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Executives

Mr. Kenneth D. Rardin – Chief Exec. Officer, Pres, Director

Mr. Steve Norton – Executive VP and CFO

Analysts

Bret Jones – Leerink Swann

Richard Close – Jeffries & Co.

Steven Halper – Thomas Weisel Partners

Thomas Isenberg – Open Road Partners

Poppel – PopTech. LPE.

Bill Dezellem – Tieton Capital

Merge Technologies Inc. (MRGE) F3Q07 Earnings Call February 22, 2008 9:00 AM ET

Host

We would like to welcome you to the Merge Healthcare Incorporated Third Quarter 2007 Earnings Conference Call, which includes an update on the company’s business operations and strategy. Participating in today’s call will be Kenneth Rardin, President and CEO and Steve Norton, Executive Vice President and CFO. Upon completion of the company’s prepared remarks, we will open the call for question.

Prior to review in our third quarter 2007 results, I would like to draw your attention to the company’s Safe Harbor Statement. Except for the historical information herein, the matters discussed in this conference call includes forward-looking statements that may involve a number of risks and uncertainties. When used in this conference call, the words "guidance," "believes," "intends," "anticipates," "expects," “will,” and similar expressions are intended to identify forward-looking statements, but are not exclusive means of identifying them. Actual results could differ materially from those projected in, or implied by, the forward-looking statements based on a number of factors, including, but not limited to, provided in our recent press releases in SEC filings. The Company undertakes no obligation to publicly release the results, other new revisions to these forward-looking statements to reflect any future events or circumstances.

At this time, I would like to turn the call over to Steve Norton, Executive Vice President and Chief Financial Officer.

Steve Norton

Good morning everyone and thank you for joining us. On the call with me today is Ken Rardin, our President and Chief Executive Officer. The agenda for today’s call will be to first discuss the financial results for the third quarter 2007, in comparison to the third quarter 2006, and also the second quarter of 2007. We will also discuss certain non-GAAP information in this call that was included in the press release, although we believe that this information is useful to investors in assessing the performance of our company, both historical and in the future is also important to understand that this information is not in conformity with GAAPs. In reconciliation from the non-GAAP numbers to the US GAAP information is included in the press release. I will then, turn the call over to Ken, who will discuss in more detail the status of our business, the future strategy for our company and the operating results for the three and nine months periods ended September 30, 2007.

I would like to begin the call by saying that we are very happy to report that we are now current with our SEC filings. It has been an extremely long and argues process, but I guess there is a result of the WorldCom’s, the Enron’s in an incredibly cautious public accounting environment that we all live with today. I must admit that the public accounting industry is much different that when I was with KPMG when I was still young, ten plus years ago. However, I think it has gone way too far and has taken away the ability for management to present its own financial statement and have any say in what we believe is right and wrong. But, that just my opinion, and probably that over a million plus other public companies CFOs today, but unfortunately it is depressing to say the least.

After that one side, that I could not just refuse, you have ask me in the Q3 financial results as required by US GAAP, we are entirely written off the remainder of the goodwill on our balance sheet, resulting in a charge of approximately $122 million and in additional, approximately $1 million in trade name impairments. We were also required to write down some of our intangible assets, including our customer relationships in quiet and capitalized software. In the aggregate, we recognized the impairment charges of $131.6 million in the third quarter results. The efforts associated with this impairment analysis have single-handedly caused the two month delay from the filing of the restated in Q2 2007 financials in late December. Our net sales for the third quarter of 2007, totaled $14.1 million, which was a small increase from the $13.9 million in net sales in the third quarter of 2006 and the $14 million of revenue in the second quarter of 2007.

We reach out to North America net sales, totaled $7.7 million during the quarter compared to $7.9 million in Q2 of 2007 and $8.8 million in Q3 of 2006. It is important to note that North America continues to be a challenging market for us. The depths of reduction on that has had a more dramatic effect on our customers’ willingness to invest in ours and our competitors’ solutions that we and others in the industry originally anticipated. Additionally, the major move made during the fourth quarter last year to an onshore, offshore engineering model had a negative impact on our productivity.

Although, we continue to see improvements and we continue to fine tune the balance of onshore versus offshore personnel, it has had an impact on our ability to deliver timely software solutions, which is also caused us too after defer recognition of some revenue. Revenues from the sales of the company’s eFilm diagnostic viewing product to VOE commerce distribution channel continue to grow and achieve record levels. Net sales from our AMIA business unit for the third quarter of 2007, totaled $1.4 million compared to $1.0 million in the second quarter of 2007 and $0.8 million in the third quarter of 2006. As announced in two different press releases during the second quarter, we were successful in selling our Electronic Patient Record solution at Cromer Hospital and our Fusion RIS MX solution at Rams Hospital.

Although, these were great wins for merging, very limited revenue has in recognized on these deals to date, as the deployment of these solutions are on the early stages and requires the delivery of software that is yet to be completed for Cromer. So their net sale aggregated $5 million during the third quarter of 2007, compared to $5 million during the second quarter of 2007 and $4.4 million in third quarter of 2006, in improvement, a 15% year-over-year. We continue to see a fair amount interest on our custom engineering business and signed a deal during the second quarter to perform our first onshore, offshore combination custom engineering project for customer utilizing, set areas, eye reach core software solution. In addition, we signed the contract for another custom engineering project for one of our existing customers in early Q3. And this contract has a multiple year license agreement and also a significant amount of custom engineering. The custom engineering is not included as a booking in the quarter, because it is on a time of material’s basis, but the estimate is of good size.

