<Page>

    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 5, 2001


                                                      REGISTRATION NO. 333-68256

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 

                                AMENDMENT NO. 1
                                       TO
                                    FORM S-1

 
                             REGISTRATION STATEMENT
 
                                     UNDER
 
                           THE SECURITIES ACT OF 1933
                            ------------------------
 
                              DIGIRAD CORPORATION
 
             (Exact Name of Registrant as Specified in its Charter)
 

<Table>
<S>                                       <C>                                  <C>
             DELAWARE                                  3845                                33-0145723
  (State or Other Jurisdiction of          (Primary Standard Industrial                 (I.R.S. Employer
  Incorporation or Organization)           Classification Code Number)               Identification Number)
</Table>

 
                           --------------------------
 

                                9350 TRADE PLACE
                        SAN DIEGO, CALIFORNIA 92126-6334
                                 (858) 578-5300

 
  (Address, Including Zip Code, and Telephone Number, Including Area Code, of
                   Registrant's Principal Executive Offices)
 
                           --------------------------
 
                              R. SCOTT HUENNEKENS
                            CHIEF EXECUTIVE OFFICER
                              DIGIRAD CORPORATION
                                9350 TRADE PLACE
                        SAN DIEGO, CALIFORNIA 92126-6334
                                 (858) 578-5300
 
 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
                             of Agent for Service)
 
                           --------------------------
 
                                   COPIES TO:
 


<Table>
<S>                                                   <C>
           MARTIN C. NICHOLS, ESQ.                               J. VAUGHAN CURTIS, ESQ.
       BROBECK, PHLEGER & HARRISON LLP                              ALSTON & BIRD LLP
             12390 EL CAMINO REAL                                     90 PARK AVENUE
         SAN DIEGO, CALIFORNIA 92130                             NEW YORK, NEW YORK 10016
                (858) 720-2500                                        (212) 210-9511
</Table>


 
                           --------------------------
 
        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
 
                           --------------------------
 
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
 
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
 

If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. / /

 
                           --------------------------
 
    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<Page>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
 TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
 SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<Page>

PRELIMINARY PROSPECTUS           SUBJECT TO COMPLETION           OCTOBER 5, 2001

 
--------------------------------------------------------------------------------
 
           Shares
 
[LOGO]
 
DIGIRAD CORPORATION
Common Stock
 
----------------------------------------------------------------------
 
This is our initial public offering of shares of our common stock. No public
market currently exists for our common stock.
 
We currently anticipate the initial public offering price to be between $   and
$   per share. We have applied to have our common stock approved for quotation
on the Nasdaq National Market under the symbol "DRAD."
 
BEFORE BUYING ANY SHARES, YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF
INVESTING IN OUR COMMON STOCK IN "RISK FACTORS" BEGINNING ON PAGE 6.
 
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
 

<Table>
<Caption>
                                                              PER SHARE      TOTAL
<S>                                                           <C>         <C>
-------------------------------------------------------------------------------------
Public offering price                                          $          $
-------------------------------------------------------------------------------------
Underwriting discounts and commissions                         $          $
-------------------------------------------------------------------------------------
Proceeds, before expenses, to us                               $          $
-------------------------------------------------------------------------------------
</Table>

 
The underwriters may also purchase up to       shares of common stock from us at
the public offering price, less the underwriting discounts and commissions,
within 30 days from the date of this prospectus. If the underwriters exercise
the option in full, the total underwriting discounts and commissions will be
$  , and our total proceeds before expenses will be $          .
 
The underwriters are offering the common shares as set forth under
"Underwriting." Delivery of the shares will be made on or about       , 2001.
 
UBS WARBURG                                         FIRST UNION SECURITIES, INC.
 
------------------------------------------------------------
 
                  The date of this prospectus is       , 2001.
<Page>
                                  MIDDLE TOP:
 
              The words "Charting the Future of Nuclear Medicine."
 

<Table>
<S>                                            <C>
                  TOP LEFT:                                      TOP RIGHT:
  Graphic: Photo of technician working at a    Graphic: Photo of a DIGIRAD-TM- mobile nuclear
            wire-bonding machine.              imaging services unit with technician standing
                                                 between a Digirad SPECTour(SM) Chair and a
                                                 Digirad Imaging acquisition and processing
                                                system in front of a van bearing the Digirad
                                                          Imaging Solutions logo.
 
                 CENTER LEFT:                                  CENTER RIGHT:
    Graphic: Photo showing nuclear imaging       Graphic: Photo of computer screen showing
 procedure being performed on patient using a  vertical, horizontal and short access fuse of
DIGIRAD-TM- acquisition and processing system           the heart's left ventricle.
      and a DIGIRAD SPECTour(SM) Chair.
 
