UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

o		TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

Commission file number 0-29486

MERGE TECHNOLOGIES INCORPORATED

(Exact name of Registrant as specified in its charter.)

Wisconsin		39-1600938
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

(Address of principal executive offices)		(zip code)

(414) 977-4000
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yeso      No þ

     Indicate by check mark whether the Registrant is a large accelerated filer, accelerated filer or a non-accelerated filer (see definition of accelerated filer and large accelerated filer as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o       No þ

     As of May 4, 2007, the Registrant had 32,198,650 shares of Common Stock outstanding.

 

 

INDEX

		Page
Explanatory Note — Restatement of Financial Information	ii
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)			1
Condensed Consolidated Statements of Operations (Unaudited)			2
Condensed Consolidated Statements of Cash Flows (Unaudited)			3
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			27
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 6. Exhibits			31
EX-31.1 SECTION 302 CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
EX-31.2 SECTION 302 CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
EX-32.0 SECTION 906 CERTIFICATIONS OF THE PRINCIPAL EXECUTIVE AND PRINCIPAL FINANCIAL OFFICERS

See accompanying notes to consolidated financial statements.

 i 

MERGE TECHNOLOGIES INCORPORATED

     This Quarterly Report on Form 10-Q/A for the three months ended March 31, 2007, includes a restated consolidated balance sheet as of March 31, 2007, consolidated statements of operations, consolidated statements of cash flows and consolidated statements of comprehensive loss for the three months ended March 31, 2007 and 2006. The Company will not file an amended Quarterly Report on Form 10-Q/A for the quarterly period ended March 31, 2006. The restatement relates primarily to software license arrangements with 12 customers signed prior to January 1, 2006 and net deferred income tax liabilities assumed in the acquisition of Cedara Software Corp. in June 2005. The contracts at issue include a license of software, installation services, and related maintenance and support obligations. Management and the Audit Committee determined that, with respect to these contracts, the Company should recognize the entire value of the bundled contracts as revenue over the period for which maintenance and support may be provided to the customer since fair value of the maintenance on a stand-alone basis could not be determined. This approach is different from the Company’s historical practice of recognizing the fair value of the software over the period of installation and the fair value of the maintenance over the maintenance period when fair value of the maintenance on a stand-alone basis can be determined. The Company’s restated financial statements reflect the revised method of accounting for these contracts, income tax adjustments and other adjustments. The Company has also restated the consolidated financial statements contained in our Annual Report on Form 10-K/A for the year ended December 31, 2006 for similar items and this quarterly report on Form 10-Q/A should be read in conjunction with the Form 10-K/A. The following items of the Form 10-Q have been modified or revised in this Amendment No. 1 to Form 10-Q/A to reflect these restatements:

     Part I, Item 1. Financial Statements;

     Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations; and

     Part I, Item 4. Controls and Procedures.

     This amended Quarterly Report on Form 10-Q/A sets forth the original Quarterly Report on Form 10-Q in its entirety, except as required to reflect the effects of the restatements. Except for disclosures affected by the restatements, this amended Quarterly Report on Form 10-Q/A speaks as of the original filing date of May 9, 2007 and does not modify or update disclosures in the Form 10-Q, including the nature and character of such disclosures, to reflect events occurring or items discovered after the original filing date of the Form 10-Q. Accordingly, this amended Quarterly Report on Form 10-Q/A should be read in conjunction with the Company’s filings made with the Securities and Exchange Commission subsequent to the original filing date of the Form 10-Q, including any amendments to those filings.

See accompanying notes to consolidated financial statements.

 ii 

PART I

Item 1. Consolidated Financial Statements

MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except for share data)

		March 31,				December 31,
		2007				2006
		(Unaudited, As
		restated)
ASSETS
Current assets:
Cash and cash equivalents		$	37,169			$	45,945
Accounts receivable, net of allowance for doubtful accounts and sales returns of $2,905 and $2,553 at March 31, 2007 and December 31, 2006, respectively			16,957				16,427
Inventory			2,130				2,164
Prepaid expenses			1,972				1,660
Deferred income taxes			196				196
Other current assets			1,749				812
Total current assets			60,173				67,204
Property and equipment:
Computer equipment			5,087				5,017
Office equipment			1,945				1,919
Leasehold improvements			1,494				1,460
			8,526				8,396
Less accumulated depreciation			4,885				4,456
Net property and equipment			3,641				3,940
Purchased and developed software, net of accumulated amortization of $12,300 and $11,235 at March 31, 2007 and December 31, 2006, respectively			15,997				16,628
Customer intangibles, net of accumulated amortization of $4,536 and $3,966 at March 31, 2007 and December 31, 2006, respectively			8,941				9,511
Goodwill			124,231				124,231
Deferred income taxes			4,533				4,326
Other assets			8,906				9,035
Total assets		$	226,422			$	234,875
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities		$	9,468			$	10,857
Accrued wages			6,649				6,162
Income taxes payable			—				4,398
Deferred revenue			19,325				18,686
Total current liabilities			35,442				40,103
Deferred income taxes			502				502
Deferred revenue			3,126				3,712
Income taxes payable			5,343				—
Other			396				633
Total liabilities			44,809				44,950
Shareholders’ equity:
Preferred stock, $0.01 par value: 2,999,997 shares authorized; zero shares issued and outstanding at March 31, 2007 and December 31, 2006			—				—
Series A Preferred Stock, $0.01 par value: 1,000,000 shares authorized; zero shares issued and outstanding at March 31, 2007 and December 31, 2006			—				—
Series B Junior Participating Preferred Stock, $0.01 par value: 1,000,000 shares authorized; zero shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively			—				—
Series 3 Special Voting Preferred stock, no par value: one share authorized; one share issued and outstanding at March 31, 2007 and December 31, 2006			—				—
Common Stock, $0.01 par value: 100,000,000 shares authorized; 31,979,852 shares and 29,291,030 shares issued and outstanding at March 31, 2007 and December 31, 2006			320				293
Common Stock subscribed: 7,898 and 5,242 shares at March 31, 2007 and December 31, 2006, respectively			37				33
Additional paid-in capital			452,428				451,130
Accumulated deficit			(273,114	)			(263,390	)
Accumulated other comprehensive income			1,942				1,859
Total shareholders’ equity			181,613				189,925
Total liabilities and shareholders’ equity		$	226,422			$	234,875

