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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 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.
 
  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
 
   Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $0.001 Par Value Per Share
    
    NASDAQ Global Market
  None
 
   o þ
  o þ
  þ o
 o
  o þ o
  o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
 PART IITEM 1:
    
    Business
    
    1ITEM 1A:
    
    Risk Factors
    
    16ITEM 1B:
    
    Unresolved Staff Comments
    
    26ITEM 2:
    
    Properties
    
    26ITEM 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
    
    31ITEM 7A:
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    47ITEM 8:
    
    Financial Statements and Supplementary Data
    
    48ITEM 9:
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    48ITEM 9A:
    
    Controls and Procedures
    
    48ITEM 9B:
    
    Other Information
    
    49PART 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
    
    50PART IVITEM 15:
    
    Exhibits and Financial Statement Schedules
    
    51INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
    
    F-1EX-21.1 SUBSIDIARIES OF EMAGEON INC.EX-23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATIONS OF CEO AND CFO
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PART I
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   
 ITEM 1.
    
    BUSINESS
 Overview
    1




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Our Opportunity
     Increasing Number, Size and Complexity of Imaging Exams.
 Need for Advanced Visualization Tools.
 2




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Need for Complete Electronic Health Records. Reactive to Adaptive Transforming
Hospitals With Digital Technology
 Shortcomings of Film-Based Image Management.
 Limitations of Current Methodologies for Managing Digital Medical Images.
 Our Solutions
  3




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Group
    
    Benefits from our Solutions Administration (CEO, CFO and COO)
    
    
    Demonstrable return on investment
    
    Better service to physicians
    
    Improved staff productivity
    
    Improved satisfaction of referring physicians
    
    Elimination of many routine, non-productive and non-clinical tasksInformation Technology (CIO and IT Department)
    
    
    Lower total cost of operation
    
    Fault tolerant, redundant and reliable
    
    Ease of integration with different clinical information systems
    
    Multi-site, multi-institutional standards-based integration
    
    Focused, high quality implementation servicesDiagnostic Physicians (Radiologists)
    
    
    Integrated and easy-to-use visualization tools
    
    Multi-point access to visualization tools and images
    
    Productivity gains
    
    Easy access to unified visual recordsTreating Physicians (Cardiologists, Surgeons, etc.)
    
    
    Availability of easy-to-use, specialty-specific visualization
tools
    
    Faster turnaround of information for treatment planning
    
    Facilitates collaborative analysis with diagnostic physicians
    
    Improved treatment planning
    
    Easy access to unified visual records
 Payor
    
    
    Ability to avoid duplicate exams through cross-enterprise access
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Enterprise-Level Image Content Management.
 Advanced Visualization Technology.
 Specialty-Specific Clinical Applications.
 Open Standards-Based Software.
 Effective Implementation, User Adoption and Support Services.
 Our Strategy
  5




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Expand Our Market Share by Attracting New Customers.
 Increase Penetration With Existing Customers.
 
    
    Increase Installations with Existing Multi-Facility Customers.As of December 31,
2006, we had customer relationships with 19 multi-facility health care providers that
control 263 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 a strong position to sell
additional functionality to our existing customers, including advanced visualization
tools for image-intensive medical specialties that may not have been part of the
initial sale. As follow-on sales opportunities, we offer our advanced visualization
software and other products and additional functionality to radiologists and other
specialty groups within the organization. Our offering of our HeartSuite cardiology
products gives us broader cross-selling opportunities than we had prior to the
acquisition of Camtronics.
 Enhance Our Product Offerings.
 Continue to Deliver Superior Implementation, User Adoption and Customer Support Services.
 Maintain Our Open-Standards Focus.
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Our Product and Service Offerings
  Software
  Clinical Content Management
   
    
    Multi-Site and Multi-Department. The system permits authorized users to access images
from any network access point, including home, office or throughout the health care
facility. It handles images created by multiple hospital departments and multiple image
devices.
    
    Enterprise and Cross Enterprise-Level Scalability. We can install Clinical Content
Management as a single facility application or as an enterprise-level solution to support
the medical image management needs of large multi-facility health care providers. Our
solutions can support multiple institutions to unify the patient record.
    
    Fault Tolerance. We use an advanced, fault tolerant, high availability configuration on
redundant server clusters with redundant storage systems. We support either full backup
and recovery or mirrored archives in two different locations, enabling uninterrupted
operation in the event of the loss of one archive.
    
    Open Standards. Unlike many competitive image management systems, our system has been
designed using an open standards architecture that leads to better integration with imaging
devices and clinical information systems, improves the speed and reliability of transfers
of medical image data and provides a lower total cost of ownership by avoiding unnecessary
translation overhead.
 RadSuite Advanced Visualization Tools
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
    
    Speed and Efficiency. The ability to improve efficiency for physicians through better
tools and reduce latency for care by access at the point of need.
    
    Sophistication. The software makes use of complex processing techniques such as
multi-planar reformat, or MPR, and volumetric imaging for 3D imaging applications.
    
    Integration. Imaging tools include integrated 2D and 3D viewing methods that can be used
simultaneously with the same image or images on the same computer.
    
    Ease of Use. The system is intuitive and user-friendly so physicians can easily adapt
its use into their current practice patterns.
    
    Application to Numerous Clinical Specialties. The user interface automatically adjusts
for the type of physician using the system, user preferences, the type of imaging device
used to create the image (such as CT, X-ray or MRI), and the particular body part and
tissue type being imaged.
    
    Platform Compatibility. The system uses a common personal computer graphics standard,
allowing off-site physicians to use inexpensive personal computers and permitting the
enterprise to make use of lower priced workstations with off the shelf graphics hardware.
    
    Web-enabled. Physicians or other authorized users have secure access to images and
advanced visualization tools at any network access point.
 Clinical Workflow
  HeartSuite VERICIS
 
    
    elimination of film and paper-based processes;
    
    reduction of redundant tasks, including cine film handling, data entry, archiving and transcription;
    
    streamlined access to patient studies and reports; and
    
    scalable and expandable to meet needs of any size cardiology department.
 HeartSuite Hemodynamics
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HeartSuite CVIS
 Service and Support
   
    
    Adoption Success Management (ASM). ASM is our services program that facilitates rapid
and complete adoption by all relevant constituents during the implementation phase, which
typically lasts several months. We have designed ASM to maximize the user implementation
experience, promote behavioral change at all levels and increase the probability of
complete implementation success.
    
    Total Solution Management (TSM). TSM is an ongoing set of support services to ensure
that our systems are highly available and optimally configured for the 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 24-hour service and support for our software
and any third-party components we provide to the customer.
  Third-Party Components
  
    
    Servers. Our software and the database run on a cluster of standard redundant servers.
    
    Data Storage. We support industry standard storage configurations, including
fault-tolerant 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 the digital
medical images. We also offer an optional configuration with mirrored archives in two
locations, enabling uninterrupted operation in the event of the loss of one archive.
    
    Workstations and Monitors. Customers typically implement our advanced visualization
software using standard personal computer workstations and high-resolution monitors for
visualization within the facility.
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
    
    Database. Our software applications operate on Oracle
 database technology and
other standard relational database applications.
    
    Computed Radiography. We offer computed radiography devices manufactured by Eastman
Kodak Company. Computed radiography devices convert analog X-ray images into digital
images.
    
    Advanced 3D Analysis Tools. We offer Vital Images Vitrea software as an option for
advanced clinical applications for visualization and integrated analysis tools that
complement our enterprise native visualization and workflow capabilities. Through the
desktop integration of our respective products, physicians can access Vitreas advanced
visualization and analysis tools and review the image data seamlessly without interrupting
workflow.
    
    Electronic Health Record, Enterprise Practice Management, and Electronic Health
Exchange. We offer Allscripts TouchWorks EHR and PM solutions to our healthcare system and
hospital customers, thereby offering another system to enhance patient care and lower
healthcare costs for physicians and healthcare professionals. The robust integration
between these respective solutions can enable physicians who use TouchWorks in ambulatory
offices to visualize and analyze images from the practice or hospital. Desktop sharing
rapidly presents our visualization and analysis tools which are tailored to the
specialists needs.
    