Overall gross margins for the third quarter and the second quarter of 2007 were 56% and 57% respectively, excluding the write-downs of intangible assets in each of these quarters, compared to 51% in the third quarter of last year. In addition, the mix of software sales versus service and maintenance continues to be last and in the past contributing to the lower than desired gross margin percentage. We continue to believe that margins were slowly progressed toward the mid upper 60% range, assuming we are successful in growing our revenues in the product mix shifts more to software and other versus service and maintenance which has historically has been a low 50% gross margin. Also, we expect that the future gross margin percentages will be positively affected by the tall radiology business as we anticipate that the margins from this business will be sizeable.

Operating expenses, excluding goodwill impairment, restructuring and other intangible asset impairments and other expenses aggregated $18.3 million during the third quarter of 2007, compared to $18.0 million in the second quarter of 2007 and $18.0 million for the third quarter of 2006. Legal fees relating to the restatement law suits aggregated approximately $1.1 million during the third quarter compared to $900,000.00 during the second quarter. In addition, we incur approximately $400 thousand in fees during the third quarter of 2007 relating to the restatement of our financials and expect another $500 thousand or so in Q4. There is 123R stock compensation costs aggregated $1.4 million in the second and the third quarters of 2007 compared to $1.9 million in the third quarter of 2006.

Our non-GAAP adjusted operating loss for the third quarter of 2007, $5.5 million compares to a non-GAAP adjusted operating loss of $4.4 million in the third quarter of 2006 in a non-GAAP adjusted operating loss of $5.4 million in the second quarter of 2007. The non-GAAP adjusted operating losses for all periods, exclude the impact of stud compensation cost depreciation, amortization and impairment charges. Non-recurring legal and accounting costs associated with the re-statement and associated to the litigation. Goodwill and other long lived asset impairments, reduction in force and duplication of effort costs, we excluded these items in an attempt to show the approximate cash loss for the quarter from our ongoing core operations.

We continue to anticipate that the effective income tax rate going forward for the remainder of 2007 will approximate 0 as the company has fully reserve all net deferred tax assets and we have substantial unrecognized in that operating loss to reports. Our net loss on a GAAP basis for the third quarter of 2007 totaled up $ 141.6 million or $4.17 per share, compared to a net loss of $11.2 millions or $0.33per share on the third quarter of 2006 and net loss of $10.7 million or $0.32 per share in the second quarter of 2007.

Of the $141.6 million net loss on a GAAP basis for the third quarter of 2007, $131.6 million was related to the impairment charges we recognized in the third quarter. As announced previously, bookings for the third quarter totaled approximately $10 million, compared to approximately $10 million in the second quarter of 2007. Bookings for the three months ended September 30, 2007, included two contracts in excess of a $1 million each and 14 contracts with new customers. Aggregate bookings for the nine months ended September 30th, were approximately $40 million and included 6 contracts and excess of $1 million each and 35 contracts with new customers.

Bookings as defined by the company has a total value of all the contract signed during the period and excludes any value attributed to related maintenance other than the first year of post-contract customers support. During the quarter our cash balance decreased by approximately $8 million, from $29.7 million at June 30, 2007 to approximately $21.7 million at September 30, 2007. During the fourth quarter, our cash has decreased to a balance of approximately $14 million at December 31. However, this balance is still preliminary, as it is not yet been audited or reviewed by outside orders.

As Ken will discuss in his detailed comments, the company is very focused on cash preservation, and the infusion of additional capital into the company and is considering all strategic options. This is and continues to be a key focus of mine and Ken’s and we are committed to leaving no stone unturned.

As part of these efforts, we announced the right sizing and cost reduction initiative last week that have made the majority of the cuts already in an attempt to get our head count down to approximately 440 persons, including consultants, by March 31, 2008. We anticipate that this reduction of approximately 160 employees and consultants, combined with the savings from vacating our Boston office and certain other smaller items, will aggregate approximately $10 million per year. These savings should began during the second quarter of 2008 at the restruction charge to recognize in the fourth quarter of 2008 income statement will be slightly higher than the quarterly savings realized from February 14th through the end of the quarter.

In addition, based on historical attrition, we anticipate that we all have an additional net 20 person reduction between March 31, 2008 and year end, resulting in incrementally in your savings of somewhere between $1 million and $2 million. Daily sales outstanding of September 30, 2007 was 88 days compared to 110 days at June 30, 2007 and 96 days of September 30, 2006. The improvement in the DSO is attributable to a much more focused detention on collections and the very solid and successful efforts from our collection person and some of our old accounts. Total deferred revenue decreased by approximately $1.7 million during the quarter to a total of $21.8 million at September 30, 2007. With that, I would now like to turn the call over to Ken Rardin, our Chief Executive Officer.

Ken Rardin

As you can see from our third quarter of 2007 10-Q the first nine months of 2007 had been another very difficult and challenging period for Merge Healthcare. We will begin 2007 with a lot of positive momentum after their challenging year in 2006, which included a major restatement of our financials, class action and derived law suits, filed against Merge Healthcare because of the restatement and the initiation of an SEC informal query. We kicked off 2007 with the best quarter of the year with approximately $16 million in revenue and approximately $20 million on new bookings. Then, in the second quarter of 2007, our entire industry got hit very hard from a negative impact caused by the Deficit Reduction Act or DRA.

