the Form 10-K . Accordingly, this amended Annual Report
on Form 10-K/A should be read in conjunction with the Companys filings made with the Securities
and Exchange Commission subsequent to the original filing date of the Form 10-K , including any
amendments to those filings. The Company has not amended, and does not intend to amend, any of its
other previously filed reports for the periods affected by the restatement. The Companys
previously issued financial statements included in those reports for the years ended December 31,
2004 through December 31, 2006 and for the quarter ended March 31, 2007 should no longer be relied
upon.




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PART I
 
 Item 1. BUSINESS
 Cautionary Note Regarding ForwardLooking Statements
 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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Our Market
  
    
    In 2005, the U.S. market for RIS and PACS, consisting of RIS and enterprise, radiology,
orthopedic and cardiology PACS, was valued at over $1.5 billion.
    
    By 2010, this market will grow to over $3.0 billion, representing a compound annual
growth rate of nearly 15%.
    
    Growth for the RIS market is primarily driven by imaging centers and small hospitals,
particularly those that do not already have a PACS or RIS and elect an integrated RIS/PACS
solution.
    
    Growth for the PACS market is primarily driven by:
 
    
    adoption of EPR;
    
    growing customer receptiveness to PACS;
    
    the conversion from radiology to enterprise PACS solutions;
    
    customer demand for replacement PACS and integrated RIS/PACS solutions;
    
    affordable price points for small hospitals and imaging centers;
    
    growth in diagnostic capabilities for the cardiology market; and
    
    growth of inoffice modalities in the orthopedic market.
 2




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3




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Recent Challenges
  History
   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;
 4




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
    
    More accountability and convenience in working with one vendor that 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 lower cost 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 reduce the need for capital equipment expenditures or disaster recovery;
and
    
    Optimizing imageviewing and diagnostic capabilities.
  
    
    Using our technologies and services to enhance the workflow capabilities of their
solutions;
    
    Accelerating the time to market in the development of new solutions;
    
    Creating greater product differentiation compared to their competitors; and
    
    Leveraging our technical and deployment skills, which facilitates an increased ability
to focus on core competencies.
 Business Strategy
    
    
    Reorganized our business into three distinct business units;
    
    Announced new solutions for deformable registration and image fusion;
    
    Partnered with Advanced Imaging Technologies, a Washington corporation, in the
development of an innovative breast ultrasound system;
 5




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
    
    Released a new .NET DICOM toolkit;
    
    Released Fusion RIS version 3.1;
    
    Released a Spanish version of eFilm Workstation;
    
    Announced a distribution agreement with Medavis GmbH, a German corporation, to provide
RIS software to selected European markets;
    
    Signed an agreement to deliver comprehensive digital orthopedic solutions to healthcare
providers; and
    
    Entered into a partnership with CPAGE, a French public information technology group, to
deliver EPR functionality to the French hospital market based on our aXigate technology.
  
    
    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, expanded presence in other healthcare vertical
markets and expanded product purchases from current customers, ongoing solution selling
training and investment in solution selling tools like returnoninvestment and
costbenefit analyses;
    
    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;
    
    Creating enhanced product offerings such as FUSION MATRIX PACS and FUSION RIS/PACS MX
that expand the functionality of RIS/PACS to clinical applications beyond radiology; and
    
    Innovating technologies and solutions that serve new markets such as orthopedic,
veterinary, pharmaceutical clinical trials, oncology and EPR.
  EndUser Products and Services Description
  6




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OEM Products and Services Descriptions
 ®
    7




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Merge Healthcare Product Portfolio
  FUSION RIS
 FUSION MATRIX PACS
 FUSION PACS
 FUSION RIS/PACS
 Referring Practice Portal
 Connectivity Tools MergePort, MergeCOM3, ExamWorks, MergeMVP, Cedara IAcquire/FD DataBridge
 eFilm Workstation
 Cedara IReadMammo
 Cedara BCAD ®
 8




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Cedara PET/CT
 Cedara OrthoWorks ProPlanner
 Cedara OrthoWorks Spine Analyzer
 Cedara OrthoWorks Care Manager
 CalScore Review
 Colon Review
 Lung Review
 3D/4D Review
 AccuStitch
 Cedara OpenEyes
 Cedara ISoftView
 Cedara IReport
 Cedara IReport CT
 Cedara IRead
 9




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Cedara IView
 Cedara IAcquire
 Cedara Baby Explorer
 Cedara IReach
 Cedara IStore
 Cedara IConference
 ExamWorks ExamWorks+
 Cedara IResponse
 aXigate
 Employees
  Sales, Marketing and Distribution
  10




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Competition
     Intellectual Property Rights
  Medical, Regulatory and Government Standards and Reforms
  11




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
    
    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 Deficit Reduction Act of 2005 (DRA). Effective for services provided
on or after January 1, 2007, the DRA provides 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. See Item 1A, Risk Factors of this Annual Report on
Form 10-K for a discussion of the risks and effects of the DRA.
    
    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 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.
  Other 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
 12




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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 have identified material weaknesses 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 otherwise seriously harm our
business
 The actual costs and savings associated with our reorganization and rightsizing initiatives
may differ materially from amounts we estimate
  We intend to rapidly grow our India operations, which are subject to regulatory, economic and
political uncertainties
  13




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Antioutsourcing legislation, if adopted, could adversely affect our business, financial
condition and results of operations and 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, could negatively impact our business
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Our operating results may be impacted by actions related to the implementation of a new
information technology (or accounting) system
 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
 15




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The turnover in our management team could negatively impact our business and the trading price
of our Common Stock
 Our performance and future success depends on our ability to attract, integrate and retain
qualified technical, managerial and sales personnel
 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
 16




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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
  Our proprietary technology may be subjected to infringement claims or may be infringed upon
which could result in additional costs or lost sales
  17




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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
 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
 18




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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;
    
    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
competitiveness 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.
 19




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We provide our customers with certain warranties which could result in higher costs than we
anticipate
 We may be unable to successfully integrate acquisitions, which could negatively impact our
results
 
    
    an increase in our expenses and working capital requirements in connection with the
integration of the personnel, operations, technologies or products of the acquired
companies;
    
    other financial risks, such as potential liabilities associated with the businesses
that we acquire;
    
    diversion of capital and managements attention from our core business;
    
    adverse effects on business relationships with our existing customers and suppliers and
those of the acquired company;
    
    an increased risk that we become the subject of litigation regarding intellectual
property or other matters;
    
    difficulty in successfully implementing acquired operations, IT systems, customers,
supplier and partner relationships, products and business with our operations;
    
    acquired assets becoming impaired as a result of technical advancements or worse than
expected performance by the acquired company;
    
    entering markets in which we have no, or limited, prior experience; and
    
    potential loss of our key employees and those of the acquired company.
  
    
    issue stock that would dilute existing shareholders percentage of ownership;
    
    incur debt and assume liabilities, perhaps on terms that prove unfavorable to us or our
security holders;
    
    incur significant expenditures related to office closures of the acquired companies,
including costs relating to termination of employees and leasehold improvement charges
relating to vacating the acquired companies or our premises; or
    
    use cash that would otherwise be available to fund operations or to use for other
purposes.
 Product liability suits against us could result in expensive and time consuming litigation,
payment of substantial damages and an increase in our insurance rates
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We may not be able to generate sufficient cash from our operations to meet our future
operating, financing and capital requirements
 We maintain substantial deposits of cash and cash equivalents at a limited number of financial
institutions in excess of amounts covered by insurance. If one or more of these financial
institutions fail, our financial condition may be adversely affected
 Healthcare industry consolidation could impose pressure on our software prices, reduce our
potential client base and reduce demand for our software
 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;
    
    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.
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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
   
 Item 3. LEGAL PROCEEDINGS
  22




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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  VotesAgainst orVotes For
    
    Withheld
    
    ResultElect Robert A. Barish, M. D. to serve as Director
    
    
    12,518,269
    
    
    
    4,475,737
    
    
    ElectedElect Dennis Brown to serve as Director
    
    
    12,706,305
    
    
    
    4,287,701
    
    
    ElectedElect Michael D. Dunham to serve as Director
    
    
    13,369,802
    
    
    
    3,624,204
    
    
    ElectedElect Robert T. Geras to serve as Director
    
    
    13,333,430
    
    
    
    3,660,576
    
    
    ElectedElect Anna Marie Hajek to serve as Director
    
    
    12,514,552
    
    
    
    4,479,454
    
    
    ElectedElect R. Ian Lennox to serve as Director
    
    
    12,909,124
    
    
    
    4,084,882
    
    
    ElectedElect Kevin E. Moley to serve as Director
    
    
    14,033,653
    
    
    
    2,960,353
    
    
    ElectedElect Ramamritham Ramkumar to serve as Director
    
    
    13,209,695
    
    
    
    3,784,311
    
    
    ElectedElect Kenneth D. Rardin to serve as Director
    
    
    14,034,747
    
    
    
    2,959,259
    
    
    ElectedElect Kevin G. Quinn to serve as Director
    
    
    14,035,293
    
    
    
    2,958,713
    
    
    ElectedElect Richard A. Reck to serve as Director
    
    
    12,870,993
    
    
    
    4,123,013
    
    
    Elected
  23




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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 Quarter2006High
    
    $
    8.14
    
    
    $
    8.17
    
    
    $
    16.06
    
    
    $
    27.36Low
    
    $
    5.72
    
    
    $
    6.43
    
    
    $
    11.31
    
    
    $
    15.012005High
    
    $
    30.05
    
    
    $
    20.49
    
    
    $
    20.00
    
    
    $
    22.90Low
    
    $
    16.29
    
    
    $
    16.50
    
    
    $
    14.90
    
    
    $
    17.05
  Dividend Policy
  Recent Sales of Unregistered Securities
   24




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Item 6. SELECTED FINANCIAL DATA
  Year Ended December 31,2006(4)
    
    2005(1)(4)
    
    2004(4)
    
    2003(4)
    
    2002(As restated)
    
    (As restated)
    
    (As restated)
    
    (As restated)(in thousands, except for share and per share data)Statements of Operations Data:Net sales
    
    $
    74,322
    
    
    $
    82,538
    
    
    $
    25,477
    
    
    $
    24,268
    
    
    $
    19,147Operating income (loss)(2)(3)
    
    
    (252,087
    )
    
    
    4,377
    
    
    
    (250
    )
    
    
    3,064
    
    
    
    2,782Income (loss) before income taxes
    
    
    (249,473
    )
    
    
    5,113
    
    
    
    219
    
    
    
    2,962
    
    
    
    2,846Income tax expense (benefit)
    
    
    9,450
    
    
    
    8,373
    
    
    
    (1,444
    )
    
    
    (1,325
    )
    
    
    79Net income (loss)
    
    
    (258,923
    )
    
    
    (3,260
    )
    
    
    1,663
    
    
    
    4,287
    
    
    
    2,767Earnings (loss) per share:Basic
    
    $
    (7.68
    )
    
    $
    (0.13
    )
    
    $
    0.13
    
    
    $
    0.37
    
    
    $
    0.29Diluted
    
    
    (7.68
    )
    
    
    (0.13
    )
    
    
    0.12
    
    
    
    0.34
    
    
    
    0.25Weighted average shares outstanding:Basic
    
    
    33,701,735
    
    
    
    24,696,762
    
    
    
    13,013,927
    
    
    
    11,566,054
    
    
    
    8,840,059Diluted
    
    
    33,701,735
    
    
    
    24,696,762
    
    
    
    13,827,522
    
    
    
    12,586,900
    
    
    
    10,383,651
 As of December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(As restated)
    
    (As restated)
    
    (As restated)
    
    (As restated)(in thousands)Balance Sheet Data:Working capital
    
    $
    27,101
    
    
    $
    56,964
    
    
    $
    22,786
    
    
    $
    18,165
    
    
    $
    7,010Total assets(5)
    
    
    234,875
    
    
    
    500,045
    
    
    
    85,853
    
    
    
    66,110
    
    
    
    27,481Long-term debt
obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity(5)
    
    
    189,925
    
    
    
    442,592
    
    
    
    54,949
    
    
    
    50,709
    
    
    
    20,821
 
 (1)
    
    Includes the results of Cedara Software Corp. from June 1, 2005, the date of our business
combination.(2)
    
    For the years ended December 31, 2005 and 2002, we incurred a charge for acquired in-process
research and development of $13.0 million and $0.1 million, respectively.(3)
    
    For the year ended December 31, 2006, we incurred charges of $214.1 million related to the
impairment of goodwill and $6.7 million related to the impairment of trade names. In addition,
for the years ended December 31, 2006 and 2005, we incurred restructuring charges of
$2.7 million and $0.5 million, respectively.(4)
    
    As disclosed under Explanatory NoteRestatements of Financial Information immediately
preceding Part I, Item 1 of this Annual Report on Form 10-K/A, we have restated certain
financial data for the years ended December 31, 2006, 2005, 2004, and 2003. The effects of
these restatements on net sales were a decrease of $0.7 million, $0.1 million, $0.9 million,
and $0.3 million, respectively, for the years ended December 31, 2006, 2005, 2004, and 2003.
The effects on income before income taxes related to these restatements were an increase
(decrease) of $6.5 million, $(0.1) million, $(0.7) million,
and $(0.2) million, respectively, for the
years ended December 31, 2006, 2005, 2004, and 2003. The effects on net
income for 25




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##### Table of Contents



the periods ended December 31, 2006, 2005, 2004, and 2003 were a decrease of $0.5
million, $0.6 million, $0.5 million, and $0.1 million, respectively. Refer to Note 2 of notes
to consolidated financial statements for additional information.(5)
    
    As disclosed under Explanatory NoteRestatements of Financial Information immediately
preceding Part I, Item 1 of this Annual Report on Form 10-K/A, we have restated certain
financial data as of December 31, 2006, 2005, 2004, and 2003. The effects on total assets were
an increase (decrease) of $0.2 million, $(1.6) million, $0.4 million, and $0.0 million, as of
December 31, 2006, 2005, 2004, and 2003, respectively. The effects on shareholders equity
were a decrease of $1.8 million, $1.2 million, $0.7 million, and $0.1 million as of December
31, 2006, 2005, 2004, and 2003, respectively. 26




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##### Table of Contents



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 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 in this Annual
Report on Form 10-K/A . 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 the consolidated
financial statements and notes thereto appearing elsewhere in this report.
 Restatement of Previously Issued Consolidated Financial Statements
  Revenue Recognition
  Goodwill and Deferred Income Taxes
  Other Adjustments
   27




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##### Table of Contents



Overview
    Recent Developments
   
    
    Reduction of approximately 150 jobs (including consultants and temporary workforce), or
28% of the then-current workforce, with plans to add more than 200 technical personnel
offshore in our Pune, India software engineering and customer support center by the end of
2007.
    
    Strategic transition to a blended onshore-offshore global delivery model to improve
quality and customer satisfaction, to decrease costs, to increase capacity, and to improve
delivery and customer support. At December 31, 2006, we had approximately 100 persons
employed by our partner in India, dedicated to this effort.
    
    Operational consolidation of the Merge Healthcare and Cedara Software organizations,
encompassing most administrative functions, as well as software engineering and product
management.
 28




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##### Table of Contents




    
    Formation of Cedara Software Services (India) Pvt. Ltd. for the purpose of expanding
our capacity for performing custom engineering services on behalf of our OEM customers,
led by Managing Director Avinash Agrawal.
    
    Closing of offices in San Francisco, CA, and Tokyo, Japan, and downsizing operations in
Burlington, MA, Cleveland, OH and Mississauga, Ontario.
    
    Formation of three business units:
 
    
    Merge Healthcare North America (formerly Merge eMed, U.S. and Canada direct
market), led by recently hired President Gary Bowers, former Senior Vice President,
Strategic Business Initiatives at Merge Healthcare.
    
    Cedara Software (Global OEM market), led by President Loris Sartor, former Vice
President of Sales at Cedara.
    
    Merge Healthcare EMEA (Europe, Middle East, and Africa direct market), led by
President Jacques Cornet, former Vice President of Marketing and Business Development
at Cedara Software.
 
    
    Consolidation of two existing engineering groups into a single consolidated
organization. Peter Bascom, former Vice President of Engineering for Cedara Software, was
promoted to Senior Vice President of Engineering for Merge Healthcare.
    
    Promotion of Tim Kulbago, former Chief Technical Officer of Merge eMed, to Chief
Technical Officer and Chief Strategy Officer for Merge Healthcare with responsibility for
strategic business initiatives, including merger and acquisition activities.
    
    Consolidation of two existing product management groups into one consolidated
organization. Recently-hired Senior Clinical Consultant, Cory Hall, was promoted to Senior
Vice President of Product Management for Merge Healthcare.
  
    
    Announced an agreement with Medavis GmbH to distribute their Radiology Information
System in conjunction with our FUSION PACS offering to selected European markets.
    
