Digirad (DRAD)

Item 3. Legal Proceedings

In January 2005, a complaint was served on a physician, who is a DIS customer, his medical practice and two DIS technicians, individually and in their capacity as agents of the medical practice. The complaint was filed in the Circuit Court of the Fifth Judicial Circuit, County of Vermilion, Danville, Illinois and alleges negligence claims in connection with the death of a patient purportedly arising from the administration of a stress imaging test. The trial is set for September 2006. While the technicians deny the allegations and we will vigorously defend them in the matter, we cannot assure you that this matter will be resolved in their favor.

In September 2005, we received notice from the Nuclear Regulatory Commission of an apparent license violation relating to findings by the Commission’s Office of Investigation of (a) the deliberate submission of inaccurate information to us by a physician listed as an authorized user on our license; and (b) our submission of that information to the Commission, not knowing that the information was false. We attended a mediation in the matter. The mediation resulted in the declaration of a Level III violation and our agreement to implement certain corrective actions.

On February 17, 2006, we filed a complaint in the United States District Court for the Southern District of California against Gamma Medica—IDEAS alleging infringement of two patents, and seeking monetary damages and injunctive relief based thereon.

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Table of Contents

On February 17, 2006, nine former and present employees filed a complaint against us in the United States District Court, Northern California, Oakland Division, alleging wage and hour violations, wrongful termination and other tort claims. Plaintiffs seek compensatory and punitive damages and penalties. We have not yet responded to the complaint.

In the normal course of business, we have been and will likely continue to be subject to litigation or administrative proceedings incidental to our business, such as claims related to customer disputes, employment practices, wage and hour disputes, product liability, professional liability, commercial disputes, licensure restrictions or denials, warranty or patent infringement. Responding to litigation or administrative proceedings, regardless of whether they have merit, can be expensive and disruptive to normal business operations. As litigation and the administrative proceedings are inherently uncertain, we cannot predict the outcome of such matters. We can provide no assurance that the ultimate outcome, either individually or in the aggregate, will not have a material adverse effect on our business or financial results.

Other than the immediately preceding discussion, we are not currently a party to any other material legal proceedings.

ITEM 1. LEGAL PROCEEDINGS

In January 2005, a complaint was served on a DIS customer physician, his medical practice and two DIS technicians, individually, and in their capacity as agents of the medical practice.  The complaint was filed in the Circuit Court of the Fifth Judicial Circuit, County of Vermilion, Danville, Illinois and alleges negligence claims in connection with the death of a patient purportedly arising from the administration of a stress imaging test.  We have tendered the matter to the physician practice for indemnification and defense pursuant to our contract with the practice.  While the technicians deny the allegations and we will vigorously defend them in the matter, we cannot assure you that this matter will be resolved in their favor.

In September 2005, we received notice from the Nuclear Regulatory Commission of an apparent license violation regarding findings by the Commission’s Office of Investigation of (a) the deliberate submission of inaccurate information to us by a physician listed as an authorized user on our license; and (b) our submission of that information to the Commission, not knowing that the information was false.  We have agreed to attend a mediation in the matter.  The mediation could result in an agreement by us to pay certain fines and implement corrective action.  An unsuccessful mediation could result in enforcement action, including the imposition of fines and restrictions on or conditions to our license.

In the normal course of business, we have been and will likely continue to be subject to litigation incidental to our business, such as claims related to customer disputes, employment practices, product liability, warranty or patent infringement. Responding to litigation, regardless of whether it has merit, can be expensive and disruptive to normal business operations. We dispute the merits of all such current claims and plan to vigorously defend against them. However, as litigation is inherently uncertain, we cannot predict the outcome of such matters. We can provide no assurance that the

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On November 18, 2004, we received a notice of violation from the Maryland Department of the Environment, or Department, relating to our radioactive materials license.   The notice alleges violations related primarily to record-keeping and the failure to follow certain operating protocols.  We responded to the notice and then participated in a licensee management enforcement conference conducted by the Department in January 2005.  We have instituted corrective actions and made a supplemental submission to the Department in February.    In May 2005, the Department has accepted our supplemental response, and the matter is closed.  In January 2005, a complaint was served on a DIS customer physician, his medical practice and two DIS technicians, individually, and in their capacity as agents of the medical practice.  The complaint was filed in the Circuit Court of the Fifth Judicial Circuit, County of Vermilion, Danville, Illinois and alleges negligence claims in connection with the death of a patient purportedly arising from the administration of a stress imaging test.  We have tendered the matter to the physician practice for indemnification and defense pursuant to our contract with the practice.  While the technicians deny the allegations and we will vigorously defend them in the matter, we cannot assure you that this matter will be resolved in their favor.

In the normal course of business, we have been and will likely continue to be subject to routine litigation incidental to our business, such as claims related to customer disputes, employment practices, product liability, warranty or patent infringement. Responding to litigation, regardless of whether it has merit, can be expensive and disruptive to normal business operations. We dispute the merits of all such current claims and plan to vigorously defend against them. However, as litigation is inherently uncertain, we cannot predict the outcome of such matters. We can provide no assurance that the ultimate outcome, either individually or in the aggregate, will not have a material adverse effect on our financial statements.

On November 18, 2004, we received a notice of violation from the Maryland Department of the Environment, or Department, relating to our radioactive materials license.   The notice alleges violations related primarily to record-keeping and the failure to follow certain operating protocols.  We responded to the notice and then participated in a licensee management enforcement conference conducted by the Department in January 2005.  We have instituted corrective actions and made a supplemental submission to the Department in February.   If the Department concludes that corrective actions are not adequate, it could take escalated enforcement action, including the imposition of civil penalties of up to $10,000 per violation per day, or the modification, suspension or revocation of our license in Maryland.  While we believe we have fully addressed each of the Department’s concerns, we cannot assure you that this matter will be resolved in our favor.

In January 2005, a complaint was served on a DIS customer physician, his medical practice and two DIS technicians, individually, and in their capacity as agents of the medical practice.  The complaint was filed in the Circuit Court of the Fifth Judicial Circuit, County of Vermilion, Danville, Illinois and alleges negligence claims in connection with the death of a patient purportedly arising from the administration of a stress imaging test.  We have tendered the matter to the physician practice for indemnification and defense pursuant to our contract with the practice.  While the technicians deny the allegations and we will vigorously defend them in the matter, we cannot assure you that this matter will be resolved in their favor.

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In January 2005, a complaint was served on a DIS customer physician, his medical practice and two DIS technicians, individually and in their capacity as agents of the medical practice.  The complaint was filed in the Circuit Court of the Fifth Judicial Circuit, County of Vermilion, Danville, Illinois and alleges negligence claims in connection with the death of a patient purportedly arising from the administration of a stress imaging test.  We have tendered the matter to the physician practice for indemnification and defense pursuant to our contract with the group.  While the technicians deny the allegations and we will vigorously defend them in the matter, if necessary, we cannot assure you that this matter will be resolved in their favor.

On November 18, 2004, we received a notice of violation from the Maryland Department of the Environment, or Department, relating to our radioactive materials license.   The notice alleges violations related primarily to record-keeping and the failure to follow certain operating protocols.  We responded to the notice and then participated in a licensee management enforcement conference conducted by the Department in January 2005.  We have instituted corrective actions and made a supplemental submission to the Department in February.   If the Department concludes that corrective actions are not adequate, it could take escalated enforcement action, including the imposition of civil penalties of up to $10,000 per violation per day, or the modification, suspension or revocation

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