    We also offer a software toolset for orthopedic surgeons which is licensed from
Orthocrat, Ltd. and a voice recognition dictation system from Lanier Worldwide, Inc.
 Our Technology
  
    
    Native DICOM Compatibility. We have written our software to conform to the DICOM
standard for medical image storage and workflow management as promulgated by the American
College of Radiology and the National Electronics Manufacturers Association. 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 or
other 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.
    
    Proprietary 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. Unlike many of our
competitors who license DICOM-toolkits from third parties, we have developed and own a
DICOM-toolkit that we believe permits us to more rapidly integrate DICOM-based information
into our software. We 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 billing and patient record
information systems implemented at our customer sites.
    
    Compatibility with the OPEN GL Graphics Standard. Our advanced 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.
Historically, workstations and graphics
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hardware that could provide advanced
visualization functionality were cost prohibitive. Our advanced visualization software
uses the OPEN GL graphics standard, which permits our customers, or off-site physicians
affiliated with our customers, to purchase 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 the entire application level.
 Customers
   Sales and Marketing
   Research and Development
  
    
    improving physician and technologist workflow;
    
    expansion of content management to cover medical documents beyond DICOM data;
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
    
    expansion of content management to service communities;
    
    improving reporting and data analysis capabilities;
    
    developing and refining visualization capabilities including new 3D and analysis applications; 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 Eastman Kodak Company and
Fujifilm Medical Systems USA, Inc.;
    
    companies that have traditionally sold health care information technology applications
such as McKesson Corp. and Cerner Corp.; and
    
    a number of smaller companies that sell department-level or cardiology-specific PACS or
specialty visualization tools.
   
    
    product innovation;
    
    regulatory decisions;
    
    product quality and performance;
    
    customer service and support;
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
    
    the experience of our sales, marketing and service professionals;
    
    rapid development of new products and features;
    
    price;
    
    continued active involvement in the development of DICOM and other standards-based
medical communication protocols; and
    
    product and policy decisions announced by competitors.
 Intellectual Property
      ® ® ®
 Employees
  13




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Government Regulation
  Food and Drug Administration
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Health Canada
   HIPAA Privacy and Security Regulations
  Government Reimbursement
 Fraud and Abuse
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
    
    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 original Stark Law, its subsequent Stark II amendment,
and the Stark implementing regulations from referring patients for designated health
services reimbursed under the Medicare and Medicaid programs to entities with which they
have a financial relationship or an ownership 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 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.
 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.
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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 and increased penetration of PACS in the hospitals in the U.S. may also delay or
extend the sales cycle for affected customers. As a result, our enterprise solution has a
typical sales cycle, from the initial contact to the placing of an order, of nine to twelve
months, and sometimes 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 substantially 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 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.
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We have incurred substantial operating losses in the past.
  Our failure to manage growth effectively may strain our management, personnel and other resources,
which could impair our ability to meet customer requirements.
  Failure to successfully execute our acquisition strategy may have an adverse impact on our growth
strategy.
  Implementing our acquisition strategy could result in integration risks, operating difficulties,
dilution or other adverse financial consequences.
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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 businesses effectively.
  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 raise additional capital on acceptable terms to fund our operations, develop
product enhancements or fund acquisitions, which could adversely affect our growth prospects.
  
    
    develop new technologies;
    
    enhance existing product lines, such as expanding our advanced visualization tools
product line to apply to additional clinical specialties;
    
    fund additional sales and marketing programs;
    
    invest in or acquire complementary businesses, product lines or technologies; or
    
    hire additional personnel, particularly to expand sales, marketing, research and development.
 
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We may not be successful in expanding our sales and marketing efforts into new market segments,
which may have an adverse impact on our growth strategy.
   
    
    refine and adapt our products and services for new or different applications;
    
    offer our products and services at price points that are competitive in the market segment;
    
    create and develop demand for and market acceptance of our products and services in the
market segment;
    
    market, promote and distribute our products and services, and establish public awareness
of our brand in the market segment;
    
    compete with other companies already in the market segment; and
    
    establish and maintain sufficient internal marketing, sales and customer service
infrastructures to support these efforts.
  The loss of Ascension Health or future 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.
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We depend on highly specialized personnel, and the loss or failure to identify, hire, motivate and
retain additional highly specialized personnel could adversely affect our ability to grow our
business.
   Changes in our third-party reselling arrangements may affect our revenues and our ability to
deliver a complete solution, which may adversely impact our revenue and cause customer
dissatisfaction.
  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.
  Our customers depend on third-party reimbursement. A reduction or other change in third-party
reimbursements to our customers could negatively affect our business by reducing the demand for our
products or adversely impacting our pricing.
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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.
   If we fail to comply with other potentially applicable health care regulations, we could face
substantial penalties, and our business, operations, and financial condition could be adversely
impacted.
  
    
    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.
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
    
    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.
  If the market for digital medical imaging products and services does not develop as we expect, our
business strategy may be ineffective, and we may not be able to grow our business.
  
    
    the availability of high performance computers and storage systems at reduced prices;
    
    the continuing development of industry standards for the generation, transmission and
storage of medical imaging data;
    
    changing dynamics in the health care industry, including consolidation and third-party
reimbursement, which are driving increased automation across multiple sites; and
    
    changing medical practices, including demand for more and better medical imaging.
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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 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;
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
    
    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.
  Our directors may not be held personally liable for certain actions, which could discourage
stockholder suits against them.
  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.
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ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS
  
 ITEM 2.
    
    PROPERTIES
   
 ITEM 3.
    
    LEGAL PROCEEDINGS
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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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
   2005 Quarter Ended
    
    High
    
    LowMarch 31, 2005
    
    $
    18.50
    
    
    $
    14.35June 30, 2005
    
    
    17.29
    
    
    
    13.99September 30, 2005
    
    
    15.00
    
    
    
    11.30December 31, 2005
    
    $
    16.47
    
    
    $
    12.35
 2006 Quarter Ended
    
    High
    
    LowMarch 31, 2006
    
    $
    18.82
    
    
    $
    15.30June 30, 2006
    
    
    17.90
    
    
    
    12.90September 30, 2006
    
    
    15.96
    
    
    
    13.39December 31, 2006
    
    $
    16.53
    
    
    $
    13.79
 Dividends
  Use of Proceeds from Initial Public Offering
  27




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##### Table of Contents



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
 
 28




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##### Table of Contents



ITEM 6.
    
    SELECTED CONSOLIDATED FINANCIAL DATA
  Year Ended December 31,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006(In thousands, except per share data)Consolidated Statements of Operations Data (1) (2):Revenue:System sales
    
    $
    8,437
    
    
    $
    17,234
    
    
    $
    33,441
    
    
    $
    50,041
    
    
    $
    75,340Support services
    
    
    4,198
    
    
    
    6,341
    
    
    
    13,059
    
    
    
    25,023
    
    
    
    48,165Total revenue
    
    
    12,635
    
    
    
    23,575
    
    
    
    46,500
    
    
    
    75,064
    
    
    
    123,505Cost of revenue:System sales
    
    
    6,316
    
    
    
    10,227
    
    
    
    21,452
    
    
    
    28,316
    
    
    
    43,333Support services
    
    
    4,056
    
    
    
    7,777
    
    
    
    11,426
    
    
    
    15,921
    
    
    
    24,331Total cost of revenue
    
    
    10,372
    
    
    
    18,004
    
    
    
    32,878
    
    
    
    44,237
    
    
    
    67,664Gross profit
    
    
    2,263
    
    
    
    5,571
    
    
    
    13,622
    
    
    
    30,827
    
    
    
    55,841Operating expenses:Research and development
    
    
    2,570
    
    
    
    4,875
    
    
    
    6,197
    
    
    
    11,652
    
    
    
    17,368Sales and marketing
    
    
    4,642
    
    
    
    6,403
    
    
    
    9,377
    
    
    
    12,238
    
    
    
    18,459General and administrative
    
    
    2,776
    
    
    
    4,802
    
    
    
    7,498
    
    
    
    10,945
    
    
    
    17,028Amortization and write-off of intangible assets
related to Camtronics acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    993
    
    
    
    3,540Integration costs related to Camtronics acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    244
    
    
    
    5,369Loss on disposal of property and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    437Total operating expenses
    
    
    9,988
    
    
    
