Based on industry data, more than 500 million imaging procedures were performed in the U.S. in 2003, producing as much as 12.5 billion megabytes of data. Healthcare providers need digital infrastructure, storage and image management capabilities to alleviate the operating strain created by medical image records.

Frost & Sullivan estimates, in a 2004 report, that the total U.S. medical imaging market, including capital equipment and technology, will reach $12.6 billion in 2004. They report that information technology spending associated with medical imaging accounted for approximately 15% of the total medical imaging market in 2003 and estimate that it will grow at an average compound annual growth rate of 15% from 2002 through 2008. A survey conducted by the Health Financial Management Association found that 71% of U.S. hospitals anticipate making capital expenditures for digital radiography systems in the next five years.

The need to improve clinical care and eliminate inefficiencies in existing paper-based methods, including film-based image management, continues to drive investment in clinical information technology. The federal government recently announced several initiatives to accelerate information technology adoption rates within the health care system, including the Presidential appointment of a national health care information technology office and a recommitment to the President’s Information Technology Advisory Committee. The health care information technology market continues to grow more rapidly than other segments of the technology industry, according to a February 2004 release from Sheldon I. Dorenfest & Associates. Dorenfest estimates that health care information technology spending amounted to $23.6 billion in 2003 and will increase to $30.5 billion by 2006.

The Company’s solution includes three principal software components: UltraVisual, UltraStructure and UltraConnect.

UltraVisual is the Company’s suite of software tools for the advanced visualization and analysis of digital medical images by physicians and medical professionals. The Company’s acquired the software technology underlying UltraVisual when it merged with Ultravisual Medical Systems Corporation in May 2003. UltraVisual components include graphics and image processing modules that present information to physicians and medical professionals using relevant multi-specialty tools through a dynamic user interface. Physicians can manipulate 2D and 3D image-related content in a variety of ways including organization, rotation, inversion, magnification and enhancement of images in a collaborative environment for sharing findings with other physicians or medical professionals. UltraVisual helps physicians better visualize and understand internal anatomic structure and pathology.

UltraStructure is the Company’s image archival and distribution management software. UltraStructure supports the DICOM standard for digital medical images enabling a high level of scalability that facilitates fast, efficient access to storage and retrieval of such images in enterprise applications. UltraStructure includes auto-routing and predictive capabilities that improve workflow in a clinical environment by performing time intensive tasks in anticipation of their need, thereby minimizing network traffic and facilitating responsiveness across the enterprise.

Cost of revenue increased by $9.2 million, or 79.1%, from $11.6 million for the nine months ended September 30, 2003 to $20.8 million for the nine months ended September 30, 2004.

Gross profit increased from 17.6% of total revenue for the nine months ended September 30, 2003 to 29.6% of total revenue for the nine months ended September 30, 2004.

Research and development expenses increased by $0.7 million, or 23.3%, from $3.0 million for the nine months ended September 30, 2003 to $3.7 million for the nine months ended September 30, 2004.

Operating loss decreased by $1.2 million, or 14.1%, from $8.8 million for the nine months ended September 30, 2003 to $7.6 million for the nine months ended September 30, 2004.