                                                               BOTTOM RIGHT:
                                                  Graphic: Photo of a DIGIRAD-TM- detector
                                                                  module.
</Table>

 
                                 BOTTOM MIDDLE:
 
                                 DIGIRAD LOGO.
<Page>
--------------------------------------------------------------------------------
 
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with any other information. We are offering
to sell, and seeking offers to buy, our common shares only in jurisdictions
where these offers and sales are permitted. The information in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
the delivery of this prospectus or of any sale of our common stock.
 
TABLE OF CONTENTS
--------------------------------------------------------------------------------
 


<Table>
<S>                                      <C>
Prospectus summary.....................         1
 
The offering...........................         4
 
Summary financial and operating data...         5
 
Risk factors...........................         6
 
Forward-looking information............        19
 
Market and industry data and
  forecasts............................        19
 
Use of proceeds........................        20
 
Dividend policy........................        20
 
Capitalization.........................        21
 
Dilution...............................        23
 
Selected historical financial and
  operating data.......................        25
 

Management's discussion and analysis of
  financial condition and results of
  operations...........................        27
 
Business...............................        35
 
Management.............................        57
 
Certain relationships and related
  transactions.........................        68
 
Principal stockholders.................        71
 
Description of capital stock...........        73
 
Shares eligible for future sale........        78
 
Material United States federal tax
  consequences to non-United States
  holders of common stock..............        80
 
Underwriting...........................        83
 
Legal matters..........................        85
 
Experts................................        85
 
Where you can find more information....        85
 
Index to consolidated financial
  statements...........................       F-1
</Table>


 
Through and including       , 2001 (the 25th day after commencement of this
offering), federal securities law may require all dealers selling our common
stock, whether or not participating in this offering, to deliver a prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a prospectus when acting as an underwriter and with respect to unsold allotments
or subscriptions.
 
We have filed applications for federal trademark registrations and claim rights
in 2020TC Imager(TM), NOTEBOOK IMAGER(TM), FLEXIMAGING(SM), SPECTour(TM),
DIGISPECT(SM), DIGIRAD(TM), DIGIRAD (and design)(TM) and DIGIRAD IMAGING
SOLUTIONS(SM). This prospectus may also refer to trade names and trademarks of
other companies.
 
As used in this prospectus, references to "we," "our," "us" and Digirad refer to
Digirad Corporation and its subsidiaries, unless the context otherwise requires.
<Page>

Prospectus summary
 
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, especially the risks of investing
in shares of our common stock, which we discuss under the heading "Risk factors"
beginning on page 6, and the financial statements and related notes before
making an investment decision.
 
OVERVIEW
 

We are the first and only company to have developed and commercialized a
solid-state, digital gamma camera. A gamma camera is the preferred technology
used in nuclear imaging. Nuclear imaging offers the ability to non-invasively
measure physiological activity, including blood flow and organ function. We
believe that our technology will allow us to become a leading provider of gamma
cameras and mobile nuclear cardiac imaging services. Our patented solid-state
camera offers many advantages over a conventional vacuum tube camera, such as
smaller size, increased mobility, increased durability, improved image quality,
expanded clinical applications and enhanced patient comfort. All other gamma
cameras on the market currently use conventional vacuum tube technology. We
believe the features and benefits of our technology will encourage healthcare
providers to choose our camera over conventional cameras for both initial and
replacement purchases. In addition, because of our camera's increased mobility
and durability, we believe it is ideally suited for use in a mobile imaging
services application that has not been widely available until now. We are
initially focusing on the nuclear cardiology segment of the nuclear imaging
market, which is the largest and fastest growing segment of that market.

 

Our proprietary technology allows for both a significant reduction in the size
of a gamma camera and a significant improvement in spatial resolution, which is
a measurement of the quality of the image produced. Conventional gamma camera
photo-detectors are approximately four inches in height. Our photo-detectors are
only 0.012 inches high, providing an approximate 350-to-1 reduction in detector
size that makes the camera both thinner and lighter. While conventional cameras
use an average calculation to approximate the location of the gamma rays used to
create the image, our cameras determine the precise location of these gamma
rays. This improves spatial resolution and allows our camera to offer a
significant improvement in image quality over the conventional vacuum tube
technology.

 
We are currently addressing the rapidly growing nuclear cardiology market in the
following two ways:
 
-   NUCLEAR CAMERA SALES--We are selling our camera and related products to
    physician offices, imaging centers, hospitals and research laboratories,
    thus providing customers with a technologically advanced alternative to
    conventional vacuum tube gamma cameras.
 