    16,080
    
    
    
    23,072
    
    
    
    36,072
    
    
    
    62,201Operating loss
    
    
    (7,725
    )
    
    
    (10,509
    )
    
    
    (9,450
    )
    
    
    (5,245
    )
    
    
    (6,360
    )Interest income (expense), net
    
    
    (601
    )
    
    
    (850
    )
    
    
    (1,022
    )
    
    
    248
    
    
    
    328Net loss
    
    $
    (8,326
    )
    
    $
    (11,359
    )
    
    $
    (10,472
    )
    
    $
    (4,997
    )
    
    $
    (6,032
    )Net loss per share, basic and diluted
    
    $
    (6.38
    )
    
    $
    (5.79
    )
    
    $
    (4.07
    )
    
    $
    (0.28
    )
    
    $
    (0.29
    )Weighted average shares, basic and diluted
    
    
    1,314
    
    
    
    1,973
    
    
    
    2,590
    
    
    
    17,975
    
    
    
    20,919Selected Cash Flow Data:Cash provided by (used in) operations
    
    $
    (7,847
    )
    
    $
    (2,377
    )
    
    $
    4,959
    
    
    $
    (1,881
    )
    
    $
    7,263
 29




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##### Table of Contents



As of December 31,2002
    
    2003
    
    2004
    
    2005
    
    2006(In thousands)Consolidated Balance Sheet Data:Cash and cash equivalents
    
    $
    2,242
    
    
    $
    2,340
    
    
    $
    5,995
    
    
    $
    15,520
    
    
    $
    23,008Marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,951
    
    
    
    Intangible assets, net
    
    
    
    
    
    
    8,000
    
    
    
    6,873
    
    
    
    34,277
    
    
    
    30,090Total assets
    
    
    24,990
    
    
    
    29,050
    
    
    
    41,768
    
    
    
    117,944
    
    
    
    113,908Total debt and capital lease obligations
    
    
    10,260
    
    
    
    8,467
    
    
    
    9,489
    
    
    
    3,749
    
    
    
    961Redeemable preferred stock
    
    
    24,326
    
    
    
    30,282
    
    
    
    30,348
    
    
    
    
    
    
    
    Total stockholders equity (deficit)
    
    
    (20,508
    )
    
    
    (23,535
    )
    
    
    (32,370
    )
    
    
    63,639
    
    
    
    65,107
 
 (1)
    
    On November 1, 2005, we acquired Camtronics Medical Systems, Ltd., and on May 30, 2003, we
merged with Ultravisual Medical Systems Corporation. Both the acquisition and the merger were
accounted for as purchases under Statement of Financial Accounting Standards No. 141, Business
Combinations. Accordingly, the results of operations of Camtronics Medical Systems, Ltd. and
Ultravisual Medical Systems Corporation have been included in the accompanying consolidated
financial statements since the respective dates of acquisition. For more information, see
Note 4 of the notes to our consolidated financial statements.(2)
    
    Certain reclassifications have been made to prior years financial data to conform to the
current year presentation. 30




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Company Overview
   Results Overview
   Initial Public Offering And Camtronics Integration
   31




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##### Table of Contents



Our Market
  
    
    Increasing procedure volumes
    
    Increasing procedure size
    
    Modality blending, a layering of studies from two separate modalities for diagnostic
and treatment purposes
    
    Expanding adoption and use of standards
    
    Increasing emphasis by payors, healthcare providers, and government agencies on
electronic health record integration
    
    Body transparency, a new paradigm for navigating through large volumes of information
  
    
    MR and CT angiography
    
    Multi-Detector CT for heart and chest imaging
    
    CT/PET Fusion
    
    Cardiac catheterization
   Significant Events in 2006
  
    
    We successfully completed the integration of Camtronics into our business, including
integration of the management structure and sales force, commencement of cross-selling
efforts, consolidation of the engineering staff, and consolidation of the administrative
function including financial systems.
 32




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##### Table of Contents




    
    In November, we entered into strategic relationships with Vital Images, Inc. and
AllScripts Healthcare Solutions allowing us to offer the complementary products of those
companies with our products across our installed base of customers.
    
    We expanded our customer relationships to now encompass 588 medical facilities, 460 of
which have installed our products.
    
    We achieved record bookings and revenue, improved our gross margins, reduced our
operating expenses as a percentage of revenue, and generated positive operating cash flow
while avoiding the incurrence of debt.
 Sources of Revenue
     Cost of Revenue
  33




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##### Table of Contents



Gross Profit
  
    
    actual sales prices negotiated in the contracting process;
    
    costs associated with purchasing and manufacturing 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; and
    
    the relative mix of the hardware and software components comprising system sales in a given period.
  
    
    actual 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; and
    
    costs associated with the use of outside contractors.
 Operating Expenses
 Research and Development
 Sales and Marketing
 General and Administrative
 34




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##### Table of Contents



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.
    
    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.
    
    Term licenses: 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 for our
software, which is evidenced by written customer acknowledgement. In the event that we
grant a customer the right to specified upgrades, we defer recognition of the entire
arrangement fee until we deliver the specified upgrades as we have not established
vendor-specific objective evidence (VSOE) of fair value for specified upgrades. Specified
upgrades include, but are not limited to, future software deliverables that are stated in
the customer contract.
    
    The customers payment is deemed fixed or determinable: 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
 35




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36




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##### Table of Contents



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




---



##### Table of Contents



Results of Operations
 Revenue
  Year Ended December 31,
    
    
    Year Ended December 31,2006
    
    
    2005
    
    
    Change
    
    
    Change (%)
    
    
    2005
    
    
    2004
    
    
    Change
    
    
    Change(%)(In thousands except percentages)
    
    
    (In thousands except percentages)System sales
    
    $
    75,340
    
    
    $
    50,041
    
    
    $
    25,299
    
    
    
    50.6
    %
    
    $
    50,041
    
    
    $
    33,441
    
    
    $
    16,600
    
    
    
    49.6
    %Support services
    
    $
    48,165
    
    
    $
    25,023
    
    
    $
    23,142
    
    
    
    92.5
    %
    
    $
    25,023
    
    
    $
    13,059
    
    
    $
    11,964
    
    
    
    91.6
    %Total revenue
    
    $
    123,505
    
    
    $
    75,064
    
    
    $
    48,441
    
    
    
    64.5
    %
    
    $
    75,064
    
    
    $
    46,500
    
    
    $
    28,564
    
    
    
    61.4
    %
      38




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##### Table of Contents



Gross Margin
  Year Ended December 31,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2004Revenue:System sales
    
    $
    75,340
    
    
    $
    50,041
    
    
    $
    33,441Support services
    
    
    48,165
    
    
    
    25,023
    
    
    
    13,059Total
    
    
    123,505
    
    
    
    75,064
    
    
    
    46,500Cost of revenue:System sales
    
    
    43,333
    
    
    
    28,316
    
    
    
    21,452Support services
    
    
    24,331
    
    
    
    15,921
    
    
    
    11,426Total
    
    
    67,664
    
    
    
    44,237
    
    
    
    32,878Gross profit:System sales
    
    
    32,007
    
    
    
    21,725
    
    
    
    11,989Support services
    
    
    23,834
    
    
    
    9,102
    
    
    
    1,633Total
    
    $
    55,841
    
    
    $
    30,827
    
    
    $
    13,622Gross margin:System sales
    
    
    42.5
    %
    
    
    43.4
    %
    
    
    35.9
    %Support services
    
    
    49.5
    %
    
    
    36.4
    %
    
    
    12.5
    %Total
    
    
    45.2
    %
    
    
    41.1
    %
    
    
    29.3
    %
   39




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##### Table of Contents



Research and Development, Sales and Marketing, and General and Administrative Expenses
  
    
    increased general and administrative expenses resulting from additional compliance
costs related to public company financial reporting requirements, specifically the
costs of compliance with the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley);
    
    stock-based compensation expense recognized in accordance with Statement of
Financial Accounting Standards No. 123R, Share-Based Payment(SFAS No. 123R); and
 40




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##### Table of Contents




    
    increased costs of personnel and overhead expenses consistent with our growth and
expanded development, selling and marketing efforts and related supporting
administrative costs.
   Research and Development (R&D) Expense
 Year Ended December 31,
    