Our direct selling business Merge Healthcare in North America is primary focused on the inventory or imaging center market, where most of the DRA reductions were focused. In June 2007 the SEC changed their position from an informal query to a formal investigation and then just prior to the following our second quarter press release in 10-Q, our auditors informed us that we had to restate our financials again due to a very technical accounting rule. Fortunately, every statement was not as bad as we originally were told.

When we announced in August 2007 that we have to restate, we are expecting to restate our financials as far back as 1999, which would have included several hundred contracts and tens of millions of dollars. During the next five months we invested substantial time and money revealing our auditor’s position, we hired another law firm to review the historical contracts. We hired an outside financial advisory firm, as a result of our efforts, we finally determined with auditors that we did not have to restate hundreds of contracts. Ultimately, we did determined that we have to restate 15 contracts from the period of 2003 to 2004, in connection with our RIS Logic acquisition and the contracts employees prior to the acquisition of RIS Logic in 2003.

The aggregate restated revenue from these 15 contracts from 2003 and 2004 represented approximately $2 million and our revenues were just shifted to the recorders, rather that going away. The only reason that we have to restate the revenues for these 15 contracts was because we did not have in our possession documentation for our position that was considered acceptable by auditors; otherwise, we would have been able to avoid the reinstatement entirely.

I have been the CEO of several public and private companies and I have never experienced this level of scrutiny and what I believe to be over regulation by the accounting industry. Unfortunately, the public company environment today requires restatements likely we have experienced, even though the actual impact of these last reinstatement was minimal. There is nothing we can do about it, except to spend the money and spend the time to deal with issues like these.

As you know, in December 2007, we did complete the restatement of our 2006 10-K and our first quarter 2007 10-Q and the fine of our second quarter 2007 10-Q. However, we were not yet current with SEC filings and we still had to file our third quarter 10-Q, which was started last night, so Steve said we are very happy to say we are now current with our SEC filings.

The significant management from a time and the millions of dollars spent on these two restatements. The two law suits and the formal SEC investigation have nothing to do with helping the operations of our business. These matters have continued to adversely effect the morale of our employees our relationship with some of our current and receptive customers and our genuine reputation of market place, because of declining new sales and the significant dollars spent on these matters, we are deputing are cash reserves. Many of our competitors continued to make these very few remarks about Merge Healthcare and we spent a lot of time explaining to our current prospected customers what all these means. As you can see from our results, this continues to be a major drag in our ability to increase booking and revenue.

We have recognized the negative financial impact this is having on the company. As a result to these events, we announced another restructuring just last week, which included the reduction of force of approximately 160 employees and consultants, which should result in annualized savings of approximately $10 million to $12 million, including the anticipated attrition that we will not replace.

Over the past 18 months, we have sent millions of dollars from our cap reserves to pay for non-operational legal fees. We are optimistic that within the next few weeks our D&O carriers will begin paying for some of our significant, historical and ongoing legal expenses, which were incurred from the class action and driven law suits and the SEC investigation. Our number one focus today is operation efficiencies, ongoing cost reduction majors, revenue and cash generation and all possible financial alternatives including the possible sale of assets. We are considering in detail all situated options available to the company. Even with the negative news and this trashing caused for the legal and restatement issues, and the industry wide impact of DRA, Merge Healthcare still generated $44 million in revenues during the first nine months of 2007. We signed approximately $40 million new contracts, we signed 35 new customers.

During the time of significant destruction of the past twelve months, we made significant progress in several areas. Cedara Software entered the oncology market with a large OEM order for customized version of our Eye Response product, which we uses a patented Molecular Imaging technique to access tumor response from cellular mechanisms for the early detection of radiation treatment responses for brain cancer. We released to the market our first integrated version of our Merge and EMET products, which we call Fusion RIS/PACS MX, which is the combination of our EMET industry leading visualization product matrix, along with the Merge Fusing RIS product and our Merge Fusion PACS.net backend. Based upon industry expert feedback and feedback from our current and prospective customers, we believe that we now had one of the best integrated RIS-PACS products in the market today. It is important know that this is a new product and is not an upgrade or enhancement that would be included in our maintenance contract to our existing customers. We have identified over 250 of our current customers, who maybe candidates to upgrades to our new Fusion RIS/PACS MX product.

Since announcing this main product in April, we have sold 10 systems, which included three new accounts and seven upgrades from current customers. The average upgrade price to these seven accounts was approximately $230,000.00 and the average new account sale for these three accounts was approximately $410,000.00. Considering the negative news in the market place about Merge, we are very pleased with acceptance of our new Fusion RIS/PACS MX product.

In September o 2007, we opened the doors of our new Cedara Software Services India operation. We will just focus on Cedara OEM custom and engineering projects. This is a world class facility that is completely built at and equipped for approximately 100 personnel. We currently have 30 people in this office and we continued to add technical staff to this facility to support our growing custom engineering projects. We also shifted the current custom engineering projects from our outsourcing partner to this new facility.

We announced in November our new eFilm RIS/PACS product that is targeted at the single sight imaging center market with ten thousand or fewer studies per year. This product will be sold from our eCommerce unit and it will be shipped to the customer preconfigured and preinstalled on required hardware and can be easily installed by the customer. In contrast, a typical RIS installation takes 6 to 12 months, because of its significant customization used to require by our larger imaging clients.