    Entered into a strategic relationship with Foresight Imaging to deliver the next
generation Merge Box to the market.
    
    Entered into a partnership with CPAGE, a French public information technology group, to
deliver EPR functionality to the French hospital market based on our aXigate technology.
   
    
    Developed the Cedara Clinical Control Center (C4) to enable us and our partners to
easily integrate clinical applications into existing products. A prototype of C4 was shown
at RSNA and was initially released as part of I-Softview 6.2.
    
    Developed a number of novel oncology prototypes to handle prostate and tumor
segmentation. The tumor segmentation algorithms were added to Cedaras oncology
workstation I-Response that will be released in 2007.
 29




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##### Table of Contents




    
    Created an automatic mammography skin line detection algorithm that will be used in the
I-ReadMammo product to be released in 2007. This algorithm enables the automation of the
comparison of prior images and automatically maximizing the displayable area.
    
    Developed an automatic module to stitch overlapping X-Ray images for orthopedics. In
addition, we worked to enhance the autotemplating functionality to improve accuracy and
performance while adding support for the coverage of full-hip images.
    
    Developed a complete X-Ray Pipeline solution that implements shutter detection, image
enhancement (CIE) and the setting of the optimal window width and level.
    
    Developed a novel graphical processing unit (GPU)-based image enhancement filter for
use on ultrasound and angiography datasets.
   Revenues and Expenses
  Net Sales
  Cost of Sales
  30




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##### Table of Contents



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 Impairment, Restructuring and Other Expenses
  Depreciation and Amortization
  Other Income, Expense
  Critical Accounting Policies
  31




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##### Table of Contents



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
   32




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##### Table of Contents



Accounting for
Performance on Construction-Type and Certain Production-Type Contracts
     Income
Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred Accounting for Shipping and Handling Fees
 Allowance for Doubtful Accounts
  Software Capitalization
  33




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##### Table of Contents



Other Long-Lived Assets
  Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets,
 Share-based Compensation Expense
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock
Issued to Employees
 Income Taxes
 Accounting for Income Taxes
 34




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Accounting for
Contingencies
  Guarantees
 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
   35




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##### Table of Contents



Loss Contingencies
  Recent Accounting Pronouncements
 How Sales Taxes Collected from Customers and
Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross
Versus Net Presentation)
 Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement No. 109
 Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial Statement
 Fair Value Measurements
 36




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##### Table of Contents



Results of Operations
 (in thousands)
 Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
  Twelve Months EndedDecember 31,2006
    
    2005(As restated)Net sales
    
    
    100
    %
    
    
    100
    %Cost of sales
    
    
    40
    
    
    
    31Gross margin
    
    
    60
    
    
    
    69Operating costs and expenses:Sales and marketing
    
    
    27
    
    
    
    17Product research and development
    
    
    27
    
    
    
    12General and administrative
    
    
    39
    
    
    
    14Acquired in-process research and development
    
    
    
    
    
    
    16Goodwill impairment, restructuring and other expenses
    
    
    301
    
    
    
    1Depreciation and amortization
    
    
    5
    
    
    
    4Total operating costs and expenses
    
    
    399
    
    
    
    64Operating income (loss)
    
    
    (339
    )
    
    
    5Total other income, net
    
    
    3
    
    
    
    1Income (loss) before income taxes
    
    
    (336
    )
    
    
    6Income tax expense
    
    
    13
    
    
    
    10Net loss
    
    
    (349
    )%
    
    
    (4
    )%
 Net Sales
  December 31,2006
    
    2005
    
    % Change(As restated)Software and other
    
    $
    40,275
    
    
    $
    60,019
    
    
    
    (33
    )%As a percentage of total net sales
    
    
    54
    %
    
    
    73
    %Services and maintenance
    
    $
    34,047
    
    
    $
    22,519
    
    
    
    51
    %As a percentage of total net sales
    
    
    46
    %
    
    
    27
    %Total net sales
    
    $
    74,322
    
    
    $
    82,538
    
    
    
    (10
    )%
  37




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##### Table of Contents




    
    We recognized net sales of approximately $16,300 for 2006, due to the ultimate delivery
of certain software product functionality on certain customer contracts entered into in
previous years. Net sales were reduced by approximately $1,800 for 2005 due to our
delivery of certain software products to end-user customers that did not fully meet the
functionality that we believe our customers expected. We deferred such revenue until the
delivery of the expected product functionality.
    
    We recognized approximately $900 in net sales in 2006 related to customer contracts
where collectibility was not reasonably assured at time of delivery of the software, but
which became reasonably assured in 2006. Net sales for 2005 were reduced by approximately
$1,000 related to customer contracts where collectibility was not reasonably assured at
time of delivery of the software.
    
    We recognized approximately $300 in net sales in 2006 related to contracts under which
we delivered certain software products remaining on prior orders for which partial
shipment had previously occurred. Net sales in 2005 were reduced by approximately $300 due
to contracts under which we did not deliver all of the contracted software products.
    
    We recognized approximately $900 in net sales in 2006 due to ratable recognition of
sales from prior periods related to customer contracts for which we did not have VSOE of
fair value of maintenance. Net sales decreased in 2005 by approximately $900 related to
contracts for sales that we did not have VSOE of fair value of maintenance.
 Cost of Sales
  December 31,2006
    
    
    2005
    
    
    % Change(As restated)Software and other
    
    $
    9,605
    
    
    $
    6,941
    
    
    
    38
    %Services and maintenance
    
    
    14,472
    
    
    
    11,087
    
    
    
    31
    %Amortization
    
    
    5,532
    
    
    
    7,740
    
    
    
    (29
    )%Total cost of sales
    
    $
    29,609
    
    
    $
    25,768
    
    
    
    15
    %
  38




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##### Table of Contents



Net Sales
  Gross Margin
 Net Sales
 Sales and Marketing
  Product Research and Development
  General and Administrative
  39




---



##### Table of Contents



Acquired In-Process Research and Development
  Goodwill Impairment, Restructuring and Other Expenses
  Depreciation and Amortization
  Other Income, Expense
  Income Taxes
   40




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Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
  Twelve Months EndedDecember 31,2005
    
    2004(As restated)Net sales
    
    
    100
    %
    
    
    100
    %Cost of sales
    
    
    31
    
    
    
    42Gross margin
    
    
    69
    
    
    
    58Operating costs and expenses:Sales and marketing
    
    
    17
    
    
    
    27Product research and development
    
    
    12
    
    
    
    8General and administrative
    
    
    14
    
    
    
    19Acquired in-process research and development
    
    
    16
    
    
    
    Goodwill impairment, restructuring and other expenses
    
    
    1
    
    
    
    Depreciation and amortization
    
    
    4
    
    
    
    5Total operating costs and expenses
    
    
    64
    
    
    
    59Operating income
    
    
    5
    
    
    
    (1
    )Total other income, net
    
    
    1
    
    
    
    2Income before income taxes
    
    
    6
    
    
    
    1Income tax expense (benefit)
    
    
    10
    
    
    
    (6
    )Net income (loss)
    
    
    (4
    )%
    
    
    7
    %
 Net Sales
  December 31,2005
    
    2004
    
    % Change(As restated)Software and other
    
    $
    60,019
    
    
    $
    16,952
    
    
    
    254
    %As a percentage of total net sales
    
    
    73
    %
    
    
    67
    %Services and maintenance
    
    $
    22,519
    
    
    $
    8,525
    
    
    
    164
    %As a percentage of total net sales
    
    
    27
    %
    
    
    33
    %Total net sales
    
    $
    82,538
    
    
    $
    25,477
    
    
    
    224
    %
 41




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##### Table of Contents




    
    We deferred approximately $1,800 and $10,700 for 2005 and 2004, respectively, due to
current year and prior years contracts, for which the software product sold did not meet
functionality we believe was expected by the customer and as to which revenue was
therefore deferred into future periods.
    
    Net sales for 2005 were reduced by approximately $1,000 related to customer contracts
where collectibility was not reasonably assured at time of delivery of the software.
    
    Net sales for 2005 were reduced by approximately $300 due to contracts in which we did
not deliver all contracted software products.
    
    Net sales were reduced by approximately $900 for 2005 due to contracts for which we did
not have vendor specific objective evidence of fair value of maintenance.
 Cost of Sales
  December 31,2005
    
    
    2004
    
    
    % Change(As restated)Software and other
    
    $
    6,941
    
    
    $
    2,239
    
    
    
    210
    %Services and maintenance
    
    
    11,087
    
    
    
    6,050
    
    
    
    83
    %Amortization
    
    
    7,740
    
    
    
    2,492
    
    
    
    211
    %Total cost of sales
    
    $
    25,768
    
    
    $
    10,781
    
    
    
    139
    %
   42




---



##### Table of Contents



Net Sales
  Gross Margin
 Net Sales
 Sales and Marketing
 Net Sales
 Product Research and Development
  General and Administrative
  Acquired In-Process Research and Development
  Goodwill impairment, Restructuring and Other Expenses
  43




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##### Table of Contents



Depreciation and Amortization
  Other Income, Expense
  Income Taxes
    Liquidity and Capital Resources
 (in thousands)
  Operating Cash Flows
   44




---



##### Table of Contents



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
    
    $
    6,816
    
    
    $
    2,110
    
    
    $
    3,564
    
    
    $
    890
    
    
    $
    252
  Share Repurchase Program
  General
  45




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##### Table of Contents



Material Off Balance Sheet Arrangements
  
 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
  Foreign Currency Exchange Risk
  46




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##### Table of Contents



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Report of Independent Registered Public Accounting Firm
 
    Share-Based Payment
  Internal ControlIntegrated
Framework
  
 47




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##### Table of Contents



MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except for share data)
 (As restated)
 December 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    45,945
    
    
    $
    64,278Accounts receivable, net of allowance
for doubtful accounts and sales
returns of $2,553 and $2,222 at
December 31, 2006 and December 31,
2005, respectively
    
    
    16,427
    
    
    
    23,294Inventory
    
    
    2,164
    
    
    
    2,440Prepaid expenses
    
    
    1,660
    
    
    
    2,646Deferred income taxes
    
    
    196
    
    
    
    11,735Other current assets
    
    
    812
    
    
    
    3,208Total current assets
    
    
    67,204
    
    
    
    107,601Property and equipment:Computer equipment
    
    
    5,017
    
    
    
    4,025Office equipment
    
    
    1,919
    
    
    
    1,759Leasehold improvements
    
    
    1,460
    
    
    
    1,3728,396
    
    
    
    7,156Less accumulated depreciation
    
    
    4,456
    
    
    
    2,716Net property and equipment
    
    
    3,940
    
    
    
    4,440Purchased and developed software, net of
accumulated amortization of $11,235 and
$6,759 at December 31, 2006 and
December 31, 2005, respectively
    
    
    16,628
    
    
    
    19,539Other intangibles, net of accumulated
amortization of $3,966 and $1,687 at
December 31, 2006 and December 31, 2005,
respectively
    
    
    9,511
    
    
    
    11,789Goodwill
    
    
    124,231
    
    
    
    345,121Deferred income taxes
    
    
    4,326
    
    
    
    3,490Other assets
    
    
    9,035
    
    
    
    8,065Total assets
    
    $
    234,875
    
    
    $
    500,045LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,284
    
    
    $
    5,938Accrued wages
    
    
    6,162
    
    
    
    5,870Income taxes payable
    
    
    4,398
    
    
    
    4,206Other accrued liabilities
    
    
    2,573
    
    
    
    3,503Deferred revenue
    
    
    18,686
    
    
    
    31,120Total current liabilities
    
    
    40,103
    
    
    
    50,637Deferred income taxes
    
    
    502
    
    
    
    2,015Deferred revenue
    
    
    3,712
    
    
    
    4,317Other
    
    
    633
    
    
    
    484Total liabilities
    
    
    44,950
    
    
    
    57,453Shareholders equity:Preferred stock, $0.01 par value: 2,999,997 and 3,999,997 shares
authorized at December 31, 2006 and
December 31, 2005; zero shares issued
and outstanding at December 31, 2006
and December 31, 2005
    
    
    
    
    
    
    Series A Preferred Stock, $0.01 par
value: 1,000,000 shares authorized;
zero shares issued and outstanding at
December 31, 2006 and December 31,
2005
    
    
    
    
    
    
    Series B Junior Participating
Preferred Stock, $0.01 par value: 1,000,000 shares authorized and zero
shares authorized at December 31, 2006
and December 31, 2005; zero shares
issued and outstanding at December 31,
2006 and December 31, 2005
    
    
    
    
    
    
    Series 3 Special Voting Preferred
stock, no par value: one share
authorized; one share issued; one
share and zero shares issued and
outstanding at December 31, 2006 and
December 31, 2005
    
    
    
    
    
    
    Common Stock, $0.01 par value: 100,000,000 shares authorized;
29,291,030 shares and 26,500,140
shares issued and outstanding at
December 31, 2006 and December 31,
2005, respectively
    
    
    293
    
    
    
    265Common Stock subscribed: 5,242 and 706
shares at December 31, 2006 and
December 31, 2005, respectively
    
    
    33
    
    
    
    17Additional paid-in capital
    
    
    451,130
    
    
    
    445,954Deferred stock compensation
    
    
    
    
    
    
    (1,245
    )Accumulated deficit
    
    
    (263,390
    )
    
    
    (4,467
    )Accumulated other comprehensive income
    
    
    1,859
    
    
    
    2,068Total shareholders equity
    
    
    189,925
    
    
    
    442,592Total liabilities and shareholders equity
    
    $
    234,875
    
    
    $
    500,045
  48




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##### Table of Contents



MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share and per share data)
 (As restated)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Net sales:Software and other
    
    $
    40,275
    
    
    $
    60,019
    
    
    $
    16,952Services and maintenance
    
    
    34,047
    
    
    
    22,519
    
    
    
    8,525Total net sales
    
    
    74,322
    
    
    
    82,538
    
    
    
    25,477Cost of sales:Software and other
    
    
    9,605
    
    
    
    6,941
    
    
    
    2,239Services and maintenance
    
    
    14,472
    
    
    
    11,087
    
    
    
    6,050Amortization
    
    
    5,532
    
    
    
    7,740
    
    
    
    2,492Total cost of sales
    
    
    29,609
    
    
    
    25,768
    
    
    
    10,781Gross margin
    
    
    44,713
    
    
    
    56,770
    
    
    
    14,696Operating costs and expenses:Sales and marketing
    
    
    20,100
    
    
    
    13,646
    
    
    
    7,006Product research and development
    
    
    20,410
    
    
    
    9,914
    
    
    
    1,967General and administrative
    
    
    28,752
    
    
    
    11,709
    
    
    
    4,820Acquired in-process research and development
    
    
    
    
    
    
    13,046
    
    
    
    Goodwill impairment, restructuring and other expenses
    
    
    223,505
    
    
    
    530
    
    
    
    Depreciation and amortization
    
    
    4,033
    
    
    
    3,548
    
    
    
    1,153Total operating costs and expenses
    
    
    296,800
    
    
    
    52,393
    
    
    
    14,946Operating income (loss)
    
    
    (252,087
    )
    
    
    4,377
    
    
    
    (250
    )Other income (expense):Interest expense
    
    
    (67
    )
    
    
    (38
    )
    
    
    (21
    )Interest income
    
    
    2,548
    
    
    
    1,061
    
    
    
    344Other, net
    
    
    133
    
    
    
    (287
    )
    
    
    146Total other income
    
    
    2,614
    
    
    
    736
    
    
    
    469Income (loss) before income taxes
    
    
    (249,473
    )
    
    
    5,113
    
    
    
    219Income tax expense (benefit)
    
    
    9,450
    
    
    
    8,373
    
    
    
    (1,444
    )Net income (loss)
    
    $
    (258,923
    )
    
    $
    (3,260
    )
    
    $
    1,663Net income (loss) per sharebasic
    
    $
    (7.68
    )
    
    $
    (0.13
    )
    
    $
    0.13Weighted average number of shares of Common Stock
outstandingbasic
    
    
    33,701,735
    
    
    
    24,696,762
    
    
    
    13,013,927Net income (loss) per sharediluted
    
    $
    (7.68
    )
    
    $
    (0.13
    )
    
    $
    0.12Weighted average number of shares of Common Stock
outstandingdiluted
    
    
    33,701,735
    
    
    
    24,696,762
    
    
    
    13,827,522
  49




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##### Table of Contents



MERGE TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 2004, 2005 and 2006
(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, 2003
    
    
    2
    
    
    $
    
    
    
    
    8,058
    
    
    $
    47
    
    
    
    12,485,646
    
    
    $
    125
    
    
    $
    53,175
    
    
    $
    
    
    
    $
    (2,723
    )
    
    $
    232
    
    
    $
    50,856Adjustments (see Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (147
    )
    
    
    
    
    
    
    (147
    )Balance at December 31, 2003 (as restated)
    
    
    2
    
    
    $
    
    
    
    
    8,058
    
    
    $
    47
    
    
    