    Year Ended December 31,2006
    
    2005
    
    Change
    
    Change (%)
    
    2005
    
    2004
    
    Change
    
    Change(%)(In thousands except percentages)
    
    (In thousands except percentages)R&D Expense
    
    $
    17,368
    
    
    $
    11,652
    
    
    $
    5,716
    
    
    
    49.1
    %
    
    $
    11,652
    
    
    $
    6,197
    
    
    $
    5,455
    
    
    
    88.0
    %% of Revenue
    
    
    14.1
    %
    
    
    15.5
    %
    
    
    
    
    
    
    
    
    
    
    15.5
    %
    
    
    13.3
    %
    Sales and Marketing Expense
 Year Ended December 31,
    
    Year Ended December 31,2006
    
    2005
    
    Change
    
    Change (%)
    
    2005
    
    2004
    
    Change
    
    Change(%)(In thousands except percentages)
    
    (In thousands except percentages)S&M Expense
    
    $
    18,459
    
    
    $
    12,238
    
    
    $
    6,221
    
    
    
    50.8
    %
    
    $
    12,238
    
    
    $
    9,377
    
    
    $
    2,861
    
    
    
    30.5
    %% of Revenue
    
    
    14.9
    %
    
    
    16.3
    %
    
    
    
    
    
    
    
    
    
    
    16.3
    %
    
    
    20.2
    %
 41




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##### Table of Contents



General and Administrative Expense
 Year Ended December 31,
    
    Year Ended December 31,2006
    
    2005
    
    Change
    
    Change (%)
    
    2005
    
    2004
    
    Change
    
    Change(%)(In thousands except percentages)
    
    (In thousands except percentages)G&A Expense
    
    $
    17,028
    
    
    $
    10,945
    
    
    $
    6,083
    
    
    
    55.6
    %
    
    $
    10,945
    
    
    $
    7,498
    
    
    $
    3,447
    
    
    
    46.0
    %% of Revenue
    
    
    13.8
    %
    
    
    14.6
    %
    
    
    
    
    
    
    
    
    
    
    14.6
    %
    
    
    16.1
    %
   42




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##### Table of Contents



Amortization of Intangible Assets Related to Camtronics Acquisition
  Integration Costs Related to Camtronics Acquisition
  Operating Income (Loss)
  Other Income and Expense
   43




---



##### Table of Contents



Quarterly Results of Operations
   Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2005
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2006
    
    
    2006(Dollars in thousands, except per share data)Revenue:System sales
    
    $
    7,719
    
    
    $
    13,402
    
    
    $
    13,490
    
    
    $
    15,430
    
    
    $
    17,269
    
    
    $
    17,601
    
    
    $
    19,370
    
    
    $
    21,100Support services
    
    
    3,865
    
    
    
    5,513
    
    
    
    6,526
    
    
    
    9,118
    
    
    
    9,732
    
    
    
    12,415
    
    
    
    13,641
    
    
    
    12,377Total revenue
    
    
    11,584
    
    
    
    18,915
    
    
    
    20,016
    
    
    
    24,548
    
    
    
    27,001
    
    
    
    30,016
    
    
    
    33,011
    
    
    
    33,477Cost of revenue:System sales
    
    
    4,823
    
    
    
    5,753
    
    
    
    7,206
    
    
    
    10,534
    
    
    
    13,284
    
    
    
    9,977
    
    
    
    10,712
    
    
    
    9,360Support services
    
    
    3,331
    
    
    
    3,667
    
    
    
    3,799
    
    
    
    5,123
    
    
    
    6,218
    
    
    
    6,534
    
    
    
    6,187
    
    
    
    5,392Total cost of revenue
    
    
    8,154
    
    
    
    9,420
    
    
    
    11,005
    
    
    
    15,657
    
    
    
    19,502
    
    
    
    16,511
    
    
    
    16,899
    
    
    
    14,752Gross profit
    
    
    3,430
    
    
    
    9,495
    
    
    
    9,011
    
    
    
    8,891
    
    
    
    7,499
    
    
    
    13,505
    
    
    
    16,112
    
    
    
    18,725Operating expenses:Research and
development
    
    
    2,534
    
    
    
    2,797
    
    
    
    2,624
    
    
    
    3,697
    
    
    
    4,130
    
    
    
    4,032
    
    
    
    4,601
    
    
    
    4,605Sales and marketing
    
    
    2,803
    
    
    
    2,596
    
    
    
    2,455
    
    
    
    4,384
    
    
    
    4,002
    
    
    
    4,589
    
    
    
    4,435
    
    
    
    5,433General and
administrative
    
    
    2,292
    
    
    
    2,537
    
    
    
    2,467
    
    
    
    3,649
    
    
    
    4,338
    
    
    
    3,851
    
    
    
    4,495
    
    
    
    4,344Amortization and
write-off of
intangible assets
related to Camtronics
acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    993
    
    
    
    885
    
    
    
    885
    
    
    
    885
    
    
    
    885Integration costs
related to Camtronics
acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    244
    
    
    
    1,204
    
    
    
    1,077
    
    
    
    2,062
    
    
    
    1,026Loss on disposal of
property and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    4
    
    
    
    
    
    
    
    453Total operating expenses
    
    
    7,629
    
    
    
    7,930
    
    
    
    7,546
    
    
    
    12,967
    
    
    
    14,539
    
    
    
    14,438
    
    
    
    16,478
    
    
    
    16,746Operating income (loss)
    
    
    (4,199
    )
    
    
    1,565
    
    
    
    1,465
    
    
    
    (4,076
    )
    
    
    (7,040
    )
    
    
    (933
    )
    
    
    (366
    )
    
    
    1,979Other (expense) income, net
    
    
    (619
    )
    
    
    335
    
    
    
    366
    
    
    
    166
    
    
    
    47
    
    
    
    76
    
    
    
    93
    
    
    
    112Net income (loss)
    
    $
    (4,818
    )
    
    $
    1,900
    
    
    $
    1,831
    
    
    $
    (3,910
    )
    
    $
    (6,993
    )
    
    $
    (857
    )
    
    $
    (273
    )
    
    $
    2,091Net income (loss) per
share-basic and
diluted
    
    $
    (0.42
    )
    
    $
    0.09
    
    
    $
    0.09
    
    
    $
    (0.19
    )
    
    $
    (0.34
    )
    
    $
    (0.04
    )
    
    $
    (0.01
    )
    
    $
    0.10
  Revenue
 Gross Margin
 44




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##### Table of Contents



Operating Expenses
   Liquidity and Capital Resources
  December 312006
    
    2005Working capital *
    
    $
    21,392
    
    
    $
    10,717Current ratio **
    
    
    1.5:1.0
    
    
    
    1.2:1.0Cash, cash equivalents and marketable securities
    
    $
    23,008
    
    
    $
    20,471Short-term borrowings and long-term debt
    
    $
    961
    
    
    $
    3,749
 
 *
    
    Working capital is total current assets less total current liabilities.**
    
    Current ratio is the ratio of current assets to current liabilities.  Operating Activities
   45




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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)Long-term debt, including interest
    
    $
    762
    
    
    $
    762
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital lease obligations
    
    
    244
    
    
    
    230
    
    
    
    14
    
    
    
    
    
    
    
    Operating leases
    
    
    6,408
    
    
    
    1,505
    
    
    
    3,127
    
    
    
    1,206
    
    
    
    570Total contractual cash obligations
    
    $
    7,414
    
    
    $
    2,497
    
    
    $
    3,141
    
    
    $
    1,206
    
    
    $
    570
 46




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##### Table of Contents



Off-Balance Sheet Arrangements
  Recently Issued Accounting Pronouncements
 Accounting For Uncertainty in Income Taxes
 Fair
Value Measurements
 
 ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  47




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##### Table of Contents



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.
  48




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
  
 ITEM 9B.
    
    OTHER INFORMATION
  49




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##### Table of Contents



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
  
 ITEM 14.
    
    PRINCIPAL ACCOUNTING FEES AND SERVICES
  50




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##### Table of Contents



PART IV
 
 ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 (a)
    
    The following documents are filed as part of this Report:
 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 Managements Assessment of
Internal Control Over Financial Reporting
    
    
    F-3Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    F-4Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    
    F-6Consolidated
Statements of Stockholders Equity (Deficit) for the years ended December 31, 2006,
2005 and 2004
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 2.
    