Also, in November we announced the availability of the eFilm versions 3.0, which was the first significant new release of this product since 2005. This product release was the culmination of 11 months of coordinated efforts between our onshore product management and our offshore R&D teams and was the first major product release to be developed in our Indian office in our offshore development facility.

And, after a year of planning and development, in November we announced our new Teleradiology product and service initiative, which included our new TeleRead software and Consult PreRead teleradiology service. This is a high differentiated and very exciting new teleradiology product and service offering. Our Consult PreRead offering is a consulting service that provides a preliminary port of medical imaging study that has been double read by our offshore radiologist. Our offshore radiologist produced a detailed report of their findings, which were reviewed by US radiologist as a consult to help him or her prepare their final interpretation report. Our Consult PreRead report includes references to prior studies and relevant, current and historical patient clinical information, along with extensive management of relevant and incidental pathology and their associated key images.

Our new Merge TeleRead software is a proprietary product that supports the complex environment that has completed final read to a teleradiology, by accessing current studies, prior studies and prior reports along with all available current and historical patient information. There are many articles and reports to talk about this significant size of the teleradiology final read market, but today there has been very little penetration of this market, because the technology did not exist to support this complex environment. We believe that our teleradiology technology will provide the missing link that will allow Merge Healthcare and our customers to enter this multi-billion dollar Teleradiology Final Read Business.

This new offering combined with our RIS/PACS products, provides us with a highly differentiated product offering. We believe this significant differentiation will not only help us improve our win rate for new deals, but we will also be very attractive to our large customer based.

This new combined offering is the key to our gross strategy, it is highly differentiated, it provides a recurring revenue stream and provides with product and service that allows us to leverage our large off balanced asset, which is our customer-based. The initial market acceptance, more customers have been very positive. We have two signed beta agreements and we expect to sign 2 to 4 additional beta agreements in the next few weeks. We are seeing early indications that this differentiations is helping drive RIS/PACS sales. We also have a number of installed customers well along the sale cycle who are interested in using our Consult PreRead service.

We believe a package offering of our new RIS/PACS MX, combined with our new Teleradiology offering will be a very attractive value proposition to our current and prospective customers. Cedara software has also been on the discussion with one its larger OEM clients to provide Teleradiology services as an integrated packs in Teleradiology service offering for role hospitals, catastrophic event like tsunami and Third World countries that have access to radiologists.

I am not going to go into the specific details to these new offerings on this call. If you want more information, please send us a request to receive a copy by CD that includes the power point and voice over of the presentation that I gave on November 21, when we announced new offering to the market. Before I open up the call for questions and answers, I want to assure you that we are highly focused on our liquidity issue, we are focused on revenue and cash generation. We are focused on ongoing cost reductions, as you can see from last week restructured announcement and we are revealing all strategic options available to us, including depth or equity financing in the sale of assets. We have engaged outside experts and advisers to help us review all strategic options available through the company.

Thank you for your time this morning and Carol, could you please open the call up for questions and answers.

Question and Answer Session

Operator

(Operator’s instruction)

Your first question comes from the line of Bret Jones with Leerink Swann.

Bret Jones – Leerink Swann

To focus on the liquidity position, I was wondering if you could answer this question. With the credit and facility in place, do you believe that spinning off the European, Middle East and Africa business to provide enough liquidity to allow you guys to reach on a break even point on cash basis, without having to do that directly offering or you would potentially need to do both?

Steve Norton

The spin-off of the operation really is independent of a financing operation that would not see the path and are in itself would provide the appropriate liquidity. We will have to look at other options in addition to that.

Ken Rardin

One of the things as company, we are getting highly focused on our core competencies and dealing with the European market in the European business is a public company, is somewhat a bit destruction to us and it is a destruction to the business there, because of our regulations in accounting. So, it is part of a highly focused business strategy going forward and that is the major reason, in addition to potentially reducing some of our expenses, for spinning off this operation.

Bret Jones – Leerink Swann

In the past, I think you said you needed to get to a run rate, a revenue run rate of about $25 million to get to a cash break even point, with the restruction that has been undertaken already, can you update us on what that number, would you anticipate that number needing to be?

Steve Norton

We are not going to give any guidance on that, but you can do your own math. We said that, I think $25 million was in order to get a US GAAP break even, I think it will last if we can get to adjusted EBITDA positive, but if you are seeing $10 million of annualized cost savings, break them into four quarters at $2.5 million, you can do your math and try to figure out about where that is going to be, but we do not want to give specific guidances as to where we think that is going to happen.

Bret Jones – Leerink Swann

Okay, fair enough and lastly, before I jump back in the queue, I just wondering to ask you about the existing customers, you said there was a drop in the third revenue. I wonder is that indicative of a customer’s concerns and not wanting to prepay for services, or am I really reading too much too into that matter.

Steve Norton

I think the deferred revenue does fluctuate on a quarterly basis, the other quarters’ work goes up, quarters work goes down, it depends on billings and a variety of other factors. I do not think you can make that assumption that these people are not willing, you know, portion of this is the fact that we had some continuing professional services and installation of some of our matrix products and that we are recognizing that revenue and previously had been sitting in the deferred accounts. So, I would not read too much into that.

Bret Jones – Leerink Swann

But, have you guys lost any customers? I was thinking the last call you had, it has been awhile since your last call.

