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SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period
from  to
 Commission
File No. 0-51149
 EMAGEON INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    63-1240138(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)1200 Corporate Drive, Suite 200
Birmingham, Alabama
    
    35242(Address of Principal Executive Offices)
    
    (Zip Code)
 (205) 980-9222   (Registrants Telephone Number, Including Area Code)
  Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $0.001 Par Value Per Share
    
    NASDAQ Global Market
  
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting
company þ o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
  
 PART IITEM 1:
    
    Business
    
    
    2ITEM 1A:
    
    Risk Factors
    
    
    16ITEM 1B:
    
    Unresolved Staff Comments
    
    
    25ITEM 2:
    
    Properties
    
    
    25ITEM 3:
    
    Legal Proceedings
    
    
    26ITEM 4:
    
    Submission of Matters to a Vote of Security Holders
    
    
    26PART IIITEM 5:
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    27ITEM 6:
    
    Selected Consolidated Financial Data
    
    
    29ITEM 7:
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    30ITEM 7A:
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    48ITEM 8:
    
    Financial Statements and Supplementary Data
    
    
    49ITEM 9:
    
    Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    49ITEM 9A:
    
    Controls and Procedures
    
    
    49ITEM 9B:
    
    Other Information
    
    
    50PART IIIITEM 10:
    
    Directors, Executive Officers, and Corporate Governance
    
    
    50ITEM 11:
    
    Executive Compensation
    
    
    50ITEM 12:
    
    Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    50ITEM 13:
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    50ITEM 14:
    
    Principal Accounting Fees and Services
    
    
    51PART IVITEM 15:
    
    Exhibits and Financial Statement Schedules
    
    
    51FINANCIAL
STATEMENTS
    
    
    F-1Financial
Statement Schedules
    
    
    F-30EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1




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PART I
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   
 ITEM 1. BUSINESS
 Overview
    2




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Recent Developments
     Our Opportunity
  3




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Increasing Number, Size and Complexity of Imaging Exams
 Need for Advanced Visualization Tools
 Need for Vendor Neutral Content Management
 Need for Outside Study Management
 Our Solutions
 Overview
  4




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Group
    
    Benefits from our SolutionsAdministration
    
      Demonstrable return on investment(CEO, CFO and COO)
    
      Better service to physicians  Improved staff productivity  Improved satisfaction of referring physicians  Elimination of many routine, non-productive and non-clinical tasksInformation Technology
    
      Lower total cost of operation(CIO and IT Department)
    
      Highly available, redundant and reliable  Ease of integration with different clinical information systems  Multi-site, standards-based integration  Focused, high quality implementation servicesDiagnostic Physicians
    
      Productivity gains(Radiologists, Cardiologists)
    
      Multi-point access to visualization tools and images  Efficient tools for collaboration with treating physicians  Improved management of outside studiesTreating Physicians
    
      Availability of easy-to-use, specialty specific visualization tools(Cardiologists, Surgeons, etc.)
    
      Faster turnaround of information for treatment planning  Facilitation of collaborative analysis with diagnostic physicians  Improved treatment planning
 5




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Group
    
    Benefits from our Solutions  Improved management of outside studies  Robust integration with clinical information systemsPayor
    
      Ability to avoid duplicate exams through cross-enterprise access  Ability to avoid unnecessary transports by leveraging remote
diagnostics for triage
  Enterprise Content Management
 Enterprise Visualization Technology
 Integration with Third Party Systems
 Specialty-Specific Clinical Applications
 Management of Outside Studies
 Open Standards-Based Software
 6




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Implementation, User Adoption, and Support Services
 Our Product Offerings
  Enterprise Content Manager
 Enterprise Visualization
 RadSuite
 HeartSuite
 7




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Third-party Components
 
    
    Servers. Our software and the database run on single server or a cluster of
standard redundant servers.
    
    Data Storage. We support industry standard storage configurations, including
high availability redundant array of independent disks, or RAID, systems.
    
    Backup/recovery. Our solution typically includes a tape library based backup
and recovery system that provides backup for our database, configuration files, and
digital medical images. We also offer an optional configuration with replicated content
managers in two locations, enabling uninterrupted operation in the event of loss of one
archive.
    
    Workstations and Monitors. Customers typically implement our enterprise
visualization software using standard personal computer workstations and high
resolution monitors for visualization within the facility.
    
    Database. Our software applications operate on Oracle database technology and
other standard relational database applications.
    
    Computed Radiography. We offer computed radiography devices manufactured by
Carestream Health. Computed radiography devices convert analog X-ray images into
digital images.
    
    Advanced Three-Dimensional Analysis Tools. We offer Teracon as an option for
advanced clinical applications and integrated analysis tools that complement our
enterprise native visualization and workflow capabilities. Through the desktop
integration of our respective products, physicians can access these advanced
visualization and analysis tools and review the image data seamlessly without
interrupting workflow.
    
    Dictation. We offer a voice recognition dictation system from Lanier Worldwide
for radiology reporting.
    
    OrthoSuite. We offer a software toolset for orthopedic surgeons which is
licensed from Orthocrat. Our integration with the system provides for seamless launch
from our Enterprise Visualization software and storage of the images in our Enterprise
Content Manager.
    
    MammoSuite. We offer a mammography visualization and analysis solution from
Cedara. Our integration with the system provides for seamless launch from our
Enterprise Visualization software and storage of images in our Enterprise Content
Manager.
    
    RadSuite RIS. We offer a radiology information system (RIS) from Swearingen to
complement our RadSuite visualization software for customers who desire to replace
their current RIS solution.
    
    HeartSuite ECG. We offer an ECG solution from Epiphany which provides seamless
integration of ECG information with our HeartSuite VERICIS solution.
    
    3D Ultrasound. We offer a 3D Ultrasound visualization and analysis package
from TomTec to complement our HeartSuite VERICIS visualization software.
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Support Services
  
    
    Adoption Success Managementis our services program that facilitates rapid and complete
adoption by all relevant constituents during the implementation phase, which
typically lasts several months.
    
    Continuous Success Managementis an ongoing set of support services to ensure that
our systems are highly available and optimally configured for users. Through continuous
remote monitoring of our solution, we analyze system and user behaviors and, when
appropriate, intervene and make the necessary adjustments to prevent anticipated problems
from occurring. We provide standard twenty four hour service and support for our software
and any third party components we provide to the customer.
    
    Professional Servicesis our services program for managing custom engineering such
as customized integrations with dictation systems, electronic medical record systems,
radiology information solutions, and third-party PACS.
    
    Migration Servicesis our offering to assist customers with migration of data from
legacy PACS or hardware platforms to our software system. These services may include data
cleansing services to ensure proper compliance with the DICOM standard.
 Our Strategy
  Expand Our Market Share by Attracting New Customers
 Increase Penetration With Existing Customers
 
    
    Increase Product Placement with Existing Multi-Facility Customers. As of
December 31, 2008, we had customer relationships with multi-facility healthcare
providers that control 287 hospitals. Our initial contracts with these customers often
provide for implementation of the content management functions and sometimes the
advanced visualization functions of our EVMS solution at only a portion of the
facilities managed by the parent company. We believe there are opportunities to expand
our installed base at facilities that are part of multi-facility systems in which we
have a customer relationship with the parent company.
    
    Cross Sell to Existing Customers. We are also in position to sell additional
functionality to our existing customers, including enterprise content management,
enterprise visualization, specialty specific clinical suites such as RadSuite,
HeartSuite, OrthoSuite, and MammoSuite, and third-party applications and services that
may not have been part of the initial sale. As follow on sales opportunities, we offer
our
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advanced visualization software and other products and additional functionality to
radiologists, cardiologists and other specialty groups within the organization.
 Enhance Our Product Offerings
 Continue to Deliver Superior Implementation, User Adoption, and Customer Support Services
 Maintain Our Open Standards Focus
 Our Technology
  
    
    Native DICOM Compatibility. Our software conforms to the DICOM standard for
medical image storage and workflow management. DICOM is an industry standard in medical
imaging that defines the data elements, communication protocols, storage formats, and
workflow methods associated with medical imaging data and processes. Our software
stores and manages medical images using native DICOM communications, preserves the
DICOM information associated with the image, and follows DICOM workflow methods. Using
native DICOM communication means our solution does not require translation devices
for converting the DICOM information into a proprietary storage format. We believe our
commitment to DICOM as the underlying protocol for our software is a competitive
advantage, delivering faster streaming, more efficient storage of the image, and the
ability to integrate our software to new imaging devices.
    
    Native DICOM-Toolkit. While DICOM is an industry standard protocol for medical
image data management and storage, the software toolsets used to process, manage, and
use DICOM information are generally unique to particular software vendors. We have
developed and own a DICOM toolkit that we believe permits us to more rapidly integrate
DICOM-based information into our software and believe that the ownership and continued
development of our DICOM toolkit is a core technology strategy.
    
    Commitment to the IHE Technical Framework. The Radiological Society of North
America and the Healthcare Information Management Systems Society created the
Integrated Healthcare Enterprise (IHE) technical framework. IHE is a protocol for the
integration of DICOM image information and HL7 text based patient information. We
believe our commitment to IHE helps to ensure that our software integrates seamlessly
with HL7-based clinical and financial record information systems.
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
    
    Compatibility with the OPEN GL Graphics Standard. Our enterprise visualization
software performs sophisticated 3D rendering and other graphics intensive functions
that provide physicians the ability to view 3D medical images for diagnosis and
treatment planning. Our enterprise visualization software uses the OPEN GL graphics
standard, which permits our customers to purchase relatively inexpensive personal
computers and graphics hardware to perform sophisticated image analysis.
    