-   MOBILE NUCLEAR CARDIAC IMAGING SERVICES--We are also providing mobile
    nuclear imaging services, as described in this prospectus, to physician
    offices, including cardiology and internal medicine practices. Our turn-key
    mobile imaging solution provides on-site access to all the benefits of our
    advanced diagnostic imaging technology, without requiring customers to make
    an up-front payment, hire additional personnel, obtain regulatory approval
    or establish a dedicated nuclear imaging suite. Our service model enables
    physicians to capture the revenue that would have otherwise been lost
    because the patient was referred elsewhere. In addition, it provides us with
    a recurring revenue stream from the servicing of our customers on a routine
    basis.
 
We began commercial production of our first solid-state, digital gamma camera
product, marketed as the DIGIRAD-TM- 2020TC Imager-TM- camera, in January 2000
and shipped our first unit in March 2000. From our first shipment through
June 30, 2001, we had received orders for 117 cameras, 59 of which had been
shipped. We established our mobile nuclear cardiac imaging services operations
in the second half of 2000. As of June 30, 2001, we were providing nuclear
cardiac imaging services to approximately 101 physician offices in California,
Delaware, Florida, Indiana, Maryland, New Jersey,
 
                                                                               1
<Page>
North Carolina, Ohio and Pennsylvania. During the six month period ended
June 30, 2001, our mobile imaging services business performed approximately
6,900 imaging procedures.
 
INDUSTRY OVERVIEW
 
NUCLEAR IMAGING
 
Nuclear medicine is used primarily in cardiovascular, oncology and neurological
applications. Nuclear imaging offers the ability to non-invasively measure
varying degrees of physiological activity, including blood flow, organ function,
metabolic activity, biochemical activity, and other functional activity within
the body. According to a 2001 study by Frost & Sullivan, a leading marketing
consulting company, there were approximately 15.5 million nuclear imaging
procedures performed in the U.S. in 2000. We believe over 25 million procedures
were performed worldwide. The market consists of two primary technologies, gamma
cameras and dedicated positron emission tomography, or PET, machines. Frost &
Sullivan states that gamma cameras are currently the preferred choice for the
majority of nuclear medicine procedures. The most widely used type of gamma
camera is a single photon emission computed tomography, or SPECT, camera.
 
TRENDS IN NUCLEAR CARDIAC IMAGING
 
Nuclear cardiology is the largest and fastest growing segment of the nuclear
imaging market. Frost & Sullivan reports that of the 15.5 million nuclear
imaging procedures performed in the U.S. in 2000, 7.9 million, or 51%, were
cardiology related procedures. The nuclear cardiology procedure volume is
expected to grow by approximately 25% annually over the next 5 years.
Increasingly, a nuclear cardiac imaging procedure is the first non-invasive,
diagnostic imaging procedure performed on patients with suspected heart disease.
Given the clinical advantages of nuclear cardiac images, many payors are
requiring nuclear studies prior to the more invasive and expensive diagnostic
and therapeutic procedures.
 
Reasons for the rapid growth in nuclear cardiac imaging procedures include:
 
-   Valuable clinical information;
 
-   Cost-effectiveness;
 
-   Non-invasive nature;
 
-   Established reimbursement; and
 
-   An increase in heart disease.
 
Frost & Sullivan divides the nuclear cardiac imaging procedure market into four
segments: hospital in-patient, hospital out-patient, cardiology practices and
diagnostic imaging centers. Although a number of cardiology practices with more
than five cardiologists have incorporated nuclear medicine into their practice
setting, most nuclear cardiology procedures are currently referred to hospitals
and imaging centers, where the cardiologist loses clinical control and receives
minimal or no economic benefit.
 
DIGIRAD'S MARKET OPPORTUNITY
 
Our technology allows us to address the following two markets:
 
-   NUCLEAR CAMERA SALES--Frost & Sullivan projects that the U.S. gamma camera
    market for nuclear imaging will be approximately $325 million in 2001, and
    is expected to grow at an average annual rate of approximately 5% from 2001
    to 2007. We estimate that the non-U.S. gamma camera market is approximately
    $300 million. In addition, we estimate that the market for technical
    services is an additional 10% to 15% of a camera's purchase price per year
    over the life of the contract, which is typically 5 years.
 