Steve Norton

Obviously, every company now losses customers periodically, it is in our business, where we do not see a lot of customers going away, most of our customers, in our retention rates on our maintenance is quite high. But, you cannot say that there have never been any lost customers. It does happen periodically, but I would not say that anything in the last several months, we will see a significant change in the normal attrition rate of customers.

Operator

Your question comes from the line of Richard Close with Jeffries & Co.

Richard Close – Jeffries & Co.

Curious on the Teleradiology side of things, you mentioned hopefully 2 to 4 beta agreements in the coming weeks, you have two signed currently. When do you begin to start generating revenue associated with the Teleradiology product?

Steve Norton

We are in discussions with the number of installed accounts right now. I personally met with probably 20, 25 of our customers on this specific subject. Along with potential upgrades to our RIS/PACS product line our new MX RIS/PACS and I would expect that we will see contracts this quarter for new clients using the Teleradiology service and start receiving revenue in the first quarter of 2008.

Richard Close – Jeffries & Co.

With respect to beta, if you could walk me through that, when will those convert your revenue generating customers? Is there any timetable for that?

Ken Rardin

Typically, we are looking at probably 30 to 60 days and we are doing this for a couple of reasons. One, we need it in multiple accounts just make sure our technology is working as advertised, as we think it should work. Test out volumes and also to provide reference sites to customers that are talking about coming on board with the service. So, after we get 4, 5 or 6 up and running, it is going to help us in closing both current and new account sales, because we are going to have the results in experiences from more than on of our customers.

Steve Norton

Just to add on that a bit, when Ken mentioned that we are hopeful that we will actually see some revenue on the first quarter. The revenue that will come in the first quarter will not be sizeable, but we do expect to get some cash, but it will not be of any magnitude.

Richard Close – Jeffries & Co.

With respect to, I guess to two betas you have currently up and going. What has been the general conclusion, how did the customers view that?

Steve Norton

So far, very positive, the scene was nature of this thing, because with the service we are doing, called the Consult PreRead, is effectively proof varying at the closing of a file of the report, which means that we should get all the prior history, all the prior studies and that is going to be workloads to radiologist and report to me back. So, our experience has been very positive on the quality, which is really the number one test here. If there is high quality in the report, the net obviously improves productivity by radiologist. But, two is running, we had very positive feedback especially on the quality ratings, which is really the key to productivity.

Richard Close – Jeffries & Co.

Moving over to bookings and all that, I guess you are pretty even second quarter and third quarter from your comments about the restatement impacting your business and all that. I would say that should we sort of think of the fourth quarter is being maybe the bottom possibly in terms of the negative impact associated with the restatement?

Steve Norton

It is kind of hard to get into a lot of details, but obviously if we can improve our liquidity position, if we can get some of our negative factors behind us. Obviously, the first one is getting current with our financials. If we can make some progress on the litigation, if we could get the idea in all insurance carriers to provide some cash and if we can improve our liquidity position, we do believe that there a lot of opportunities for us to improve, so until that happens, this is probably is going to somewhat difficult. But, assuming that we can achieve that and when we think that we could have positive improvements going forward.

Richard Close – Jeffries & Co.

Okay, let me ask you in something little different, the third quarter was essentially when you had to go to the restatement and do all that. You talked about customers using this against and you and negative impacted DRA. I guess I am trying to get a sense of, did you see any deterioration from third quarter to fourth quarter. How is the market or has there been any changes, with respect to the market place and customer demand or anything like that in the fourth quarter?

Ken Rardin

We have seen some pretty major push back. I spend a lot of my time, both on telephone calls and going to clients that are very much worried about this, especially on the liquidity issues. Are you guys going to be around, are you going to be in business? It has how impact from a point of view, people slowing things down. I think that there is a bunch of people sitting to wait and see right now. You look at our OEM business, which deals with very large strategic counts, we do not believe we are loosing much or any of that, but there is going to be a lot of people sitting in the side lines, to see what happens right now.

So, it is critical to get these things behind us, get our financial current as we are now. And I think there are some positive things that maybe happening on liquidity side that we started getting some reimbursement for all those legal expenses that we have been paying for almost the last two years. And, if we can maybe have something happening on the financing side, I think that is going to have a very positive impact going forward, but it has other negative impacts. It has taken a lot of our time and a lot of people are concerned about it.

Operator

Your next question comes from the line of Steven Halper with Thomas Weisel Partners.

Steven Halper – Thomas Weisel Partners

Could you give us some more details about the 160 people that you are eliminating? Positions that you are eliminating, what areas are they from and tell us about the process that you went through to identify these people, because obviously you need to keep the sales effort, customer service, all those things, are you cutting muscle, as to suppose to fat?

Steve Norton

We went through a very detailed effort with our entire management team, from all sides of the business. There was no business that was really left untouched, but some other people that where I go really came from all facets, some of the real people are in sales, some people in development, people in engineering, focusing on the administrative of areas, but obviously, the majority of our people are in engineering and the good portion of the cuts were consultants that were being used offshore, so a fair number of those have actually went away. Some are going at September 30th, so the terminations that occurred on February 14th, there were not actually a 160 people that were let go on that day. There were number of folks, there is a large majority of those with the consultants that were used offshore and those have been scaled down over the past 4 or 5 months.

So, since September 30th, or down, probably cost to 160 number, so I say the vast majority of those are in the engineering area.