    12,485,646
    
    
    $
    125
    
    
    $
    53,175
    
    
    $
    
    
    
    $
    (2,870
    )
    
    $
    232
    
    
    $
    50,709Accretion of put value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68Exchange of share rights into Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352,261
    
    
    
    4
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock issued under ESPP
    
    
    
    
    
    
    
    
    
    
    (7,241
    )
    
    
    (33
    )
    
    
    11,806
    
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    336,472
    
    
    
    3
    
    
    
    1,483
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,486Retirement of preferred shares
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit on exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    595
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    595Net income (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,663
    
    
    
    
    
    
    
    1,663Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    360
    
    
    
    360Balance at December 31, 2004 (as restated)
    
    
    
    
    
    $
    
    
    
    
    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 (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,260
    )
    
    
    
    
    
    
    (3,260
    )Other comprehensive income (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,476
    
    
    
    1,476Balance at December 31, 2005 (as restated)
    
    
    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 (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258,923
    )
    
    
    
    
    
    
    (258,923
    )Other comprehensive income (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (209
    )
    
    
    (209
    )Balance at December 31, 2006 (as restated)
    
    
    1
    
    
    $
    
    
    
    
    5,242
    
    
    $
    33
    
    
    
    29,291,030
    
    
    $
    293
    
    
    $
    451,130
    
    
    $
    
    
    
    $
    (263,390
    )
    
    $
    1,859
    
    
    $
    189,925
  50




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##### Table of Contents



MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 (As restated)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    (258,923
    )
    
    $
    (3,260
    )
    
    $
    1,663Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    9,565
    
    
    
    11,288
    
    
    
    3,646Amortization of discount on note assumed in merger
    
    
    
    
    
    
    
    
    
    
    12Provision for doubtful accounts receivable and sales returns, net of recoveries
    
    
    829
    
    
    
    978
    
    
    
    147Deferred income taxes
    
    
    11,160
    
    
    
    7,661
    
    
    
    (1,969
    )In-process research and development
    
    
    
    
    
    
    13,046
    
    
    
    Stock-based compensation
    
    
    5,961
    
    
    
    979
    
    
    
    Goodwill and trade name impairment charge
    
    
    218,810
    
    
    
    
    
    
    
    Change in assets and liabilities, excluding effects from acquisitions:Accounts receivable
    
    
    6,038
    
    
    
    (5,421
    )
    
    
    (2,030
    )Inventory
    
    
    276
    
    
    
    (439
    )
    
    
    (189
    )Prepaid expenses
    
    
    986
    
    
    
    (76
    )
    
    
    (404
    )Accounts payable
    
    
    2,370
    
    
    
    (3,474
    )
    
    
    711Accrued wages
    
    
    268
    
    
    
    765
    
    
    
    500Other accrued liabilities
    
    
    (780
    )
    
    
    (19
    )
    
    
    221Deferred revenue
    
    
    (13,040
    )
    
    
    6,789
    
    
    
    14,465Other assets
    
    
    1,328
    
    
    
    (5,117
    )
    
    
    (2,646
    )Other
    
    
    192
    
    
    
    (98
    )
    
    
    (215
    )Net cash provided by (used in) operating activities
    
    
    (14,960
    )
    
    
    23,602
    
    
    
    13,912Cash flows from investing activities:Cash acquired in acquisitions, net of cash paid
    
    
    
    
    
    
    9,644
    
    
    
    Purchases of property, equipment, and leasehold improvements
    
    
    (1,252
    )
    
    
    (2,996
    )
    
    
    (565
    )Purchased technology
    
    
    (367
    )
    
    
    
    
    
    
    Capitalized software development
    
    
    (2,257
    )
    
    
    (3,621
    )
    
    
    (3,479
    )Net cash provided by (used in) investing activities
    
    
    (3,876
    )
    
    
    3,027
    
    
    
    (4,044
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    471
    
    
    
    9,508
    
    
    
    1,486Proceeds from employee stock purchase plan
    
    
    33
    
    
    
    65
    
    
    
    68Principal payment of notes
    
    
    
    
    
    
    
    
    
    
    (231
    )Net cash provided by financing activities
    
    
    504
    
    
    
    9,573
    
    
    
    1,323Effect of exchange rate changes on cash
    
    
    (1
    )
    
    
    9
    
    
    
    5Net increase (decrease) in cash
    
    
    (18,333
    )
    
    
    36,211
    
    
    
    11,196Cash and cash equivalents, beginning of period
    
    
    64,278
    
    
    
    28,067
    
    
    
    16,871Cash and cash equivalents, end of period
    
    $
    45,945
    
    
    $
    64,278
    
    
    $
    28,067Supplemental Disclosures of Cash Flow InformationCash paid for income taxes
    
    $
    69
    
    
    $
    286
    
    
    $
    1,119Equity securities received in sales transactions
    
    $
    2,010
    
    
    $
    4,606
    
    
    $
    Non Cash Investing and Financing Activities:Redemption value related to exchangeable Common Stock
    
    $
    
    
    
    $
    
    
    
    $
    1Value of Common Stock and options issued for acquisitions
    
    $
    
    
    
    $
    381,689
    
    
    $
    
  51




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##### Table of Contents



MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 (As restated)
 Years ended December 31,2006
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    (258,923
    )
    
    $
    (3,260
    )
    
    $
    1,663Accumulated other comprehensive income:Cumulative translation adjustment(1)
    
    
    (89
    )
    
    
    815
    
    
    
    215Unrealized gain (loss) on marketable securities(2)
    
    
    (58
    )
    
    
    79
    
    
    
    Comprehensive income (loss)
    
    $
    (259,070
    )
    
    $
    (2,366
    )
    
    $
    1,878
 
 (1)
    
    Net of income tax expense (benefit) of $(60), $547, and $145 for the twelve months ended
December 31, 2006, 2005, and 2004, respectively.(2)
    
    Net of income tax expense (benefit) of $(2), $60, and $0 for the twelve months ended
December 31, 2006, 2005, and 2004, respectively. 52




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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
 (a) Nature of Operations
  (b) Principles of Consolidation
   (c) Reporting Periods Presented
  (d) Use of Estimates
  (e) Reclassifications
  (f) Segment Reporting
 Disclosures about Segments of an Enterprise and Related Information
  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)
  (g) Functional Currency
    (h) Fair Value of Financial Instruments
  (i) Derivative Financial Instruments
 Accounting for Derivative Instruments and Hedging
Activities
 (j) Cash and Cash Equivalents
  (k) Inventory
  (l) Property and Equipment
   54




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##### Table of Contents



Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (contined)
 (In thousands, except for share and per share data)
  (m) Long-Lived Assets
 Accounting for the
Impairment or Disposal of Long-Lived Assets
 (n) Developed Software
 Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed
  (o) Investments
  (p) Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets
 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)
  (q) Warranties
  (r) Guarantees
 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
   (s) Income Taxes
 Accounting for Income Taxes
 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)
  Accounting
for Contingencies
 (t) Share-Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
  (u) Revenue Recognition
  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)
 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
 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)
     Income
Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred Accounting for Shipping and Handling Fees
 (v) Recent Accounting Pronouncements
 How Sales Taxes Collected from Customers and
Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross
Versus Net Presentation)
 Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement No. 109
 Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial Statement
 Fair Value Measurements
 (2) Restatement of Consolidated Financial Statements
  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)
  Revenue Recognition
  Goodwill and Deferred Income Taxes
  Other Adjustments
   60




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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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 December 31, 2006
    
    
    
    
    
    
    December 31, 2006(As reported)
    
    
    (Adjustments)
    
    
    (As restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    45,945
    
    
    
    
    
    
    $
    45,945Accounts receivable, net
    
    
    17,210
    
    
    
    (783
    )(b)
    
    
    16,427Inventory
    
    
    2,164
    
    
    
    
    
    
    
    2,164Prepaid expenses
    
    
    1,660
    
    
    
    
    
    
    
    1,660Deferred income taxes
    
    
    196
    
    
    
    
    
    
    
    196Other current assets
    
    
    812
    
    
    
    
    
    
    
    812Total current assets
    
    
    67,987
    
    
    
    (783
    )
    
    
    67,204Net property and equipment
    
    
    3,940
    
    
    
    
    
    
    
    3,940Purchased and developed software, net
    
    
    16,628
    
    
    
    
    
    
    
    16,628Acquired intangibles, net
    
    
    9,511
    
    
    
    
    
    
    
    9,511Goodwill
    
    
    124,407
    
    
    
    (176
    )(b,d)
    
    
    124,231Other assets
    
    
    8,887
    
    
    
    148
    (b)
    
    
    9,035Deferred income taxes
    
    
    3,303
    
    
    
    673
    (d)350
    (c)
    
    
    4,326Total assets
    
    $
    234,663
    
    
    $
    212
    
    
    $
    234,875LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,284
    
    
    
    
    
    
    $
    8,284Accrued wages
    
    
    6,244
    
    
    
    (82
    )(b)
    
    
    6,162Other accrued liabilities
    
    
    2,381
    
    
    
    192
    (b)
    
    
    2,573Deferred revenue
    
    
    18,175
    
    
    
    511
    (a,b)
    
    
    18,686Income taxes payable
    
    
    4,033
    
    
    
    365
    (b,c)
    
    
    4,398Total current liabilities
    
    
    39,117
    
    
    
    986
    
    
    
    40,103Deferred income taxes
    
    
    
    
    
    
    502
    (d)
    
    
    502Deferred revenue
    
    
    3,218
    
    
    
    494
    (a)
    
    
    3,712Other
    
    
    633
    
    
    
    
    
    
    
    633Total liabilities
    
    
    42,968
    
    
    
    1,982
    
    
    
    44,950Total shareholders equity
    
    
    191,695
    
    
    
    (1,770
    )
    
    
    189,925Total liabilities and shareholders equity
    
    $
    234,663
    
    
    $
    212
    
    
    $
    234,875
 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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
 December 31, 2005
    
    
    
    
    
    
    December 31, 2005(As reported)
    
    
    (Adjustments)
    
    
    (As restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    64,278
    
    
    
    
    
    
    $
    64,278Accounts receivable, net
    
    
    23,624
    
    
    
    (330
    )(b)
    
    
    23,294Inventory
    
    
    2,440
    
    
    
    
    
    
    
    2,440Prepaid expenses
    
    
    2,646
    
    
    
    
    
    
    
    2,646Deferred income taxes
    
    
    11,213
    
    
    
    522
    (b,c)
    
    
    11,735Other current assets
    
    
    3,208
    
    
    
    
    
    
    
    3,208Total current assets
    
    
    107,409
    
    
    
    192
    
    
    
    107,601Net property and equipment
    
    
    4,440
    
    
    
    
    
    
    
    4,440Purchased and developed software, net
    
    
    19,539
    
    
    
    
    
    
    
    19,539Acquired intangibles, net
    
    
    11,789
    
    
    
    
    
    
    
    11,789Goodwill
    
    
    350,634
    
    
    
    (176
    )(b)(5,337
    )(d)
    
    
    345,121Other assets
    
    
    7,862
    
    
    
    203
    (b)
    
    
    8,065Deferred income taxes
    
    
    
    
    
    
    3,460
    (d)30
    (b)
    
    
    3,490Total assets
    
    $
    501,673
    
    
    $
    (1,628
    )
    
    $
    500,045LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,938
    
    
    
    
    
    
    $
    5,938Accrued wages
    
    
    5,870
    
    
    
    
    
    
    
    5,870Other accrued liabilities
    
    
    3,453
    
    
    
    50
    (b)
    
    
    3,503Deferred revenue
    
    
    30,918
    
    
    
    202
    (a)
    
    
    31,120Income taxes payable
    
    
    3,894
    
    
    
    312
    (b,c)
    
    
    4,206Total current liabilities
    
    
    50,073
    
    
    
    564
    
    
    
    50,637Deferred income taxes
    
    
    3,491
    
    
    
    (1,476
    )(d)
    
    
    2,015Deferred revenue
    
    
    3,784
    
    
    
    533
    (a)
    
    
    4,317Other
    
    
    484
    
    
    
    
    
    
    
    484Total liabilities
    
    
    57,832
    
    
    
    (379
    )
    
    
    57,453Total shareholders equity
    
    
    443,841
    
    
    
    (1,249
    )
    
    
    442,592Total liabilities and shareholders equity
    
    $
    501,673
    
    
    $
    (1,628
    )
    
    $
    500,045
 62




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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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended
    
    
    
    
    
    
    Year EndedDecember 31, 2006
    
    
    
    
    
    
    December 31, 2006(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Net sales:Software and other
    
    $
    40,635
    
    
    $
    (360
    )(a,b)
    
    $
    40,275Services and maintenance
    
    
    34,407
    
    
    
    (360
    )(a,b)
    
    
    34,047Total net sales
    
    
    75,042
    
    
    
    (720
    )
    
    
    74,322Cost of sales:Software and other
    
    
    9,611
    
    
    
    (6
    )(a,b)
    
    
    9,605Services and maintenance
    
    
    14,464
    
    
    
    8
    (a)
    
    
    14,472Amortization
    
    
    5,532
    
    
    
    
    
    
    
    5,532Total cost of sales
    
    
    29,607
    
    
    
    2
    
    
    
    29,609Gross profit
    
    
    45,435
    
    
    
    (722
    )
    
    
    44,713Operating costs and expenses:Sales and marketing
    
    
    20,132
    
    
    
    (32
    )(b)
    
    
    20,100Product research and development
    
    
    20,440
    
    
    
    (30
    )(b)
    
    
    20,410General and administrative
    
    
    28,629
    
    
    
    123
    (b)
    
    
    28,752Goodwill impairment, restructuring
and other expenses
    
    
    230,813
    
    
    
    (7,308
    )(d)
    
    
    223,505Depreciation and amortization
    
    
    4,033
    
    
    
    
    
    
    
    4,033Total operating costs and expenses
    
    
    304,047
    
    
    
    (7,247
    )
    
    
    296,800Operating loss
    
    
    (258,612
    )
    
    
    6,525
    
    
    
    (252,087
    )Other income (expense):Interest expense
    
    
    (67
    )
    
    
    
    
    
    
    (67
    )Interest income
    
    
    2,548
    
    
    
    
    
    
    
    2,548Other, net
    
    
    133
    
    
    
    
    
    
    
    133Total other income
    
    
    2,614
    
    
    
    
    
    
    
    2,614Loss before income taxes
    
    
    (255,998
    )
    
    
    6,525
    
    
    
    (249,473
    )Income tax expense (benefit)
    
    
    2,460
    
    
    
    6,990
    (b,c,d)
    
    
    9,450Net loss
    
    $
    (258,458
    )
    
    $
    (465
    )
    
    $
    (258,923
    )Net loss per share  basic
    
    $
    (7.67
    )
    
    $
    (0.01
    )
    
    $
    (7.68
    )Weighted average number of common
shares outstanding  basic
    
    
    33,701,735
    
    
    
    
    
    
    
    33,701,735Net loss per share  diluted
    
    $
    (7.67
    )
    
    $
    (0.01
    )
    
    $
    (7.68
    )Weighted average number of common
shares outstanding  diluted
    
    
    33,701,735
    
    
    
    
    
    
    
    33,701,735
 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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
 Year Ended
    
    
    
    
    
    
    Year EndedDecember 31, 2005
    
    
    
    
    
    
    December 31, 2005(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Net sales:Software and other
    
    $
    60,120
    
    
    $
    (101
    )(a,b)
    
    $
    60,019Services and maintenance
    
    
    22,481
    
    
    
    38
    (a,b)
    
    
    22,519Total net sales
    
    
    82,601
    
    
    
    (63
    )
    
    
    82,538Cost of sales:Software and other
    
    
    6,921
    
    
    
    20
    (a)
    
    
    6,941Services and maintenance
    
    
    11,105
    
    
    
    (18
    )(a)
    
    
    11,087Amortization
    
    
    7,740
    
    
    
    
    
    
    
    7,740Total cost of sales
    
    
    25,766
    
    
    
    2
    
    
    
    25,768Gross profit
    
    
    56,835
    
    
    
    (65
    )
    
    
    56,770Operating costs and expenses:Sales and marketing
    
    
    13,646
    
    
    
    
    
    
    
    13,646Product research and development
    
    
    9,914
    
    
    
    
    
    
    
    9,914General and administrative
    
    
    11,624
    
    
    
    85
    (b)
    
    
    11,709Acquired in process R&D
    
    
    13,046
    
    
    
    
    
    
    
    13,046Goodwill impairment, restructuring
and other expenses
    
    
    530
    
    
    
    
    
    
    
    530Depreciation and amortization
    
    
    3,548
    
    
    
    
    
    
    
    3,548Total operating costs and expenses
    
    
    52,308
    
    
    
    85
    
    
    
    52,393Operating income
    
    
    4,527
    
    
    
    (150
    )
    
    
    4,377Other income (expense):Interest expense
    
    
    (38
    )
    