    Financial Statement Schedules
 Page NumberDescription
    

in ReportSchedule II  Valuation and
Qualifying Accounts and Reserves for
the three years ended December 31,
2006
    
    Follows page F-24
  3.
    
    Exhibits
  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)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 3.4 to the Companys Registration
Statement on Form S-1/A, Registration No. 333-120621, filed
on January 25, 2005)
 51




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##### Table of Contents



Exhibit No.
    
    Description4.1
    
    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)10.9#
    
    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)
 52




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##### Table of Contents



Exhibit No.
    
    Description10.13A
    
    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)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 53




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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 Managements
Assessment of 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 (Deficit)
    
    F-7Notes To Consolidated Financial Statements
    
    F-8
 F-1




---



##### Table of Contents



REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL
STATEMENTS
 
    Share Based Payment
  /s/ Ernst &Young LLP 
 F-2




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON MANAGEMENTS ASSESSMENT
OF INTERNAL CONTROL OVER FINANCIAL REPORTING
 
     , .
  /s/ Ernst &Young LLPAtlanta, GeorgiaMarch 15, 2007 F-3




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##### Table of Contents



EMAGEON INC.
 
 CONSOLIDATED BALANCE SHEETS
 December 31,2006
    
    
    2005(In thousands, exceptshare data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,008
    
    
    $
    15,520Marketable securities
    
    
    
    
    
    
    4,951Trade accounts receivable, net of allowance for doubtful
accounts of $277 and $126 at December 31, 2006 and 2005,
respectively
    
    
    27,602
    
    
    
    29,261Inventories
    
    
    8,579
    
    
    
    8,031Prepaid expenses and other current assets
    
    
    4,459
    
    
    
    3,052Total current assets
    
    
    63,648
    
    
    
    60,815Property and equipment, net
    
    
    18,362
    
    
    
    21,433Other noncurrent assets
    
    
    1,808
    
    
    
    1,419Intangible assets:Goodwill
    
    
    21,210
    
    
    
    21,079Customer relationships, net
    
    
    6,399
    
    
    
    9,510Acquired technology, net
    
    
    1,836
    
    
    
    3,028Capitalized software development costs, net
    
    
    645
    
    
    
    231Trademark and trade names, net
    
    
    
    
    
    
    429Total intangible assets
    
    
    30,090
    
    
    
    34,277Total assets
    
    $
    113,908
    
    
    $
    117,944LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    9,738
    
    
    $
    13,858Accrued payroll and related costs
    
    
    3,770
    
    
    
    4,104Deferred revenue
    
    
    24,849
    
    
    
    26,057Other accrued expenses
    
    
    2,946
    
    
    
    3,316Current portion of long-term debt and capital lease obligations
    
    
    953
    
    
    
    2,763Total current liabilities
    
    
    42,256
    
    
    
    50,098Long-term deferred revenue
    
    
    5,851
    
    
    
    3,221Other long-term liabilities
    
    
    686
    
    
    
    Long-term debt and capital lease obligations
    
    
    8
    
    
    
    986Total liabilities
    
    
    48,801
    
    
    
    54,305Stockholders equity:Common stock, $0.001 par value: 165,050,000 shares authorized;
21,433,574 shares and 20,628,913 shares issued; and 21,257,817
shares and 20,453,156 shares outstanding at December 31, 2006 and
2005, respectively
    
    
    21
    
    
    
    21Additional paid in capital
    
    
    122,538
    
    
    
    115,215Accumulated other comprehensive income
    
    
    262
    
    
    
    85Accumulated deficit
    
    
    (57,439
    )
    
    
    (51,407
    )65,382
    
    
    
    63,914Treasury stock: 175,757 shares
    
    
    (275
    )
    
    
    (275
    )Total stockholders equity
    
    
    65,107
    
    
    
    63,639Total liabilities and stockholders equity
    
    $
    113,908
    
    
    $
    117,944
 F-4




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##### Table of Contents



EMAGEON INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended December 31,2006
    
    
    2005
    
    
    2004(In thousands, except per share amounts)Revenue:System sales
    
    $
    75,340
    
    
    $
    50,041
    
    
    $
    33,441Support services
    
    
    48,165
    
    
    
    25,023
    
    
    
    13,059Total revenue
    
    
    123,505
    
    
    
    75,064
    
    
    
    46,500Cost of revenue:System sales
    
    
    43,333
    
    
    
    28,316
    
    
    
    21,452Support services
    
    
    24,331
    
    
    
    15,921
    
    
    
    11,426Total cost of revenue
    
    
    67,664
    
    
    
    44,237
    
    
    
    32,878Gross profit
    
    
    55,841
    
    
    
    30,827
    
    
    
    13,622Operating expenses:Research and development
    
    
    17,368
    
    
    
    11,652
    
    
    
    6,197Sales and marketing
    
    
    18,459
    
    
    
    12,238
    
    
    
    9,377General and administrative
    
    
    17,028
    
    
    
    10,945
    
    
    
    7,498Amortization and write-off of intangible assets related
to Camtronics acquisition
    
    
    3,540
    
    
    
    993
    
    
    
    Integration costs related to Camtronics acquisition
    
    
    5,369
    
    
    
    244
    
    
    
    Loss on disposal of property and equipment
    
    
    437
    
    
    
    
    
    
    
    Total operating expenses
    
    
    62,201
    
    
    
    36,072
    
    
    
    23,072Operating loss
    
    
    (6,360
    )
    
    
    (5,245
    )
    
    
    (9,450
    )Other income (expense):Interest income
    
    
    655
    
    
    
    1,497
    
    
    
    31Interest expense
    
    
    (327
    )
    
    
    (1,249
    )
    
    
    (1,053
    )Net loss
    
    $
    (6,032
    )
    
    $
    (4,997
    )
    
    $
    (10,472
    )Net loss per share  basic and diluted
    
    $
    (0.29
    )
    
    $
    (0.28
    )
    
    $
    (4.07
    )Weighted average common stock outstanding  basic and diluted
    
    
    20,919
    
    
    
    17,975
    
    
    
    2,590
 F-5




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##### Table of Contents



EMAGEON INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2006
    
    
    2005
    
    
    2004(In thousands)Operating activitiesNet loss
    
    $
    (6,032
    )
    
    $
    (4,997
    )
    
    $
    (10,472
    )Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation
    
    
    6,990
    
    
    
    5,668
    
    
    
    4,790Amortization of intangible assets
    
    
    4,969
    
    
    
    1,626
    
    
    
    1,160Write off of intangible assets related to Camtronics acquisition, net of tax liability
    
    
    
    
    
    
    403
    
    
    
    Amortization and write off of subordinated debt discount
    
    
    
    
    
    
    646
    
    
    
    157Employee stock based compensation expense
    
    
    3,430
    
    
    
    1,171
    
    
    
    533Loss on disposal of property and equipment
    
    
    702
    
    
    
    
    
    
    
    Other operating activities
    
    
    129
    
    
    
    215
    
    
    
    373Changes in operating assets and liabilities, net of acquired companies
    
    
    (2,925
    )
    
    
    (6,613
    )
    
    
    8,418Net cash provided by (used in) operating activities
    
    
    7,263
    
    
    
    (1,881
    )
    
    
    4,959Investing ActivitiesPurchases of property and equipment
    
    
    (5,229
    )
    
    
    (7,680
    )
    
    
    (2,905
    )Purchases of marketable securities
    
    
    
    
    
    
    (44,198
    )
    
    
    Proceeds from maturities of marketable securities
    
    
    5,000
    
    
    
    39,335
    
    
    
    Capitalized software development costs
    
    
    (652
    )
    
    
    (354
    )
    
    
    (32
    )Purchase price of Camtronics, net of cash received
    
    
    
    
    
    
    (40,359
    )
    
    
    Net cash used in investing activities
    
    
    (881
    )
    
    
    (53,256
    )
    
    
    (2,937
    )Financing ActivitiesProceeds from issuance of common stock, net of issuance costs
    
    
    3,892
    
    
    
    70,630
    
    
    
    64Payment of debt and capital lease obligations
    
    
    (2,788
    )
    