Ken Rardin

We had very little reduction on the customers’ support side. We were very careful that we are able to maintain the ongoing support of our clients and as part I mentioned on opening our own facility offshore. Obviously, the cost of that facility on our per percent basis is much lower than a consultant of any use in, so we did shift some of the projects there. Even though we did do a reduction of the employees and consultants, our offshore Cedara Software services business, were actually increasing headcount there.

Steve Norton

We mentioned the press release, we are talking about fine tuning it really was trying to figure out what is the proper mix and we have added people at the CS society and prepare our own business there, but we also added some folks onshore, so as we can get the better mix and better productivity out of the other business. I think that is all related to the final tuning.

Steven Halper – Thomas Weisel Partners

You have been through your current on your filings and gone through this latest restructuring. Have you gone through a more traditional budget process, at this point or it does yet to happen?

Ken Rardin

That was actually done in connection with these whole effort, so when we do an internal budgeting process and that internal budgeting process correlates basely right on line with the addresses that we made. So it went to the board, talked about our budget, on moving forward with our plan, based on the headcounts and the changes that we have made. So, they are right on line with each other.

Steven Halper – Thomas Weisel Partners

Does the internal budget process assume a financing or capital infusion? Do you need that capital infusion to affect your plans?

Steve Norton

Well, you have seen the cash position of the company where, we were running $8 million a quarter. We ended the year at $14 million, so we are not going to give guidance, but I think it would be fair to say that we are going to have to find ways to get some cash into the company, through a number of means, one being cost reduction as one we actually already taken, another way is revenue generation, but we will be doing everything we can to try in cash from another source.

Operator

Your next question comes from the line of Tom Isenberg with Open Road Partners.

Thomas Isenberg - Open Road Partners

Congratulations through the financial statements that seems like a mountain, out of a mow hill that was unfortunately, as you mentioned at the beginning of the call that you just had to unnecessarily cross. On the other hand, you will be out of cash by June, unless you get the DNO and leaving the side financing and I am just trying to wonder and trying to figure out what the sales safe strategy is. I have always said that you had good enterprise software and it would be valuable, perhaps to someone, I do not know if there would be a Toshiba, GE or Siemens, who does not have such software. And you mentioned that it is hard to keep the clients on-board without them knowing whether you are going to be in business or not.

Sure you can sell 20 million shares at $0.80 give up a bunch of warrants and all and hopefully it would all work out, one of the strategies is to sell the company or if you are not looking at that, if you can assure shareholders, how could we run out of money, the basic software, you know $40 million in a year of sales, two times sales, the company is still worth a buck or two a share in a sale scenario. I realized that may not be your first choice. So, you can see where I am getting at, what is the basic, deadlock value in the company and especially to inquire who would have the deep pockets to make the sales efforts that you know you might be able to make.

Ken Rardin

I am not going to comment on market evaluation and whether to resell the company or not. As we said earlier, we are not going to make detailed comments at this; we are looking at all of our alternatives. We are looking at all strategic alternatives, in order to provide ongoing liquidity for the company, so I am not going to say any more and that, except that we are looking at all options.

Thomas Isenberg - Open Road Partners

Do you think your software has value to a larger entity?

Ken Rardin

I think our software and our services have tremendous value to us, to our shareholders and to other entities, yes.

Thomas Isenberg - Open Road Partners

So, bankruptcy, which is a crazy thing, would be a very low probability event, do your feel in your opinion?

Ken Rardin

Like I said, we are not gong to comment on any of those on the go-forward basis. We are looking on all our alternatives and we are not going to talk about any of the specifics of that.

Steve Norton

Obviously, our objective is to avoid that.

Operator

Your next question comes from the line of Harvey Poppel with PopTech. LPE.

Harvey Poppel – PopTech. LPE.

I am trying to be very objective about the situations. It is difficult having been there at one point, couple of years back as the largest share holder in the company. As I look at the outlook and it would seem to me, if one looks at the two extremes, which we sell the company or sizeable divestitures versus raising money and going forward as the entity is today. It seems to me that the latter alternative just does not have any basis of attraction, given what you were saying about the state of the market, about the absence of any remarks about your ability to pick up revenue and still obviously a large GAAP, using the calculations you mentioned between the results of the reduction in force and the need to break even point. It is just seems that raising cash at this point would not in at of it itself, even a very large sum get you out of the hole you are in. Unless, there will be a dramatic change in the market, which I do not think an investor or investors would be counting on. So, that is just an observation, I do not know if you want to comment on that at all.

Steve Norton

Well, Harvery since it is an observation and I probably will not really to comment in detail, but an interesting market at the end. I think that with our technology and our products and combined with this new offering we came out with. Hopefully we could get some of these major distractions behind us that have nothing to do with our operations and we can generate some liquidity, I think this could be a growth market and a very attracted market to be in. Beyond that, I am not going to comment on your observations.

Harvey Poppel – PopTech. LPE.

Okay, let met shift gears, on the Teleradiology initiative, is there someway to monetize that in the nearer term, rather than just the ramped up of revenues and their ordinary course of business.

Steve Norton

Well, Harvey again that goes down to the strategic options, as you can imagine, we have said we are looking at all of them. We believe there is a lot of growth opportunity in the Teleradiology business. There is a lot of interest, I do not think we have talked to very many of our customers about this opportunity that do not have an interest in it, there is a tremendous amount of interests, it is a balancing as to what strategy we will take. We believe we can grow the business if we can find the band to address in the time due up to invest that.

Harvey Poppel – PopTech. LPE.

Are you marketing the Teleradiology capability on the Cedara side, the OEM side?