    
    
    
    
    
    (38
    )Interest income
    
    
    1,061
    
    
    
    
    
    
    
    1,061Other, net
    
    
    (317
    )
    
    
    30
    (b)
    
    
    (287
    )Total other income
    
    
    706
    
    
    
    30
    
    
    
    736Income before income taxes
    
    
    5,233
    
    
    
    (120
    )
    
    
    5,113Income tax expense (benefit)
    
    
    7,890
    
    
    
    483
    (b,c,d)
    
    
    8,373Net loss
    
    $
    (2,657
    )
    
    $
    (603
    )
    
    $
    (3,260
    )Net loss per share  basic
    
    $
    (0.11
    )
    
    $
    (0.02
    )
    
    $
    (0.13
    )Weighted average number of common
shares outstanding  basic
    
    
    24,696,762
    
    
    
    
    
    
    
    24,696,762Net loss per share  diluted
    
    $
    (0.11
    )
    
    $
    (0.02
    )
    
    $
    (0.13
    )Weighted average number of common
shares outstanding  diluted
    
    
    24,696,762
    
    
    
    
    
    
    
    24,696,762
 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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
 Year Ended
    
    
    
    
    
    
    Year EndedDecember 31, 2004
    
    
    
    
    
    
    December 31, 2004(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Net sales:Software and other
    
    $
    17,444
    
    
    $
    (492
    )(a)
    
    $
    16,952Services and maintenance
    
    
    8,903
    
    
    
    (378
    )(a)
    
    
    8,525Total net sales
    
    
    26,347
    
    
    
    (870
    )
    
    
    25,477Cost of sales:Software and other
    
    
    2,302
    
    
    
    (63
    )(a)
    
    
    2,239Services and maintenance
    
    
    6,108
    
    
    
    (58
    )(a)
    
    
    6,050Amortization
    
    
    2,492
    
    
    
    
    
    
    
    2,492Total cost of sales
    
    
    10,902
    
    
    
    (121
    )
    
    
    10,781Gross profit
    
    
    15,445
    
    
    
    (749
    )
    
    
    14,696Operating costs and expenses:Sales and marketing
    
    
    7,006
    
    
    
    
    
    
    
    7,006Product research and development
    
    
    1,967
    
    
    
    
    
    
    
    1,967General and administrative
    
    
    4,820
    
    
    
    
    
    
    
    4,820Depreciation and amortization
    
    
    1,153
    
    
    
    
    
    
    
    1,153Total operating costs and expenses
    
    
    14,946
    
    
    
    
    
    
    
    14,946Operating income (loss)
    
    
    499
    
    
    
    (749
    )
    
    
    (250
    )Other income (expense):Interest expense
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )Interest income
    
    
    344
    
    
    
    
    
    
    
    344Other, net
    
    
    146
    
    
    
    
    
    
    
    146Total other income
    
    
    469
    
    
    
    
    
    
    
    469Income before income taxes
    
    
    968
    
    
    
    (749
    )
    
    
    219Income tax expense (benefit)
    
    
    (1,222
    )
    
    
    (222
    )(b,c)
    
    
    (1,444
    )Net income
    
    $
    2,190
    
    
    $
    (527
    )
    
    $
    1,663Net income per share  basic
    
    $
    0.17
    
    
    $
    (0.04
    )
    
    $
    0.13Weighted average number of common
Shares outstanding  basic
    
    
    13,013,927
    
    
    
    
    
    
    
    13,013,927Net income per share  diluted
    
    $
    0.16
    
    
    $
    (0.04
    )
    
    $
    0.12Weighted average number of common
shares outstanding  diluted
    
    
    13,827,522
    
    
    
    
    
    
    
    13,827,522
 65




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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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended
    
    
    
    
    
    
    Year EndedDecember 31, 2006
    
    
    
    
    
    
    December 31, 2006(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Cash flows from operating activities:Net loss
    
    $
    (258,458
    )
    
    $
    (465
    )
    
    $
    (258,923
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    9,565
    
    
    
    
    
    
    
    9,565Provision for doubtful accounts receivable and sales
returns, net of recoveries
    
    
    289
    
    
    
    540
    (b)
    
    
    829Deferred income taxes
    
    
    4,223
    
    
    
    6,937
    (c,d)
    
    
    11,160Stock compensation expenses
    
    
    5,961
    
    
    
    
    
    
    
    5,961Goodwill and trade name impairment charge
    
    
    226,118
    
    
    
    (7,308
    )(d)
    
    
    218,810Changes in operating assets and liabilities:Accounts receivable
    
    
    6,125
    
    
    
    (87
    )(b)
    
    
    6,038Inventory
    
    
    276
    
    
    
    
    
    
    
    276Prepaid expenses
    
    
    986
    
    
    
    
    
    
    
    986Accounts payable
    
    
    2,370
    
    
    
    
    
    
    
    2,370Accrued wages
    
    
    350
    
    
    
    (82
    )(b)
    
    
    268Other accrued liabilities
    
    
    (923
    )
    
    
    143
    (b)
    
    
    (780
    )Deferred revenue
    
    
    (13,309
    )
    
    
    269
    (a,b)
    
    
    (13,040
    )Other assets
    
    
    1,328
    
    
    
    
    
    
    
    1,328Other
    
    
    139
    
    
    
    53
    (b,c)
    
    
    192Net cash used in operating activities
    
    
    (14,960
    )
    
    
    
    
    
    
    (14,960
    )Net cash used in investing activities
    
    
    (3,876
    )
    
    
    
    
    
    
    (3,876
    )Net cash provided by financing activities
    
    
    504
    
    
    
    
    
    
    
    504Effect of exchange rates on cash and cash equivalents
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Net decrease in cash and cash equivalents
    
    
    (18,333
    )
    
    
    
    
    
    
    (18,333
    )Cash and cash equivalents, beginning of period
    
    
    64,278
    
    
    
    
    
    
    
    64,278Cash and cash equivalents, end of period
    
    $
    45,945
    
    
    
    
    
    
    $
    45,945
 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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 Year Ended
    
    
    
    
    
    
    Year EndedDecember 31, 2005
    
    
    
    
    
    
    December 31, 2005(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Cash flows from operating activities:Net loss
    
    $
    (2,657
    )
    
    $
    (603
    )
    
    $
    (3,260
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    11,288
    
    
    
    
    
    
    
    11,288Provision for doubtful accounts receivable and sales
returns, net of recoveries
    
    
    723
    
    
    
    255
    (b)
    
    
    978Deferred income taxes
    
    
    7,374
    
    
    
    287
    (c,d)
    
    
    7,661In-process research and development
    
    
    13,046
    
    
    
    
    
    
    
    13,046Stock compensation expenses
    
    
    979
    
    
    
    
    
    
    
    979Changes in operating assets and liabilities:Accounts receivable
    
    
    (5,421
    )
    
    
    
    
    
    
    (5,421
    )Inventory
    
    
    (439
    )
    
    
    
    
    
    
    (439
    )Prepaid expenses
    
    
    (76
    )
    
    
    
    
    
    
    (76
    )Accounts payable
    
    
    (3,474
    )
    
    
    
    
    
    
    (3,474
    )Accrued wages
    
    
    765
    
    
    
    
    
    
    
    765Other accrued liabilities
    
    
    (69
    )
    
    
    50
    (b)
    
    
    (19
    )Deferred revenue
    
    
    6,973
    
    
    
    (184
    )(a)
    
    
    6,789Other assets
    
    
    (5,117
    )
    
    
    
    
    
    
    (5,117
    )Other
    
    
    (293
    )
    
    
    195
    (b,c)
    
    
    (98
    )Net cash provided by operating activities
    
    
    23,602
    
    
    
    
    
    
    
    23,602Net cash provided by investing activities
    
    
    3,027
    
    
    
    
    
    
    
    3,027Net cash provided by financing activities
    
    
    9,573
    
    
    
    
    
    
    
    9,573Effect of exchange rates on cash and cash equivalents
    
    
    9
    
    
    
    
    
    
    
    9Net increase in cash and cash equivalents
    
    
    36,211
    
    
    
    
    
    
    
    36,211Cash and cash equivalents, beginning of period
    
    
    28,067
    
    
    
    
    
    
    
    28,067Cash and cash equivalents, end of period
    
    $
    64,278
    
    
    
    
    
    
    $
    64,278
 67




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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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 Year Ended
    
    
    
    
    
    
    Year EndedDecember 31, 2004
    
    
    
    
    
    
    December 31, 2004(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Cash flows from operating activities:Net income
    
    $
    2,190
    
    
    $
    (527
    )
    
    $
    1,663Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    3,646
    
    
    
    
    
    
    
    3,646Amortization of discount on note assumed in merger
    
    
    12
    
    
    
    
    
    
    
    12Provision for doubtful accounts receivable and sales
returns, net of recoveries
    
    
    147
    
    
    
    
    
    
    
    147Deferred income taxes
    
    
    (1,631
    )
    
    
    (338
    )(b,c)
    
    
    (1,969
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,030
    )
    
    
    
    
    
    
    (2,030
    )Inventory
    
    
    (189
    )
    
    
    
    
    
    
    (189
    )Prepaid expenses
    
    
    (404
    )
    
    
    
    
    
    
    (404
    )Accounts payable
    
    
    711
    
    
    
    
    
    
    
    711Accrued wages
    
    
    500
    
    
    
    
    
    
    
    500Other accrued liabilities
    
    
    221
    
    
    
    
    
    
    
    221Deferred revenue
    
    
    13,717
    
    
    
    748
    (a)
    
    
    14,465Other assets
    
    
    (2,646
    )
    
    
    
    
    
    
    (2,646
    )Other
    
    
    (332
    )
    
    
    117
    (b,c)
    
    
    (215
    )Net cash provided by operating activities
    
    
    13,912
    
    
    
    
    
    
    
    13,912Net cash used in investing activities
    
    
    (4,044
    )
    
    
    
    
    
    
    (4,044
    )Net cash provided by financing activities
    
    
    1,323
    
    
    
    
    
    
    
    1,323Effect of exchange rates on cash and cash equivalents
    
    
    5
    
    
    
    
    
    
    
    5Net increase in cash and cash equivalents
    
    
    11,196
    
    
    
    
    
    
    
    11,196Cash and cash equivalents, beginning of period
    
    
    16,871
    
    
    
    
    
    
    
    16,871Cash and cash equivalents, end of period
    
    $
    28,067
    
    
    
    
    
    
    $
    28,067
 
 (a)
    
    Impact of deferral and recognition of net sales and related costs attributed to factors
discussed in the Revenue Recognitionsection of Note 2 for the period, including cumulative
effect of all periods on deferred revenue.(b)
    
    Impact of adjustments discussed in the Other Adjustmentssection of Note 2 for the current
period, primarily consisting of items previously deemed immaterial for restatement purposes.
Balance sheet impact is cumulative for all periods impacted.(c)
    
    Impact on income tax expense, net, of all adjustments in (a) and (b) during the period at
the effective tax rate, including cumulative effect of all periods on current and long-term
deferred income tax assets and liabilities. Also includes reclassification of the net current
and long-term deferred tax position on the balance sheet as a result of the effects of (d). 68




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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)
 (d)
    
    Impact of adjustments on deferred income taxes and goodwill related to the acquisition
accounting adjustments described in the Goodwill and Deferred Income Taxessection of Note 2,
as well as related effects on income tax expense.
 (3) Earnings Per Share
  Years Ended December 31,2006
    
    
    2005
    
    
    2004(As restated)
    
    
    (As restated)
    
    
    (As restated)Numerator:Net income (loss)
    
    $
    (258,923
    )
    
    $
    (3,260
    )
    
    $
    1,663Accretion of redemption value related to
exchangeable shares
    
    
    
    
    
    
    
    
    
    
    (1
    )Allocation of income to exchangeable shares
    
    
    
    
    
    
    
    
    
    
    (1
    )Numerator for net income (loss) per
sharebasic and diluted
    
    $
    (258,923
    )
    
    $
    (3,260
    )
    
    $
    1,661Denominator:Weighted average number shares of Common Stock
outstanding
    
    
    33,701,735
    
    
    
    24,696,762
    
    
    
    13,013,927Effect of stock options
    
    
    
    
    
    
    
    
    
    
    813,595Denominator for net income (loss) per sharediluted
    
    
    33,701,735
    
    
    
    24,696,762
    
    
    
    13,827,522Net income (loss) per sharebasic
    
    $
    (7.68
    )
    
    $
    (0.13
    )
    
    $
    0.13Net income (loss) per sharediluted
    
    $
    (7.68
    )
    
    $
    (0.13
    )
    
    $
    0.12
     2006
    
    2005
    
    2004Stock options
    
    
    3,571,799
    
    
    
    2,979,139
    
    
    
    1,590,085Exchangeable shares
    
    
    4,568,155
    
    
    
    7,129,246
    
    
    
    8,139,954
    
    
    
    10,108,385
    
    
    
    1,590,085
 69




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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)
 (4) Goodwill and Other Intangibles
  WeightedAverage
    
    
    December 31, 2006
    
    
    December 31, 2005Remaining
    
    
    Gross
    
    
    
    
    
    
    GrossAmortization
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedPeriod (Years)
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationPurchased technology
    
    
    3.7
    
    
    $
    16,990
    
    
    $
    (6,130
    )
    
    $
    16,633
    
    
    $
    (3,118
    )Patents
    
    
    9.0
    
    
    
    117
    
    
    
    (10
    )
    
    
    101
    
    
    
    (1
    )Customer relationships
    
    
    4.2
    
    
    
    13,477
    
    
    
    (3,966
    )
    
    
    13,477
    
    
    
    (1,688
    )Total
    
    
    3.9
    
    
    $
    30,584
    
    
    $
    (10,106
    )
    
    $
    30,211
    
    
    $
    (4,807
    )
  For the year ended:    2007
    
    $
    5,1562008
    
    $
    4,8072009
    
    $
    4,4012010
    
    $
    4,2772011
    
    $
    1,782Thereafter
    
    $
    55
  (As restated)Balance as of January 1, 2006
    
    $
    345,121Adjustments to goodwill(1)
    
    
    (110
    )Goodwill impairment charge
    
    
    (214,095
    )Trade name impairment charge
    
    
    (6,685
    )Balance as of December 31, 2006
    
    $
    124,231
 
 (1)
    
    Comprised of $(110) of normal purchase price allocation adjustments to acquired assets and
liabilities.   70




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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
   (5) Acquisitions
 (a) Cedara Software
  Reasons for the Transaction
  71




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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)
  Purchase Accounting
  Form of Consideration
    
    Fair ValueStock issued
    
    $
    356,478Estimated fair value of options assumed
    
    
    25,211Direct transaction costs
    
    
    5,210Total consideration
    
    $
    386,899
  Fair Value(As restated)Assets acquired
    
    $
    52,728Liabilities assumed
    
    
    (25,033
    )Purchased and developed technologies
    
    
    13,019Customer relationships
    
    
    12,500Inprocess research and development
    
    
    13,046Deferred stock compensation
    
    
    2,132Goodwill, including trade names
    
    
    318,507Total consideration
    
    $
    386,899
   72




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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)
      Pro forma Results
   Year EndedDecember 31, 2005Revenue
    
    $
    107,466Net income from continuing operations
    
    $
    6,624Earnings per share:Basic
    
    $
    0.15Diluted
    
    $
    0.15
 (b) AccuImage
  73




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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)
      Fair ValueAssets acquired
    
    $
    584Purchased and developed technologies
    
    
    763Customer relationship
    
    
    80Goodwill
    
    
    4,248Deferred tax asset
    
    
    1,676Liabilities assumed
    
    
    (1,385
    )Debt assumed and paid
    
    
    1,012Total consideration
    
    $
    6,978
   (6) Accounts Receivable
   74




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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)
  AdditionsBalance at
    
    
    
    
    
    
    charged to
    
    
    
    
    
    
    Balance atbeginning of
    
    
    Additions
    
    
    costs and
    
    
    
    
    
    
    end ofperiod
    
    
    due to
    
    
    expenses
    
    
    
    
    
    
    periodDescription
    
    (As restated)
    
    
    acquisitions
    
    
    (As restated)
    
    
    Deductions
    
    
    (As restated)For
year ended December 31, 2006Allowance for doubtful accounts
and sales returns
    
    $
    2,222
    
    
    $
    
    
    
    $
    829
    
    
    $
    (498
    )
    
    $
    2,553For year ended December 31, 2005Allowance for doubtful accounts and sales returns
    
    $
    525
    
    
    $
    719
    
    
    $
    1,267
    
    
    $
    (289
    )
    
    $
    2,222For year ended December 31, 2004Allowance for doubtful accounts and sales returns

    
    $
    378
    
    
    $
    
    
    
    $
    158
    
    
    $
    (11
    )
    
    $
    525
 (7) ShareBased Compensation
     Year EndedDecember 31,2006Sharebased compensation expense included in statement of operations:Services and maintenance (cost of sales)
    