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for share and per share data)

(As restated)

		Three Months Ended
		March 31,
		2007				2006
Net sales:
Software and other		$	8,170			$	9,524
Services and maintenance			7,704				6,616
Total net sales			15,874				16,140
Cost of sales:
Software and other			1,997				1,660
Services and maintenance			3,520				3,686
Amortization			1,062				1,277
Total cost of sales			6,579				6,623
Gross profit			9,295				9,517
Operating costs and expenses:
Sales and marketing			4,733				5,221
Product research and development			5,383				4,843
General and administrative			7,539				5,885
Restructuring and other expenses			797				22
Depreciation and amortization			1,002				1,042
Total operating costs and expenses			19,454				17,013
Operating loss			(10,159	)			(7,496	)
Other income (expense):
Interest expense			(45	)			(4	)
Interest income			450				660
Other, net			47				20
Total other income			452				676
Loss before income taxes			(9,707	)			(6,820	)
Income tax expense (benefit)			14				(1,500	)
Net loss		$	(9,721	)		$	(5,320	)
Loss per share—basic		$	(0.29	)		$	(0.16	)
Weighted average number of common shares outstanding—basic			33,885,682				33,634,778
Loss per share—diluted		$	(0.29	)		$	(0.16	)
Weighted average number of common shares outstanding—diluted			33,885,682				33,634,778

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
(As restated)

		Three Months Ended
		March 31,
		2007				2006
Cash flows from operating activities:
Net loss		$	(9,721	)		$	(5,320	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			2,064				2,318
Stock-based compensation			1,191				1,289
Provision for doubtful accounts receivable and sales returns, net of recoveries			352				(87	)
Deferred income taxes			103				(1,347	)
Change in assets and liabilities:
Accounts receivable			(867	)			3,718
Inventory			33				(398	)
Prepaid expenses			(310	)			(692	)
Accounts payable and other accrued liabilities			(1,624	)			207
Accrued wages			485				(672	)
Deferred revenue			53				2,202
Other			(137	)			778
Net cash provided by (used in) operating activities			(8,378	)			1,996
Cash flows from investing activities:
Purchases of property, equipment, and leasehold improvements			(123	)			(254	)
Purchased technology			—				(367	)
Capitalized software development			(422	)			(549	)
Net cash used in investing activities			(545	)			(1,170	)
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan			139				25
Net cash provided by financing activities			139				25
Effect of exchange rate changes on cash			8				(1	)
Net increase (decrease) in cash			(8,776	)			850
Cash and cash equivalents, beginning of period			45,945				64,278
Cash and cash equivalents, end of period		$	37,169			$	65,128
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes, net of refunds		$	39			$	69
Equity securities received in sales transactions		$	—			$	2,010

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
(As restated)

		Three Months Ended
		March 31,
		2007				2006
Net loss		$	(9,721	)		$	(5,320	)
Accumulated other comprehensive income:
Cumulative translation adjustment			(16	)			—
Unrealized gain (loss) on marketable securities (1)			75				(59	)
Comprehensive net loss		$	(9,662	)		$	(5,379	)

See accompanying notes to consolidated financial statements.

Merge Technologies Incorporated and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited and in thousands, except for share and per share data)

(1) Basis of Presentation and Significant Accounting Policies

     The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and notes required by United States of America generally accepted accounting principles (“GAAP”) for complete financial statements are not included herein. The interim statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K/A for the year ended December 31, 2006 of Merge Technologies Incorporated, a Wisconsin corporation, and its subsidiaries and affiliates (which we sometimes refer to collectively as “Merge Healthcare,” “we,” “us,” or “our”).

     Our accompanying unaudited consolidated financial statements reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary to present a fair statement of our financial position and results of operations. Such adjustments are of a normal recurring nature unless otherwise noted. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.

(a) Reclassifications

     Where appropriate, certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. Specifically, we reclassified $286 of expense from “product research and development” to “software and other cost of sales” within the Consolidated Statement of Operations for the three months ended March 31, 2006, to conform to current year presentation.

(b) Accounting for uncertainty in income taxes

     On January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN No. 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The pronouncement also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Pursuant to FIN No. 48 we have reclassified as noncurrent, unrecognized tax benefits not expected to be paid within one year. The impact of adopting FIN No. 48 had the cumulative effects explained in Note 8 below.

(c) Presentation of sales tax in statement of operations

     On January 1, 2007, we adopted Emerging Issues Task Force (“EITF”) No. 06-3, How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross Versus Net Presentation) (“EITF No. 06-3”), which discusses taxes imposed on, and imposed concurrent with, a specific revenue-producing transaction between a seller and its customer. It requires entities to disclose, if significant, on an interim and annual basis for all periods presented: (a) the accounting policy elected for these taxes; and (b) the amounts of the taxes reflected gross (as revenue) in the income statement. We account for sales taxes on a net basis and EITF No. 06-3 did not have a material impact on our consolidated financial statements for the three months ended March 31, 2007.