2
<Page>
-   MOBILE NUCLEAR CARDIAC IMAGING SERVICES--We believe the market opportunity
    for our mobile nuclear imaging services business is approximately $2.6
    billion. This market size is based on our target market of procedures
    performed in hospital, outpatient facilities, diagnostic imaging centers,
    physician offices and the following:
 
           - A report by Frost & Sullivan that approximately 7.9 million nuclear
             cardiac imaging procedures were performed in the U.S. in 2000;
 
           - Frost & Sullivan's estimate, based on a more limited study, that
             approximately 56% of U.S. nuclear cardiac imaging procedures were
             performed in a hospital outpatient facility, diagnostic imaging
             center or physician office in 2000; and
 
           - Our average net revenue of approximately $600 per procedure.
 
Our proprietary technology enables physicians to perform office-based nuclear
imaging procedures that were previously referred elsewhere, with limited
disruption to their current practice. Therefore, we believe our solutions will
accelerate the transition of nuclear cardiac imaging procedures to non-hospital
sites, in particular cardiology and internal medicine practices.
 

THE DIGIRAD SYSTEM

 

Our proprietary technology has enabled us to develop a gamma camera with many
unique features. Some of the features of the DIGIRAD-TM- solid-state camera are
outlined below:

 

-   SMALLER SIZE--Our 425-pound camera and 350-pound SPECTour-TM- chair require
    only 7 feet by 9 feet of working space vs. a 1,500 to 5,000 pound vacuum
    tube SPECT camera that requires a dedicated room with reinforced floors;

 

-   INCREASED MOBILITY--The mobility of our camera facilitates our imaging
    services business as opposed to vacuum tube cameras that are typically
    permanently installed in hospitals or imaging centers;

 

-   INCREASED DURABILITY--Our camera is relatively insensitive to physical shock
    or temperature variations and should offer much greater reliability than a
    vacuum tube camera whose single scintillation crystal is easily damaged;

 

-   IMPROVED IMAGE QUALITY--Images on the perimeter of our detector heads are as
    clear as images at the center while the best image quality on a vacuum tube
    camera is obtained only in the center;

 

-   EXPANDED CLINICAL APPLICATIONS--Our smaller and lighter camera heads are
    more flexible than vacuum tube camera heads and can be used in multiple
    applications throughout the hospital; and

 
-   ENHANCED PATIENT COMFORT--With our camera, patients sit upright with their
    arms resting in front of them rather than having to lie and hold their arms
    above their head as vacuum tube cameras require.
 
OUR BUSINESS STRATEGY
 
Our goal is to rapidly expand our business and increase our revenues by offering
a complete nuclear imaging solution to physician offices, imaging centers,
hospitals and research laboratories. The key elements of our business strategy
include:
 
-   Leveraging our proprietary technology to increase sales of products and
    imaging services;
 
-   Aggressively targeting the growing nuclear cardiology market;
 
-   Expanding our integrated, direct sales force;
 
-   Leveraging our proprietary manufacturing processes to reduce costs and
    improve performance;
 
-   Expanding acceptance of additional clinical applications; and
 
-   Continuing technological development.
 
Our principal executive offices are located at 9350 Trade Place, San Diego, CA
92126-6334. Our telephone number is (858) 578-5300. We maintain a web site on
the Internet at www.digirad.com. Our web site, and the information contained
therein, is not a part of this prospectus.
                            ------------------------
 
                                                                               3
<Page>
The offering
 

<Table>
<S>                                            <C>
Common stock we are offering.................  shares
 
Common stock to be outstanding after this
  offering...................................  shares
 
Proposed Nasdaq National Market symbol.......  DRAD
 
Use of proceeds..............................  Repayment of approximately $5.7 million of
                                               outstanding debt and general corporate
                                               purposes, including product development,
                                               marketing, capital expenditures and working
                                               capital.
 
Risk factors.................................  Investing in our common stock involves
                                               significant risks. See "Risk factors."
</Table>

 
The total number of outstanding shares of our common stock includes:
 
-   4,526,474 shares of our common stock outstanding as of August 23, 2001; and
 
-   29,748,030 shares of common stock issuable upon the automatic conversion of
    all shares of preferred stock outstanding as of August 23, 2001 in
    connection with this offering.
 
The total number of outstanding shares of our common stock above does not
include:
 
-   the issuance of up to 5,952,426 shares of common stock upon the exercise of
    stock options outstanding as of August 23, 2001 at a weighted average
    exercise price of $0.64 per share;
 
-   the issuance of up to 603,578 shares of common stock upon the exercise of
    warrants outstanding as of August 23, 2001 at a weighted average exercise
    price of $2.59 per share, of which warrants to purchase 65,875 shares will
    expire if not exercised at the time of this offering and warrants to
    purchase 60,000 shares will expire if a consulting agreement is terminated
    before July 31, 2002;
 
-   the issuance of up to 250,000 shares of common stock, as well as additional
    shares of common stock issuable based upon future earnings results, as
    additional consideration in connection with our acquisitions of Nuclear
    Imaging Systems, Inc. and Florida Cardiology and Nuclear Medicine Group;
 
-   the issuance of up to 4,725,883 shares of common stock reserved for future
    issuance under our stock option plans; and
 
-   the issuance of 10,000 shares of common stock at fair market value for every
    three of our digital cameras sold by a consultant, up to a maximum of 40,000
    shares, and thereafter 1,500 shares of common stock at fair market value for
    each of our digital cameras sold by the consultant, in each case upon the
    exercise of warrants issuable to the consultant.
 