    Component-Based Software Engineering. Our software architecture is based on a
component based services model. Our software development framework supports common and
domain specific components that can be plugged in while the system is operating. By
building flexible, dynamic, reusable components, we gain flexibility to add
functionality to and increase the reliability of our system because we can remedy
problems at the component rather than at the entire application level.
 Customers
   Sales and Marketing
   Research and Development
  
    
    improving physician and technologist workflow and productivity;
    
    expanding content management to cover medical documents beyond DICOM data;
    
    expanding content management to service communities;
    
    integrating with other information systems and acquisition devices;
    
    developing and refining visualization capabilities including new 3D and
analysis applications;
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
    
    developing integrated reporting solutions for cardiology and radiology; and
    
    extending imaging tools to referring physicians in multiple specialties.
   Competition
  
    
    companies that manufacture and sell digital imaging devices such as GE
Healthcare, Siemens Medical Solutions, and Philips Medical Systems, who may integrate
some of the functionality provided by our products into their equipment or bundle it
with the equipment sale;
    
    companies that have traditionally sold imaging films such as Carestream Health,
Inc., Agfa, and Fujifilm Medical Systems USA, Inc.;
    
    companies that have traditionally sold healthcare information technology
applications such as McKesson Corp.; and
    
    a number of smaller companies that sell department level PACS or specialty
visualization tools.
   
    
    product innovation, regulatory decisions, product quality and performance;
    
    customer service and support;
    
    the experience of our sales, marketing, and service professionals;
    
    rapid development of new products and features;
    
    price, product and policy decisions announced by competitors; and
    
    adequate financial and other resources.
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Intellectual Property
       Employees
  Government Regulation
  Food and Drug Administration
 13




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Health Canada
   HIPAA Privacy and Security Regulations
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Government Reimbursement
 Fraud and Abuse
 
    
    Anti-Kickback Law. The anti-kickback provisions of the Social Security Act
prohibit the exchange of anything of value with the intent to encourage utilization of
items or services payable under a federal health care program. Courts have construed
the anti-kickback law to mean that a financial arrangement will violate such law if
even one of the purposes of one of the parties is to encourage patient referrals or
other Medicare/Medicaid business, regardless of whether legitimate purposes also exist
for the arrangement. Penalties for federal anti-kickback violations are severe.
Conviction can result in up to five years imprisonment, a $25,000 fine per offense, and
exclusion from participation under federal health care programs. Violators may also be
assessed civil monetary penalties ranging from $10,000 to $50,000 per offense, as well
as damage assessments equal to three times the total amount of the kickback. We
believe that all of our arrangements with physicians and health care facilities have
been fully lawful. But given the broad sweep of the federal anti-kickback law, we
cannot assure you that all such arrangements will be found compliant with such law if
examined by government regulators, to the extent that such regulators determine that
any of our arrangements are subject to such law.
    
    Stark Law. The Ethics in Patient Referrals Act, known as the Stark Law, also
prohibits certain types of referral arrangements between physicians and health care
entities. Physicians are prohibited under the Stark Law, its subsequent Stark II
amendment, and its implementing regulations from referring patients for designated
health services reimbursed under the Medicare program to entities with which they or a
family member have a compensatory relationship or an ownership or investment interest,
unless such referrals fall within a Stark exception. Violations of the statute can
result in civil monetary penalties of up to $15,000 per improper referral and exclusion
from the Medicare and Medicaid programs. We do not believe that our arrangements with
physician consultants or other health care
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providers violate the Stark Law, but we cannot provide assurances to such effect, nor can
there be assurance that we will not in the future be subject to Stark Law penalties.
    
    State Law. Various states have enacted equivalents of the foregoing federal
statutory and regulatory provisions. These state law equivalents would apply to items
or services reimbursed by any thirdparty payor, including commercial payors. Many of
these laws vary significantly from state to state, rendering compliance a costly and
uncertain endeavor.
 Available Information
  
 ITEM 1A. RISK FACTORS
 Our business involves various risks and uncertainties, some of which are discussed in this
section. The information discussed below should be considered carefully with the other information
contained in this Annual Report on Form 10K and the other documents and materials we file with
the SEC, as well as news releases and other information we may publicly disseminate from time to
time. The risks and uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us, or that we currently believe to be immaterial, may
also adversely affect our business. Any of the following risks or uncertainties that develop into
actual events could have a materially adverse effect on our business, financial condition, or
results of operations, or on the market price of our common stock.
 Changes in our primary market for PACS radiology systems have resulted in a significant
decline in PACS radiology system sales orders.
  Our
business is subject to the cyclical nature of our industry and
changes in consumer confidence and in economic and market
conditions in general. Adverse changes with respect to
these factors may reduce demand for our products, lower our revenues, and affect our financial
condition.
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The
ability of our customers to purchase and to pay for our products and
services is affected by the availability of capital and access to
credit.
   If we are unable to develop new products, or if we are unable to upgrade the performance,
features, and reliability of our existing products, our business and operating results could be
adversely affected.
  If the merger contemplated by the Agreement and Plan of Merger entered into on February 23,
2009 with AMICAS, Inc. and AMICAS Acquisition Corp. does not occur, it could have a material
adverse effect on our business, results of operations, and financial condition.
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Our prolonged investigation of strategic alternatives and the terms and conditions of our
merger agreements with Health Systems Solutions and AMICAS have had and may continue to have
adverse effects on our customers, personnel and other relationships as well as our operations and financial
condition.
   The termination of our merger agreement with Health Systems Solutions may have a material
adverse effect on our business, results of operations, and financial condition.
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We depend on highly specialized personnel, and the loss of, or failure to identify, hire,
motivate and retain these highly specialized personnel could adversely affect our ability to
manage our business.
  We
may not be able to raise additional capital on acceptable terms to
fund our operations, which could adversely affect our business.
   Recent modifications may make it difficult to access our line of credit.
  We have incurred substantial operating losses in the past.
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Our products are complex and are operated in a wide variety of network configurations, which
could result in errors or product failures.
  We may not be able to respond to changes in our industry, competitive technologies, changes in
customer requirements, or evolving industry standards, which would result in reduced revenue and
profit margins.
  The loss of Ascension Health or other major customers could materially and adversely affect
our results of operations and financial condition because portions of our future revenues are tied
to continuing relationships with significant customers.
  We are dependent on our senior executive management, and the loss of any member of senior
executive management may prevent us from managing and growing our business effectively.
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Our industry includes many large companies that have significantly greater resources and other
competitive advantages, and we may not be able to compete successfully against these competitors.
  Our operating results may fluctuate, which makes quarterly results difficult to predict and
could cause our stock price to decline or exhibit volatility.
  
    
    Long Sales Cycle: Many of our customers are large organizations with lengthy and
unpredictable purchasing processes. Because our solution is a major capital
expenditure involving a multi-year commitment, it can take a significant period of time
to close a sale. We typically have to educate our prospective customers on the
benefits of our solution and obtain approval from senior management. Consolidation in
the health care industry may also delay or extend the sales cycle for affected
customers. As a result, our solution has a typical sales cycle, from the initial
contact to the placing of an order, of six to nine months, and sometimes much longer.
This long and unpredictable sales cycle may contribute to substantial fluctuations in
our quarterly operating results.
    
    Timing of Revenue: A significant portion of our revenue each quarter comes from
sales made in prior periods, as we implement our solution and perform services under
multi-year maintenance and support agreements with our customers. As a result, a
decline in sales, client renewals, or market acceptance of our products in a particular
quarter will not necessarily be reflected in revenue in that quarter and may adversely
affect our revenue and profitability in future quarters. Moreover, a majority of our
customers now purchase perpetual licenses from us. Unlike term licenses, where license
revenue and certain implementation fees are recognized over the life of an initial term
typically ranging from two to seven years, with perpetual licenses the full software
license fee and associated implementation fees are recognized as revenue in the month
when all revenue recognition criteria are met. Because revenue recognition may not be
achieved in the period expected, our revenue could fluctuate from quarter to quarter
solely due to the timing of satisfying our revenue recognition criteria.
    
    Implementation Delays: Once we enter into a customer contract, our recognition of
revenue from that contract depends, to a significant extent, on the timing of our
implementation of the project. Customer implementation schedules may be delayed for
reasons beyond our control, such as customer scheduling
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changes, delays in acceptance testing by customers, unusual integration issues, or
delays in obtaining equipment from third-party vendors. Delays in the implementation of
a particular project may require us to delay the recognition of anticipated revenue from
one quarter to another and may contribute to substantial fluctuations in our quarterly
operating results.
  Our operating results could suffer if we become subject to a protracted infringement claim or
litigation or a significant damage award.
  
    
    costly litigation and damage awards;
    
    diversion of management attention and resources;
    
    product sales and distribution delays or suspensions, either temporary or permanent;
and
    
    the need to enter into royalty or licensing agreements, which may not be available
on terms acceptable to us, if at all.
  If we fail to obtain or maintain necessary FDA clearances for our products, if such clearances
are delayed, or if our products are subject to FDA recall, we will be unable to distribute and
market some of our products.
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If we fail to comply with other potentially applicable health care regulations, we could face
substantial penalties.
  
    
    The Federal AntiKickback Statute prohibits the exchange of anything of value with
the intent to encourage utilization of services payable under a federal health care
program. Courts have construed this statute as being implicated even when only one of
the purposes of one of the parties is to encourage patient referrals or other federal
health care business, even if legitimate purposes also exist for the arrangement.
    
    The Federal Ethics in Patient Referrals Act, known as the Stark Law, prohibits
(absent an applicable Stark exception) referrals for designated health services
reimbursable under Medicare or Medicaid by a physician to an entity with which the
physician, or an immediate family member, has a financial relationship.
    
    The Federal Health Insurance Portability and Accountability Act of 1996, or HIPAA,
has increased the scope of federal fraud and abuse laws by applying them to prohibit
fraudulent conduct in connection with any health care benefit program, not only federal
health care programs. Although we are not a covered entity that is directly subject to
liability under the HIPAA privacy and security standards, we could be impacted by such
regulations through contractual relations with those of our customer base who are
covered entities.
    