(2) Restatement of Consolidated Financial Statements

     On August 13, 2007, we announced that the audited financial statements for the years ended December 31, 2006, 2005 and 2004 and other financial information included in our Annual Report on Form 10-K for the year ended December 31, 2006 and the unaudited financial statements included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 should no longer be relied upon. The errors identified in previously issued financial statements are described below.

     Revenue Recognition

     We have determined that our previously filed financial statements contained errors resulting from the incorrect recognition of revenue on software license arrangements with 12 customers that were signed between July of 2003 and June of 2004 following the acquisition of RIS Logic. As a result, we determined that the revenue associated with these arrangements should have been recognized ratably over the lesser of the maintenance period or the economic life of the software following the first productive use of the software at the customer site. The original value of these contracts, excluding the multiple years of maintenance, aggregated approximately $2,000.

     Goodwill and Deferred Income Taxes

     In connection with the accounting for the acquisition of Cedara in June of 2005, we did not appropriately record purchase accounting for deferred income taxes. As a result, both acquired goodwill and net deferred tax liabilities were overstated. The impact of these purchase accounting adjustments recorded in the consolidated financial statements included herein have been restated.

     Other Adjustments

     We have also restated for other errors generally related to our accrual for bonuses, accrual for state and franchise taxes, accrual for subsequent credit memos, and correction of clerical errors in accumulating and recording transactions. These adjustments included changes to the following financial statement line items: revenue, as well as related accounts including cost of goods sold, accounts receivable and related reserves, and deferred revenue; accrued wages; various operating expenses; goodwill; other assets; accumulated other comprehensive income; income tax expense; and income taxes payable.

     The following tables summarize the impact of the restatements on our consolidated balance sheets as of March 31, 2006 and 2007, and on our statements of operations and statements of cash flow for the three months ended March 31, 2006 and March 31, 2007, and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10K/A for the year ended December 31, 2006. Explanations for adjustments (a) through (d) in the following tables may be found on the last page of this Note 2. To the extent that an individual balance sheet or statement of operations line item classification has been affected by more than one adjustment as described in (a) through (d), and one of such adjustments is greater than $1,000, each adjustment is listed separately. The restatement also affected Notes 4, 7, and 8 to our Consolidated Financial Statements.

Merge Technologies Incorporated and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited and in thousands, except for share and per share data)

MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

		March 31, 2007								March 31, 2007
		(As reported)				(Adjustments)				(As restated)
ASSETS
Current assets:
Cash and cash equivalents		$	37,169							$	37,169
Accounts receivable, net			17,820				(863	)(b)			16,957
Inventory			2,130								2,130
Prepaid expenses			1,972								1,972
Deferred income taxes			196								196
Other current assets			1,749								1,749
Total current assets			61,036				(863	)			60,173
Net property and equipment			3,641								3,641
Purchased and developed software, net			15,997								15,997
Acquired intangibles, net			8,941								8,941
Goodwill			124,407				(176	)(b,d)			124,231
Other assets			8,719				187	(b)			8,906
Deferred income taxes			3,614				553	(d)
							366	(c)			4,533
Total assets		$	226,355			$	67			$	226,422
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities		$	9,190				278	(b)		$	9,468
Accrued wages			6,774				(125	)(b)			6,649
Deferred revenue			18,922				403	(a,b)			19,325
Total current liabilities			34,886				556				35,442
Deferred income taxes			—				502	(d)			502
Deferred revenue			2,751				375	(a)			3,126
Income taxes payable			5,329				14	(d)			5,343
Other			396								396
Total liabilities			43,362				1,447				44,809
Total shareholders’ equity			182,993				(1,380	)			181,613
Total liabilities and shareholders’ equity		$	226,355			$	67			$	226,422

Merge Technologies Incorporated and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited and in thousands, except for share and per share data)

MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

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

Merge Technologies Incorporated and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited and in thousands, except for share and per share data)

MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended March 31, 2007
		(As reported)				(Adjustments)				(As restated)
Net sales:
Software and other		$	8,056			$	114	(a,b)		$	8,170
Services and maintenance			7,615				89	(a,b)			7,704
Total net sales			15,671				203				15,874
Cost of sales:
Software and other			1,995				2	(a,b)			1,997
Services and maintenance			3,499				21	(a)			3,520
Amortization			1,062								1,062
Total cost of sales			6,556				23				6,579
Gross profit			9,115				180				9,295
Operating costs and expenses:
Sales and marketing			4,750				(17	)(b)			4,733
Product research and development			5,399				(16	)(b)			5,383
General and administrative			7,431				108	(a,b)			7,539
Goodwill impairment, restructuring and other expenses			797								797
Depreciation and amortization			1,002								1,002
Total operating costs and expenses			19,379				75				19,454
Operating loss			(10,264	)			105				(10,159	)
Other income (expense):
Interest expense			(45	)							(45	)
Interest income			450								450
Other, net			47								47
Total other income			452								452
Loss before income taxes			(9,812	)			105				(9,707	)
Income tax expense (benefit)			262				(248	) (b,c,d)			14
Net loss		$	(10,074	)		$	353			$	(9,721	)
Net loss per share — basic		$	(0.30	)		$	0.01			$	(0.29	)
Weighted average number of common shares outstanding — basic			33,885,682								33,885,682
Net loss per share — diluted		$	(0.30	)		$	0.01			$	(0.29	)
Weighted average number of common shares outstanding — diluted			33,885,682								33,885,682