    
    (6,515
    )
    
    
    (2,316
    )Proceeds from loans, net of issuance costs
    
    
    
    
    
    
    
    
    
    
    3,980Other financing activities
    
    
    
    
    
    
    432
    
    
    
    (96
    )Net cash provided by financing activities
    
    
    1,104
    
    
    
    64,547
    
    
    
    1,632Effect of exchange rate changes on cash
    
    
    2
    
    
    
    116
    
    
    
    Net increase in cash
    
    
    7,488
    
    
    
    9,526
    
    
    
    3,654Cash at beginning of year
    
    
    15,520
    
    
    
    5,994
    
    
    
    2,340Cash at end of year
    
    $
    23,008
    
    
    $
    15,520
    
    
    $
    5,994Supplemental disclosure of cash flow information:Interest paid
    
    $
    357
    
    
    $
    1,266
    
    
    $
    863
 F-6




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##### Table of Contents



EMAGEON INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
 Additional
    
    
    Accumulated Other
    
    
    
    
    
    
    
    
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid In
    
    
    Comprehensive
    
    
    Treasury
    
    
    Accumulated
    
    
    Stockholders'Shares
    
    
    Carrying Value
    
    
    Shares
    
    
    Par Value
    
    

Capital
    
    

Income
(Loss)
    
    

Stock
    
    

Deficit
    
    

Equity
(Deficit)(In thousands, except for share data)Balance at December 31, 2003
    
    
    19,692,358
    
    
    $
    7,306
    
    
    
    3,033,209
    
    
    $
    3
    
    
    $
    5,294
    
    
    
    
    
    
    $
    (275
    )
    
    $
    (35,863
    )
    
    $
    (23,535
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    22,972
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64Issuance of warrants in
connection with
subordinated debt and
customer sales agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,046
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,046Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    594
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    594Accretion of redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67
    )
    
    
    (67
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,472
    )
    
    
    (10,472
    )Balance at December 31, 2004
    
    
    19,692,358
    
    
    
    7,306
    
    
    
    3,056,181
    
    
    
    3
    
    
    
    6,998
    
    
    
    
    
    
    
    (275
    )
    
    
    (46,402
    )
    
    
    (32,370
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    417,607
    
    
    
    1
    
    
    
    1,292
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,293Exercise of stock warrants
    
    
    105,703
    
    
    
    58
    
    
    
    24,632
    
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132Exercise of mandatorily
redeemable stock warrants
in connection with
initial public offering
    
    
    
    
    
    
    
    
    
    
    537,082
    
    
    
    1
    
    
    
    735
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    736Proceeds from initial
public offering, net of
issuance costs
    
    
    
    
    
    
    
    
    
    
    5,750,000
    
    
    
    6
    
    
    
    67,195
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,201Automatic conversion of
non-redeemable preferred
stock into common stock
in connection with
initial public offering
    
    
    (19,798,061
    )
    
    
    (7,364
    )
    
    
    2,402,898
    
    
    
    2
    
    
    
    7,362
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Automatic conversion of
redeemable preferred
stock into common stock
in connection with
initial public offering
    
    
    
    
    
    
    
    
    
    
    8,440,513
    
    
    
    8
    
    
    
    30,348
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,356Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,211
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,211Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    93Unrealized loss on
available-for-sale
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    (8
    )Accretion of redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,997
    )
    
    
    (4,997
    )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
    
    
    
    
    
    
    
    
    
    
    12,562
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Other stock issuance
    
    
    
    
    
    
    
    
    
    
    4,400
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,430
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,430Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    169Realized loss on sale of
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,032
    )
    
    
    (6,032
    )Balance at December 31, 2006
    
    
    
    
    
    $
    
    
    
    
    21,433,574
    
    
    $
    21
    
    
    $
    122,538
    
    
    $
    262
    
    
    $
    (275
    )
    
    $
    (57,439
    )
    
    $
    65,107
 F-7




---



##### Table of Contents



EMAGEON INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2006, 2005, and 2004
 Note 1. Business Description and Background
 Business Description
  Background
  Note 2. Summary of Significant Accounting Policies
 Presentation
  Reclassification
   Principles of Consolidation
  Use of Estimates
  F-8




---



##### Table of Contents



Fair value of financial instruments
  Cash and Cash Equivalents
  Restricted Cash
  Securities Available-for-Sale
  Trade Accounts Receivable and Allowance for Doubtful Accounts
    Inventories
   F-9




---



##### Table of Contents



Property and Equipment
    Business Combinations, Goodwill, and Intangible Assets
 Business Combinations Goodwill and Other Intangible Assets
    Treasury Stock
  F-10




---



##### Table of Contents



Revenue Recognition
   Software Revenue Recognition
      F-11




---



##### Table of Contents



Cost of Revenue
     Customer Indemnity and Warranty Costs
   Customer Indemnity
 Product Warranty
 F-12




---



##### Table of Contents



Income Taxes
     Comprehensive Income
  Computation of Net Loss Per Share
   For the Year Ended December 31,2006
    
    
    2005
    
    
    2004Net loss
    
    $
    (6,032
    )
    
    $
    (4,997
    )
    
    $
    (10,472
    )Accretion of redemption value related to redeemable
preferred stock
    
    
    
    
    
    
    (8
    )
    
    
    (66
    )Net loss allocable to common stockholders
    
    $
    (6,032
    )
    
    $
    (5,005
    )
    
    $
    (10,538
    )Common stock outstanding at beginning of period
    
    
    20,453,156
    
    
    
    2,709,370
    
    
    
    2,429,742Weighted average effect of:Release of escrowed common stock
    
    
    
    
    
    
    
    
    
    
    151,866Conversion of preferred stock to common stock
    
    
    
    
    
    
    9,506,552
    
    
    
    Issuance of common stock in initial public offering
    
    
    
    
    
    
    5,032,877
    
    
    
    Issuance of common stock and preferred stock
pursuant to stock option and warrant exercises
    
    
    465,562
    
    
    
    576,321
    
    
    
    8,224Release of escrowed common stock upon completion
of initial public offering
    
    
    
    
    
    
    149,963
    
    
    
    Weighted average number of shares of common stock 
basic and diluted
    
    
    20,918,718
    
    
    
    17,975,083
    
    
    
    2,589,832Net loss per share  basic and diluted
    
    $
    (0.29
    )
    
    $
    (0.28
    )
    
    $
    (4.07
    )
 F-13




---



##### Table of Contents



Stock-Based Compensation
 Share Based Payment Accounting for Stock Issued to Employees
  Research and Development Costs
   Translation of Foreign Currencies
  F-14




---



##### Table of Contents



Advertising Expense
  Recent Accounting Pronouncements
 Accounting For Uncertainty in Income Taxes Fair Value Measurements
 Note 3. Initial Public Offering
   F-15




---



##### Table of Contents



Note 4. Acquisitions and Intangible Assets
    Accounts receivable
    
    $
    7,101Inventories
    
    
    3,207Property, plant and equipment
    
    
    10,595Other current assets
    
    
    693Goodwill
    
    
    17,325Intangible assets:Customer relationships
    
    
    10,028Developed technology
    
    
    1,074Trade names
    
    
    501In-process technology
    
    
    248Total assets acquired
    
    
    50,772Accounts payable and other liabilities
    
    
    5,312Accrued expenses
    
    
    844Unearned revenue
    
    
    4,257Total liabilities assumed
    
    
    10,413Net assets acquired
    
    $
    40,359
   For the Year EndedDecember 31,2004
    
    
    2005(unaudited)Revenue
    
    
    
    
    
    $
    99,876
    
    
    $
    111,032Net loss
    
    
    
    
    
    $
    (16,459
    )
    
    
    (11,689
    )Loss per share  basic and diluted
    
    
    
    
    
    $
    (6.38
    )
    
    $
    (0.65
    )
  WeightedAverageAmortization
    
    
    December 31, 2006
    
    
    December 31, 2005Period
    
    
    Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    Accumulated(Years)
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAcquired technology
    
    
    4.6
    
    
    $
    5,240
    
    
    $
    (3,404
    )
    
    $
    5,240
    
    
    $
    (2,212
    )Goodwill
    
    
    n/a
    
    
    
    21,210
    
    
    