    State law equivalents of each of the above federal laws, such as anti-kickback,
self-referral, and false claims laws, may apply to items or services reimbursed by any
third-party payor (including commercial insurers). State laws governing the privacy of
health information in certain circumstances, many of which differ from each other in
significant ways and often are not preempted by HIPAA (thus complicating compliance
efforts) and some of which may apply to us directly, may also affect our operations.
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Product liability claims may require us to pay damages, reduce the demand for our products,
and harm our reputation.
  If we fail to protect our intellectual property rights, our competitors may take advantage of
our ideas to compete more effectively with us.
   Our directors may not be held personally liable for certain actions, which could discourage
stockholder suits against them.
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Delaware law and certain antitakeover provisions of our corporate documents could delay or
prevent a third party from acquiring us or a change in control even if it would benefit our
stockholders.
  
    
    our board of directors may issue 200,000 shares of blank check preferred stock
without stockholder approval and that may be substantially dilutive or contain
preferences or rights objectionable to an acquiror;
    
    our board of directors is comprised of classes of directors with staggered,
threeyear terms so that only a portion of our directors is subject to election at
each annual meeting;
    
    our board of directors can amend our bylaws without stockholder approval;
    
    stockholders cannot call special meetings of stockholders;
    
    stockholders cannot act by written consent;
    
    stockholders must give advance notice to nominate directors for election or to
submit proposals at stockholder meetings;
    
    we may be obligated to make payments under executive employment agreements in the
event of a change in control; and
    
    some Delaware statutes restrict or prohibit certain transactions with affiliated or
interested parties and permit the adoption of poison pills without stockholder
approval.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  25




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ITEM 3. LEGAL PROCEEDINGS
  Philip Fishman v.
Emageon, Inc., et. al.
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     Votes For
    
    Votes Against
    
    AbstentionsProposal One
    
    
    17,896,906
    
    
    
    166,034
    
    
    
    25,233Proposal Two
    
    
    17,553,472
    
    
    
    505,757
    
    
    
    28,944
  26




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market for Common Stock
   2008 Quarter Ended
    
    High
    
    LowMarch 31, 2008
    
    $
    4.05
    
    
    $
    1.87June 30, 2008
    
    
    2.91
    
    
    
    2.06September 30, 2008
    
    
    2.55
    
    
    
    1.80December 31, 2008
    
    $
    2.74
    
    
    $
    0.89
 2007 Quarter Ended
    
    High
    
    LowMarch 31, 2007
    
    $
    15.58
    
    
    $
    9.75June 30, 2007
    
    
    11.89
    
    
    
    7.42September 30, 2007
    
    
    10.25
    
    
    
    7.90December 31, 2007
    
    $
    8.66
    
    
    $
    3.08
 Dividends
  Use of Proceeds from Initial Public Offering
   27




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Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  Stock Performance Graph
  COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG EMAGEON INC.,
NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX
 
 
 2/9/05
    
    6/30/05
    
    12/31/05
    
    6/30/06
    
    12/31/06
    
    6/30/07
    
    12/31/07
    
    6/30/08
    
    12/31/08EMAGEON INC.
    
    
    100.00
    
    
    
    107.62
    
    
    
    122.31
    
    
    
    112.23
    
    
    
    118.15
    
    
    
    69.38
    
    
    
    31.00
    
    
    
    16.54
    
    
    
    14.23HEMSCOTT GROUP INDEX
    
    
    100.00
    
    
    
    99.98
    
    
    
    108.04
    
    
    
    114.28
    
    
    
    127.86
    
    
    
    137.80
    
    
    
    134.68
    
    
    
    120.36
    
    
    
    89.98NASDAQ MARKET INDEX
    
    
    100.00
    
    
    
    100.49
    
    
    
    107.95
    
    
    
    106.88
    
    
    
    119.14
    
    
    
    128.54
    
    
    
    130.99
    
    
    
    112.98
    
    
    
    77.69
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
  Year Ended December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008Consolidated Statements of Operations Data(1)(2):Revenue:System sales
    
    $
    33,441
    
    
    $
    50,041
    
    
    $
    75,340
    
    
    $
    51,140
    
    
    $
    19,920Support services
    
    
    13,059
    
    
    
    25,023
    
    
    
    48,165
    
    
    
    53,485
    
    
    
    49,408Total revenue
    
    
    46,500
    
    
    
    75,064
    
    
    
    123,505
    
    
    
    104,625
    
    
    
    69,328Cost of revenue:System sales
    
    
    21,452
    
    
    
    28,316
    
    
    
    43,333
    
    
    
    28,551
    
    
    
    14,740Support services
    
    
    11,426
    
    
    
    15,921
    
    
    
    27,772
    
    
    
    29,469
    
    
    
    24,352Total cost of revenue
    
    
    32,878
    
    
    
    44,237
    
    
    
    71,105
    
    
    
    58,020
    
    
    
    39,092Gross profit
    
    
    13,622
    
    
    
    30,827
    
    
    
    52,400
    
    
    
    46,605
    
    
    
    30,236Operating expenses:Research and development
    
    
    6,197
    
    
    
    11,652
    
    
    
    13,927
    
    
    
    18,529
    
    
    
    18,408Sales and marketing
    
    
    9,377
    
    
    
    12,238
    
    
    
    18,459
    
    
    
    18,285
    
    
    
    14,128General and administrative
    
    
    7,498
    
    
    
    10,945
    
    
    
    17,028
    
    
    
    13,430
    
    
    
    11,944Amortization and write-off of intangible assets
    
    
    
    
    
    
    993
    
    
    
    3,540
    
    
    
    1,381
    
    
    
    22,958Other operating expenses
    
    
    
    
    
    
    244
    
    
    
    5,806
    
    
    
    2,874
    
    
    
    5,547Total operating expenses
    
    
    23,072
    
    
    
    36,072
    
    
    
    58,760
    
    
    
    54,499
    
    
    
    72,985Operating loss
    
    
    (9,450
    )
    
    
    (5,245
    )
    
    
    (6,360
    )
    
    
    (7,894
    )
    
    
    (42,749
    )Interest (expense) income, net
    
    
    (1,022
    )
    
    
    248
    
    
    
    328
    
    
    
    809
    
    
    
    478Net loss
    
    $
    (10,472
    )
    
    $
    (4,997
    )
    
    $
    (6,032
    )
    
    $
    (7,085
    )
    
    $
    (42,271
    )Net loss per share, basic and diluted
    
    $
    (4.07
    )
    
    $
    (0.28
    )
    
    $
    (0.29
    )
    
    $
    (0.33
    )
    
    $
    (1.97
    )Weighted average shares, basic and diluted
    
    
    2,590
    
    
    
    17,975
    
    
    
    20,936
    
    
    
    21,385
    
    
    
    21,470Selected Cash Flow Data:Cash provided by (used in) operations
    
    $
    4,959
    
    
    $
    (1,881
    )
    
    $
    7,263
    
    
    $
    (3,177
    )
    
    $
    (1,698
    )
 29




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##### Table of Contents



As of December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008Consolidated Balance Sheet Data:Cash and cash equivalents
    
    $
    5,995
    
    
    $
    15,520
    
    
    $
    23,008
    
    
    $
    17,034
    
    
    $
    13,511Marketable securities
    
    
    
    
    
    
    4,951
    
    
    
    
    
    
    
    
    
    
    
    Intangible assets, net
    
    
    6,873
    
    
    
    34,277
    
    
    
    30,090
    
    
    
    27,604
    
    
    
    3,777Total assets
    
    
    41,768
    
    
    
    117,944
    
    
    
    113,012
    
    
    
    99,294
    
    
    
    50,274Total debt and capital lease obligations
    
    
    9,489
    
    
    
    3,749
    
    
    
    961
    
    
    
    89
    
    
    
    43Redeemable preferred stock
    
    
    30,348
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total (deficit) stockholders equity
    
    $
    (32,370
    )
    
    $
    63,639
    
    
    $
    65,107
    
    
    $
    62,296
    
    
    $
    23,475
 
 (1)
    
    On November 1, 2005, we acquired Camtronics Medical Systems, Ltd. The acquisition was
accounted for as a purchase under Statement of Financial Accounting Standards No. 141,
Business Combinations. Accordingly, the results of operations of Camtronics have been
included in the accompanying consolidated financial statements since the date of acquisition.(2)
    
    Certain reclassifications have been made to prior years financial data to conform to the
current year presentation. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Company Overview
   Strategic Alternatives Process and Agreements with Health Systems Solutions and AMICAS
   30




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##### Table of Contents



Results Overview
  31




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##### Table of Contents




    
    Slow overall market demand for medical imaging software, hardware, and support
services;
    
    Maturity in our primary picture archiving and communications radiology (PACS)
market, which has made that market primarily a replacement systems market;
    
    A high level of penetration of our primary radiology market and consequent delay in
the timing of our customers system replacement cycle;
    
    Disruption in our base of existing and potential customers as a result of our
prolonged investigation of strategic alternatives and our 2008 proxy contest with
Oliver Press;
    
    The ongoing deterioration in general economic conditions;
    
    The ongoing negative lending environment, which has negatively affected the capital
spending plans of our existing and potential customers, many of whom are nonprofit
organizations; and
    
    Our difficulties in development, marketing, and sale of next generation imaging
software to replace our current software offerings.
   Sources of Revenue
   32




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##### Table of Contents



Cost of Revenue
   Gross Profit
  
    
    sales prices negotiated in the contracting process;
    
    costs associated with purchasing and assembly or integration of third-party
components;
    
    fluctuations in prices received from third-party component manufacturers and
distributors relative to the mark-up percentages provided for in customer contracts;
    
    the relative mix of the hardware and software components comprising system
sales in a given period; and
    
    the volume of systems sales in a given period relative to the semi-fixed costs of
procurement and assembly.
 33




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##### Table of Contents




    
    services fees negotiated during the contracting process;
    
    productivity of our professional service team;
    
    costs of service agreements related to third-party components included in our
solution;
    
    costs associated with the use of outside contractors; and
    
    the level of support services revenue relative to the semi-fixed costs of support.
 Operating Expenses
 Research and Development
 Sales and Marketing
 General and Administrative
 Critical Accounting Policies and Estimates
   Revenue Recognition and Deferred Revenue Software Revenue Recognition
  
    
    Perpetual licenses: software licensed on a perpetual basis to a customer based
on a fixed number of users and/or estimates of annual study volumes with no right to
return the licensed software;
 34




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##### Table of Contents




    
    Enterprise licenses: software licensed on a perpetual basis to a customer
(typically a multi-facility health care provider), as opposed to licensing based on a
fixed number of users or on estimates of annual study volumes, with no right to return
the licensed software; and
    
    Term licenses: which we use to a lesser extent and consist of software licensed
on a term basis according to a fixed number of users and/or estimates of annual study
volumes.
  
    
    Persuasive evidence of an arrangement exists: It is our customary practice to
have a written contract, which is signed by both the customer and us, or a purchase
order from those customers that have previously negotiated a standard end-user license
arrangement, prior to recognizing revenue on an arrangement.
    