(Unaudited and in thousands, except for share and per share data)

MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended March 31, 2006
		(As reported)				(Adjustments)				(As restated)
Net sales:
Software and other		$	9,545			$	(21	)(a,b)		$	9,524
Services and maintenance			6,651				(35	)(a,b)			6,616
Total net sales			16,196				(56	)			16,140
Cost of sales:
Software and other			1,658				2	(a)			1,660
Services and maintenance			3,686								3,686
Amortization			1,277								1,277
Total cost of sales			6,621				2				6,623
Gross profit			9,575				(58	)			9,517
Operating costs and expenses:
Sales and marketing			5,221								5,221
Product research and development			4,843								4,843
General and administrative			5,841				44	(b)			5,885
Goodwill impairment, restructuring and other expenses			22								22
Depreciation and amortization			1,042								1,042
Total operating costs and expenses			16,969				44				17,013
Operating loss			(7,394	)			(102	)			(7,496	)
Other income (expense):
Interest expense			(4	)							(4	)
Interest income			660								660
Other, net			20								20
Total other income			676								676
Loss before income taxes			(6,718	)			(102	)			(6,820	)
Income tax expense (benefit)			(1,818	)			318	(b,c,d)			(1,500	)
Net loss		$	(4,900	)		$	(420	)		$	(5,320	)
Net loss per share — basic		$	(0.15	)		$	(0.01	)		$	(0.16	)
Weighted average number of common shares outstanding — basic			33,634,778								33,634,778
Net loss per share — diluted		$	(0.15	)		$	(0.01	)		$	(0.16	)
Weighted average number of common shares outstanding — diluted			33,634,778								33,634,778

(Unaudited and in thousands, except for share and per share data)

MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended March 31, 2007
		(As reported)				(Adjustments)				(As restated)
Cash flows from operating activities:
Net loss		$	(10,074	)		$	353			$	(9,721	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,064								2,064
Provision for doubtful accounts receivable, net of recoveries			272				80	(b)			352
Deferred income taxes			—				103	(b,d)			103
Stock compensation expenses			1,191								1,191
Changes in operating assets and liabilities:
Accounts receivable			(867	)							(867	)
Inventory			33								33
Prepaid expenses			(310	)							(310	)
Accounts payable and other accrued liabilities			(1,711	)			87	(b)			(1,624	)
Accrued wages			527				(42	)(b)			485
Deferred revenue			281				(228	) (a,b)			53
Other			216				(353	)(b,c,d)			(137	)
Net cash used in operating activities			(8,378	)							(8,378	)
Net cash used in investing activities			(545	)							(545	)
Net cash provided by financing activities			139								139
Effect of exchange rates on cash and cash equivalents			8								8
Net decrease in cash and cash equivalents			(8,776	)							(8,776	)
Cash and cash equivalents, beginning of period			45,945								45,945
Cash and cash equivalents, end of period		$	37,169							$	37,169

(Unaudited and in thousands, except for share and per share data)

MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended March 31, 2006
		(As reported)				(Adjustments)				(As restated)
Cash flows from operating activities:
Net loss		$	(4,900	)		$	(420	)		$	(5,320	)
Adjustments to reconcile loss to net cash provided by operating activities:
Depreciation and amortization			2,318								2,318
Provision for doubtful accounts receivable, net of recoveries			(177	)			90	(b)			(87	)
Deferred income taxes			(1,652	)			305	(c,d)			(1,347	)
Stock compensation expenses			1,289								1,289
Changes in operating assets and liabilities:
Accounts receivable			3,740				(22	)(b)			3,718
Inventory			(398	)							(398	)
Prepaid expenses			(692	)							(692	)
Accounts payable and other accrued liabilities			163				44	(b)			207
Accrued wages			(672	)							(672	)
Deferred revenue			2,212				(10	)(a)			2,202
Other			765				13	(b,c)			778
Net cash provided by operating activities			1,996								1,996
Net cash used in investing activities			(1,170	)							(1,170	)
Net cash provided by financing activities			25								25
Effect of exchange rates on cash and cash equivalents			(1	)							(1	)
Net increase in cash and cash equivalents			850								850
Cash and cash equivalents, beginning of period			64,278								64,278
Cash and cash equivalents, end of period		$	65,128							$	65,128

(Unaudited and in thousands, except for share and per share data)

(3) Other Intangibles

     Our intangible assets, other than capitalized software development costs, subject to amortization are summarized as of March 31, 2007 as follows:

		Weighted
		Average
		Remaining				Gross
		Amortization				Carrying				Accumulated
		Period (Years)				Amount				Amortization
Purchased technology			3.5			$	16,990			$	(6,883	)
Customer relationships			4.0				13,477				(4,536	)
Patents			9.0				129				(13	)
Total			3.7			$	30,596			$	(11,432	)

     Purchased technology amortization expense, which is being recorded in cost of sales ratably over the life of the related intangible asset, was $753 for the three months ended March 31, 2007 and 2006. Customer relationships and patent amortization expense, which is being recorded ratably over the life of the related intangible asset in depreciation and amortization included in operating costs and expenses, was $570 for the three months ended March 31, 2007 and 2006, respectively.