Unless we indicate otherwise, information throughout this prospectus reflects:
 
-   no exercise of the over-allotment option granted to the underwriters;
 
-   the automatic conversion of all outstanding shares of preferred stock into
    shares of common stock in connection with this offering; and
 
-   a one-for-       reverse stock split of our outstanding shares of common
    stock to be effected in connection with this offering.
 
4
<Page>
Summary financial and operating data
 
The following table summarizes our financial data and provides selected
operating data. The summary financial data for the years ended December 31,
1998, 1999, and 2000, are derived from our audited financial statements. We have
also included data from our unaudited financial statements for the six months
ended June 30, 2000 and 2001 and as of June 30, 2001. You should read this data
together with our financial statements and related notes included elsewhere in
this prospectus and the information under "Selected historical financial and
operating data" and "Management's discussion and analysis of financial condition
and results of operations."
 


<Table>
<Caption>
                                                                                                              SIX MONTHS ENDED
                                                                       YEARS ENDED DECEMBER 31,                   JUNE 30,
                                                                 ------------------------------------      ----------------------
STATEMENT OF OPERATIONS DATA:                                        1998          1999          2000          2000          2001
                                                                   (In thousands, except per share and selected operating data)
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>           <C>           <C>           <C>           <C>
Revenues:
  Products.................................................      $   340       $    284      $  5,815      $ 1,456       $ 9,802
  Imaging services.........................................           --             --         1,260           --         4,217
  Licensing and other......................................        1,581             --            --           --            --
                                                                 -------       --------      --------      -------       -------
    Total revenues.........................................        1,921            284         7,075        1,456        14,019
Cost of revenues:
  Products.................................................          388            265         9,834        3,602         6,438
  Imaging services.........................................           --             --           839           --         3,394
                                                                 -------       --------      --------      -------       -------
    Total cost of revenues.................................          388            265        10,673        3,602         9,832
                                                                 -------       --------      --------      -------       -------
Gross profit (loss)........................................        1,533             19        (3,598)      (2,146)        4,187
Operating expenses:
  Research and development.................................        5,426         10,063         2,372        1,083         1,327
  Sales and marketing......................................          623          1,455         3,586        1,291         4,028
  General and administrative...............................        2,533          1,967         2,878        1,072         2,899
  Amortization of intangible assets........................           --             --           209            3           315
  Stock-based compensation.................................           --             --           296           --         1,063
                                                                 -------       --------      --------      -------       -------
    Total operating expenses...............................        8,582         13,485         9,341        3,449         9,632
                                                                 -------       --------      --------      -------       -------
Loss from operations.......................................       (7,049)       (13,466)      (12,939)      (5,595)       (5,445)
Other income (expense), net................................          857            274          (537)         (97)         (401)
                                                                 -------       --------      --------      -------       -------
Net loss...................................................      $(6,192)      $(13,192)     $(13,476)     $(5,692)      $(5,846)
                                                                 =======       ========      ========      =======       =======
Net loss applicable to common stockholders.................      $(6,192)      $(13,192)     $(13,524)     $(5,692)      $(5,902)
                                                                 =======       ========      ========      =======       =======
Basic and diluted net loss per share(1):
  Historical...............................................      $ (1.87)      $  (3.90)     $  (3.61)     $ (1.65)      $ (1.35)
                                                                 =======       ========      ========      =======       =======
  Pro forma................................................                                  $  (0.53)                   $ (0.19)
                                                                                             ========                    =======
Shares used to compute basic and diluted net loss per
  share(1):
  Historical...............................................        3,306          3,381         3,745        3,455         4,366
                                                                 =======       ========      ========      =======       =======
  Pro forma................................................                                    25,474                     30,436
                                                                                             ========                    =======
SELECTED OPERATING DATA:
Product sales
  Number of gamma cameras sold to third parties............           --             --            23            6            36
Imaging services
  Number of imaging procedures performed...................           --             --             *           --         6,953
</Table>


 