    Delivery has occurred: It is our customary practice to obtain acceptance of our
software, which is evidenced by written customer acknowledgement. In the event that we
grant a customer the right to specified upgrades, we defer recognition of the entire
arrangement fee until we deliver the specified upgrades as we have not established
vendor specific objective evidence (VSOE) of fair value for specified upgrades.
Specified upgrades include, but are not limited to, future software deliverables that
are stated in the customer contract.
    
    The customers payment is deemed fixed or determinable: We assess whether fees
are fixed or determinable and free of contingencies or significant uncertainties at the
time of sale and recognize revenue when all other revenue recognition requirements are
met. If the fee is determined not to be fixed or determinable, we recognize revenue as
the amounts become due and payable.
    
    Collection is probable: Likelihood of collection is assessed on a customer by
customer basis. If it is determined from the outset of an arrangement or at the time of
add-on sales to existing customers that collection is not probable based upon our
credit review process, revenue is recognized on a cash collected basis if all other
criteria are met.
    35




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##### Table of Contents




    
    Our sales agreements with customers generally contain infringement indemnity
provisions. Under these agreements, we agree to indemnify, defend and hold harmless the
customer in connection with patent, copyright or trade secret infringement claims made
by third parties with respect to the customers authorized use of our products and
services. Our sales agreements with customers sometimes also contain indemnity
provisions for death, personal injury or property damage caused by our personnel or
contractors in the course of performing services to customers. Under these agreements,
we agree to indemnify, defend and hold harmless the customer in connection with death,
personal injury and property damage claims made by third parties with respect to
actions of our personnel or contractors. The indemnity obligations contained in sales
agreements generally have no specified expiration date but typically limit the amount
of award covered to a portion of the fees paid by the customer over a portion of the
contract term. We have not incurred costs to settle claims or pay awards under these
indemnification provisions. Accordingly, we have no liabilities recorded for these
provisions as of December 31, 2008.
    
    We warrant that our software products will perform in all material respects in
accordance with our standard published specifications in effect at the time of delivery
of the licensed products to the customer as long as the contract remains in effect.
Additionally, we warrant that our services will be performed by qualified personnel in
a manner consistent with normally accepted industry standards. We provide for the
estimated cost of product and service warranties based on specific warranty claims and
claim history. As of December 31, 2008 we have a liability of $0.3 million in our
balance sheet for these obligations.
  36




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Research and Development Costs
  Intangible and Other Long-Lived Assets
   37




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##### Table of Contents



Results of Operations
 Revenue
  Year Ended December 31,
    
    Year Ended December 31,2008
    
    2007
    
    Change
    
    Change (%)
    
    2007
    
    2006
    
    Change
    
    Change (%)(In thousands except percentages)
    
    (In thousands except percentages)System sales
    
    $
    19,920
    
    
    $
    51,140
    
    
    $
    (31,220
    )
    
    
    (61.0
    )%
    
    $
    51,140
    
    
    $
    75,340
    
    
    $
    (24,200
    )
    
    
    (32.1
    )%Support services
    
    
    49,408
    
    
    
    53,485
    
    
    
    (4,077
    )
    
    
    (7.6
    )%
    
    
    53,485
    
    
    
    48,165
    
    
    
    5,320
    
    
    
    11.0
    %Total revenue
    
    $
    69,328
    
    
    $
    104,625
    
    
    $
    (35,297
    )
    
    
    (33.7
    )%
    
    $
    104,625
    
    
    $
    123,505
    
    
    $
    (18,880
    )
    
    
    (15.3
    )%
      38




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##### Table of Contents



Gross Margin
  Year Ended December 31,2008
    
    2007
    
    2006Revenue:System Sales
    
    $
    19,920
    
    
    $
    51,140
    
    
    $
    75,340Support Services
    
    
    49,408
    
    
    
    53,485
    
    
    
    48,165Total
    
    
    69,328
    
    
    
    104,625
    
    
    
    123,505Cost of Revenue:System Sales
    
    
    14,740
    
    
    
    28,551
    
    
    
    43,333Support Services
    
    
    24,352
    
    
    
    29,469
    
    
    
    27,772Total
    
    
    39,092
    
    
    
    58,020
    
    
    
    71,105Gross Profit:System Sales
    
    
    5,180
    
    
    
    22,589
    
    
    
    32,007Support Services
    
    
    25,056
    
    
    
    24,016
    
    
    
    20,393Total
    
    $
    30,236
    
    
    $
    46,605
    
    
    $
    52,400Gross Margin:System Sales
    
    
    26.0
    %
    
    
    44.2
    %
    
    
    42.5
    %Support Services
    
    
    50.7
    %
    
    
    44.9
    %
    
    
    42.3
    %Total
    
    
    43.6
    %
    
    
    44.5
    %
    
    
    42.4
    %
   39




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##### Table of Contents



Research and Development, Sales and Marketing, and General and Administrative Expenses
   Research and Development (R&D)
 Year Ended December 31,
    
    Year Ended December 31,2008
    
    2007
    
    Change
    
    Change (%)
    
    2007
    
    2006
    
    Change
    
    Change (%)(In thousands except percentages)
    
    (In thousands except percentages)R&D Expense
    
    $
    18,408
    
    
    $
    18,529
    
    
    $
    (121
    )
    
    
    (0.1
    )%
    
    $
    18,529
    
    
    $
    13,927
    
    
    $
    4,602
    
    
    
    33.0
    %% of Revenue
    
    
    26.6
    %
    
    
    17.7
    %
    
    
    
    
    
    
    
    
    
    
    17.7
    %
    
    
    11.3
    %
  40




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##### Table of Contents



Sales and Marketing (S&M)
 Year Ended December 31,
    
    Year Ended December 31,2008
    
    2007
    
    Change
    
    Change (%)
    
    2007
    
    2006
    
    Change
    
    Change (%)(In thousands except percentages)
    
    (In thousands except percentages)S&M Expense
    
    $
    14,128
    
    
    $
    18,285
    
    
    $
    (4,157
    )
    
    
    (22.7
    )%
    
    $
    18,285
    
    
    $
    18,459
    
    
    $
    (174
    )
    
    
    (1.0
    )%% of Revenue
    
    
    20.4
    %
    
    
    17.5
    %
    
    
    
    
    
    
    
    
    
    
    17.5
    %
    
    
    14.9
    %
   General and Administrative (G&A)
 Year Ended December 31,
    
    Year Ended December 31,2008
    
    2007
    
    Change
    
    Change (%)
    
    2007
    
    2006
    
    Change
    
    Change (%)(In thousands except percentages)
    
    (In thousands except percentages)G&A Expense
    
    $
    11,944
    
    
    $
    13,430
    
    
    $
    (1,486
    )
    
    
    (11.1
    )%
    
    $
    13,430
    
    
    $
    17,028
    
    
    $
    (3,598
    )
    
    
    (21.1
    )%% of Revenue
    
    
    17.2
    %
    
    
    12.8
    %
    
    
    
    
    
    
    
    
    
    
    12.8
    %
    
    
    13.8
    %
 41




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##### Table of Contents



Amortization and Write-off of Intangible Assets
   Other Operating Expenses
  Year ended December 31,2008
    
    2007
    
    2006Integration costs, Camtronics acquisition
    
    
    
    
    
    
    
    
    
    $
    5,369Employee severance and related expenses
    
    $
    1,287
    
    
    $
    2,001
    
    
    
    Strategic alternative expenses
    
    
    3,243
    
    
    
    320
    
    
    
    Litigation settlement
    
    
    1,000
    
    
    
    
    
    
    
    Loss on disposal, property and equipment
    
    
    17
    
    
    
    553
    
    
    
    437Total
    
    $
    5,547
    
    
    $
    2,874
    
    
    $
    5,806
 42




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##### Table of Contents



Integration Costs Related to Camtronics Acquisition
  Employee Severance and Related Expenses
   Strategic
Alternative Expenses
   Litigation Settlement
  43




---



##### Table of Contents



Loss on Disposal of Property and Equipment
  Operating Loss
  Interest Income, Net of Interest Expense
     44




---



##### Table of Contents



Quarterly Results of Operations
   Quarter EndedDec. 31,
    
    Sept. 30,
    
    June 30,
    
    March 31,
    
    Dec. 31,
    
    Sept. 30,
    
    June 30,
    
    March 31,2008
    
    2008
    
    2008
    
    2008
    
    2007
    
    2007
    
    2007
    
    2007(Dollars in thousands, except per share data)Revenue:System sales
    
    $
    3,869
    
    
    $
    4,232
    
    
    $
    5,999
    
    
    $
    5,820
    
    
    $
    15,531
    
    
    $
    10,706
    
    
    $
    11,235
    
    
    $
    13,668Support services
    
    
    12,129
    
    
    
    11,717
    
    
    
    12,115
    
    
    
    13,447
    
    
    
    13,440
    
    
    
    12,022
    
    
    
    14,341
    
    
    
    13,682Total revenue
    
    
    15,998
    
    
    
    15,949
    
    
    
    18,114
    
    
    
    19,267
    
    
    
    28,971
    
    
    
    22,728
    
    
    
    25,576
    
    
    
    27,350Cost of
revenue:System sales
    
    
    3,393
    
    
    
    3,245
    
    
    
    3,830
    
    
    
    4,272
    
    
    
    7,192
    
    
    
    6,327
    
    
    
    6,310
    
    
    
    8,722Support services
    
    
    5,368
    
    
    
    5,845
    
    
    
    6,463
    
    
    
    6,676
    
    
    
    6,903
    
    
    
    7,681
    
    
    
    7,204
    
    
    
    7,681Total cost of revenue
    
    
    8,761
    
    
    
    9,090
    
    
    
    10,293
    
    
    
    10,948
    
    
    
    14,095
    
    
    
    14,008
    
    
    
    13,514
    
    
    
    16,403Gross profit
    
    
    7,237
    
    
    
    6,859
    
    
    
    7,821
    
    
    
    8,319
    
    
    
    14,876
    
    
    
    8,720
    
    
    
    12,062
    
    
    
    10,947Operating expenses:Research and development
    
    
    4,472
    
    
    
    4,883
    
    
    
    4,727
    
    
    
    4,326
    
    
    