    $
    542Sales and marketing
    
    
    1,047Product research and development
    
    
    1,186General and administrative
    
    
    3,136Total
    
    
    5,911Tax benefit
    
    
    1,368Sharebased compensation expense, net of tax
    
    $
    4,543Decrease in basic loss per share
    
    $
    0.13Decrease in diluted loss per share
    
    $
    0.13
 75




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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 31,2006
    
    
    2005
    
    
    2004(Pro Forma,
    
    
    (Pro Forma,(As restated)
    
    
    as restated)
    
    
    as restated)Net income (loss)(1)
    
    $
    (258,923
    )
    
    $
    (3,260
    )
    
    $
    1,663Sharebased employee compensation
expense included in reported net
income (loss), net of tax effect(2)
    
    
    N/A
    
    
    
    587
    
    
    
    Sharebased employee compensation
expense determined under fair value
method for all awards, net of tax
effect(2)
    
    
    N/A
    
    
    
    (4,101
    )
    
    
    (1,507
    )Net income (loss), including the
effect of sharebased employee
compensation expense
    
    $
    (258,923
    )
    
    $
    (6,774
    )
    
    $
    156Net income (loss) per shareBasic:Net income (loss) as reported(1)
    
    $
    (7.68
    )
    
    $
    (0.13
    )
    
    $
    0.13Net income (loss), including the
effect of sharebased employee
compensation expense
    
    
    N/A
    
    
    $
    (0.27
    )
    
    $
    0.01Net income (loss) per shareDiluted:Net income (loss) as reported(1)
    
    $
    (7.68
    )
    
    $
    (0.13
    )
    
    $
    0.12Net income (loss), including the
effect of sharebased employee
compensation expense
    
    
    N/A
    
    
    $
    (0.27
    )
    
    $
    0.01
 
 (1)
    
    Net income (loss) and net income (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.  Years Ended December 31,2006
    
    2005
    
    2004Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    50%  60
    %
    
    
    30%  50
    %
    
    
    50
    %Riskfree interest rate
    
    
    4.3%  4.8
    %
    
    
    2.8%  4.3
    %
    
    
    2.1%  3.1
    %Expected term (in years)
    
    
    3.5  4.0
    
    
    
    0.2  3.5
    
    
    
    0.0  4.0Weightedaverage grant date fair value
    
    $
    3.98
    
    
    $
    5.34
    
    
    $
    5.90
  76




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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)
    WeightedAverageRemainingNumber
    
    Weighted
    
    Contractual
    
    Aggregateof
    
    Average
    
    Term
    
    IntrinsicOptions
    
    Exercise Price
    
    (In Years)
    
    ValueOptions outstanding, December 31, 2005
    
    
    2,979,139
    
    
    $
    13.24
    
    
    
    4.7
    
    
    $
    35,166Options granted
    
    
    2,193,772
    
    
    $
    8.50Options exercised
    
    
    (229,099
    )
    
    $
    2.06Options forfeited and expired
    
    
    (1,372,013
    )
    
    $
    14.71Options outstanding, December 31, 2006
    
    
    3,571,799
    
    
    $
    10.48
    
    
    
    5.0
    
    
    $
    1,035Options exercisable, December 31, 2006
    
    
    1,382,857
    
    
    $
    10.60
    
    
    
    4.8
    
    
    $
    697Options exercisable, December 31, 2005
    
    
    1,040,883
    
    
    $
    11.84
    
    
    
    4.6
    
    
    $
    13,735Options exercisable, December 31, 2004
    
    
    831,416
    
    
    $
    6.64
    
    
    
    3.7
    
    
    $
    12,980
   Year Ended December 31,2006
    
    2005
    
    2004Weightedaverage grantdate fair value of stock options granted
    
    $
    3.98
    
    
    $
    5.34
    
    
    $
    5.90Total fair value of stock options vested
    
    $
    7,289
    
    
    $
    5,894
    
    
    $
    2,562Total intrinsic value of stock options exercised
    
    $
    1,446
    
    
    $
    24,469
    
    
    $
    3,940
  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
    
    
    279,063
    
    
    
    2.76
    
    
    $
    3.57
    
    
    
    194,124
    
    
    $
    3.12$5.18  $7.87
    
    
    1,024,546
    
    
    
    5.62
    
    
    
    6.44
    
    
    
    209,796
    
    
    
    6.48$8.05  $9.90
    
    
    1,052,137
    
    
    
    5.81
    
    
    
    8.10
    
    
    
    423,186
    
    
    
    8.17$12.49  $17.84
    
    
    1,015,635
    
    
    
    4.32
    
    
    
    16.47
    
    
    
    529,604
    
    
    
    16.49$18.21  $24.88
    
    
    200,418
    
    
    
    4.92
    
    
    
    22.74
    
    
    
    26,147
    
    
    
    19.233,571,799
    
    
    
    5.04
    
    
    $
    10.48
    
    
    
    1,382,857
    
    
    $
    10.60
 77




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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)
 (8) Income Taxes
  2006
    
    
    2005
    
    
    2004(As restated)United States
    
    $
    (218,274
    )
    
    $
    (4,037
    )
    
    $
    (693
    )Foreign
    
    
    (31,199
    )
    
    
    9,150
    
    
    
    912$
    (249,473
    )
    
    $
    5,113
    
    
    $
    219
  2006
    
    
    2005
    
    
    2004(As restated)Current:Federal
    
    $
    313
    
    
    $
    2,816
    
    
    $
    699State
    
    
    (60
    )
    
    
    963
    
    
    
    552Foreign
    
    
    28
    
    
    
    669
    
    
    
    119Total current
    
    
    281
    
    
    
    4,448
    
    
    
    1,370Deferred:Federal
    
    
    8,332
    
    
    
    1,588
    
    
    
    (2,515
    )State
    
    
    1,619
    
    
    
    (299
    )
    
    
    (528
    )Foreign
    
    
    (782
    )
    
    
    2,636
    
    
    
    229Total deferred
    
    
    9,169
    
    
    
    3,925
    
    
    
    (2,814
    )Total provision
    
    $
    9,450
    
    
    $
    8,373
    
    
    $
    (1,444
    )
  Years Ended December 31,2006
    
    
    2005
    
    
    2004(As restated)Expected tax expense (benefit)
    
    $
    (84,820
    )
    
    $
    1,789
    
    
    $
    77Total increase in income taxes resulting from:Nondeductible amortization and acquired inprocess technology
    
    
    
    
    
    
    4,566
    
    
    
    Nondeductible impairment of goodwill
    
    
    72,793
    
    
    
    
    
    
    
    Change in valuation allowance allocated to income tax expense
    
    
    21,339
    
    
    
    
    
    
    
    Extraterritorial income tax benefit
    
    
    (219
    )
    
    
    (323
    )
    
    
    (1,457
    )Research and experimentation credit
    
    
    (209
    )
    
    
    
    
    
    
    (228
    )Employee stock options
    
    
    896
    
    
    
    
    
    
    
    Nondeductible expenses
    
    
    175
    
    
    
    484
    
    
    
    (39
    )Foreign income taxes, net of federal income tax benefit
    
    
    7
    
    
    
    (407
    )
    
    
    74State and local income taxes, net of federal income tax benefit
    
    
    (229
    )
    
    
    441
    
    
    
    21Foreign income tax rate differential
    
    
    (753
    )
    
    
    149
    
    
    
    15Business combination tax restructuring
    
    
    
    
    
    
    1,308
    
    
    
    Other
    
    
    470
    
    
    
    366
    
    
    
    93Actual income tax expense (benefit)
    
    $
    9,450
    
    
    $
    8,373
    
    
    $
    (1,444
    )
 78




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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)
  December 31,2006
    
    
    2005(As restated)Deferred tax assets:Accrued wages
    
    $
    1,175
    
    
    $
    1,110Deferred revenue
    
    
    437
    
    
    
    5,878Depreciation
    
    
    1,086
    
    
    
    662Research and experimentation credit carry forwards
    
    
    4,140
    
    
    
    3,956credit carry forwards
    
    
    1,515
    
    
    
    1,470Net operating loss carry forwards
    
    
    11,872
    
    
    
    8,588Foreign net operating loss carry forwards
    
    
    19,168
    
    
    
    11,950Nonqualified stock options
    
    
    1,381
    
    
    
    Other
    
    
    2,876
    
    
    
    2,065Total gross deferred tax assets
    
    
    43,650
    
    
    
    35,679Less: asset valuation allowance
    
    
    (30,018
    )
    
    
    (8,653
    )Net deferred tax asset
    
    
    13,632
    
    
    
    27,026Deferred tax liabilities:Software development costs and intangible assets
    
    
    (5,198
    )
    
    
    (5,981
    )Intangiblescustomer contracts & tradenames
    
    
    (3,554
    )
    
    
    (7,789
    )Other
    
    
    (860
    )
    
    
    (46
    )Total gross deferred liabilities
    
    
    (9,612
    )
    
    
    (13,816
    )Net deferred tax asset
    
    $
    4,020
    
    
    $
    13,210Included on balance sheet:Current assets: Deferred income taxes
    
    $
    196
    
    
    $
    11,735Noncurrent asset: Deferred income taxes
    
    
    4,326
    
    
    
    3,490Noncurrent liabilities: Deferred income taxes
    
    
    (502
    )
    
    
    (2,015
    )Net deferred income taxes
    
    $
    4,020
    
    
    $
    13,210
 , Accounting
for Income Taxes,
   79




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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)
   i.e.
  (9) Leases
   2007
    
    $
    2,1102008
    
    
    2,0522009
    
    
    1,5122010
    
    
    5852011
    
    
    305Thereafter
    
    
    252Total minimum lease payments
    
    $
    6,816
 (10) Commitments and Contingencies
  80




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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)
       81




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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) 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
    
    $
    1,997
  (12) Shareholders Equity
 (a) Common Stock
     (b) Special Voting Preferred Stock
  82




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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)
 (c) Series 2 Special Voting Preferred Stock
  (d) Series 3 Special Voting Preferred Stock
  (e) Series B Junior Participating Preferred Stock
   (f) Stock Option Plans
    83




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
   (g) Stock Purchase Plan
   (h) Exchange Rights
   (13) Employee Benefit Plan
   84




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 (14) Concentrations of Risk
 (a) Cash in Excess of Federally Insured Amount
  (b) Net Sales and Accounts Receivable
     Net Sales2006
    
    
    2005
    
    
    2004(As restated)United States of America
    
    $
    60,660
    
    
    $
    49,181
    
    
    $
    17,095Japan
    
    
    3,394
    
    
    
    24,377
    
    
    
    1,122Europe
    
    
    7,024
    
    
    
    6,626
    
    
    
    4,704Canada
    
    
    2,139
    
    
    
    1,877
    
    
    
    2,458Other
    
    
    1,105
    
    
    
    477
    
    
    
    98Total net sales
    
    $
    74,322
    
    
    $
    82,538
    
    
    $
    25,477
 LongLived Assets2006
    
    2005
    
    2004United States of America
    
    $
    2,576
    
    
    $
    2,889
    
    
    $
    1,128Canada
    
    
    1,096
    
    
    
    1,504
    
    
    
    338Europe
    
    
    231
    
    
    
    45
    
    
    
    28Other
    
    
    37
    
    
    
    2
    
    
    
    4
  (15) Quarterly Results (unaudited)
  85




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
   86




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 March 31, 2005
    
    
    
    
    
    
    March 31, 2005(As reported)
    
    
    (Adjustments)
    
    
    (As restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    22,569
    
    
    
    
    
    
    $
    22,569Accounts receivable, net
    
    
    11,557
    
    
    
    (75
    )(b)
    
    
    11,482Inventory
    
    
    1,094
    
    
    
    
    
    
    
    1,094Prepaid expenses
    
    
    1,350
    
    
    
    
    
    
    
    1,350Deferred income taxes
    
    
    8,114
    
    
    
    450
    (b,c)
    
    
    8,564Other current assets
    
    
    5,182
    
    
    
    
    
    
    
    5,182Total current assets
    
    
    49,866
    
    
    
    375
    
    
    
    50,241Net property and equipment
    
    
    1,758
    
    
    
    
    
    
    
    1,758Purchased and developed software, net
    
    
    10,685
    
    
    
    
    
    
    
    10,685Acquired intangibles, net
    
    
    1,163
    
    
    
    
    
    
    
    1,163Goodwill
    
    
    25,995
    
    
    
    
    
    
    
    25,995Other assets
    
    
    773
    
    
    
    
    
    
    
    773Total assets
    
    $
    90,240
    
    
    $
    375
    
    
    $
    90,615LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,877
    
    
    
    
    
    
    $
    2,877Accrued wages
    
    
    896
    
    
    
    
    
    
    
    896Other accrued liabilities
    
    
    1,523
    
    
    
    21
    (b)
    
    
    1,544Deferred revenue
    
    
    28,098
    
    
    
    258
    (a)
    
    
    28,356Income taxes payable
    
    
    
    
    
    
    165
    (b,c)
    
    
    165Total current liabilities
    
    
    33,394
    
    
    
    444
    
    
    
    33,838Deferred income taxes
    
    
    865
    
    
    
    (7
    )(b)
    
    
    858Deferred revenue
    
    
    
    
    
    
    657
    (a)
    
    
    657Total liabilities
    
    
    34,259
    
    
    
    1,094
    
    
    
    35,353Total shareholders equity
    
    
    55,981
    
    
    
    (719
    )
    
    
    55,262Total liabilities and shareholders equity
    
    $
    90,240
    
    
    $
    375
    
    
    $
    90,615
 87




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 Quarter Ended
    
    
    
    
    
    
    Quarter EndedMarch 31, 2005
    
    
    
    
    
    
    March 31, 2005(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Net sales:Software and other
    
    $
    4,648
    
    
    $
    (11
    )(a)
    
    $
    4,637Services and maintenance
    
    
    2,289
    
    
    
    (12
    )(a)
    
    
    2,277Total net sales
    
    
    6,937
    
    
    
    (23
    )
    
    
    6,914Cost of sales:Software and other
    
    
    570
    
    
    
    (1
    )(a)
    
    
    569Services and maintenance
    
    
    1,634
    
    
    
    (27
    )(a)
    
    
    1,607Amortization
    
    
    702
    
    
    
    
    
    
    
    702Total cost of sales
    
    
    2,906
    
    
    
    (28
    )
    
    
    2,878Gross profit
    
    
    4,031
    
    
    
    5
    
    
    
    4,036Operating costs and expenses:Sales and marketing
    
    
    1,580
    
    
    
    
    
    
    
    1,580Product research and development
    
    
    753
    
    
    
    
    
    
    
    753General and administrative
    
    
    1,218
    
    
    
    21
    (b)
    
    
    1,239Depreciation and amortization
    
    
    303
    
    
    
    
    
    
    
    303Total operating costs and expenses
    
    
    3,854
    
    
    
    21
    
    
    
    3,875Operating income
    
    
    177
    
    
    
    (16
    )
    
    
    161Other income (expense):Interest income
    
    
    120
    
    
    
    
    
    
    
    120Other, net
    
    
    (43
    )
    
    
    
    
    
    
    (43
    )Total other income
    
    
    77
    
    
    
    
    
    
    
    77Income before income taxes
    
    
    254
    
    
    
    (16
    )
    
    
    238Income tax expense (benefit)
    
    
    89
    
    
    
    28
    (b,c)
    
    
    117Net income
    
    $
    165
    
    
    $
    (44
    )
    
    $
    121Net income per share  basic
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.01Weighted average number of common
shares outstanding  basic
    
    
    13,208,370
    
    
    
    
    
    
    
    13,208,370Net income per share  diluted
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.01Weighted average number of common
shares outstanding  diluted
    
    
    13,992,241
    
    
    
    
    
    
    
    13,992,241
 88




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 June 30, 2005
    
    
    
    
    
    
    June 30, 2005(As reported)
    
    
    (Adjustments)
    
    
    (As restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    39,830
    
    
    
    
    
    
    $
    39,830Accounts receivable, net
    
    
    23,754
    
    
    
    (75
    )(b)
    
    
    23,679Inventory
    
    
    1,814
    
    
    
    
    
    
    
    1,814Prepaid expenses
    
    
    2,857
    
    
    
    
    
    
    
    2,857Deferred income taxes
    
    
    8,823
    
    
    
    453
    (b,c)
    
    
    9,276Other current assets
    
    
    4,824
    
    
    
    
    
    
    
    4,824Total current assets
    
    
    81,902
    
    
    
    378
    
    
    
    82,280Net property and equipment
    
    
    3,882
    
    
    
    
    
    
    
    3,882Purchased and developed software, net
    
    
    22,905
    
    
    
    
    
    
    
    22,905Acquired intangibles, net
    
    
    12,934
    
    
    
    
    
    
    
    12,934Goodwill
    
    
    354,953
    
    
    
    (162
    ) (b)(5,338
    ) (d)
    