Steve Norton

It primarily, focuses on the imaging center market, which is primarily in the North American Merge Healthcare business, the direct business. However, as Ken mentioned in his scripted comments, there is a Cedara customer that we are working very closely with that has a little bit of a unique business that could very much be interested in a Teleradiology type offering.

Operator

Your next question comes from the line of Bill Dezellem with Tieton Capital.

Bill Dezellem – Tieton Capital

We have a group of questions, first of all, may we start with the insurance carriers and what is the ballpark dollar amount of historic legal fees that you are looking for them to pay for during the next few weeks and what is your current digest, where the ongoing quarterly payment will be from them?

Steve Norton

Radically, for the historical we said in the past that to date actually the first restructuring, I believe, including all the restatement, accounting fees, all the legal fees incurred to date were somewhere in the $ 68 million range. Obviously, we continued to incur some costs. The legal cases, that are also going on now are actually in a pretty quiet mode. There is not a lot of activity, we are hoping that it stays that way. With regards to the amount of cash that we could expect to get from them that is really a $60 million question. We are working very closely with them, trying to get it in hand, we are hoping that we will make some progress here very shortly and as soon as we do we will update everyone on that fact, but to project or anticipate how much they are going to cover and when they are going to cover it is outside of my ability to look in the crystal ball.

Bill Dezellem – Tieton Capital

And, then shifting to the AMIA business, what was the loss or income generated from that business in the first nine months of 2007?

Steve Norton

We break out our business units on a revenue basis only, but the costs are quite integrated and we do not have the ability to break out profitability or loss by individual business units.

Bill Dezellem – Tieton Capital

The dollar amount of cash maybe arranged or cash that would flow into the business if you were to spend that business off as you referenced in your release?

Steve Norton

We are not a position to have that discussion it is obviously something that we are looking at. We have not entered to any agreements or anything. So, when that happens we will inform everyone, where at this point it is difficult to say.

Bill Dezellem – Tieton Capital

This maybe another one of those questions that it is difficult to answer right now, but in addition to the AMIA business, do you have other asset that you feel that you could sell to help bridge the gap between here and the company reaching profitability?

Steve Norton

As you know, we have a lot of assets. There is a variety of things. We have investments in certain of our customers. We have tremendous amounts of assets in the electrical property area. We got patents, we have got a host of software; we got business lines. There are all kinds of assets that could potentially be sold, obviously, in some cases, some of those assets are more instrumental to us on a go-forward basis, but understand that we are in a process of looking which if any those will be appropriate to try to sell, if there is anything at all.

Bill Dezellem – Tieton Capital

And, on that note, there was a new line item on the balance sheet, the $8.8 million in investments that are listed. Would you please detail what those are and to what degree those could be saleable?

Steve Norton

Yes, that is what I was referring to you briefly, earlier it is a largely the investments in our customers. Primarily, in the Cedara business, when we entered into relationships with some of our customers, some of the smaller customers we sometimes take on our ownership interest in their company and majority of that investments is investment in several entities that our customers of Cedara.

In most instances those companies are not large. They are not publicly traded, so the ability to liquidate some of those assets is somewhat restricted, but as we said before, we are looking on all options and that is one possibility, but there are also, obviously customers, when you have an investment or customer it is important to keep that investment and relationship going forward.

Bill Dezellem – Tieton Capital

In a good scenario, you would find yourself maybe with the ability to receive nearly a quarter’s worth of cash to operate the business from your insurance carriers. Another quarter from the investments that are on the balance sheet, in which case we give you enough time maybe to line up some other alternative and you could move forward.

Steve Norton

It is tough to respond to that because as I said, I do not know how much money is, if any we will get from our insurance carriers and if we attempted to sell any of those investments, again it would be difficult to say.

Ken Rardin

Well, even if we warrant, we are not saying we are going to sell assets. Also we are looking at financing alternatives.

Bill Dezellem – Tieton Capital

On the note, was there restatement that you have now completed as of yesterday? Was that a pre-requisite to some of the financing alternatives that presumably you have been discussing with external parties?

Steve Norton

We are not going to get into any details, as to what pre-requisites are for doing getting cash or exactly what we are doing. As a matter a fact, the third quarter was not a restatement, the filing of the 10-Q yesterday was not a restatement, the second quarter was not a restatement. The only thing we restated was the 2006 10-K and the first quarter 10-Q. The second quarter Q delayed and the third quarter was delayed but either the second or third quarter were actually restatements.

Bill Dezellem – Tieton Capital

I stand corrected here, I missed both so basically, becoming current with the filings, we are wondering if that was a pre-requisite of before some of your external parties with -entertain moving forward.

Steve Norton

I am not in the position to be able to talk about that.

Bill Dezellem – Tieton Capital

Okay, and one final question for you is, relative to the fourth quarter, given your comments about the market place, would it be fair to assume that bookings in the fourth quarter will probably somewhat similar to what they were in the second and third quarters?

Steve Norton

We have addressed that with the previous question and we are really not going talk about what the fourth quarter bookings were, until we have our Fourth Quarter Conference Call, which will hopefully be sometime in mid-March.

Operator

You have a follow-up question comes from Bret Jones with Leerink Swann.

Bret Jones – Leerink Swann

Just one quick clean-up question here, I was wondering if you could break the impairment charge out, as far as what is in the amortization, the cost gets sold and how much is in the D&A line below?