    4,356
    
    
    
    5,197
    
    
    
    4,358
    
    
    
    4,618Sales and marketing
    
    
    3,509
    
    
    
    3,143
    
    
    
    3,691
    
    
    
    3,785
    
    
    
    5,272
    
    
    
    4,121
    
    
    
    4,500
    
    
    
    4,392General and administrative
    
    
    2,150
    
    
    
    3,023
    
    
    
    3,105
    
    
    
    3,666
    
    
    
    4,088
    
    
    
    3,136
    
    
    
    2,752
    
    
    
    3,454Amortization and
write-off of intangible
assets
    
    
    345
    
    
    
    346
    
    
    
    21,922
    
    
    
    345
    
    
    
    345
    
    
    
    346
    
    
    
    345
    
    
    
    345Other operating expenses
    
    
    2,677
    
    
    
    1,643
    
    
    
    299
    
    
    
    928
    
    
    
    1,670
    
    
    
    413
    
    
    
    622
    
    
    
    169Total operating expenses
    
    
    13,153
    
    
    
    13,038
    
    
    
    33,744
    
    
    
    13,050
    
    
    
    15,731
    
    
    
    13,213
    
    
    
    12,577
    
    
    
    12,978Operating loss
    
    
    (5,916
    )
    
    
    (6,179
    )
    
    
    (25,923
    )
    
    
    (4,731
    )
    
    
    (855
    )
    
    
    (4,493
    )
    
    
    (515
    )
    
    
    (2,031
    )Interest income, net of
interest expense
    
    
    101
    
    
    
    116
    
    
    
    120
    
    
    
    141
    
    
    
    173
    
    
    
    213
    
    
    
    227
    
    
    
    196Net loss
    
    $
    (5,815
    )
    
    $
    (6,063
    )
    
    $
    (25,803
    )
    
    $
    (4,590
    )
    
    $
    (682
    )
    
    $
    (4,280
    )
    
    $
    (288
    )
    
    $
    (1,835
    )Net loss per share-basic
and diluted
    
    $
    (0.27
    )
    
    $
    (0.28
    )
    
    $
    (1.20
    )
    
    $
    (0.21
    )
    
    $
    (0.03
    )
    
    $
    (0.20
    )
    
    $
    (0.01
    )
    
    $
    (0.09
    )
  Revenue
 Gross Margin
 Operating Expenses
 45




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##### Table of Contents



Liquidity and Capital Resources
  December 312008
    
    2007Working capital*
    
    $
    7,571
    
    
    $
    21,304Current ratio**
    
    
    1.32:1.0
    
    
    
    1.66:1.0Cash and cash equivalents
    
    $
    13,511
    
    
    $
    17,034Short-term borrowings and long-term debt
    
    $
    43
    
    
    $
    89
 
 *
    
    Working capital is total current assets less total current liabilities.**
    
    Current ratio is the ratio of current assets to current liabilities.  Operating Activities
    46




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##### Table of Contents



Investing Activities
   Financing Activities
   Payment Due By Period (In thousands)Less than
    
    
    
    
    
    
    
    
    
    More thanContractual Cash Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 years(Dollars in thousands)Capital lease obligations
    
    $
    44
    
    
    $
    35
    
    
    $
    9
    
    
    
    
    
    
    
    Operating leases
    
    
    3,605
    
    
    
    1,428
    
    
    
    1,425
    
    
    $
    752
    
    
    
    Total contractual cash obligations
    
    $
    3,649
    
    
    $
    1,463
    
    
    $
    1,434
    
    
    $
    752
    
    
    
    
   47




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##### Table of Contents



Off Balance Sheet Arrangements
  Recently Issued Accounting Pronouncements
 Fair
Value Measurements
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   48




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
  
    
    pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets;
    
    provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and that our
receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and
    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition or use of our assets that could have a material effect on our
financial statements.
  Internal ControlIntegrated
Framework
 49




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
  
 ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  www.emageon.com
 
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  50




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  
 PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
    1.
    
    Financial Statements
 Page NumberDescription
    
    in ReportReport of Independent Registered Public Accounting Firm on Financial Statements
    
    F-2Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
    
    F-3Consolidated Balance Sheets as of December 31, 2008 and 2007
    
    F-4Consolidated
Statements of Operations for the years ended December 31, 2008,
2007 and 2006
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006
    
    F-6Consolidated Statements of Stockholders Equity for the years ended December 31, 2008, 2007 and 2006
    
    F-7Notes to Consolidated Financial Statements
    
    F-8
 2.
    
    Financial Statement Schedules
 Follows pageSchedule II  Valuation and Qualifying Accounts and Reserves for the three years ended December 31, 2008
    
    F-29
  3.
    
    Exhibits
  51




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##### Table of Contents



Exhibit No.
    
    Description2.1
    
    Agreement and Plan of Merger, dated as of April 30, 2003, by
and among Emageon, Inc., Emageon  UV Development
Corporation, Ultravisual Medical Systems Corporation and Jeff
Rusinow as Stockholders Representative (incorporated by
reference to Exhibit 2.1 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004)2.2A
    
    Agreement and Plan of Merger, dated as of October 13, 2008, by
and among the Company, Health Systems Solutions, Inc., and HSS
Acquisition Corp. (incorporated by reference to Exhibit 2.1 of
the Companys Form 8-K filed October 14, 2008)2.2B
    
    Amendment No. 1 to Agreement and Plan of Merger, dated as of
December 29, 2008, by and among the Company, Health Systems
Solutions, Inc. and HSS Acquisition Corp. (incorporated by
reference to Exhibit 2.1 of the Companys Form 8-K filed
December 30, 2008)2.3
    
    Agreement and Plan of Merger, dated as of February 23, 2009,
by and among the Company, AMICAS, Inc. and AMICAS Acquisition
Corp. (incorporated by reference to Exhibit 2.1 of the
Companys Form 8-K filed February 24, 2009)3.1
    
    Emageon Inc. Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.2 to the Companys
Registration Statement on Form S-1/A, Registration No.
333-120621, filed on February 4, 2005)3.2
    
    Emageon Inc. Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.5 to the Companys Current Report on
Form 8-K filed on November 15, 2007)4.1
    
    Form of Emageon Inc. common stock certificate (incorporated by
reference to Exhibit 3.4 to the Companys Registration
Statement on Form S-1/A, Registration No. 333-120621, filed on
February 4, 2005)10.1#
    
    Imageon Solutions, Inc. 2000 Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Companys
Registration Statement on Form S-1, Registration No.
333-120621, filed on November 19, 2004)10.2#
    
    Emageon Inc. 2000 Equity Compensation Plan (incorporated by
reference to Exhibit 10.2 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004)10.3#
    
    Emageon Inc. 2005 Equity Incentive Plan (incorporated by
reference to Exhibit 10.3 to the Companys Registration
Statement on Form S-1/A, Registration No. 333-120621, filed on
February 4, 2005)10.4#
    
    Emageon Inc. 2005 Non-Employee Director Stock Incentive Plan
(incorporated by reference to Exhibit 10.4 to the Companys
Registration Statement on Form S-1/A, Registration No.
333-120621, filed on February 4, 2005)10.5#
    
    Employment Agreement of Charles A. Jett, Jr. (incorporated by
reference to Exhibit 10.5 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004)10.6#
    
    Employment Agreement of Milton G. Silva-Craig (incorporated by
reference to Exhibit 10.6 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004)10.7#
    
    Employment Agreement of W. Randall Pittman (incorporated by
reference to Exhibit 10.7 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004)10.8#
    
    Employment Agreement of Mark A. Gehring (incorporated by
reference to Exhibit 10.8 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004)
 52




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##### Table of Contents



Exhibit No.
    
    Description10.9#
    
    Employment Agreement of Noel D. Gartman (incorporated by
reference to Exhibit 10.9 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004)10.10
    
    Form of Indemnification Agreement between the Registrant and
each of its directors and executive officers (incorporated by
reference to Exhibit 10.10 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004)10.11
    
    Amended and Restated Registration Rights Agreement, dated as
of October 2, 2001, by and among Emageon UV, Inc. and certain
stockholders, as amended and joined on May 30, 2003 and June
25, 2003 (incorporated by reference to Exhibit 10.11 to the
Companys Registration Statement on Form S-1, Registration No.
333-120621, filed on November 19, 2004)10.12
    
    Enterprise Agreement, dated as of May 5, 2004, by and between
Emageon UV, Inc. and Ascension Health (incorporated by
reference to Exhibit 10.12 to the Companys Registration
Statement on Form S-1/A, Registration No. 333-120621, filed on
February 8, 2005)10.13
    
    Lease Agreement, dated as of December 20, 2001, by and between
Meadow Brook North, L.L.C. and Emageon UV, Inc. (incorporated
by reference to Exhibit 10.13 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004)10.13A
    
    Sixth Amendment to Lease Agreement, dated as of July 23, 2004,
by and between Meadow Brook North, L.L.C. and Emageon UV, Inc.
(incorporated by reference to Exhibit 10.13A to the Companys
Registration Statement on Form S-1, Registration No.
333-120621, filed on November 19, 2004)10.14
    
    Note and Warrant Purchase Agreement, dated as of June 25,
2004, among Emageon UV, Inc. and Whitecap Alabama Growth Fund
I, LLC, Enhanced Alabama Issuer, LLC and Advantage Capital
Alabama Partners I, L.P. (incorporated by reference to Exhibit
10.14 to the Companys Registration Statement on Form S-1/A,
Registration No. 333-120621, filed on January 25, 2005)10.15
    
    Emageon Inc. Amended and Restated Stockholders Agreement,
dated as of October 2, 2001, among Emageon, Inc. and the
stockholders signatory thereto (incorporated by reference to
Exhibit 10.15 to the Companys Registration Statement on Form
S-1/A, Registration No. 333-120621, filed on January 25, 2005)10.15A
    
    Emageon Inc. First Amendment and Joinder to Amended and
Restated Stockholders Agreement, dated as of May 30, 2003,
among Emageon, Inc and the stockholders signatory thereto
(incorporated by reference to Exhibit 10.15A to the Companys
Registration Statement on Form S-1/A, Registration No.
333-120621, filed on January 25, 2005)10.15B
    
    Emageon Inc. Second Amendment and Joinder to Amended and
Restated Stockholders Agreement, dated as of June 25, 2003,
among Emageon, Inc. and the stockholders signatory thereto
(incorporated by reference to Exhibit 10.15B to the Companys
Registration Statement on Form S-1/A, Registration No.
333-120621, filed on January 25, 2005)10.16#
    
    Employment Agreement of Grady Floyd (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on Form 8-K
filed on April 4, 2006)10.17#
    
    Employment Agreement of Chris Perkins (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on December 12, 2007)10.18#
    
    Employment Agreement, dated April 29, 2008, between Emageon
Inc. and John W. Wilhoite (incorporated by reference to
Exhibit 10.1 of the Companys Form 8-K filed May 1, 2008)10.19#
    
    Employment Agreement, dated May 8, 2008, between Emageon Inc.
and Keith Stahlhut (incorporated by reference to Exhibit
(e)(6) of the Companys Schedule 14D-9 filed March 5, 2009)10.20
    
    Agreement, dated June 22, 2008, by and among the Company,
Charles A. Jett, Jr., Oliver Press Partners, LLC, and certain
of its affiliates party thereto (incorporated by reference to
Exhibit 10.1 of the Companys Form 8-K filed June 23, 2008)
 53




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##### Table of Contents



Exhibit No.
    