    
    
    
    
    21,079
    
    
    
    Customer relationships
    
    
    4.9
    
    
    
    10,028
    
    
    
    (3,629
    )
    
    
    10,028
    
    
    
    (518
    )Trade names
    
    
    1.2
    
    
    
    501
    
    
    
    (501
    )
    
    
    501
    
    
    
    (72
    )Capitalized software
development costs
    
    
    1.4
    
    
    
    1,451
    
    
    
    (806
    )
    
    
    798
    
    
    
    (567
    )$
    38,430
    
    
    $
    (8,340
    )
    
    $
    37,646
    
    
    $
    (3,369
    )
  2007
    
    $
    3,0892008
    
    
    2,1572009
    
    
    1,3812010
    
    
    1,3352011 and thereafter
    
    
    918Total
    
    $
    8,880
 Note 5. Marketable Securities
   F-16




---



##### Table of Contents



Note 6. Inventories
  December 31,2006
    
    
    2005Third-party components
    
    $
    2,716
    
    
    $
    1,708Work-in-process
    
    
    336
    
    
    
    345Completed systems
    
    
    5,527
    
    
    
    5,978$
    8,579
    
    
    $
    8,031
 Note 7. Supplementary Cash Flow Information
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(Increase) decrease in:Trade accounts receivable, net
    
    $
    1,659
    
    
    $
    (7,659
    )
    
    $
    (10,233
    )Inventories, net
    
    
    (548
    )
    
    
    (3,402
    )
    
    
    (1,137
    )Prepaid expenses and other current assets
    
    
    (1,407
    )
    
    
    (885
    )
    
    
    (2,120
    )Other noncurrent assets
    
    
    (389
    )
    
    
    (726
    )
    
    
    (59
    )Increase (decrease) in:Accounts payable
    
    
    (4,120
    )
    
    
    5,775
    
    
    
    3,243Accrued payroll and related costs
    
    
    (334
    )
    
    
    348
    
    
    
    184Other accrued expenses
    
    
    792
    
    
    
    (187
    )
    
    
    3,500Deferred revenue
    
    
    1,422
    
    
    
    123
    
    
    
    15,040Net changes in operating assets and liabilities
    
    $
    (2,925
    )
    
    $
    (6,613
    )
    
    $
    8,418
 Note 8. Property and Equipment
  Estimated
    
    
    December 31,Useful Lives
    
    
    2006
    
    
    2005Land
    
    
    Indefinite
    
    
    $
    791
    
    
    $
    791Buildings and improvements
    
    
    39 years
    
    
    
    7,141
    
    
    
    5,913Machinery and equipment
    
    
    5 to 7 years
    
    
    
    990
    
    
    
    861Computers, software and other
    
    
    3 to 7 years
    
    
    
    10,918
    
    
    
    12,733Furniture and fixtures
    
    
    3 to 7 years
    
    
    
    1,973
    
    
    
    1,967Leasehold improvements
    
    
    4 to 5 years
    
    
    
    560
    
    
    
    1,411Third-party components leased to customers
under operating leases
    
    
    5 to 7 years
    
    
    
    11,553
    
    
    
    13,23433,926
    
    
    
    36,910Less accumulated depreciation and amortization
    
    
    
    
    
    
    (15,564
    )
    
    
    (15,477
    )$
    18,362
    
    
    $
    21,433
 F-17




---



##### Table of Contents



Note 9. Major Customers and Related Party Transactions
  Note 10. Defined Contribution Benefit Plan
  Note 11. Income Taxes
  December 31,2006
    
    
    2005Deferred tax assets:Net operating loss carryforward
    
    $
    16,967
    
    
    $
    17,066Intangible assets
    
    
    1,544
    
    
    
    394Deferred revenue
    
    
    4,293
    
    
    
    3,021Reserves and accrued liabilities
    
    
    428
    
    
    
    436Stock-based compensation
    
    
    1,269
    
    
    
    Other
    
    
    158
    
    
    
    10024,659
    
    
    
    21,017Deferred tax liabilities:Depreciation
    
    
    (1,220
    )
    
    
    (223
    )Developed technology
    
    
    (1,602
    )
    
    
    (1,033
    )(2,822
    )
    
    
    (1,256
    )Net deferred tax assets
    
    
    21,837
    
    
    
    19,761Valuation allowance
    
    
    (21,837
    )
    
    
    (19,761
    )Net deferred tax liability
    
    $
    
    
    
    $
    
  F-18




---



##### Table of Contents



Year Ended December 31,2006
    
    
    2005
    
    
    2004Tax benefit computed at the statutory federal rate
    
    $
    (2,051
    )
    
    $
    (1,731
    )
    
    $
    (3,561
    )State taxes, net of federal tax benefit
    
    
    (168
    )
    
    
    (137
    )
    
    
    (314
    )Increase in tax from:Change in deferred tax valuation allowance
    
    
    2,076
    
    
    
    1,591
    
    
    
    3,899Permanent differences
    
    
    143
    
    
    
    184
    
    
    
    33Other
    
    
    
    
    
    
    93
    
    
    
    (57
    )Benefit for income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
 Note 12. Debt And Capital Lease Obligations
  December 31,2006
    
    
    2005Secured promissory note payable in 60 monthly installments of
$45, including interest at 10.0%, due in December 2006, secured by hardware and
software at customer site
    
    $
    
    
    
    $
    508Secured promissory note payable in 60 monthly installments of $38, including
interest at 9.88%, due in March 2007, secured by hardware and software at
customer site
    
    
    113
    
    
    
    536Secured promissory note payable in 58 monthly installments of $11, including
interest at 4.76%, final payment of $10 in September 2007, secured by hardware
and software at customer site
    
    
    109
    
    
    
    237Secured promissory note payable to bank in 54 monthly installments of $83,
including interest at 6.13%, due in June 2007, secured by hardware and software
at customer site
    
    
    480
    
    
    
    1,397Promissory note to governmental agency payable in 57 monthly installments of $5,
including interest at 4.0%, final payment of $4 in October 2007
    
    
    47
    
    
    
    103Capital lease of third-party computer hardware and software at a customer site,
57 month term expiring March 2007, with renewal and purchase options; and
capital leases of certain office and computer equipment
    
    
    212
    
    
    
    968Total debt and capital lease obligations
    
    
    961
    
    
    
    3,749Current portion
    
    
    (953
    )
    
    
    (2,763
    )Long-term portion of debt and capital lease obligations
    
    $
    8
    
    
    $
    986
 F-19




---



##### Table of Contents



Note 13. Common Stock Warrants
    Year Ended December 31,2006
    
    
    2005
    
    
    2004Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceCommon stock warrants at
beginning of period
    
    
    48,986
    
    
    $
    5.04
    
    
    
    1,479,443
    
    
    $
    3.56
    
    
    
    1,315,430
    
    
    $
    3.39Forfeited or Canceled
    
    
    
    
    
    
    
    
    
    
    (552,661
    )
    
    
    0.01
    
    
    
    
    
    
    
    Exercised
    
    
    (12,562
    )
    
    $
    3.63
    
    
    
    (883,981
    )
    
    
    5.67
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    $
    
    
    
    
    6,185
    
    
    $
    3.63
    
    
    
    164,013
    
    
    
    4.88Outstanding at end of period
    
    
    36,424
    
    
    $
    5.52
    
    
    
    48,986
    
    
    $
    5.04
    
    
    
    1,479,443
    
    
    $
    3.56Exercisable at end of period
    
    
    36,424
    
    
    $
    5.52
    
    
    
    48,986
    
    
    $
    5.04
    
    
    
    910,116
    
    
    $
    5.66
 F-20




---



##### Table of Contents



Note 14. Stock-Based Compensation
      Year Ended
    
    
    Year EndedDecember 31, 2005
    
    
    December 31, 2004Net loss:As reported
    
    $
    (4,997
    )
    
    $
    (10,472
    )Deduct:
Accretion of redemption value related to redeemable preferred stock
    
    
    (8
    )
    
    
    (66
    )Add: Stock-based employee
compensation reported in net loss
    
    
    1,171
    
    
    
    533Deduct: Stock-based employee
compensation under the fair value
method for all awards
    
    
    (2,045
    )
    