<Table>
<Caption>
                                                                          AS OF JUNE 30, 2001
                                                              --------------------------------------------
                                                                                              PRO FORMA AS
BALANCE SHEET DATA:                                             ACTUAL     PRO FORMA(2)        ADJUSTED(3)
----------------------------------------------------------------------------------------------------------
<S>                                                           <C>        <C>              <C>
Cash and cash equivalents...................................  $  3,510      $11,920
Working capital.............................................  $  4,504      $12,914
Total assets................................................  $ 28,557      $36,967
Long-term debt..............................................  $  5,811      $ 5,811
Redeemable convertible preferred stock......................  $ 58,109      $    --
Total stockholders' equity (deficit)........................  $(48,111)     $18,408
</Table>


 
------------

(1) Please see Note 1 to our financial statements for an explanation of the
    method used to calculate the historical and pro forma net loss per share and
    the number of shares used in the computation of per share amounts.

 

(2) The pro forma balance sheet data give effect to the sale of 2,618,462 shares
    of Series F preferred stock in August 2001 and the automatic conversion of
    all shares of preferred stock outstanding as of August 23, 2001 into
    29,748,030 shares of common stock in connection with this offering.

 

(3) The pro forma as adjusted balance sheet data give effect to the sale of
                 shares of our common stock in this offering at an assumed
    initial public offering price of $                       per share and the
    application of the net proceeds to repay a portion of our outstanding
    indebtedness.

 
*  Not available because the methodology for tracking the number of procedures
    performed in 2000 under acquired customer contracts was not consistent with
    our current methodology.
 
                                                                               5
<Page>
--------------------------------------------------------------------------------
 

Risk factors
 
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING
RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING US AND OUR BUSINESS
BEFORE PURCHASING ANY OF THE COMMON STOCK BEING OFFERED. INVESTMENT IN OUR
COMMON STOCK INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE REGARDED AS
SPECULATIVE. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE
MATERIALLY HARMED, OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE
MATERIALLY AND ADVERSELY AFFECTED, AND THE MARKET PRICE OF OUR COMMON STOCK
COULD DECLINE AND YOU COULD LOSE ALL OR A PART OF YOUR INVESTMENT. THE
CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE
TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS
PROSPECTUS.
 
RISKS RELATING TO OUR BUSINESS
 
IF OUR SOLID-STATE, DIGITAL GAMMA CAMERA AND NUCLEAR IMAGING SERVICES ARE NOT
ACCEPTED BY PHYSICIANS OR OTHER HEALTHCARE PROVIDERS, WE MAY BE UNABLE TO
ACHIEVE PROFITABILITY.
 

Our solid-state, digital gamma camera technologies represent a new approach in
the nuclear imaging market, and we have sold our products only in limited
quantities. Our success in this market depends on whether potential customers
view our new technology as effective and economically beneficial. We do not know
the rate at which physicians or other healthcare providers will adopt our
products or imaging services, if at all, or the rate at which they will purchase
them in the future, if at all. There can be no assurances that we can attract
future customers on acceptable terms that will enable us to develop a
sustainable, profitable business. If third-party payors do not accept our
products or imaging services or deny adequate payment to physicians and other
healthcare providers using our products and services, this may adversely affect
acceptance of our products. Acceptance of our products and imaging services by
physicians, including physicians who do not currently use cardiac imaging
products, is essential to our success and may require us to overcome resistance
to a new technology for cardiac imaging services. Our failure to do any of these
things may prevent us from selling sufficient quantities of our products and
imaging services to be profitable.

 
WE HAVE RECENTLY INTRODUCED OUR PRODUCT INTO THE MARKETPLACE AND MAY NOT SUCCEED
OR BECOME PROFITABLE.
 

We have not been profitable since our inception. We have incurred substantial
costs to develop, introduce and enhance our solid-state, digital gamma camera.
As of June 30, 2001, we had an accumulated deficit of approximately
$51.0 million. We shipped our first product in March 2000. We expect to incur
substantial additional expenses in the future as we continue to conduct research
and development efforts on newer generation products and increase sales and
marketing efforts on our recently released, first generation products.
Furthermore, planned expansion of manufacturing operations and expansion in the
nuclear imaging services market will result in significant expenses over the
next several years that may not be offset by significant revenues. We expect
that a majority of our revenues for the near term and our ability to achieve
profitability will depend upon our ability to successfully market our
solid-state, digital gamma camera and our successful expansion into the nuclear
imaging services market. We will need to begin generating significant revenues
to achieve profitability. Due to our limited operating history, it is difficult
to predict when, if ever, we will be profitable and to evaluate our business or
prospects. Our business strategies, including our expansion in the nuclear
imaging services market, may not be successful and we may not be profitable in
any future period. Even if we do become profitable, we cannot ensure investors
that we can sustain or

 
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increase profitability on a quarterly or annual basis in the future. If our
revenues grow more slowly than anticipated, or if our operating expenses exceed
our expectations, our business will be adversely affected. You should consider
our business and prospects in light of the risks and uncertainties encountered
by new technology companies in evaluating whether to invest in our common stock.