    Description10.21#
    
    Amendment No. 1 to Employment Agreement, dated July 8, 2008,
between Emageon Inc. and Charles A. Jett, Jr. (incorporated by
reference to Exhibit 10.1 of the Companys Form 8-K filed July
11, 2008)10.22
    
    Deposit Escrow Agreement, dated as
of October 21, 2008, by and among The Bank of New York Mellon,
Health Systems Solutions, Inc., and the Company (incorporated by
reference to Annex D to the Companys definitive proxy statement
filed November 14, 2008)10.23
    
    Amendment No. 1 to Deposit Escrow Agreement, dated as of
December 29, 2008, by and among The Bank of New York Mellon,
Health Systems Solutions, Inc. and the Company (incorporated
by reference to Exhibit 10.1 of the Companys Form 8-K filed
December 30, 2008)10.24#
    
    Severance Agreement and General Release, dated as of February
23, 2009, by and between the Company and Charles A. Jett, Jr.
(incorporated by reference to Exhibit 10.1 of the Companys
Form 8-K filed February 24, 2009)14.1
    
    Emageon Inc. Code of Ethics (incorporated by reference to
Exhibit 14.1 to the Companys Report on Form 10-K for the year
ended December 31, 2004)21.1*
    
    Subsidiaries of Emageon Inc.23.1*
    
    Consent of Independent Registered Public Accounting Firm31.1*
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act
of 193431.2*
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act
of 193432.1*
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith.#
    
    Management contract or compensatory plan or arrangement.
    
    Confidential treatment has been granted for portions of this exhibit. 54




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##### Table of Contents



SIGNATURES
  Emageon Inc.By:
    /s/ Charles A. Jett, Jr.Charles A. Jett, Jr.President and Chief Executive Officer  Signature
    
    Title/s/ Charles A. Jett, Jr.

Charles A. Jett, Jr.
    
    President and Chief Executive Officer
(Principal Executive Officer)/s/ John W. Wilhoite

John W. Wilhoite
    
    Chief Financial Officer and Treasurer
(Principal Financial Officer)/s/ Arthur P. Beattie

Arthur P. Beattie
    
    Director/s/ Roddy J.H. Clark

Roddy J.H. Clark
    
    Director/s/ Fred C. Goad, Jr.

Fred C. Goad, Jr.
    
    Director/s/ Bradley S. Karro

Bradley S. Karro
    
    Director/s/ Mylle H. Mangum

Mylle H. Mangum
    
    Director/s/ Augustus K. Oliver

Augustus K. Oliver
    
    Director/s/ John W. Thompson

John W. Thompson
    
    Director/s/ Benner Ulrich

Benner Ulrich
    
    Director/s/ Hugh H. Williamson, III

Hugh H. Williamson, III
    
    Director
 55




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##### Table of Contents



EMAGEON INC.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
 Report of Independent Registered Public Accounting Firm on Financial Statements
    
    
    F-2Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
    
    
    F-3Consolidated Balance Sheets
    
    
    F-4Consolidated Statements of Operations
    
    
    F-5Consolidated Statements of Cash Flows
    
    
    F-6Consolidated Statements of Stockholders Equity
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
On Financial Statements
 
    Internal
Control Integrated Framework
  
 F-2




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##### Table of Contents



Report of Independent Registered Public Accounting Firm on Internal Control
Over Financial Reporting
 
 Internal Control Integrated Framework
      
  F-3




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##### Table of Contents



EMAGEON INC.
CONSOLIDATED BALANCE SHEETS
 December 31,2008
    
    
    2007(In thousands, exceptfor share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,511
    
    
    $
    17,034Trade accounts receivable, net of allowance for doubtful accounts
of $400 and $910 at December 31, 2008 and 2007, respectively
    
    
    9,976
    
    
    
    26,796Inventories
    
    
    4,881
    
    
    
    6,249Prepaid expenses and other current assets
    
    
    3,179
    
    
    
    3,398Total current assets
    
    
    31,547
    
    
    
    53,477Property and equipment, net
    
    
    11,952
    
    
    
    15,143Other noncurrent assets
    
    
    2,998
    
    
    
    3,070Intangible assets:Goodwill
    
    
    
    
    
    
    21,667Customer relationships, net
    
    
    3,636
    
    
    
    5,017Acquired technology, net
    
    
    
    
    
    
    645Capitalized software development costs, net
    
    
    141
    
    
    
    275Total intangible assets
    
    
    3,777
    
    
    
    27,604Total assets
    
    $
    50,274
    
    
    $
    99,294LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,715
    
    
    $
    9,581Accrued payroll and related costs
    
    
    2,070
    
    
    
    2,877Deferred revenue
    
    
    15,400
    
    
    
    16,382Other accrued expenses
    
    
    1,757
    
    
    
    3,297Current portion of capital lease obligations
    
    
    34
    
    
    
    36Total current liabilities
    
    
    23,976
    
    
    
    32,173Long-term deferred revenue
    
    
    2,475
    
    
    
    4,306Other long-term liabilities
    
    
    339
    
    
    
    466Long-term capital lease obligations
    
    
    9
    
    
    
    53Total liabilities
    
    
    26,799
    
    
    
    36,998Stockholders equity:Common
stock, $0.001 par value; 66,000,000 shares authorized;
21,665,624 shares and 21,626,155 shares issued; and 21,489,867
shares and 21,450,398 shares outstanding at December 31, 2008
and 2007, respectively
    
    
    22
    
    
    
    22Additional paid in capital
    
    
    129,804
    
    
    
    126,332Accumulated other comprehensive income
    
    
    719
    
    
    
    741Accumulated deficit
    
    
    (106,795
    )
    
    
    (64,524
    )23,750
    
    
    
    62,571Treasury stock: 175,757 shares
    
    
    (275
    )
    
    
    (275
    )Total stockholders equity
    
    
    23,475
    
    
    
    62,296Total liabilities and stockholders equity
    
    $
    50,274
    
    
    $
    99,294
 F-4




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EMAGEON INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended December 31,2008
    
    
    2007
    
    
    2006(In thousands, except share amounts)Revenue:System sales
    
    $
    19,920
    
    
    $
    51,140
    
    
    $
    75,340Support services
    
    
    49,408
    
    
    
    53,485
    
    
    
    48,165Total revenue
    
    
    69,328
    
    
    
    104,625
    
    
    
    123,505Cost of revenue:System sales
    
    
    14,740
    
    
    
    28,551
    
    
    
    43,333Support services
    
    
    24,352
    
    
    
    29,469
    
    
    
    27,772Total cost of revenue
    
    
    39,092
    
    
    
    58,020
    
    
    
    71,105Gross profit
    
    
    30,236
    
    
    
    46,605
    
    
    
    52,400Operating expenses:Research and development
    
    
    18,408
    
    
    
    18,529
    
    
    
    13,927Sales and marketing
    
    
    14,128
    
    
    
    18,285
    
    
    
    18,459General and administrative
    
    
    11,944
    
    
    
    13,430
    
    
    
    17,028Amortization and write-off of intangible assets
    
    
    22,958
    
    
    
    1,381
    
    
    
    3,540Other operating expenses
    
    
    5,547
    
    
    
    2,874
    
    
    
    5,806Total operating expenses
    
    
    72,985
    
    
    
    54,499
    
    
    
    58,760Operating loss
    
    
    (42,749
    )
    
    
    (7,894
    )
    
    
    (6,360
    )Other income (expense):Interest income
    
    
    518
    
    
    
    908
    
    
    
    655Interest expense
    
    
    (40
    )
    
    
    (99
    )
    
    
    (327
    )Net loss
    
    $
    (42,271
    )
    
    $
    (7,085
    )
    
    $
    (6,032
    )Net loss per share  basic and diluted
    
    $
    (1.97
    )
    
    $
    (0.33
    )
    
    $
    (0.29
    )Weighted average common stock outstanding  basic and diluted
    
    
    21,469,868
    
    
    
    21,385,487
    
    
    
    20,935,685
 F-5




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##### Table of Contents



EMAGEON INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Operating activitiesNet loss
    
    $
    (42,271
    )
    
    $
    (7,085
    )
    
    $
    (6,032
    )Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation
    
    
    3,864
    
    
    
    5,941
    
    
    
    6,990(Recoveries)
provision for doubtful accounts, net
    
    
    (510
    )
    
    
    633
    
    
    
    Amortization of intangible assets
    
    
    2,322
    
    
    
    3,013
    
    
    
    4,969Goodwill impairment charge
    
    
    21,577
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    3,472
    
    
    
    3,212
    
    
    
    3,430Loss on disposal of property and equipment
    
    
    17
    
    
    
    553
    
    
    
    702Other operating activities
    
    
    
    
    
    
    
    
    
    
    129Changes in operating assets and liabilities
    
    
    9,831
    
    
    
    (9,444
    )
    
    
    (2,925
    )Net cash (used in) provided by operating activities
    
    
    (1,698
    )
    
    
    (3,177
    )
    
    
    7,263Investing ActivitiesPurchases of property and equipment
    
    
    (1,205
    )
    