     Estimated aggregate amortization expense for the remaining periods is as follows:

For the remaining 9 months for the year ended:			2007			$	3,833
For the year ended:			2008				4,810
			2009				4,404
			2010				4,277
			2011				1,785
		Thereafter					55

     As of March 31, 2007, we had gross capitalized software development costs of $11,178 and accumulated amortization of $5,404. The weighted-average remaining amortization period of capitalized software development costs was 2.5 years as of March 31, 2007. During three months ended March 31, 2007 and 2006, we capitalized software development costs of $422 and $549, respectively. Amortization expense related to developed software of $309 and $524 was recorded to cost of sales during the three months ended March 31, 2007 and 2006, respectively. Amortization expense during the three months ended March 31, 2006 included the impairment of certain of our capitalized software projects of approximately $169, as we no longer anticipate future sales of such products.

(4) Earnings Per Share

     Basic earnings per share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares outstanding. Diluted earnings per share reflects the potential dilution that could occur based on the exercise of stock options, except for options with an exercise price of more than the average market price of our Common Stock, because such exercise would be anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2007 and 2006:

(Unaudited and in thousands, except for share and per share data)

		Three Months Ended
		March 31,
		2007				2006
		(As restated)
Numerator:
Net loss		$	(9,721	)		$	(5,320	)
Denominator for net loss per share—basic and diluted			33,885,682				33,634,778
Net loss per share—basic and diluted		$	(0.29	)		$	(0.16	)

     The weighted average number of shares of Common Stock outstanding used to calculate basic net loss per share includes exchangeable share equivalent securities for the three months ended March 31, 2007 and 2006 of 4,128,757 and 5,305,509, respectively.

     As a result of the losses during the three months ended March 31, 2007 and 2006, incremental shares from the assumed conversion of employee stock options totaling 59,183 and 928,484, respectively, have been excluded from the calculation of diluted loss per share as their inclusion would have been anti-dilutive.

     For the three months ended March 31, 2007 and 2006, options to purchase 3,375,110 and 149,500 shares of our Common Stock, respectively, had exercise prices greater than the average market price of our Common Stock, and, therefore, are not included in the above calculations of net loss per share.

(5) Share-Based Compensation

     We maintain four stock-based employee compensation plans (including our employee stock purchase plan) and one director option plan under which we grant options to acquire shares of our Common Stock to certain employees, non-employees, non-employee directors and to existing stock option holders in connection with the consolidation of option plans following an acquisition. Options generally have an exercise price equal to the fair market value of our Common Stock at the date of grant, with the exception of the options granted in 2005 to replace existing Cedara Software Corp. options (“Replacement Options”). The Replacement Options, which we granted pursuant to the merger agreement, had the same economic terms as the Cedara options that they replaced, as adjusted for the conversion ratio and currency. The majority of these options vest over a three or four–year period and have a contractual life of six years.

     We maintain an employee stock purchase plan that allows eligible employees to purchase shares of our Common Stock through payroll deductions of up to 10% of eligible compensation on an after-tax basis. The price eligible employees pay per share of Common Stock is at a 5% discount from the market price at the end of each calendar quarter.

     The following table summarizes share-based compensation expense related to share-based awards subject to SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”) recognized during the three months ended March 31, 2007 and 2006, respectively:

Merge Technologies Incorporated and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited and in thousands, except for share and per share data)

		Three Months Ended March 31,
		2007				2006
Share-based compensation expense included in statement of operations:
Services and maintenance (cost of sales)		$	106			$	136
Sales and marketing			265				391
Product research and development			302				372
General and administrative			510				550
Total			1,183				1,449
Tax benefit			—				(176	)
Share-based compensation expense, net of tax		$	1,183			$	1,273
Decrease in basic loss per share		$	(0.03	)		$	(0.04	)
Decrease in diluted loss per share		$	(0.03	)		$	(0.04	)

     The differences between the amounts recorded as share-based compensation expense in the statements of operations and the amounts of share-based compensation recorded as additional paid-in capital during the three months ended March 31, 2007 and 2006 of $8 and $16, respectively, was attributed to share-based compensation incurred by product research and development personnel who worked on capitalizable software development projects during these periods.

(6) Restructuring

     The following table shows the restructuring activity during the three months ended March 31, 2007:

		Accrued
		Restructuring
Balance at December 31, 2006		$	1,997
Charges to expense			797
Payments			(1,716	)
Balance at March 31, 2007		$	1,078

     At March 31, 2007, the remaining costs consist of one-time termination benefits and as such are primarily classified within accrued wages.

(7) Segment Information

     Late in 2006, we reorganized our business. We established three distinct business units: Merge Healthcare North America, which primarily sells directly to the end-user healthcare market comprised of hospitals, imaging centers and specialty clinics located in the U.S. and Canada and also distributes certain products through the Internet via our website; Cedara Software, our original equipment manufacturer (“OEM”) business unit, which primarily sells to OEMs and value added resellers (“VARs”), comprised of companies that develop, manufacture or resell medical imaging software or devices; and Merge Healthcare EMEA, which sells to the end-user healthcare market in Europe, the Middle East and Africa.

     SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), establishes annual and interim reporting standards for operating segments of a company. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. Our principal executive officer has been identified as the chief operating decision maker in assessing the performance and the allocation of resources within the Company. Our principal executive officer relies on the information derived from our financial reporting process, which now includes revenue by business unit and consolidated operating results and consolidated assets. As we do not have discrete financial information available for our business units, we operate as a single segment for reporting purposes as prescribed by SFAS No. 131. We are in the process of developing systems and processes to obtain discrete financial information

Merge Technologies Incorporated and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited and in thousands, except for share and per share data)

for our three business units which is intended to be used by our chief operation decision maker. At the time that the information becomes available to assess performance and allocate resources, this new information will be disclosed.