Steve Norton

In the D&A line and the cost it sold, it was about $4.2 million and I think the D& A line in operating expenses was almost the same number from up $4.2 million.

Operator

You have a follow-up question from Richard Close with Jeffries & Co.

Richard Close – Jeffries & Co.

The $4.3 million in Merge North America service and maintenance revenue, Steve can you give us some sort of feel of how much is that is service versus maintenance?

Steve Norton

Which $4.3 million are you talking about?

Richard Close – Jeffries & Co.

4355, it is the Merge North America service and maintenance revenue border.

Steve Norton

Merge North America maintenance, a good portion of that is maintenance. There is probably, I would say, 15% to 20% is professional services and the rest would be actual maintenance.

Operator

You have a follow-up question from Tom Isenberg with Open Road Partners.

Thomas Isenberg - Open Road Partners

You are attempting to get money from the D&O - carriers for various costs and legal costs. What about the shareholder law suits against the company? As the stock prices come down and the missed statements and all, probably you are going to owe some money there and I am wondering a) how those suits are gong and b) how much you anticipate having to pay for those?

Steve Norton

Three cases that are outstanding, there is the derivative law suit, which is against some of the former Executive Officers and some of the current board members. There is also a class action law suit and then there is the SEC action. The derivative law suit and the class action suit are both litigation law suits that are typically subjected to our cover D&O claim, so if they are covered all by the insurance and there is a settlement on those claims, then the company would not have to pay anything other than whatever the insurance carrier would not cover.

Operator

You have a follow-up question from Bill Dezellem with Tieton Capital

Bill Dezellem – Tieton Capital

Few follow-ups relative to the business itself, assuming that you can work your way through the financing side of the equation, would you please discuss the software delays, I think you referenced them in your comments, but they were also highlighted in the 10-Q that had limited your ability or delayed your ability to recognize some revenue with customers. Would you discuss what those delays were and to what degree those delays, I guess the software has now been developed?

Steve Norton

I would say, probably most of those have to do with the RIS/PACS MX product, we brought out in April. We brought that out and released for and there were some updates that we had to make to that and we called release 4.1 and 4.2 and there was revenue tied to the delivery of those releases and those releases were delayed.

Bill Dezellem – Tieton Capital

And, the 4.1 and 4.2, those were brought out when?

Steve Norton

4.1 came out, probably June – July time frame and 4.2 is just coming out now.

Bill Dezellem – Tieton Capital

Basically, some of the revenue that you are were not able to previously recognize, now that 4.2 is coming out, you will be able to recognize, is that a correct interpretation?

Steve Norton

We should be able to recognizing some of that. We also have, depending on some of the professional services, so at least we will be able to start organizing it soon, yes.

Bill Dezellem – Tieton Capital

Relative to the Teleradiology business, given the strong potential that that business has, if you are able to gain construction, how quickly can you ramp new customers, once you turn that business on?

Steve Norton

Well it is a combination events get this minor software to install in our clients, what we should understand right now is, we are only focused on our install-base, where our RIS/PACS are installed. It would come to that install-base and qualify them install-base and break it into A, B and C prospects and the A prospects are the ones that are larger clients that had currently releases by our product, where we can easily install the TeleRead module and the ramp up is going to be conditioned in a couple of things.

One what types of study they want us to do in the volume and what is the delivery. From what we have looked at over the next several months we do not think ramping up is going to be much of an issue for us to a point of delivery, but it takes a little bit of time, because on the front end, these clients have to go through and understand the delivery, they have to look at the quality of it and we would wrap up a client over a period, probably 3 to 4 months to the level of business they would be willing to give us.

Bill Dezellem – Tieton Capital

Finally, it has been quite sometimes since you have updated this on the varying relationship with Cedara. Would you please provide an update with that?

Steve Norton

Well, we continue to work with their aim. As you know, we announced our project with them early in the year, in the area of the eye response the tumor tracking product and that was a very large contract. We continue to talk to talk to varying about other possibilities and other projects on the go-forward basis. At this point, the only major contract we are varying is that product we announced early in the year.

Ken Rardin

But that software product was delivered to the customer, so they do have the software that we ultimately will require to deliver to them.

Bill Dezellem – Tieton Capital

In terms of that relationship, is there any on-going revenue post-delivery of the software or what is the bulk of agreement and therefore, revenues for the delivery of that software.

Steve Norton

The revenue from that contract is specifically is actually spread out over a number of years, so the revenue from the actual delivery of the software, majority of that revenue will be recognized on a quarterly basis over next several years. There is a minimum commitment that they have on a quarterly basis, so they have to purchase at least a certain number of licenses every quarter. Anything over that amount, they have to sent forth, so the entire value of that contract would not be recognized until the fifth year when the contract is completed.

Bill Dezellem – Tieton Capital

What is your initial perception of how varying in sales of that products are going to, it sound like that ultimately is going to lead to lack for Cedara.

Steve Norton

Yes, it is in the very, very early stages and they are just in the process of talking to people, so it is way to really, to give any indications as to how successful it has or will be and that was known from the beginning, we did not expect to have significant volume early on.

Operator

There are no further questions at this time.

Steve Norton

Thank you operator, we appreciate everybody joining us for the day and we will talk to you sometime in March. Take care.

Operator

This concludes today’s Merge Healthcare Conference Call, you may now disconnect.

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Source: Merge Technologies Inc. F3Q07 (Qtr End 09/30/07) Earnings Call Transcript
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