    
    (2,693
    )
    
    
    (5,229
    )Proceeds from maturities of marketable securities
    
    
    
    
    
    
    
    
    
    
    5,000Capitalized software development costs
    
    
    (162
    )
    
    
    (70
    )
    
    
    (652
    )Other investing activities
    
    
    (500
    )
    
    
    (125
    )
    
    
    Net cash used in investing activities
    
    
    (1,867
    )
    
    
    (2,888
    )
    
    
    (881
    )Financing ActivitiesProceeds from issuance of common stock, net of issuance costs
    
    
    
    
    
    
    582
    
    
    
    3,892Payment of debt and capital lease obligations
    
    
    (46
    )
    
    
    (941
    )
    
    
    (2,788
    )Decrease in restricted cash
    
    
    
    
    
    
    445
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (46
    )
    
    
    86
    
    
    
    1,104Effect of exchange rate changes on cash
    
    
    88
    
    
    
    5
    
    
    
    2Net (decrease) increase in cash
    
    
    (3,523
    )
    
    
    (5,974
    )
    
    
    7,488Cash at beginning of year
    
    
    17,034
    
    
    
    23,008
    
    
    
    15,520Cash at end of year
    
    $
    13,511
    
    
    $
    17,034
    
    
    $
    23,008Supplemental disclosure of cash flow information:Interest paid
    
    $
    40
    
    
    $
    104
    
    
    $
    357
 F-6




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##### Table of Contents



EMAGEON INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AccumulatedAdditional
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid in
    
    
    Comprehensive
    
    
    Treasury
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Par Value
    
    
    Capital
    
    
    Income
    
    
    Stock
    
    
    Deficit
    
    
    Equity(In thousands, except for share data)Balance at December 31, 2005
    
    
    20,628,913
    
    
    $
    21
    
    
    $
    115,215
    
    
    $
    85
    
    
    $
    (275
    )
    
    $
    (51,407
    )
    
    $
    63,639Exercise of stock options
    
    
    787,699
    
    
    
    
    
    
    
    3,772
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,772Exercise of warrants
    
    
    38,117
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Other stock issuance
    
    
    4,400
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75Stock based compensation
    
    
    
    
    
    
    
    
    
    
    3,430
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,430Vesting of restricted stock
    
    
    24,514
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    169Realized loss on sale of
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,032
    )
    
    
    (6,032
    )Balance at December 31, 2006
    
    
    21,483,643
    
    
    $
    21
    
    
    $
    122,538
    
    
    $
    262
    
    
    $
    (275
    )
    
    $
    (57,439
    )
    
    $
    65,107Exercise of stock options
    
    
    108,683
    
    
    
    1
    
    
    
    582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    583Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    3,212
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,212Vesting of restricted stock
    
    
    33,829
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    479
    
    
    
    
    
    
    
    
    
    
    
    479Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,085
    )
    
    
    (7,085
    )Balance at December 31, 2007
    
    
    21,626,155
    
    
    $
    22
    
    
    $
    126,332
    
    
    $
    741
    
    
    $
    (275
    )
    
    $
    (64,524
    )
    
    $
    62,296Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    3,472
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,472Vesting of restricted stock
    
    
    39,469
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    
    
    
    
    
    
    
    
    (22
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,271
    )
    
    
    (42,271
    )Balance at December 31, 2008
    
    
    21,665,624
    
    
    $
    22
    
    
    $
    129,804
    
    
    $
    719
    
    
    $
    (275
    )
    
    $
    (106,795
    )
    
    $
    23,475
 F-7




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##### Table of Contents



EMAGEON INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008, 2007, and 2006
 Note 1. Business Description and Background
 Business Description
  Background
  Strategic Alternatives Process and Agreements with Health Systems Solutions and AMICAS
    F-8




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##### Table of Contents



Note 2. Summary of Significant Accounting Policies
 Presentation
  F-9




---



##### Table of Contents



Reclassification
  Principles of Consolidation
  Use of Estimates
  Fair Value of Financial Instruments
  Fair Value Measurements
 Fair Value Measurements
 F-10




---



##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Cash and Cash Equivalents
  Restricted Cash
  Trade Accounts Receivable and Allowance for Doubtful Accounts
  Inventories
   Property and Equipment
   F-11




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##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Business Combinations, Goodwill, and Intangible Assets; Goodwill Impairment Charge In 2008
 Business Combinations Goodwill and Other Intangible Assets
     F-12




---



##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Treasury Stock
  Revenue Recognition
   Software Revenue Recognition,
  F-13




---



##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
       Cost of Revenue
     F-14




---



##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Customer Indemnity and Warranty Costs
  Customer Indemnity:
 Product Warranty:
  Income Taxes
    Accounting For Uncertainty In Income Taxes Accounting For Income Taxes
  F-15




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##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Other Comprehensive Income or Loss
  Computation of Net Loss Per Share
   Year Ended December 31,2008
    
    
    2007
    
    
    2006Net loss allocable to common stockholders
    
    $
    (42,271
    )
    
    $
    (7,085
    )
    
    $
    (6,032
    )Common stock outstanding at beginning of period
    
    
    21,450,398
    
    
    
    21,283,372
    
    
    
    20,453,156Weighted average effect of:Issuance of common stock pursuant to stock option exercises,
warrant exercises, and restricted stock vesting
    
    
    19,470
    
    
    
    102,115
    
    
    
    482,529Weighted average number of shares of common stock  basic and
diluted
    
    
    21,469,868
    
    
    
    21,385,487
    
    
    
    20,935,685Net loss per share  basic and diluted
    
    $
    (1.97
    )
    
    $
    (0.33
    )
    
    $
    (0.29
    )
  F-16




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##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Stock-Based Compensation
 Share Based Payment
  Research and Development Costs
   Translation of Foreign Currencies
    Advertising Expense
  F-17




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##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note 3. Intangible Assets
  WeightedAverage
    
    
    December 31, 2008
    
    
    December 31, 2007Amortization
    
    
    Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedPeriod (Years)
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAcquired technology
    
    
    4.6
    
    
    $
    5,240
    
    
    $
    (5,240
    )
    
    $
    5,240
    
    
    $
    (4,595
    )Goodwill
    
    
    n/a
    
    
    
    
    
    
    
    
    
    
    
    21,667
    
    
    
    Customer relationships
    
    
    5.8
    
    
    
    8,010
    
    
    
    (4,374
    )
    
    
    8,010
    
    
    
    (2,993
    )Capitalized software
development costs
    
    
    1.5
    
    
    
    169
    
    
    
    (28
    )
    
    
    1,521
    
    
    
    (1,246
    )$
    13,419
    
    
    $
    (9,642
    )
    
    $
    36,438
    
    
    $
    (8,834
    )
  2009
    
    $
    1,4612010
    
    
    1,3972011
    
    
    919Total
    
    $
    3,777
 Note 4. Inventories
  December 31,2008
    
    
    2007Third-party components
    
    $
    2,485
    
    
    $
    3,086Work-in-process
    
    
    154
    
    
    
    447Completed systems
    
    
    2,242
    
    
    
    2,716$
    4,881
    
    
    $
    6,249
 F-18




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##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note 5. Supplementary Cash Flow Information
  Year Ended December 31,2008
    
    
    2007
    
    
    2006(Increase) decrease in:Trade accounts receivable, net
    
    $
    17,330
    
    
    $
    (723
    )
    
    $
    1,659Inventories
    
    
    1,368
    
    
    
    2,330
    
    
    
    (548
    )Prepaid expenses and other current assets
    
    
    219
    
    
    
    1,061
    
    
    
    (1,407
    )Other noncurrent assets
    
    
    72
    
    
    
    (1,082
    )
    
    
    (389
    )Increase (decrease) in:Accounts payable
    
    
    (4,371
    )
    
    
    (652
    )
    
    
    (4,120
    )Accrued payroll and related costs
    
    
    (807
    )
    
    
    (893
    )
    
    
    (334
    )Other accrued expenses
    
    
    (1,167
    )
    
    
    (369
    )
    
    
    792Deferred revenue
    
    
    (2,813
    )
    
    
    (9,116
    )
    
    
    1,422Net changes in operating assets and liabilities
    
    $
    9,831
    
    
    $
    (9,444
    )
    
    $
    (2,925
    )
  Note 6. Property and Equipment
  Estimated
    
    
    December 31,Useful Lives
    
    
    2008
    
    
    2007Land
    
    Indefinite
        
    $
    791
    
    
    $
    791Buildings and improvements
    
    15 to 39 years
        
    
    7,170
    
    
    
    7,170Machinery and equipment
    
    
    5 to 7 years
    
    
    
    1,031
    
    
    
    1,028Computers, software and other
    
    
    3 to 7 years
    
    
    
    11,934
    
    
    
    11,768Furniture and fixtures
    
    
    3 to 7 years
    
    
    
    2,273
    
    
    
    2,247Leasehold improvements
    
    
    4 to 5 years
    
    
    
    556
    
    
    
    572Third-party components leased to customers
under operating leases
    
    
    5 to 7 years
    
    
    
    3,181
    
    
    
    2,97126,936
    
    
    
    26,547Less accumulated depreciation and amortization
    
    
    
    
    
    
    (14,984
    )
    
    
    (11,404
    )$
    11,952
    
    
    $
    15,143
  F-19




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##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note 7. Major Customers
  Note 8. Defined Contribution Benefit Plan
  Note 9. Income Taxes
  December 31,2008
    
    2007Deferred tax assets:Net operating loss carryforward
    
    $
    29,512
    
    
    $
    21,700Intangible assets
    
    
    2,114
    
    
    
    1,842Deferred revenue
    
    
    2,575
    
    
    
    5,821Reserves and accrued liabilities
    
    
    496
    
    
    
    452Stock-based compensation
    
    
    2,020
    
    
    
    1,285Goodwill
    
    
    3,647
    
    
    
    Depreciation
    
    
    41
    
    
    
    Other
    
    
    311
    
    
    
    145Total
    
    
    40,716
    
    
    
    31,245Deferred tax liabilities:Depreciation
    
    
    
    
    
    
    (1,912
    )Developed technology
    
    
    (267
    )
    
    
    (1,638
    )Total
    
    
    (267
    )
    