    
    349,453Other assets
    
    
    3,347
    
    
    
    175
    (b)
    
    
    3,522Deferred income taxes
    
    
    
    
    
    
    6,297
    (d)15
    (b)
    
    
    6,312Total assets
    
    $
    479,923
    
    
    $
    1,365
    
    
    $
    481,288LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    7,300
    
    
    
    
    
    
    $
    7,300Accrued wages
    
    
    5,988
    
    
    
    
    
    
    
    5,988Other accrued liabilities
    
    
    5,113
    
    
    
    7
    (b)
    
    
    5,120Deferred revenue
    
    
    34,964
    
    
    
    266
    (a)
    
    
    35,230Income taxes payable
    
    
    3,464
    
    
    
    214
    (b,c)
    
    
    3,678Total current liabilities
    
    
    56,829
    
    
    
    487
    
    
    
    57,316Deferred income taxes
    
    
    1,056
    
    
    
    959
    (d)
    
    
    2,015Deferred revenue
    
    
    
    
    
    
    616
    (a)
    
    
    616Total liabilities
    
    
    57,885
    
    
    
    2,062
    
    
    
    59,947Total shareholders equity
    
    
    422,038
    
    
    
    (697
    )
    
    
    421,341Total liabilities and shareholders equity
    
    $
    479,923
    
    
    $
    1,365
    
    
    $
    481,288
 89




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 Quarter Ended
    
    
    
    
    
    
    Quarter EndedJune 30, 2005
    
    
    
    
    
    
    June 30, 2005(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Net sales:Software and other
    
    $
    11,037
    
    
    $
    20
    (a)
    
    $
    11,057Services and maintenance
    
    
    4,124
    
    
    
    18
    (a)
    
    
    4,142Total net sales
    
    
    15,161
    
    
    
    38
    
    
    
    15,199Cost of sales:Software and other
    
    
    1,805
    
    
    
    3
    (a)
    
    
    1,808Services and maintenance
    
    
    2,478
    
    
    
    2
    (a)
    
    
    2,480Amortization
    
    
    1,887
    
    
    
    
    
    
    
    1,887Total cost of sales
    
    
    6,170
    
    
    
    5
    
    
    
    6,175Gross profit
    
    
    8,991
    
    
    
    33
    
    
    
    9,024Operating costs and expenses:Sales and marketing
    
    
    2,810
    
    
    
    
    
    
    
    2,810Product research and development
    
    
    1,648
    
    
    
    
    
    
    
    1,648General and administrative
    
    
    3,966
    
    
    
    (14
    ) (b)
    
    
    3,952Acquired in process R&D
    
    
    12,989
    
    
    
    
    
    
    
    12,989Goodwill impairment, restructuring
and other expenses
    
    
    589
    
    
    
    
    
    
    
    589Depreciation and amortization
    
    
    1,087
    
    
    
    
    
    
    
    1,087Total operating costs and expenses
    
    
    23,089
    
    
    
    (14
    )
    
    
    23,075Operating loss
    
    
    (14,098
    )
    
    
    47
    
    
    
    (14,051
    )Other income (expense):Interest income
    
    
    169
    
    
    
    
    
    
    
    169Other, net
    
    
    (82
    )
    
    
    
    
    
    
    (82
    )Total other income
    
    
    87
    
    
    
    
    
    
    
    87Loss before income taxes
    
    
    (14,011
    )
    
    
    47
    
    
    
    (13,964
    )Income tax expense (benefit)
    
    
    1,190
    
    
    
    39
    (b,c)
    
    
    1,229Net loss
    
    $
    (15,201
    )
    
    $
    8
    
    
    $
    (15,193
    )Net loss per share  basic
    
    $
    (0.79
    )
    
    $
    0.00
    
    
    $
    (0.79
    )Weighted average number of common
shares outstanding  basic
    
    
    19,254,640
    
    
    
    
    
    
    
    19,254,640Net loss per share  diluted
    
    $
    (0.79
    )
    
    $
    0.00
    
    
    $
    (0.79
    )Weighted average number of common
shares outstanding  diluted
    
    
    19,254,640
    
    
    
    
    
    
    
    19,254,640
 90




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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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 September 30, 2005
    
    
    
    
    
    
    September 30, 2005(As reported)
    
    
    (Adjustments)
    
    
    (As restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    46,465
    
    
    
    
    
    
    $
    46,465Accounts receivable, net
    
    
    33,097
    
    
    
    (140
    )(b)
    
    
    32,957Inventory
    
    
    1,838
    
    
    
    
    
    
    
    1,838Prepaid expenses
    
    
    2,849
    
    
    
    
    
    
    
    2,849Deferred income taxes
    
    
    7,999
    
    
    
    480
    (b,c)
    
    
    8,479Other current assets
    
    
    4,846
    
    
    
    
    
    
    
    4,846Total current assets
    
    
    97,094
    
    
    
    340
    
    
    
    97,434Net property and equipment
    
    
    3,758
    
    
    
    
    
    
    
    3,758Purchased and developed software, net
    
    
    22,633
    
    
    
    
    
    
    
    22,633Acquired intangibles, net
    
    
    12,359
    
    
    
    
    
    
    
    12,359Goodwill
    
    
    349,696
    
    
    
    (155
    )(b)(5,337
    ) (d)
    
    
    344,204Other assets
    
    
    3,674
    
    
    
    160
    (b)
    
    
    3,834Deferred income taxes
    
    
    
    
    
    
    6,005
    (d)22
    (b)
    
    
    6,027Total assets
    
    $
    489,214
    
    
    $
    1,035
    
    
    $
    490,249LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,071
    
    
    
    
    
    
    $
    6,071Accrued wages
    
    
    6,657
    
    
    
    
    
    
    
    6,657Other accrued liabilities
    
    
    3,016
    
    
    
    28
    (b)
    
    
    3,044Deferred revenue
    
    
    31,162
    
    
    
    285
    (a)
    
    
    31,447Income taxes payable
    
    
    3,550
    
    
    
    263
    (b,c)
    
    
    3,813Total current liabilities
    
    
    50,456
    
    
    
    576
    
    
    
    51,032Deferred income taxes
    
    
    1,074
    
    
    
    941
    (d)
    
    
    2,015Deferred revenue
    
    
    
    
    
    
    565
    (a)
    
    
    565Total liabilities
    
    
    51,530
    
    
    
    2,082
    
    
    
    53,612Total shareholders equity
    
    
    437,684
    
    
    
    (1,047
    )
    
    
    436,637Total liabilities and shareholders equity
    
    $
    489,214
    
    
    $
    1,035
    
    
    $
    490,249
 91




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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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 Quarter Ended
    
    
    
    
    
    
    Quarter EndedSeptember 30, 2005
    
    
    
    
    
    
    September 30, 2005(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Net sales:Software and other
    
    $
    26,733
    
    
    $
    (23
    )(a,b)
    
    $
    26,710Services and maintenance
    
    
    8,310
    
    
    
    (4
    )(a,b)
    
    
    8,306Total net sales
    
    
    35,043
    
    
    
    (27
    )
    
    
    35,016Cost of sales:Software and other
    
    
    2,587
    
    
    
    4
    (a)
    
    
    2,591Services and maintenance
    
    
    3,451
    
    
    
    2
    (a)
    
    
    3,453Amortization
    
    
    1,162
    
    
    
    
    
    
    
    1,162Total cost of sales
    
    
    7,200
    
    
    
    6
    
    
    
    7,206Gross profit
    
    
    27,843
    
    
    
    (33
    )
    
    
    27,810Operating costs and expenses:Sales and marketing
    
    
    4,256
    
    
    
    
    
    
    
    4,256Product research and development
    
    
    3,513
    
    
    
    
    
    
    
    3,513General and administrative
    
    
    4,005
    
    
    
    21
    (b)
    
    
    4,026Acquired in process R&D
    
    
    57
    
    
    
    
    
    
    
    57Goodwill impairment, restructuring
and other expenses
    
    
    160
    
    
    
    
    
    
    
    160Depreciation and amortization
    
    
    1,039
    
    
    
    
    
    
    
    1,039Total operating costs and expenses
    
    
    13,030
    
    
    
    21
    
    
    
    13,051Operating income
    
    
    14,813
    
    
    
    (54
    )
    
    
    14,759Other income (expense):Interest expense
    
    
    (25
    )
    
    
    
    
    
    
    (25
    )Interest income
    
    
    330
    
    
    
    
    
    
    
    330Other, net
    
    
    (145
    )
    
    
    
    
    
    
    (145
    )Total other income
    
    
    160
    
    
    
    
    
    
    
    160Income before income taxes
    
    
    14,973
    
    
    
    (54
    )
    
    
    14,919Income tax expense (benefit)
    
    
    5,373
    
    
    
    288
    (b,c,d)
    
    
    5,661Net income
    
    $
    9,600
    
    
    $
    (342
    )
    
    $
    9,258Net income per share  basic
    
    $
    0.30
    
    
    $
    (0.02
    )
    
    $
    0.28Weighted average number of common
Shares outstanding  basic
    
    
    32,491,717
    
    
    
    
    
    
    
    32,491,717Net income per share  diluted
    
    $
    0.28
    
    
    $
    (0.01
    )
    
    $
    0.27Weighted average number of common
shares outstanding  diluted
    
    
    34,271,312
    
    
    
    
    
    
    
    34,271,312
 92




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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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 December 31, 2005
    
    
    
    
    
    
    December 31, 2005(As reported)
    
    
    (Adjustments)
    
    
    (As restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    64,278
    
    
    
    
    
    
    $
    64,278Accounts receivable, net
    
    
    23,624
    
    
    
    (330
    )(b)
    
    
    23,294Inventory
    
    
    2,440
    
    
    
    
    
    
    
    2,440Prepaid expenses
    
    
    2,646
    
    
    
    
    
    
    
    2,646Deferred income taxes
    
    
    11,213
    
    
    
    522
    (b,c)
    
    
    11,735Other current assets
    
    
    3,208
    
    
    
    
    
    
    
    3,208Total current assets
    
    
    107,409
    
    
    
    192
    
    
    
    107,601Net property and equipment
    
    
    4,440
    
    
    
    
    
    
    
    4,440Purchased and developed software, net
    
    
    19,539
    
    
    
    
    
    
    
    19,539Acquired intangibles, net
    
    
    11,789
    
    
    
    
    
    
    
    11,789Goodwill
    
    
    350,634
    
    
    
    (176
    )(b)(5,337
    )(d)
    
    
    345,121Other assets
    
    
    7,862
    
    
    
    203
    (b)
    
    
    8,065Deferred income taxes
    
    
    
    
    
    
    3,460
    (d)30
    (b)
    
    
    3,490Total assets
    
    $
    501,673
    
    
    $
    (1,628
    )
    
    $
    500,045LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,938
    
    
    
    
    
    
    $
    5,938Accrued wages
    
    
    5,870
    
    
    
    
    
    
    
    5,870Other accrued liabilities
    
    
    3,453
    
    
    
    50
    (b)
    
    
    3,503Deferred revenue
    
    
    30,918
    
    
    
    202
    (a)
    
    
    31,120Income taxes payable
    
    
    3,894
    
    
    
    312
    (b,c)
    
    
    4,206Total current liabilities
    
    
    50,073
    
    
    
    564
    
    
    
    50,637Deferred income taxes
    
    
    3,491
    
    
    
    (1,476
    )(d)
    
    
    2,015Deferred revenue
    
    
    3,784
    
    
    
    533
    (a)
    
    
    4,317Other
    
    
    484
    
    
    
    
    
    
    
    484Total liabilities
    
    
    57,832
    
    
    
    (379
    )
    
    
    57,453Total shareholders equity
    
    
    443,841
    
    
    
    (1,249
    )
    
    
    442,592Total liabilities and shareholders equity
    
    $
    501,673
    
    
    $
    (1,628
    )
    
    $
    500,045
 93




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 Quarter Ended
    
    
    
    
    
    
    Quarter EndedDecember 31, 2005
    
    
    
    
    
    
    December 31, 2005(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Net sales:Software and other
    
    $
    17,702
    
    
    $
    (87
    )(a.b)
    
    $
    17,615Services and maintenance
    
    
    7,758
    
    
    
    36
    (a,b)
    
    
    7,794Total net sales
    
    
    25,460
    
    
    
    (51
    )
    
    
    25,409Cost of sales:Software and other
    
    
    1,959
    
    
    
    14
    (a)
    
    
    1,973Services and maintenance
    
    
    3,542
    
    
    
    5
    (a)
    
    
    3,547Amortization
    
    
    3,989
    
    
    
    
    
    
    
    3,989Total cost of sales
    
    
    9,490
    
    
    
    19
    
    
    
    9,509Gross profit
    
    
    15,970
    
    
    
    (70
    )
    
    
    15,900Operating costs and expenses:Sales and marketing
    
    
    5,000
    
    
    
    
    
    
    
    5,000Product research and development
    
    
    4,000
    
    
    
    
    
    
    
    4,000General and administrative
    
    
    2,435
    
    
    
    57
    (b)
    
    
    2,492Goodwill impairment, restructuring
and other expenses
    
    
    (219
    )
    
    
    
    
    
    
    (219
    )Depreciation and amortization
    
    
    1,119
    
    
    
    
    
    
    
    1,119Total operating costs and expenses
    
    
    12,335
    
    
    
    57
    
    
    
    12,392Operating income
    
    
    3,635
    
    
    
    (127
    )
    
    
    3,508Other income (expense):Interest expense
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )Interest income
    
    
    442
    
    
    
    
    
    
    
    442Other, net
    
    
    (47
    )
    
    
    30
    (b)
    
    
    (17
    )Total other income
    
    
    382
    
    
    
    30
    
    
    
    412Income before income taxes
    
    
    4,017
    
    
    
    (97
    )
    
    
    3,920Income tax expense (benefit)
    
    
    1,238
    
    
    
    128
    (b,c,d)
    
    
    1,366Net income
    
    $
    2,779
    
    
    $
    (225
    )
    
    $
    2,554Net income per share  basic
    
    $
    0.08
    
    
    $
    (0.00
    )
    
    $
    0.08Weighted average number of common
shares outstanding  basic
    
    
    33,523,440
    
    
    
    
    
    
    
    33,523,440Net income per share  diluted
    
    $
    0.08
    
    
    $
    (0.01
    )
    
    $
    0.07Weighted average number of common
shares outstanding  diluted
    
    
    34,930,278
    
    
    
    
    
    
    
    34,930,278
 94




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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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 March 31, 2006
    
    
    
    
    
    
    March 31, 2006(As reported)
    
    
    (Adjustments)
    
    
    (As restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    65,128
    
    
    
    
    
    
    $
    65,128Accounts receivable, net
    
    
    20,061
    
    
    
    (398)
    (b)
    
    
    19,663Inventory
    
    
    2,838
    
    
    
    
    
    
    
    2,838Prepaid expenses
    
    
    3,276
    
    
    
    
    
    
    
    3,276Deferred income taxes
    
    
    11,213
    
    
    
    550
    (b,c)
    
    
    11,763Other current assets
    
    
    2,947
    
    
    
    
    
    
    
    2,947Total current assets
    
    
    105,463
    
    
    
    152
    
    
    
    105,615Net property and equipment
    
    
    4,254
    
    
    
    
    
    
    
    4,254Purchased and developed software, net
    
    
    19,147
    
    
    
    
    
    
    
    19,147Acquired intangibles, net
    
    
    11,219
    
    
    
    
    
    
    
    11,219Goodwill
    
    
    350,521
    
    
    
    (176
    )(b)(5,337
    )(d)
    
    
    345,008Other assets
    
    
    7,312
    
    
    
    173
    (b)
    
    
    7,485Deferred income taxes
    
    
    
    
    
    
    4,765
    (d)45
    (b)
    
    
    4,810Total assets
    
    $
    497,916
    
    
    $
    (378
    )
    
    $
    497,538LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,650
    
    
    
    
    
    
    $
    5,650Accrued wages
    
    
    5,198
    
    
    
    
    
    
    
    5,198Other accrued liabilities
    
    
    3,762
    
    
    
    94
    (b)
    
    
    3,856Deferred revenue
    
    
    33,517
    
    
    
    276
    (a)
    
    
    33,793Income taxes payable
    
    
    3,894
    
    
    
    325
    (b,c)
    
    
    4,219Total current liabilities
    
    
    52,021
    
    
    
    695
    
    
    
    52,716Deferred income taxes
    
    
    1,839
    
    
    
    176
    (d)
    
    
    2,015Deferred revenue
    
    
    3,396
    
    
    
    449
    (a)
    
    
    3,845Other
    
    
    453
    
    
    
    
    
    
    
    453Total liabilities
    
    
    57,709
    
    
    
    1,320
    
    
    
    59,029Total shareholders equity
    
    
    440,207
    
    
    
    (1,698
    )
    
