707388--3/8/2006--DIGIRAD

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Risks Related to Our Business and Industry Our industry is highly competitive, and we often compete against large, well-established competitors that have significantly greater financial resources than we have. If the market for nuclear imaging cameras continues to decrease, or if we are not successful in expanding our market share or product and service offerings, our revenues will decline and our business will be harmed. Changes in laws, regulations, or coverage and reimbursement policies of third-party payors may adversely impact our ability to market and sell our products and services. A loss of key executives or failure to attract qualified managers, engineers and imaging technologists, or high employee attrition rates, could limit our growth and adversely affect our business. Our imaging systems and DIS services may become obsolete, and we may not be able to timely develop new products, product enhancements or services that will be accepted by the market. If our imaging systems and DIS services are not accepted by physicians or hospitals, we may be unable to develop a sustainable, profitable business. If we are unable to expand our DIS business, our growth rates could be significantly diminished and our business could be materially harmed. Because our imaging systems and DIS services are not widely diversified, a decrease in sales of our products and leasing services could seriously harm our business. If we experience problems with the technologies used in our imaging systems or if delivery of our DIS services is delayed, public perception of our products and service offerings could be harmed and we may lose customers and revenue. We are subject to the financial risks associated with providing services through our DIS business. Our manufacturing operations are highly dependent upon third-party suppliers, making us vulnerable to supply problems and price fluctuations, which could harm our business. We have limited marketing, sales and distribution capabilities. We are exposed to risks relating to product liability, product recalls, property damage and personal injury and death for which insurance coverage is expensive, limited and potentially inadequate, and our business may be negatively affected by insufficiently insured claims and increased insurance costs. If we choose to acquire new or complementary businesses, products or technologies instead of developing them ourselves, we may be unable to complete those acquisitions or to successfully integrate them in a cost-effective and non-disruptive manner. Our manufacturing operations and executive offices are located at a single facility that may be at risk from fire, earthquakes or other natural or man-made disasters or crises. Risks Related to Government Regulation We must be licensed to handle and use hazardous materials and may be liable for contamination or other harm caused by hazardous materials that we use. We spend considerable time and money complying with federal and state laws, regulations, and other rules, and, if we are unable to comply with such laws, regulations and other rules, we could face substantial penalties. Legislative or regulatory reform of the healthcare system may affect our ability to sell our products. Regulatory changes could have a negative impact on camera sales to and leases with hospitals desiring to use our cameras and services in their outpatient facilities. If we fail to comply with various licensure or certification laws, regulations or standards, we may be subject to civil, criminal and/or administrative penalties, which would adversely affect our operations. Our products are subject to reporting requirements and recalls even after receiving FDA clearance or approval, which could harm our reputation, business and financial results. If we fail to obtain, or are significantly delayed in obtaining, FDA or foreign regulatory clearances or approvals for future products or product enhancements, or if we or our third party contractors fail to comply with FDA s Quality System Regulation, or the quality regulations of foreign governments, our ability to market and distribute our products will suffer. Modifications to our products may require new 510(k) clearances or pre-market approvals, or may require us to cease marketing or recall the modified products until clearances are obtained. Risks Related to Our Financial Results and Need for Financing Our quarterly and annual financial results are difficult to predict and are likely to fluctuate significantly from period to period because our business prospects are uncertain and our DIS leasing services business is seasonal. We have incurred significant and recurring operating losses since our inception in 1985 and we expect to incur such losses and increased operating expenses in the near term. The sales cycle for our gamma cameras is typically lengthy, which may result in significant fluctuations in our revenue. Our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms, if at all. Risks Related to Our Intellectual Property and Potential Litigation Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain. The medical device industry is characterized by patent litigation and we could become subject to litigation that could be costly, result in the diversion of our management s time and efforts, and require us to pay damages. We may be subject to lawsuits and actions brought by our employees. We rely significantly on a license agreement with Segami Corporation for imaging processing software for our digital gamma camera, and the loss of the license could result in delivery delays, loss of customers and loss of revenue. We may be subject to damages resulting from claims that we, or our employees, have wrongfully used or disclosed alleged trade secrets of their former employers. Risks Related to the Securities Markets and Ownership of Our Common Stock Our stock price may be volatile. Future sales of our common stock may cause our stock price to decline. Our common stock has been publicly traded for a short time and an active trading market may not be sustained. Anti-takeover provisions in our organizational documents, our Stockholders Rights Plan and Delaware law may prevent or delay removal of current management or a change in control. If our officers, directors and principal stockholders choose to act together, they may be able to control our management and operations, acting in their best interests and not in the best interests of other stockholders.

Full 10-K form ▸

707388--3/8/2006--DIGIRAD_CORP