     The following tables provide revenue from our business units for the three months ended March 31, 2007 and 2006, respectively:

		For the Three Months Ended March 31, 2007
		(As restated)
		Merge
		Healthcare								Merge
		North				Cedara				Healthcare
		America				Software				EMEA				Total
Net sales:
Software and other		$	4,773			$	2,922			$	475			$	8,170
Service and maintenance			5,585				1,859				260				7,704
Total net sales		$	10,358			$	4,781			$	735			$	15,874

		For the Three Months Ended March 31, 2006
		(As restated)
		Merge
		Healthcare								Merge
		North				Cedara				Healthcare
		America				Software				EMEA				Total
Net sales:
Software and other		$	4,343			$	5,029			$	152			$	9,524
Service and maintenance			4,594				1,822				200				6,616
Total net sales		$	8,937			$	6,851			$	352			$	16,140

(8) Income Taxes

     We adopted the provisions of FIN No. 48 on January 1, 2007. The total amount of unrecognized tax benefits as of the date of adoption was $5,747 (as restated). We recognize interest and penalties in the provision for income taxes. Total accrued interest and penalties as of January 1, 2007 was $182 (as restated). The adoption of FIN No. 48 did not result in an adjustment to retained earnings due to the full valuation allowance maintained on our deferred tax assets.

     The total amount of unrecognized tax benefits at January 1, 2007 that, if recognized, would affect the effective tax rate from continuing operations is $2,647 (as restated). The remainder of unrecognized tax benefits, if recognized, would result in a decrease to goodwill. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.

     We are subject to taxation in the U.S. and Canada federal jurisdictions, various state and other foreign jurisdictions. With few exceptions, we are no longer subject to U.S. Federal, state, local or foreign examinations by tax authorities for years before 2003.

(9) Commitments and Contingencies

     Between March 22, 2006, and April 26, 2006, seven putative securities class action lawsuits were filed in the United States District Court for the Eastern District of Wisconsin, on behalf of a class of persons who acquired shares of our Common Stock between August 2, 2005 and March 16, 2006. On November 22, 2006, the Court consolidated the seven cases, appointed the Southwest Carpenters Pension Trust to be the lead plaintiff and

Merge Technologies Incorporated and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited and in thousands, except for share and per share data)

approved the Trust’s choice of its lead counsel. The lead plaintiff filed the consolidated amended complaint on March 21, 2007. Defendants in the suit currently include us, Richard A. Linden, our former President and Chief Executive Officer, Scott T. Veech, our former Chief Financial Officer, David M. Noshay, our former Senior Vice President of Strategic Business Development, and KPMG, our auditing firm. The consolidated amended complaint arises out of our restatement of our financial statements, as well as our investigation of allegations made in anonymous letters received by us. The lawsuits allege that we and the other defendants violated Section 10(b) and that the individuals violated Section 20(a) of the Securities Exchange Act of 1934, as amended. The consolidated amended complaint seeks damages in unspecified amounts. The defendant’s deadline to move, answer or otherwise respond to the remainder of the operative amended complaint has been extended to July 2, 2007. We intend to vigorously defend the lawsuit, including, but not limited to, possibly moving to dismiss the consolidated amended complaint.

     On August 28, 2006, a derivative action was filed in the Circuit Court of Milwaukee County, Civil Division, against Messrs. Linden and Veech, William C. Mortimore (our founder, former Chairman and Chief Strategist, who served as our interim Chief Executive Officer from May 15, 2006 to July 2, 2006) and all of the then-current members of our Board of Directors. The plaintiffs allege that each of the individual defendants breached fiduciary duties to us by violating generally accepted accounting principles, willfully ignoring problems with accounting and internal control practices and procedures and participating in the dissemination of false financial statements. The plaintiffs also allege that we and the director defendants failed to hold an annual meeting of shareholders for 2006 in violation of Wisconsin law. The plaintiffs ask for unspecified amounts in damages and costs, as well as equitable relief. In response to the filing of this action, our Board of Directors formed a Special Litigation Committee, which Committee has full authority to investigate the allegations of the derivative complaint and determine whether pursuit of the claims against any or all of the individual defendants would be in our best interest. The Special Litigation Committee’s investigation is substantially complete. The defendant’s deadline to move, answer or otherwise respond to the remainder of the operative amended complaint has been extended to May 16, 2007.

     On April 27, 2006, we received an informal, nonpublic inquiry from the SEC requesting voluntary production of documents and other information. The inquiry principally relates to our announcement on March 17, 2006 that we would revise our results of operations for the fiscal quarters ended June 30, 2005 and September 30, 2005, as well as our investigation of allegations made in anonymous letters received by us. The SEC has advised us that this inquiry should not be interpreted as an adverse reflection on any entity or individual involved, nor should it be interpreted as an indication by the SEC that any violation of the federal securities laws has occurred. We continue to cooperate with the SEC.

     We, and our subsidiaries, are from time to time parties to legal proceedings, lawsuits and other claims incident to our business activities. Such matters may include, among other things, assertions of contract breach or intellectual property infringement, claims for indemnity arising in the course of our business and claims by persons whose employment has been terminated. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability, amounts which may be covered by insurance or recoverable from third parties, or the financial impact with respect to these matters as of the date of this report.

(10) Recent Accounting Pronouncements

     In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; is irrevocable (unless a new election date occurs); and is applied only to entire instruments and not to portions of

Merge Technologies Incorporated and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited and in thousands, except for share and per share data)

instruments. SFAS No. 159 is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We are currently evaluating the impact of SFAS No. 159 on our financial statements, should we choose the fair value option effective as of the beginning of our fiscal year 2008.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

     This Quarterly Report on Form 10-Q/A includes forward-looking statements within the meaning and subject to the protections of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Report, the words “will,” “believes,” “intends,” “anticipates,” “expects” and similar expressions of the future are intended to assist you in identifying such forward-looking statements. Although the Company presently believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company does not give, and cannot give, any assurance that those expectations will be achieved.