    
    (3,550
    )Net deferred tax assets
    
    
    40,449
    
    
    
    27,695Valuation allowance
    
    
    (40,449
    )
    
    
    (27,695
    )Net deferred tax liability
    
    $
    
    
    
    $
    
  F-20




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##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Year Ended December 31,2008
    
    2007
    
    2006Tax benefit computed at the statutory federal rate
    
    $
    (14,362
    )
    
    $
    (2,409
    )
    
    $
    (2,051
    )State taxes, net of federal tax benefit
    
    
    (928
    )
    
    
    (171
    )
    
    
    (168
    )Increase in tax from:Change in deferred tax valuation allowance
    
    
    12,753
    
    
    
    1,544
    
    
    
    2,076Permanent differences
    
    
    3,848
    
    
    
    468
    
    
    
    143True-up of deferred taxes
    
    
    (1,350
    )
    
    
    592
    
    
    
    Other
    
    
    39
    
    
    
    (24
    )
    
    
    Benefit for income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
   Year Ended December 31,2008
    
    2007
    
    2006Balance at beginning of period
    
    $
    27,695
    
    
    $
    26,151
    
    
    $
    19,761Income tax expense
    
    
    11,404
    
    
    
    1,544
    
    
    
    2,076Other
    
    
    1,350
    
    
    
    
    
    
    
    4,314Balance at end of period
    
    $
    40,449
    
    
    $
    27,695
    
    
    $
    26,151
    F-21




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##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note 10. Capital Lease Obligations; Line Of Credit Agreement
  December 31,2008
    
    
    2007Capital leases of third-party computer hardware
and software at a customer site and of certain
office and computer equipment
    
    $
    43
    
    
    $
    89Current portion
    
    
    (34
    )
    
    
    (36
    )Long-term portion of capital lease obligations
    
    $
    9
    
    
    $
    53
   Note 11. Common Stock Warrants
  F-22




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##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  2008
    
    
    2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceCommon stock warrants at beginning of period
    
    
    10,869
    
    
    $
    5.52
    
    
    
    10,869
    
    
    $
    5.52Forfeited or canceled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of period
    
    
    10,869
    
    
    $
    5.52
    
    
    
    10,869
    
    
    $
    5.52Exercisable at end of period
    
    
    10,869
    
    
    $
    5.52
    
    
    
    10,869
    
    
    $
    5.52
  Note 12. Stock-Based Compensation
   F-23




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##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Stock Options
  Year Ended December 31,2008
    
    2007
    
    2006Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility
    
    
    50.00
    %
    
    
    50.00
    %
    
    
    70.87
    %Risk-free interest rate
    
    
    2.53
    %
    
    
    4.44
    %
    
    
    4.87
    %Expected life of options, in years
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Weighted average grant date fair value
    
    $
    1.14
    
    
    $
    4.70
    
    
    $
    10.09
  F-24




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##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
     2008
    2007Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOptions at beginning of period
    
    
    2,289,381
    
    
    $
    9.36
    
    
    
    1,750,543
    
    
    $
    9.27Forfeited
    
    
    (672,246
    )
    
    
    7.01
    
    
    
    (147,129
    )
    
    
    12.35Exercised
    
    
    
    
    
    
    
    
    
    
    (108,683
    )
    
    
    7.52Granted
    
    
    862,000
    
    
    
    2.47
    
    
    
    794,650
    
    
    
    9.53Outstanding at end of period
    
    
    2,479,135
    
    
    $
    7.36
    
    
    
    2,289,381
    
    
    $
    9.36Exercisable at end of period
    
    
    1,482,061
    
    
    $
    7.84
    
    
    
    1,320,187
    
    
    $
    8.23
  Options Outstanding
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    Weighted
    
    
    
    
    
    Average
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    Remaining
    
    AverageContractual
    
    Exercise
    
    
    
    
    
    Contractual
    
    ExerciseRange of Exercise Prices
    
    Number
    
    Life
    
    Price
    
    Number
    
    Life
    
    Price$1.73 to $2.52
    
    
    836,215
    
    
    8.30 years
    
    $
    2.38
    
    
    
    286,229
    
    
    6.65 years
    
    $
    2.26$4.52 to $7.17
    
    
    597,420
    
    
    3.46 years
    
    
    5.29
    
    
    
    582,010
    
    
    3.39 years
    
    
    5.24$7.93 to $12.46
    
    
    584,650
    
    
    8.42 years
    
    
    10.32
    
    
    
    274,319
    
    
    8.40 years
    
    
    10.16$12.72 to $14.90
    
    
    163,288
    
    
    6.93 years
    
    
    13.13
    
    
    
    140,371
    
    
    6.95 years
    
    
    13.19$15.05 to $17.79
    
    
    297,562
    
    
    7.27 years
    
    
    16.52
    
    
    
    199,132
    
    
    7.28 years
    
    
    16.52Total
    
    
    2,479,135
    
    
    6.96 years
    
    $
    7.36
    
    
    
    1,482,061
    
    
    5.81 years
    
    $
    7.84
  Restricted Stock Units
  F-25




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##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   2008
    
    2007Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageFair
    
    
    
    
    
    FairShares
    
    Value
    
    Shares
    
    ValueRestricted stock units at beginning of period
    
    
    103,864
    
    
    $
    11.20
    
    
    
    57,250
    
    
    $
    16.41Granted
    
    
    58,049
    
    
    $
    2.49
    
    
    
    94,833
    
    
    $
    9.82Vested
    
    
    (39,469
    )
    
    $
    10.33
    
    
    
    (33,829
    )
    
    $
    8.76Forfeited
    
    
    (52,385
    )
    
    $
    4.92
    
    
    
    (14,390
    )
    
    $
    14.03Restricted stock units at end of period
    
    
    70,059
    
    
    $
    9.16
    
    
    
    103,864
    
    
    $
    11.20
  Note 13. Operating Leases
 Lessee Arrangements.
 2009
    
    $
    1,4282010
    
    
    8322011
    
    
    5932012
    
    
    5582013 and Beyond
    
    
    194$
    3,605
  Year EndedDecember 31,2008
    
    
    2007Beginning liability balance
    
    $
    600
    
    
    $
    1,057Lease payments, net
    
    
    (134
    )
    
    
    (282
    )Reduction in estimated liability
    
    
    
    
    
    
    (175
    )Ending liability balance
    
    $
    466
    
    
    $
    600
 F-26




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##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Lessor Arrangements.
  2009
    
    $
    5632010
    
    
    1602011
    
    
    41Total minimum future rentals
    
    $
    764
 Note 14. Other Operating Expenses
  Year Ended December 31,2008
    
    
    2007
    
    
    2006Integration costs, Camtronics acquisition
    
    $
    
    
    
    $
    
    
    
    $
    5,369Employee severance and related expenses
    
    
    1,287
    
    
    
    2,001
    
    
    
    Strategic alternative expenses
    
    
    3,243
    
    
    
    320
    
    
    
    Litigation settlement
    
    
    1,000
    
    
    
    
    
    
    
    Loss on disposal of property and equipment
    
    
    17
    
    
    
    553
    
    
    
    437Total other operating expenses
    
    $
    5,547
    
    
    $
    2,874
    
    
    $
    5,806
 Integration Costs, Camtronics Acquisition
 Employee Severance and Related Expenses
 F-27




---



##### Table of Contents



Strategic
Alternative Expenses
  Litigation Settlement
 Loss on Disposal of Property and Equipment
 F-28




---



##### Table of Contents



EMAGEON INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note 15. Selected Quarterly Financial Data (Unaudited)
 Quarters EndedMarch 31
    
    June 30
    
    September 30
    
    December 312008Revenue
    
    $
    19,267
    
    
    $
    18,114
    
    
    $
    15,949
    
    
    $
    15,998Gross profit
    
    
    8,319
    
    
    
    7,821
    
    
    
    6,859
    
    
    
    7,237Operating loss
    
    
    (4,731
    )
    
    
    (25,923
    )
    
    
    (6,179
    )
    
    
    (5,916
    )Net loss
    
    $
    (4,590
    )
    
    $
    (25,803
    )
    
    $
    (6,063
    )
    
    $
    (5,815
    )Net loss per share  basic and diluted
    
    $
    (0.21
    )
    
    $
    (1.20
    )
    
    $
    (0.28
    )
    
    $
    (0.27
    )2007Revenue
    
    $
    27,350
    
    
    $
    25,576
    
    
    $
    22,728
    
    
    $
    28,971Gross profit
    
    
    10,947
    
    
    
    12,062
    
    
    
    8,720
    
    
    
    14,876Operating loss
    
    
    (2,031
    )
    
    
    (515
    )
    
    
    (4,493
    )
    
    
    (855
    )Net loss
    
    $
    (1,835
    )
    
    $
    (288
    )
    
    $
    (4,280
    )
    
    $
    (682
    )Net loss per share  basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.20
    )
    
    $
    (0.03
    )
 F-29




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##### Table of Contents



EMAGEON INC.
 
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 Balance
    
    Additions Charged To
    
    
    
    
    
    BalanceBeginning
    
    Costs and
    
    Other
    
    
    
    
    
    End ofDescription
    
    of Period
    
    Expenses
    
    Accounts
    
    Deductions
    
    Period(In thousands)Allowance for doubtful accounts deducted from
accounts receivable in the balance sheet:2008
    
    $
    910
    
    
    
    291
    
    
    
    
    
    
    
    (801
    )(1)
    
    $
    4002007
    
    
    277
    
    
    
    635
    
    
    
    
    
    
    
    (2
    )(1)
    
    
    9102006
    
    
    126
    
    
    
    367
    
    
    
    
    
    
    
    (216
    )(1)
    
    
    277Accrued liability for product warranty included in
other accrued expenses in the balance sheet:2008
    
    $
    440
    
    
    
    233
    
    
    
    
    
    
    
    (364
    )(2)
    
    $
    3092007
    
    
    700
    
    
    
    148
    
    
    
    
    
    
    
    (408
    )(2)
    
    
    4402006
    
    
    937
    
    
    
    254
    
    
    
    
    
    
    
    (491
    )(2)
    
    
    700
 
 (1)
    
    Uncollectible accounts reserved, and payments received on
previously reserved accounts.(2)
    
    Expenditures in settlement of warranty claims. F-30