    
    438,509Total liabilities and shareholders equity
    
    $
    497,916
    
    
    $
    (378
    )
    
    $
    497,538
 95




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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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 Quarter Ended
    
    
    
    
    
    
    Quarter EndedMarch 31, 2006
    
    
    
    
    
    
    March 31, 2006(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Net sales:Software and other
    
    $
    9,545
    
    
    $
    (21
    )(a,b)
    
    $
    9,524Services and maintenance
    
    
    6,651
    
    
    
    (35
    )(a,b)
    
    
    6,616Total net sales
    
    
    16,196
    
    
    
    (56
    )
    
    
    16,140Cost of sales:Software and other
    
    
    1,372
    
    
    
    2
    (a)
    
    
    1,374Services and maintenance
    
    
    3,686
    
    
    
    
    
    
    
    3,686Amortization
    
    
    1,277
    
    
    
    
    
    
    
    1,277Total cost of sales
    
    
    6,335
    
    
    
    2
    
    
    
    6,337Gross profit
    
    
    9,861
    
    
    
    (58
    )
    
    
    9,803Operating costs and expenses:Sales and marketing
    
    
    5,221
    
    
    
    
    
    
    
    5,221Product research and development
    
    
    5,129
    
    
    
    
    
    
    
    5,129General and administrative
    
    
    5,841
    
    
    
    44
    (b)
    
    
    5,885Goodwill impairment, restructuring
and other expenses
    
    
    22
    
    
    
    
    
    
    
    22Depreciation and amortization
    
    
    1,042
    
    
    
    
    
    
    
    1,042Total operating costs and expenses
    
    
    17,255
    
    
    
    44
    
    
    
    17,299Operating loss
    
    
    (7,394
    )
    
    
    (102
    )
    
    
    (7,496
    )Other income (expense):Interest expense
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Interest income
    
    
    660
    
    
    
    
    
    
    
    660Other, net
    
    
    20
    
    
    
    
    
    
    
    20Total other income
    
    
    676
    
    
    
    
    
    
    
    676Loss before income taxes
    
    
    (6,718
    )
    
    
    (102
    )
    
    
    (6,820
    )Income tax expense (benefit)
    
    
    (1,818
    )
    
    
    318
    (b,c,d)
    
    
    (1,500
    )Net loss
    
    $
    (4,900
    )
    
    $
    (420
    )
    
    $
    (5,320
    )Net loss per share  basic
    
    $
    (0.15
    )
    
    $
    ( 0.01
    )
    
    $
    (0.16
    )Weighted average number of common
shares outstanding  basic
    
    
    33,634,778
    
    
    
    
    
    
    
    33,634,778Net loss per share  diluted
    
    $
    (0.15
    )
    
    $
    ( 0.01
    )
    
    $
    (0.16
    )Weighted average number of common
shares outstanding  diluted
    
    
    33,634,778
    
    
    
    
    
    
    
    33,634,778
 96




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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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 June 30, 2006
    
    
    
    
    
    
    June 30, 2006(As reported)
    
    
    (Adjustments)
    
    
    (As restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    60,689
    
    
    
    
    
    
    $
    60,689Accounts receivable, net
    
    
    15,359
    
    
    
    (511
    )(b)
    
    
    14,848Inventory
    
    
    2,616
    
    
    
    
    
    
    
    2,616Prepaid expenses
    
    
    2,670
    
    
    
    
    
    
    
    2,670Deferred income taxes
    
    
    5,652
    
    
    
    639
    (b,c)
    
    
    6,291Other current assets
    
    
    555
    
    
    
    
    
    
    
    555Total current assets
    
    
    87,541
    
    
    
    128
    
    
    
    87,669Net property and equipment
    
    
    4,078
    
    
    
    
    
    
    
    4,078Purchased and developed software, net
    
    
    18,752
    
    
    
    
    
    
    
    18,752Acquired intangibles, net
    
    
    10,650
    
    
    
    
    
    
    
    10,650Goodwill
    
    
    131,092
    
    
    
    (176
    )(b,d)
    
    
    130,916Other assets
    
    
    9,238
    
    
    
    181
    (b)
    
    
    9,419Deferred income taxes
    
    
    2,442
    
    
    
    6,256
    (d)61
    (b)
    
    
    8,759Total assets
    
    $
    263,793
    
    
    $
    6,450
    
    
    $
    270,243LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,552
    
    
    
    
    
    
    $
    5,552Accrued wages
    
    
    4,829
    
    
    
    
    
    
    
    4,829Other accrued liabilities
    
    
    3,418
    
    
    
    138
    (b)
    
    
    3,556Deferred revenue
    
    
    15,935
    
    
    
    359
    (a)
    
    
    16,294Income taxes payable
    
    
    3,894
    
    
    
    338
    (b,c)
    
    
    4,232Total current liabilities
    
    
    33,628
    
    
    
    835
    
    
    
    34,463Deferred income taxes
    
    
    
    
    
    
    2,015
    (d)
    
    
    2,015Deferred revenue
    
    
    4,671
    
    
    
    542
    (a)
    
    
    5,213Other
    
    
    420
    
    
    
    
    
    
    
    420Total liabilities
    
    
    38,719
    
    
    
    3,392
    
    
    
    42,111Total shareholders equity
    
    
    225,074
    
    
    
    3,058
    
    
    
    228,132Total liabilities and shareholders equity
    
    $
    263,793
    
    
    $
    6,450
    
    
    $
    270,243
 97




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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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 Quarter Ended
    
    
    
    
    
    
    Quarter EndedJune 30, 2006
    
    
    
    
    
    
    June 30, 2006(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Net sales:Software and other
    
    $
    18,770
    
    
    $
    (127
    )(a,b)
    
    $
    18,643Services and maintenance
    
    
    12,952
    
    
    
    (158
    )(a,b)
    
    
    12,794Total net sales
    
    
    31,722
    
    
    
    (285
    )
    
    
    31,437Cost of sales:Software and other
    
    
    4,470
    
    
    
    2
    (a)
    
    
    4,472Services and maintenance
    
    
    3,787
    
    
    
    2
    (a)
    
    
    3,789Amortization
    
    
    1,068
    
    
    
    
    
    
    
    1,068Total cost of sales
    
    
    9,325
    
    
    
    4
    
    
    
    9,329Gross profit
    
    
    22,397
    
    
    
    (289
    )
    
    
    22,108Operating costs and expenses:Sales and marketing
    
    
    5,233
    
    
    
    
    
    
    
    5,233Product research and development
    
    
    5,083
    
    
    
    
    
    
    
    5,083General and administrative
    
    
    6,345
    
    
    
    44
    (b)
    
    
    6,389Goodwill impairment, restructuring
and other expenses
    
    
    219,462
    
    
    
    (5,338
    )(d)
    
    
    214,124Depreciation and amortization
    
    
    1,142
    
    
    
    
    
    
    
    1,142Total operating costs and expenses
    
    
    237,265
    
    
    
    (5,294
    )
    
    
    231,971Operating loss
    
    
    (214,868
    )
    
    
    5,005
    
    
    
    (209,863
    )Other income (expense):Interest expense
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )Interest income
    
    
    696
    
    
    
    
    
    
    
    696Other, net
    
    
    (216
    )
    
    
    
    
    
    
    (216
    )Total other income
    
    
    459
    
    
    
    
    
    
    
    459Loss before income taxes
    
    
    (214,409
    )
    
    
    5,005
    
    
    
    (209,404
    )Income tax expense (benefit)
    
    
    1,360
    
    
    
    255
    (b,c,d)
    
    
    1,615Net loss
    
    $
    (215,769
    )
    
    $
    4,750
    
    
    $
    (211,019
    )Net loss per share  basic
    
    $
    (6.41
    )
    
    $
    0.14
    
    
    $
    (6.27
    )Weighted average number of common
shares outstanding  basic
    
    
    33,637,779
    
    
    
    
    
    
    
    33,637,779Net loss per share  diluted
    
    $
    (6.41
    )
    
    $
    0.14
    
    
    $
    (6.27
    )Weighted average number of common
shares outstanding  diluted
    
    
    33,637,779
    
    
    
    
    
    
    
    33,637,779
 98




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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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 September 30, 2006
    
    
    
    
    
    
    September 30, 2006(As reported)
    
    
    (Adjustments)
    
    
    (As restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    52,159
    
    
    
    
    
    
    $
    52,159Accounts receivable, net
    
    
    15,148
    
    
    
    (649
    )(b)
    
    
    14,499Inventory
    
    
    2,229
    
    
    
    
    
    
    
    2,229Prepaid expenses
    
    
    2,879
    
    
    
    
    
    
    
    2,879Deferred income taxes
    
    
    1,297
    
    
    
    648
    (b,c)
    
    
    1,945Other current assets
    
    
    751
    
    
    
    
    
    
    
    751Total current assets
    
    
    74,463
    
    
    
    (1
    )
    
    
    74,462Net property and equipment
    
    
    3,976
    
    
    
    
    
    
    
    3,976Purchased and developed software, net
    
    
    18,158
    
    
    
    
    
    
    
    18,158Acquired intangibles, net
    
    
    10,080
    
    
    
    
    
    
    
    10,080Goodwill
    
    
    131,092
    
    
    
    (176
    )(b,d)
    
    
    130,916Other assets
    
    
    9,702
    
    
    
    167
    (b)
    
    
    9,869Deferred income taxes
    
    
    5,488
    
    
    
    5,909
    (d)76
    (b)
    
    
    11,473Total assets
    
    $
    252,959
    
    
    $
    5,975
    
    
    $
    258,934LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,261
    
    
    
    
    
    
    $
    4,261Accrued wages
    
    
    4,894
    
    
    
    
    
    
    
    4,894Other accrued liabilities
    
    
    2,218
    
    
    
    182
    (b)
    
    
    2,400Deferred revenue
    
    
    16,790
    
    
    
    365
    (a)
    
    
    17,155Income taxes payable
    
    
    4,034
    
    
    
    351
    (b,c)
    
    
    4,385Total current liabilities
    
    
    32,197
    
    
    
    898
    
    
    
    33,095Deferred income taxes
    
    
    
    
    
    
    2,015
    (d)
    
    
    2,015Deferred revenue
    
    
    3,657
    
    
    
    471
    (a)
    
    
    4,128Other
    
    
    392
    
    
    
    
    
    
    
    392Total liabilities
    
    
    36,246
    
    
    
    3,384
    
    
    
    39,630Total shareholders equity
    
    
    216,713
    
    
    
    2,591
    
    
    
    219,304Total liabilities and shareholders equity
    
    $
    252,959
    
    
    $
    5,975
    
    
    $
    258,934
 99




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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)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 Quarter Ended
    
    
    
    
    
    
    Quarter EndedSeptember 30, 2006
    
    
    
    
    
    
    September 30, 2006(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Net sales:Software and other
    
    $
    6,632
    
    
    $
    (20)
    (a,b)
    
    $
    6,612Services and maintenance
    
    
    7,318
    
    
    
    (41)
    (a,b)
    
    
    7,277Total net sales
    
    
    13,950
    
    
    
    (61
    )
    
    
    13,889Cost of sales:Software and other
    
    
    1,800
    
    
    
    9
    (a)
    
    
    1,809Services and maintenance
    
    
    3,512
    
    
    
    3
    (a)
    
    
    3,515Amortization
    
    
    1,243
    
    
    
    
    
    
    
    1,243Total cost of sales
    
    
    6,555
    
    
    
    12
    
    
    
    6,567Gross profit
    
    
    7,395
    
    
    
    (73
    )
    
    
    7,322Operating costs and expenses:Sales and marketing
    
    
    4,352
    
    
    
    
    
    
    
    4,352Product research and development
    
    
    4,847
    
    
    
    
    
    
    
    4,847General and administrative
    
    
    8,148
    
    
    
    44
    (b)
    
    
    8,192Depreciation and amortization
    
    
    854
    
    
    
    
    
    
    
    854Total operating costs and expenses
    
    
    18,201
    
    
    
    44
    
    
    
    18,245Operating loss
    
    
    (10,806
    )
    
    
    (117
    )
    
    
    (10,923
    )Other income (expense):Interest expense
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )Interest income
    
    
    646
    
    
    
    
    
    
    
    646Other, net
    
    
    207
    
    
    
    
    
    
    
    207Total other income
    
    
    843
    
    
    
    
    
    
    
    843Loss before income taxes
    
    
    (9,963
    )
    
    
    (117
    )
    
    
    (10,080
    )Income tax expense (benefit)
    
    
    788
    
    
    
    337
    (b,c,d)
    
    
    1,125Net loss
    
    $
    (10,751
    )
    
    $
    (454
    )
    
    $
    (11,205
    )Net loss per share  basic
    
    $
    (0.32
    )
    
    $
    (0.01
    )
    
    $
    (0.33
    )Weighted average number of common
shares outstanding  basic
    
    
    33,683,231
    
    
    
    
    
    
    
    33,683,231Net loss per share  diluted
    
    $
    (0.32
    )
    
    $
    (0.01
    )
    
    $
    (0.33
    )Weighted average number of common
shares outstanding  diluted
    
    
    33,683,231
    
    
    
    
    
    
    
    33,683,231
 100




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 December 31, 2006
    
    
    
    
    
    
    December 31, 2006(As reported)
    
    
    (Adjustments)
    
    
    (As restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    45,945
    
    
    
    
    
    
    $
    45,945Accounts receivable, net
    
    
    17,210
    
    
    
    (783
    )(b)
    
    
    16,427Inventory
    
    
    2,164
    
    
    
    
    
    
    
    2,164Prepaid expenses
    
    
    1,660
    
    
    
    
    
    
    
    1,660Deferred income taxes
    
    
    196
    
    
    
    
    
    
    
    196Other current assets
    
    
    812
    
    
    
    
    
    
    
    812Total current assets
    
    
    67,987
    
    
    
    (783
    )
    
    
    67,204Net property and equipment
    
    
    3,940
    
    
    
    
    
    
    
    3,940Purchased and developed software, net
    
    
    16,628
    
    
    
    
    
    
    
    16,628Acquired intangibles, net
    
    
    9,511
    
    
    
    
    
    
    
    9,511Goodwill
    
    
    124,407
    
    
    
    (176
    )(b,d)
    
    
    124,231Other assets
    
    
    8,887
    
    
    
    148
    (b)
    
    
    9,035Deferred income taxes
    
    
    3,303
    
    
    
    673
    (d)350
    (c)
    
    
    4,326Total assets
    
    $
    234,663
    
    
    $
    212
    
    
    $
    234,875LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,284
    
    
    
    
    
    
    $
    8,284Accrued wages
    
    
    6,244
    
    
    
    (82
    )(b)
    
    
    6,162Other accrued liabilities
    
    
    2,381
    
    
    
    192
    (b)
    
    
    2,573Deferred revenue
    
    
    18,175
    
    
    
    511
    (a,b)
    
    
    18,686Income taxes payable
    
    
    4,033
    
    
    
    365
    (b,c)
    
    
    4,398Total current liabilities
    
    
    39,117
    
    
    
    986
    
    
    
    40,103Deferred income taxes
    
    
    
    
    
    
    502
    (d)
    
    
    502Deferred revenue
    
    
    3,218
    
    
    
    494
    (a)
    
    
    3,712Other
    
    
    633
    
    
    
    
    
    
    
    633Total liabilities
    
    
    42,968
    
    
    
    1,982
    
    
    
    44,950Total shareholders equity
    
    
    191,695
    
    
    
    (1,770
    )
    
    
    189,925Total liabilities and shareholders equity
    
    $
    234,663
    
    
    $
    212
    
    
    $
    234,875
 101




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 Quarter Ended
    
    
    
    
    
    
    Quarter EndedDecember 31, 2006
    
    
    
    
    
    
    December 31, 2006(As reported)
    
    
    (Adjustments)
    
    
    (As restated)Net sales:Software and other
    
    $
    5,688
    
    
    $
    (192
    )(a,b)
    
    $
    5,496Services and maintenance
    
    
    7,486
    
    
    
    (126
    )(a,b)
    
    
    7,360Total net sales
    
    
    13,174
    
    
    
    (318
    )
    
    
    12,856Cost of sales:Software and other
    
    
    1,969
    
    
    
    (19
    )(a,b)
    
    
    1,950Services and maintenance
    
    
    3,479
    
    
    
    3
    (a)
    
    
    3,482Amortization
    
    
    1,944
    
    
    
    
    
    
    
    1,944Total cost of sales
    
    
    7,392
    
    
    
    (16
    )
    
    
    7,376Gross profit
    
    
    5,782
    
    
    
    (302
    )
    
    
    5,480Operating costs and expenses:Sales and marketing
    
    
    5,326
    
    
    
    (32
    )(b)
    
    
    5,294Product research and development
    
    
    5,381
    
    
    
    (30
    )(b)
    
    
    5,351General and administrative
    
    
    8,295
    
    
    
    (9
    )(b)
    