 
WE MAY NOT HAVE THE RESOURCES REQUIRED TO SUCCESSFULLY COMPETE IN OUR HIGHLY
COMPETITIVE INDUSTRY, WHICH MAY MAKE IT DIFFICULT TO PENETRATE THE PRODUCT AND
SERVICES MARKETS.
 
The existing market for nuclear imaging products, including cardiac imaging, is
well established and intensely competitive. In addition, we are seeking to
develop new markets for our solid-state, digital gamma camera products. In
particular, we are working aggressively to further develop the mobile cardiac
imaging services market. Our failure to diversify our revenue streams by
successfully increasing both product sales and mobile imaging services could
cause significant volatility in our overall results. Competitive pressure may
make it difficult for us to acquire and retain customers and may require us to
reduce the price of our products and imaging services. Our primary competitors
have better name recognition, significantly greater financial resources and
existing relationships with some of our potential customers, among other
competitive advantages. Our competitors may be able to use their existing
relationships to discourage customers from purchasing our products and imaging
services. We expect competition to increase as potential and existing
competitors begin to enter these new markets or modify their existing products
and services to compete directly with ours. In addition, our competitors may be
able to devote greater resources to the development, promotion and sale of new
or existing products and services, thereby allowing them to respond more quickly
to new or emerging technologies and changes in customer requirements.
 
OUR PUBLIC PERCEPTION COULD BE HARMED IF WE EXPERIENCE TECHNICAL PROBLEMS WITH
THE NEW TECHNOLOGIES USED IN OUR CAMERAS OR IF SHIPMENTS OF OUR PRODUCTS ARE
DELAYED, WHICH WOULD CAUSE US TO LOSE CUSTOMERS AND REVENUES.
 

Our solid-state, digital gamma camera technologies have only recently been
introduced into the marketplace. As these technologies are increasingly used by
more customers, significant defects may emerge. In addition, if our cameras are
perceived as being difficult to use or causing discomfort to patients, our
public image may be impaired. Public perception may also be impaired if we fail
to deliver our products in a timely manner due to difficulties with our
suppliers and vendors or due to our inability to efficiently manufacture and
assemble products. A tarnished reputation could result in a loss of customers
and revenues even after any quality or delivery problems are resolved.
Additionally, we expect that problems or perceived problems with our products
could adversely impact the commercial success of our imaging services business.

 
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY RESULTS.
 
Our future operating results will depend on numerous factors, many of which we
do not control. Changes in any or all of these factors could cause our operating
results to fluctuate and increase the volatility of the market price of our
common stock. Some of these factors include:
 
-   demand for our products and our ability to meet such demand;
 
-   product and price competition;
 
-   changes in the costs of components;
 
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-   success of our sales and distribution channels;
 
-   successful development and commercialization of new and enhanced products on
    a timely basis;
 
-   timing of significant orders and shipments;
 
-   timing of and possible delay in our receiving approval for necessary
    regulatory licenses;
 
-   timing of new product introductions and product enhancements by us or our
    competitors; and
 
-   timing and magnitude of our expenditures.
 
Accordingly, we believe that quarterly sales and operating results may vary
significantly in the future and that period-to-period comparisons of our results
of operations are not necessarily meaningful and should not be relied upon as
indicators of future performance. We cannot assure you that our sales will
increase or be sustained in future periods or that we will be profitable in any
future period.
 
In addition, we experience seasonality in the service of our DIS customers. For
example, our study volumes typically decline from our second fiscal quarter to
our third fiscal quarter due to summer holidays and vacation schedules. We may
also experience declining study volumes in December due to holidays and in the
first quarter due to weather conditions in certain parts of the country. These
seasonal factors may lead to fluctuations in our quarterly operating results. It
is difficult for us to evaluate the degree to which the summer slowdown, winter
holiday variations and weather conditions may make our revenues unpredictable in
the future. We may not be able to reduce our expenses, including our debt
service obligations, quickly enough to respond to these declines in revenue,
which would make our business difficult to operate and would harm our financial
results. If this happens, the price of our common stock may decline.
 
OUR RELIANCE ON A LIMITED NUMBER OF CUSTOMERS MAY CAUSE OUR SALES TO BE
VOLATILE.
 