    
    (801
    )Pro-forma net loss
    
    $
    (5,879
    )
    
    $
    (10,806
    )Basic and diluted net loss
per share:As reported
    
    $
    (0.28
    )
    
    $
    (4.04
    )Deduct:
Accretion of redemption value related to redeemable preferred stock
    
    
    
    
    
    
    (0.03
    )Add: Stock-based employee
compensation reported in net loss
    
    
    0.06
    
    
    
    0.21Deduct: Stock-based employee
compensation under the fair value
method for all awards
    
    
    (0.11
    )
    
    
    (0.31
    )Pro-forma net loss per share
    
    $
    (0.33
    )
    
    $
    (4.17
    )
 F-21




---



##### Table of Contents



Stock Options
  Year Ended December 31,2006
    
    2005
    
    2004Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    70.9
    %
    
    
    70.9
    %
    
    
    70.9
    %Risk-free interest rate
    
    
    4.87
    %
    
    
    4.11
    %
    
    
    3.09
    %Expected life of options, in years
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Weighted average grant date fair value
    
    $
    10.09
    
    
    $
    8.53
    
    
    $
    8.51
      Year Ended December 31,2006
    
    
    2005
    
    
    2004Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOptions at beginning of period
    
    
    2,128,560
    
    
    $
    5.91
    
    
    
    2,166,901
    
    
    $
    4.46
    
    
    
    1,779,527
    
    
    $
    4.14Forfeited
    
    
    (156,139
    )
    
    
    8.99
    
    
    
    (33,517
    )
    
    
    4.90
    
    
    
    (51,842
    )
    
    
    4.26Exercised
    
    
    (787,699
    )
    
    
    4.80
    
    
    
    (448,141
    )
    
    
    3.76
    
    
    
    (22,972
    )
    
    
    2.76Granted
    
    
    535,339
    
    
    
    16.15
    
    
    
    443,317
    
    
    
    10.74
    
    
    
    462,188
    
    
    
    5.85Outstanding at end of period
    
    
    1,720,061
    
    
    $
    9.33
    
    
    
    2,128,560
    
    
    $
    5.91
    
    
    
    2,166,901
    
    
    $
    4.46Exercisable at end of period
    
    
    894,393
    
    
    $
    5.29
    
    
    
    1,262,281
    
    
    $
    4.35
    
    
    
    1,328,091
    
    
    $
    3.94
 F-22




---



##### Table of Contents



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 $2.07
    
    
    115,804
    
    
    4.59 years
    
    $
    1.84
    
    
    
    115,804
    
    
    4.59 years
    
    $
    1.84$4.70 to $7.17
    
    
    873,203
    
    
    5.86 years
    
    
    5.39
    
    
    
    708,689
    
    
    5.42 years
    
    
    5.10$12.72 to $14.90
    
    
    264,319
    
    
    8.88 years
    
    
    13.06
    
    
    
    69,900
    
    
    8.75 years
    
    
    12.93$15.05 to $17.79
    
    
    466,735
    
    
    9.32 years
    
    
    16.44
    
    
    
    
    
    
    
    
    
    1,720,061
    
    
    7.18 years
    
    $
    9.33
    
    
    
    894,393
    
    
    5.57 years
    
    $
    5.29
   Weighted Average Grant DateNumber of options
    
    Fair ValueNonvested options at
January 1, 2006
    
    
    866,279
    
    
    $
    7.25Granted
    
    
    535,339
    
    
    
    10.09Vested
    
    
    (419,811
    )
    
    
    6.13Forfeited
    
    
    (156,139
    )
    
    
    7.88Nonvested options at
December 31, 2006
    
    
    825,668
    
    
    
    9.55
  Restricted
Stock
  Note 15. Operating Leases
 Lessee Arrangements
 F-23




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##### Table of Contents



2007
    
    $
    1,5052008
    
    
    1,5692009
    
    
    1,5582010
    
    
    7112011
    
    
    4952012 and beyond
    
    
    570$
    6,408
  Lessor Arrangements
  2007
    
    $
    1,1192008
    
    
    3032009
    
    
    152Total minimum future rentals
    
    $
    1,574
 Note 16. Selected Quarterly Financial Data (Unaudited)
 Quarters EndedMarch 31
    
    June 30
    
    September 30
    
    December 312006Revenue
    
    $
    27,001
    
    
    $
    30,016
    
    
    $
    33,011
    
    
    $
    33,477Gross profit
    
    
    7,499
    
    
    
    13,505
    
    
    
    16,112
    
    
    
    18,725Operating income (loss)
    
    
    (7,040
    )
    
    
    (933
    )
    
    
    (366
    )
    
    
    1,979Net income (loss)
    
    $
    (6,993
    )
    
    $
    (857
    )
    
    $
    (273
    )
    
    $
    2,091Net income (loss) per share  basic and diluted
    
    $
    (0.34
    )
    
    $
    (0.04
    )
    
    $
    (0.01
    )
    
    $
    0.102005Revenue
    
    $
    11,584
    
    
    $
    18,915
    
    
    $
    20,016
    
    
    $
    24,549Gross profit
    
    
    3,430
    
    
    
    9,495
    
    
    
    9,011
    
    
    
    8,891Operating income (loss)
    
    
    (4,199
    )
    
    
    1,565
    
    
    
    1,465
    
    
    
    (4,076
    )Net income (loss)
    
    $
    (4,818
    )
    
    $
    1,900
    
    
    $
    1,831
    
    
    $
    (3,910
    )Net income (loss) per share  basic and diluted
    
    $
    (0.42
    )
    
    $
    0.09
    
    
    $
    0.09
    
    
    $
    (0.19
    )
 F-24




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##### Table of Contents



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

Charles A. Jett, Jr.
    
    Chairman of the Board, President and
Principal Executive Officer/s/ W. Randall Pittman

W. Randall Pittman
    
    Principal Financial Officer and Treasurer,
and Principal Accounting Officer/s/ Arthur P. Beattie

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

Roddy J.H. Clark
    
    Director/s/ Douglas D. French

Douglas D. French
    
    Director/s/ Fred C. Goad, Jr.

Fred C. Goad, Jr.
    
    Director/s/ Chris H. Horgen

Chris H. Horgen
    
    Director/s/ Mylle H. Mangum

Mylle H. Mangum
    
    Director/s/ John W. Thompson

John W. Thompson
    
    Director/s/ Hugh H. Williamson, III

Hugh H. Williamson, III
    
    Director




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##### Table of Contents



EMAGEON INC.
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
 Balance
    
    Additions Charged ToBeginning
    
    Costs and
    
    Other
    
    
    
    
    
    Balance EndDescription
    
    Of Period
    
    Expenses
    
    Accounts
    
    Deductions
    
    Of PeriodAllowance for
doubtful accounts
deducted from
accounts receivable
in the
balance sheet ...2006
    
    $
    126
    
    
    
    367
    
    
    
    
    
    
    
    (216
    ) (1)
    
    $
    277...2005
    
    
    75
    
    
    
    57
    
    
    
    
    
    
    
    (6
    ) (1)
    
    
    126...2004
    
    
    50
    
    
    
    123
    
    
    
    
    
    
    
    (98
    ) (1)
    
    
    75Valuation
allowance deducted
from net deferred
tax asset in the
balance sheet...2006
    
    $
    19,761
    
    
    
    2,076
    
    
    
    
    
    
    
    
    
    
    $
    21,837...2005
    
    
    17,571
    
    
    
    1,582
    
    
    
    608
    (2)
    
    
    
    
    
    
    19,761...2004
    
    
    13,672
    
    
    
    3,899
    
    
    
    
    
    
    
    
    
    
    
    17,571Accrued
liability for product warranty included in other accrued expenses in
the balance sheet ...2006
    
    $
    937
    
    
    
    254
    
    
    
    
    
    
    
    (491
    ) (4)
    
    $
    700...2005
    
    
    
    
    
    
    178
    
    
    
    844
    (3)
    
    
    (85
    ) (4)
    
    
    937...2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Uncollectible accounts written off, and payments received on previously written-off
accounts(2)
    
    Deferred tax assets arising from Camtronics acquisition
in November 2005(3)
    
    Warranty liability of Camtronics at acquisition in November
2005.(4)
    
    Expenditures in settlement of warranty claims.