    
    8,286Goodwill impairment, restructuring
and other expenses
    
    
    11,329
    
    
    
    (1,970
    )(d)
    
    
    9,359Depreciation and amortization
    
    
    995
    
    
    
    
    
    
    
    995Total operating costs and expenses
    
    
    31,326
    
    
    
    (2,041
    )
    
    
    29,285Operating loss
    
    
    (25,544
    )
    
    
    1,739
    
    
    
    (23,805
    )Other income (expense):Interest expense
    
    
    (32
    )
    
    
    
    
    
    
    (32
    )Interest income
    
    
    546
    
    
    
    
    
    
    
    546Other, net
    
    
    122
    
    
    
    
    
    
    
    122Total other income
    
    
    636
    
    
    
    
    
    
    
    636Loss before income taxes
    
    
    (24,908
    )
    
    
    1,739
    
    
    
    (23,169
    )Income tax expense (benefit)
    
    
    2,130
    
    
    
    6,080
    (b,c,d)
    
    
    8,210Net loss
    
    $
    (27,038
    )
    
    $
    (4,341
    )
    
    $
    (31,379
    )Net loss per share  basic
    
    $
    (0.80
    )
    
    $
    (0.13
    )
    
    $
    (0.93
    )Weighted average number of common
shares outstanding  basic
    
    
    33,848,978
    
    
    
    
    
    
    
    33,848,978Net loss per share  diluted
    
    $
    (0.80
    )
    
    $
    (0.13
    )
    
    $
    (0.93
    )Weighted average number of common
shares outstanding  diluted
    
    
    33,848,978
    
    
    
    
    
    
    
    33,848,978
 102




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Merge Technologies Incorporated and Subsidiaries
 Notes to Consolidated Financial Statements (continued)
 (In thousands, except for share and per share data)
 
 (a)
    
    Impact of deferral and recognition of net sales and related costs attributed to factors
discussed in the Revenue Recognitionsection of Note 2 for the period, including cumulative
effect of all periods on deferred revenue.(b)
    
    Impact of adjustments discussed in the Other Adjustmentssection of Note 2 for the current
period, primarily consisting of items previously deemed immaterial for restatement purposes.
Balance sheet impact is cumulative for all periods impacted.(c)
    
    Impact on income tax expense, net, of all adjustments in (a) and (b) during the period at
the effective tax rate, including cumulative effect of all periods on current and long-term
deferred income tax assets and liabilities. Also includes reclassification of the net current
and long-term deferred tax position on the balance sheet as a result of the effects of (d).(d)
    
    Impact of adjustments on deferred income taxes and goodwill related to the acquisition
accounting adjustments described in the Goodwill and Deferred Income Taxessection of Note 2,
as well as related effects on income tax expense. 103




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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
    104




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Internal ControlIntegrated Framework
 1.
    
    We did not maintain an effective control environment. Specifically, we lacked an
appropriate control consciousness and sufficient resources to address and remediate
certain control deficiencies on a timely basis. These deficiencies resulted in more than a
remote likelihood that a material misstatement of our annual or interim financial
statements would not be prevented or detected.2.
    
    We did not maintain effective policies and procedures relating to revenue
recognition. Specifically, the lack of effective policies and procedures surrounding the
review and determination of revenue recognition associated with our sales contracts and
accurate recording of revenue contributed to incorrect recognition of revenue in our
preliminary 2006 consolidated financial statements, which were corrected prior to
issuance. These deficiencies resulted in more than a remote likelihood that a material
misstatement of our annual or interim financial statements would not be prevented or
detected.3.
    
    We did not maintain effective policies and procedures relating to the preparation of
current and deferred income tax provisions and related balance sheet accounts.
Specifically, we did not prepare account analyses and perform account reconciliation
procedures in a timely manner. In addition we lacked sufficient personnel with
institutional knowledge and technical expertise in the accounting for income taxes. These
deficiencies resulted in more than a remote likelihood that a material misstatement of our
annual or interim financial statements would not be prevented or detected.4.
    
    We did not maintain effective policies and procedures over the accounting for
business combinations. Specifically, we did not have formal policies and procedures to
provide for sufficient analysis to identify all net assets acquired in a prior period
business combination and allowable adjustments to goodwill, which resulted in an
adjustment to correct an error that we have recorded in the fourth quarter of 2006 in our
consolidated financial statements. These deficiencies resulted in more than a remote
likelihood that a material misstatement of our annual or interim financial statements
would not be prevented or detected.5.
    
    We did not maintain effective policies and procedures over the implementation of our
new accounting system for our U.S. operations, which we commenced in the fourth quarter.
Specifically, we failed to apply procedures with respect to program development to ensure
that certain financial reports that impact our financial reporting were developed and
maintained appropriately. As a result, controls over the access to, and completeness,
accuracy and validity of transactions processed through and reports generated from our
accounting system were not designed appropriately or did not operate as designed. These
deficiencies resulted in more than a remote likelihood that a material misstatement of our
annual or interim financial statements would not be prevented or detected and contributed
to the revenue recognition deficiency described above.
   105




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(c) Report of Independent Registered Public Accounting Firm
 
 Internal ControlIntegrated Framework .
     1.
    
    The Company did not maintain an effective control environment. Specifically, the
Company lacked an appropriate control consciousness and sufficient resources to address
and remediate certain control deficiencies on a timely basis. These deficiencies resulted
in more than a remote likelihood that a material misstatement of the Companys annual or
interim financial statements would not be prevented or detected.2.
    
    The Company did not maintain effective policies and procedures relating to revenue
recognition. Specifically, the lack of effective policies and procedures surrounding the
review and determination of revenue recognition associated with the Companys sales
contracts and accurate recording of revenue contributed to incorrect recognition of
revenue in the Companys preliminary 2006 consolidated financial statements. These
deficiencies resulted in more than a remote likelihood that a material misstatement of the
Companys annual or interim financial statements would not be prevented or detected.
 106




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##### Table of Contents



3.
    
    The Company did not maintain effective policies and procedures relating to the
preparation of current and deferred income tax provisions and related balance sheet
accounts. Specifically, the Company did not prepare account analyses and perform account
reconciliation procedures in a timely manner. In addition, the Company lacked sufficient
personnel with institutional knowledge and technical expertise in the accounting for
income taxes. These deficiencies resulted in more than a remote likelihood that a material misstatement of the Companys annual or interim financial
statements would not be prevented or detected.4.
    
    The Company did not maintain effective policies and procedures over the accounting
for business combinations. Specifically, the Company did not have formal policies and
procedures to provide for sufficient analysis to identify all net assets acquired in a
prior period business combination and allowable adjustments to goodwill, which resulted in
an error in the Companys preliminary 2006 financial statements. These deficiencies
resulted in more than a remote likelihood that a material misstatement of the Companys
annual or interim financial statements would not be prevented or detected.5.
    
    The Company did not maintain effective policies and procedures over the
implementation of the Companys new accounting system for the Companys U.S. operations,
which the Company commenced in the fourth quarter. Specifically, the Company failed to
apply procedures with respect to program development to ensure that certain financial
reports that impact the Companys financial reporting were developed and maintained
appropriately. As a result, controls over the access to, and completeness, accuracy and
validity of transactions processed through and reports generated from the Companys
accounting system were not designed appropriately or did not operate as designed. These
deficiencies resulted in more than a remote likelihood that a material misstatement of the
Companys annual or interim financial statements would not be prevented or detected and
contributed to the revenue recognition deficiency described above.
 Internal ControlIntegrated Framework
   
 (d) Changes in Internal Control Over Financial Reporting
  1.
    
    We have restructured our organization such that we have three business units, with
presidents, that report to our CEO and controllers that report to members of the finance
department under the direct responsibility of the Chief Accounting Officer.
 107




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##### Table of Contents



2.
    
    We have created an internal audit function that reports directly to the Audit
Committee of our Board of Directors and is responsible for, among other things, a
quarterly review of each of our sales contracts under which we expect to receive revenue
in excess of $100,000.3.
    
    We commenced an accounting system replacement initiative for our U.S. operations. The
project
scope includes a replacement of certain aspects of our financial systems (general ledger,
accounts payable, accounts receivable, order entry and fulfillment) as a first phase of the
overall project plan. The above named aspects of our financial systems and related control
processes and procedures were operating, to a limited extent, as of December 31, 2006.
 (e)
    
    Remediation Efforts to Address Material Weaknesses in Internal Control Over Financial
Reporting
  1.
    
    We continue to enhance our contract review processes to include a cross functional
group that is responsible for reviewing contracts and providing information required to
assist us in our determination of revenue recognition.2.
    
    We continue to formalize our procedures for project status determination and customer
acceptance signoff.3.
    
    We continue to enhance our education program for our sales and service organization
to educate them regarding our revenue recognition policies. We continue to implement
formal representation and verification procedures with sales staff as of December 31,
2006.4.
    
    We continue to refine our contract review process, related to contracts with
nonstandard or complex terms, with a goal of determining the appropriate accounting
treatment prior to quarterend. We have refined our contract review processes and
procedures as of December 31, 2006. In addition, we have refined our goal with respect to
this remediation item to determining the appropriate accounting treatment prior to
providing our quarterly results to our external auditors.
  1.
    
    The formalization of policies and procedures to provide for sufficient analysis to
identify all net assets acquired in a business combination. Specifically, the institution
of a formal checklist that we will use to ensure that we have considered applicable issues
and considerations associated with purchase price allocation, including income tax related
items.2.
    
    The expansion of our policies and procedures surrounding the program development or
implementation of internaluse software applications. Specifically, we will adjust our
current policies and procedures to ensure that more significant testing procedures,
including the testing of multiple transactions and reports over an extended period of
time, are performed prior to implementing significant changes to our internaluse
software applications (including our accounting systems) that directly impact our
financial reporting process.
  108




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Item 9B. OTHER INFORMATION
  
 PART III
  
 Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 Executive Officers
  Name
    
    Age
    
    PositionKenneth D. Rardin
    
    
    56
    
    
    President and Chief Executive Officer, DirectorGary D. Bowers
    
    
    54
    
    
    President, Merge Healthcare North AmericaJacques F. Cornet
    
    
    51
    
    
    President, Merge Healthcare EMEASteven R. Norton
    
    
    45
    
    
    Executive Vice President and Chief Financial OfficerLoris Sartor
    
    
    49
    
    
    President, Cedara Software
 Kenneth D. Rardin,
 Gary D. Bowers
 Jacques F. Cornet
 Steven R. Norton
 109




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##### Table of Contents



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
  110




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PART IV
 
 Item 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
   
    
    Restated Consolidated Balance Sheets at December 31, 2006 and December 31, 2005;
    
    Restated Consolidated Statements of Operations for each of the three years ended
December 31, 2006, December 31, 2005 and December 31, 2004;
    
    Restated Consolidated Statements of Shareholders Equity for each of the three
years ended December 31, 2006, December 31, 2005 and December 31, 2004;
    
    Restated Consolidated Statements of Cash Flows for each of the three years ended
December 31, 2006, December 31, 2005 and December 31, 2004;
    
    Restated Consolidated Statements of Comprehensive Income (Loss) for each of the
three years ended December 31, 2006, December 31, 2005 and December 31, 2004; and
    
    Notes to Consolidated Financial Statements, as restated.
  
 Exhibit Index
 2.1
    
    Merger Agreement by and among Merge Technologies Incorporated, AccuImage
Diagnostics Corp., ADI Acquisition Corp. and the Principal Shareholder of AccuImage
Diagnostics Corp. dated November 24, 2004(B)2.2
    
    Merger Agreement by and among Merge Technologies Incorporated, Cedara Software Corp. and
Corrida, Ltd. dated January 17, 2005(C)3.1
    
    Articles of Incorporation of Registrant(D), Articles of Amendment as filed on
December 28, 1998 (E) Articles of Amendment as filed on September 2, 1999(F), Articles of
Amendment as filed on February 23, 2001(F), Articles of Amendment as filed on August 9,
2002(G), Articles of Amendment as filed on May 27, 2005(H), and Articles of Amendment as
filed on September 6, 2006(J)3.2
    
    Amended and Restated Bylaws of Registrant(J)4.1
    
    Rights Agreement, dated as of September 6, 2006, between the Registrant and American
Stock Transfer & Trust Co.(J)10.1
    
    Employment Agreement entered into as of March 1, 2004, between Registrant and Richard A.
Linden(G)*10.2
    
    Employment Agreement entered into as of March 1, 2004, between Registrant and William C.
Mortimore(G)*10.3
    
    Employment Agreement entered into as of March 1, 2004, between Registrant and Scott T.
Veech(G)*10.4
    
    Letter Agreement dated May 12, 2006, between Registrant and Scott T. Veech(K)*10.5
    
    Employment Agreement entered into as of April 1, 2006, between Registrant and David M.
Noshay(L)*10.6
    
    Employment Agreement entered into as of April 1, 2006, between Registrant and Robert J.
White(L)*10.7
    
    Key Officer Agreement entered into as of October 12, 2005, by and between Registrant and
Steven M. Oreskovich(M)*10.8
    
    Letter Agreement dated July 2, 2006 by and between Registrant and Steven M. Oreskovich(N)*10.9
    
    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(O)*10.10
    
    Employment Agreement entered into as of September 6, 2006, between the Registrant and
Kenneth D. Rardin (J)*10.11
    
    Employment Agreement entered into as of January 8, 2007 between the Registrant and Steven
R. Norton(P)*
 111




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##### Table of Contents



10.12
    
    Employment Agreement entered into as of February 5, 2007 between the Registrant and Gary
Bowers(T)*10.13
    
    1998 Stock Option Plan For Directors(Q)*10.14
    
    2003 Stock Option Plan of Registrant dated June 24, 2003, and effective July 17, 2003(O)*10.15
    
    2005 Equity Incentive Plan adopted March 4, 2005, and effective May 24, 2005(R)*10.16
    
    Termination Agreement between Cedara Software Corp., Abe Schwartz and Merge Technologies
Incorporated dated June 1, 2005(S)*10.17
    
    Form of NonQualified Stock Option Agreement under Registrants 2005 Equity Incentive
Plan(M)*10.18
    
    Form of Employee Incentive Stock Option Agreement under Registrants 2005 Equity
Incentive Plan(M)*10.19
    
    Form of Director NonQualified Stock Option Agreement under Registrants 2005 Equity
Incentive Plan(M)*14.1
    
    Code of Ethics(G)14.2
    
    Whistleblower Policy(G)21
    
    Subsidiaries of Registrant(T)23.1
    
    Consent of KPMG LLP31.1
    
    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)
    
    Intentionally omitted.(B)
    
    Incorporated by reference from Current Report on Form 8K dated November 24, 2004.(C)
    
    Incorporated by reference from Current Report on Form 8K dated January 18, 2005.(D)
    
    Incorporated by reference from Registration Statement on Form SB2 (No. 33339111), effective
January 29, 1998.(E)
    
    Incorporated by reference from Quarterly Report on Form 10QSB for the three months ended
March 31, 1999.(F)
    
    Incorporated by reference from Annual Report on Form 10KSB for the year ended December 31,
2000.(G)
    
    Incorporated by reference from Annual Report on Form 10K for the year ended December 31,
2003.(H)
    
    Incorporated by reference from Current Report on Form 8K dated June 7, 2005.(J)
    
    Incorporated by reference from Current Report on Form 8K dated September 6, 2006.(K)
    
    Incorporated by reference from Current Report on Form 8K dated May 12, 2006.(L)
    
    Incorporated by reference from Current Report on Form 8K dated April 1, 2006.(M)
    
    Incorporated by reference from Annual Report on Form 10K for the year ended December 31,
2005.(N)
    
    Incorporated by reference from Current Report on Form 8K dated June 29, 2006.(O)
    
    Incorporated by reference from Quarterly Report on Form 10Q for the three months ended
September 30, 2003.(P)
    
    Incorporated by reference from the Registrants Current Report on Form 8K dated January 16,
2007.(Q)
    
    Incorporated by reference from Annual Report on Form 10KSB for the fiscal year ended
December 31, 1997.(R)
    
    Incorporated by reference from Registration Statement on Form S8 (No. 333125386) effective
June 1, 2005. 112




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(S)
    
    Incorporated by reference from Quarterly Report on Form 10Q for the six months ended
June 30, 2005.(T)
    
    Previously filed and incorporated by reference from Annual Report on Form 10-K for the year
ended December 31, 2006.*
    
    Management contract, or compensatory plan, or arrangement, required to be filed as an exhibit
to this Annual Report on Form 10-K/A. 113




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##### Table of Contents



SIGNATURES
  Merge Technologies IncorporatedDate: December 27, 2007
    By:
    /s/ Kenneth D. RardinKenneth D. RardinPresident and Chief Executive Officer
(principal executive officer) Date: December 27, 2007
    By:
    /s/ Steven R. NortonSteven R. NortonExecutive Vice President & Chief
Financial Officer
(principal financial officer and
principal accounting officer) 114