     Any number of factors could cause the actual results to differ from the results contemplated by such forward-looking statements, including, but not limited to: risks and effects of the past restatements of financial statements of the Company and other actions that may be taken or required as a result of such restatements; the Company’s inability to timely file reports with the Securities and Exchange Commission; risks associated with the Company’s inability to meet the requirements of The NASDAQ Stock Market for continued listing, including possible delisting; costs, risks and effects of legal proceedings and investigations, including the formal investigation being conducted by the Securities and Exchange Commission and class action, derivative, and other lawsuits; the uncertainty created by and the adverse impact on relationships with customers, potential customers, suppliers and investors potentially resulting from, and other risks associated with, the changes in the Company’s senior management; risks in product and technology development, market acceptance of new products and services, including teleradiology services, and continuing product demand; the impact of competitive products and pricing; continued negative effects of the DRA; limited acceptance of digital modalities and RISPACS and workflow technologies; the Company’s ability to integrate acquisitions; changing economic conditions; credit and payment risks associated with end-user sales; the Company’s dependence on major customers; the Company’s dependence on key personnel; and other risk factors detailed in the Company’s other filings with the Securities and Exchange Commission, including those matters discussed in Part I of our Annual Report on Form 10-K/A for the year ended December 31, 2006.

     You should not place undue reliance on forward-looking statements, since the statements speak only as of the date that they are made. We do not have, or undertake any obligation to, publicly update, revise or correct any of the forward-looking statements after the date of this Report, or after the respective dates on which such statements otherwise are made, whether as a result of new information, future events or otherwise. This Report should be read in conjunction with the risk factors, financial information and other information contained in this and other filings that the Company makes and previously has made with the Securities and Exchange Commission.

     The financial data in this Quarterly Report on Form 10-Q/A for the three months ended March 31, 2007 and 2006 has been restated from amounts previously reported to correct accounting errors. A discussion of the restatement for these quarters is provided in Note 2 to the consolidated financial statements contained in this Report and under “Restatement of Consolidated Financial Statements” below.

Restatement of Consolidated Financial Statements

     On August 13, 2007, we announced that the audited financial statements for the years ended December 31, 2006, 2005 and 2004 and other financial information included in our Annual Report on Form 10-K for the year ended December 31, 2006 and the unaudited financial statements included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 should no longer be relied upon. The errors identified in previously issued financial statements are described below.

     Revenue Recognition

     We have determined that our previously filed financial statements contained errors resulting from the incorrect recognition of revenue on software license arrangements with 12 customers that were signed between July of 2003 and June of 2004 following the acquisition of RIS Logic. As a result, we determined that the revenue associated with these arrangements should have been recognized ratably over the lesser of the maintenance period or the economic life of the software following the first productive use of the software at the customer site. The original value of these contracts, excluding the multiple years of maintenance, aggregated approximately $2 million.

     Goodwill and Deferred Income Taxes

     In connection with the accounting for the acquisition of Cedara in June of 2005, we did not appropriately record purchase accounting for deferred income taxes. As a result, both acquired goodwill and net deferred tax liabilities were overstated. The impact of these purchase accounting adjustments recorded in the consolidated financial statements included herein have been restated.

     Other Adjustments

     We have also restated for other errors generally related to our accrual for bonuses, accrual for state and franchise taxes, accrual for subsequent credit memos, and correction of clerical errors in accumulating and recording transactions. These adjustments included changes to the following financial statement line items: revenue, as well as related accounts including cost of goods sold, accounts receivable and related reserves, and deferred revenue; accrued wages; various operating expenses; goodwill; other assets; accumulated other comprehensive income; income tax expense; and income taxes payable.

     Please refer to Note 2 of our unaudited consolidated financial statements for a discussion of the restatement of our previously filed consolidated balance sheets as of March 31, 2006 and 2007, and our statements of operations and statements of cash flows for the three months ended March 31, 2006 and 2007.

     We, by means of this Quarterly Report on Form 10Q/A, have restated previously issued unaudited consolidated financial statements and will not amend our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. See Note 2 of notes to consolidated financial states for a discussion of the restatement of our previously filed balance sheets as of March 31, 2006 and 2007 and our statements of operations and statements of cash flows for the three months ended March 31, 2006 and 2007. The information that was previously filed for the quarters ended March 31, 2006 and 2007 is superseded by the information contained in this Quarterly Report on Form 10-Q/A, and the financial statements and related financial information contained in such previously filed report should no longer be relied upon.

Overview

     Operating under the name Merge Healthcare, we develop medical imaging and information management software and deliver related services. Late in 2006, we reorganized our business to better reflect emerging market needs. We established three distinct business units: Merge Healthcare North America, which primarily sells directly to the end-user healthcare market comprised of hospitals, imaging centers and specialty clinics located in the U.S. and Canada and also distributes certain products through the Internet via our website; Cedara Software, our OEM business unit, which primarily sells software products, developer toolkits and custom engineering services to OEMs and VARs, comprised of companies that develop, manufacture or resell medical imaging software or devices; and Merge Healthcare EMEA, which sells to the end-user healthcare market in Europe, the Middle East and Africa.

     Healthcare providers continue to be challenged by declining reimbursements, competition and reduced operating profits brought about by the increasing costs of delivering healthcare services. In the U.S., we are focusing our direct sales efforts on single and multi-site imaging centers that complete more than 10,000 studies per year, small-to-medium sized hospitals (fewer than 400 beds), and certain specialty clinics like orthopedic practices that offer imaging services.

     We have aggressively expanded our product offerings through our acquisitions of eFilm in 2002, RIS Logic in 2003 and AccuImage in January 2005, and our business combination with Cedara Software Corp. (including its subsidiary, eMed Technologies, Inc.) in June 2005.

     We continue to face challenges including the informal, non-public inquiry being conducted by the SEC and class action and other lawsuits. In addition, we continue to execute on several initiatives that were started in late 2006, including our right-sizing and reorganization, our onshore / offshore global software engineering and support delivery model and significant changes to our senior management. However, we believe that it will take time for these initiatives and hirings to have an impact on our net sales and operating income. For a more detailed discussion of these items see Part II, Item 1, “Legal Proceedings,” in this Quarterly Report on Form 10-Q/A and Item 1A, “Risk

Factors,” in our Annual Report on Form 10-K/A for the year end December 31, 2006, which is being filed contemporaneously with this Form 10-Q/A.

Critical Accounting Policies

     Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, our management evaluates these estimates. We base our estimates and judgments on our experience, our current knowledge (including terms of existing contracts), our beliefs of what could occur in the future, our observation of trends in the industry, information provided by our customers and information available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     We have identified the following accounting policies and estimates as those that we believe are most critical to our financial condition and results of operations and that require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties: revenue recognition, allowance for doubtful accounts, software capitalization, other long-lived assets, goodwill and other intangible asset valuation, share-based compensation expense, income taxes, guarantees and loss contingencies. For a complete description of our critical accounting policies, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K/A for the year ended December 31, 2006, which is being filed contemporaneously with this Form 10-Q/A.

Three Months Ended March 31, 2007 Compared to the Three Months Ended March 31, 2006

The following table sets forth selected, summarized, unaudited, consolidated financial data for the periods indicated, as well as comparative data showing increases and decreases between the periods. All amounts, except percentages, are in thousands.

		Three Months Ended March 31,
		(As restated)																Change
		2007				% (1)				2006				% (1)				$				%
Net sales:
Software and other		$	8,170				51.5	%		$	9,524				59.0	%		$	(1,354	)			-14.2	%
Services and maintenance			7,704				48.5	%			6,616				41.0	%			1,088				16.4	%
Total net sales			15,874				100.0	%			16,140				100.0	%			(266	)			-1.6	%
Cost of sales:
Software and other			1,997				24.4	%			1,660				17.4	%			337				20.3	%
Services and maintenance			3,520				45.7	%			3,686				55.7	%			(166	)			-4.5	%
Amortization			1,062			NM		(2)			1,277			NM		(2)			(215	)			-16.8	%
Total cost of sales			6,579				41.4	%			6,623				41.0	%			(44	)			-0.7	%
Gross margin
Software and other (3)			5,111				62.6	%			6,587				69.2	%			(1,476	)			-22.4	%
Services and maintenance			4,184				54.3	%			2,930				44.3	%			1,254				42.8	%
Total gross margin			9,295				58.6	%			9,517				59.0	%			(222	)			-2.3	%
Operating expenses:
Sales and marketing			4,733				29.8	%			5,221				32.3	%			(488	)			-9.3	%
Product research and development			5,383				33.9	%			4,843				30.0	%			540				11.2	%
General and administrative			7,539				47.5	%			5,885				36.5	%			1,654				28.1	%
Restructuring and other expenses			797				5.0	%			22				0.1	%			775			NM		(2)
Depreciation and amortization			1,002				6.3	%			1,042				6.5	%			(40	)			-3.8	%
Total operating costs and expenses			19,454				122.6	%			17,013				105.4	%			2,441				14.3	%
Operating loss			(10,159	)			-64.0	%			(7,496	)			-46.4	%			(2,663	)			35.5	%
Other income (expense), net			452				2.8	%			676				4.2	%			(224	)			-33.1	%
Loss before income taxes			(9,707	)			-61.2	%			(6,820	)			-42.3	%			(2,887	)			42.3	%
Income tax expense (benefit)			14				0.1	%			(1,500	)			-9.3	%			1,514				-101.0	%
Net loss		$	(9,721	)			-61.2	%		$	(5,320	)			-33.0	%		$	(4,401	)			82.7	%

Net Sales

Net sales, by business unit, are indicated as follows:

		Three Months Ended March 31,
		(As restated)																Change
		2007				%				2006 (1)				%				$				%
Cedara:
Software and other		$	2,922				18.4	%		$	5,029				31.1	%		$	(2,107	)			-41.9	%
Services and maintenance			1,859				11.7	%			1,822				11.3	%			37				2.0	%
Total net sales			4,781				30.1	%			6,851				42.4	%			(2,070	)			-30.2	%
Merge Healthcare North America:
Software and other			4,773				30.1	%			4,343				26.9	%			430				9.9	%
Services and maintenance			5,585				35.2	%			4,594				28.5	%			991				21.6	%
Total net sales			10,358				65.3	%			8,937				55.4	%			1,421				15.9	%
Merge Healthcare EMEA:
Software and other			475				3.0	%			152				1.0	%			323				212.5	%
Services and maintenance			260				1.6	%			200				1.2	%			60				30.0	%
Total net sales			735				4.6	%			352				2.2	%			383				108.8	%
Total net sales		$	15,874							$	16,140							$	(266	)