We currently have a small number of customers, whom we typically bill after the
delivery of our products and imaging services. As of June 30, 2001, we had
received orders for 117 cameras, 58 of which have not yet been delivered and
paid for, and we had signed contracts with 101 customers to use our mobile
imaging services. If these orders were to be cancelled, or our imaging service
customers stopped using our service or do not renew their service agreements
with us, our business would be harmed. Furthermore, in view of this small
customer base, our failure to gain additional customers, the loss of any current
customers or a significant reduction in the level of imaging services provided
to any one customer could harm our business, financial condition and results of
operations.
 
THE SALES CYCLE FOR OUR PRODUCTS IS TYPICALLY LENGTHY, CAUSING SIGNIFICANT
FLUCTUATIONS IN OUR REVENUE.
 
Our sales efforts for our cameras are dependent on the capital expenditures
budgets of our potential customers. Often our potential customers require a
significant amount of time to plan for major purchases, such as our camera. We
may expend substantial funds and management effort long before we actually sell
our products and with no assurance that we will ultimately be successful. Even
if we are successful in such sales, a long sales cycle makes it more difficult
for us to accurately evaluate and predict our sales and operating performance.
Our revenues may fluctuate significantly from quarter to quarter and any
shortfalls from estimates expected by securities or industry analysts could have
an immediate and significant adverse effect on our stock price.
 
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WE CURRENTLY MANUFACTURE OUR PRODUCTS IN LIMITED QUANTITIES AND HAVE LIMITED
SALES AND DISTRIBUTION CAPABILITIES.
 
We currently manufacture our products in limited quantities, and to become
profitable, we must manufacture our products in greater quantities. As we expand
production, we may encounter difficulties in obtaining adequate supplies of
components, additional employees and maintaining the high quality of our
products. We may be unable to expand production and accomplish these objectives
without incurring substantially increased costs, which may reduce our ability to
become profitable or reduce our profitability.
 
We have established a direct sales team, an independent distributor network in
the United States and Canada, and a corporate partner in Japan to sell our
products and imaging services both domestically and internationally. Our future
revenue growth will depend in large part on our success in maintaining and
expanding these sales and distribution channels, which may be an expensive and
time-consuming process. We are highly dependent upon the efforts of talented
sales employees in increasing our revenue. We face intense competition for
qualified sales employees and may be unable to attract and retain such
personnel, which would adversely affect our ability to expand and maintain our
distribution network. If we are unable to expand and maintain our direct sales
team or distribution network, we may be unable to sell enough of our products
and imaging services for our business to be profitable.
 
WE MAY BE HARMED BY HIGHER ENERGY COSTS AND INTERRUPTED POWER SUPPLIES RESULTING
FROM THE ELECTRICAL POWER SHORTAGES CURRENTLY AFFECTING CALIFORNIA.
 
Our corporate headquarters and manufacturing facilities are located in San
Diego, California. Electrical power is vital to our operations and we rely on a
continuous power supply to conduct our operations. California is in the midst of
a power crisis and has recently experienced significant power shortages. In the
event of an acute power shortage, the California system operator has on some
occasions implemented, and may in the future continue to implement, rolling
blackouts throughout California. If our energy costs substantially increase or
blackouts interrupt our power supply frequently or for more than a few days, we
may have to reduce or temporarily discontinue our normal operations. In
addition, the cost of our research and development efforts may increase because
of the disruption to our operations. Any such reduction or disruption of our
operations at our facilities could harm our business.
 
WE FACE RISKS IN OUR INTERNATIONAL MARKETS.
 
As we expand internationally, we will need to hire, train and retain qualified
personnel in countries where language, cultural or regulatory impediments may
exist. We cannot assure you that vendors, physicians or other involved parties
in foreign markets will accept our products, imaging services and business
practices. International revenues are subject to inherent risks, including:
 
-   costs of localizing product and service offerings for foreign markets;
 
-   difficulties in staffing and managing foreign operations;
 
-   reduced protection for intellectual property rights in some countries;
 
-   difficulties and delays in accounts receivable collection;
 
-   fluctuating currency exchange rates;
 
-   changes in regulatory requirements;
 
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-   burdens of complying with a wide variety of foreign laws and labor
    practices; and
 
-   conforming our business model to operate under government-run health care
    systems.
 
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH
COULD CAUSE US TO LOSE THOSE RIGHTS OR SUBJECT US TO INCREASED COSTS.
 
Our success and ability to compete depends on our licensed and
internally-developed technology. If we are unable to protect our proprietary
rights, we could face increased competition from our competitors or incur
increased costs. We protect our proprietary technology through a combination of
patent, copyright, trade secret and trademark law. We also enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to, and the distribution of,
our products, designs, documentation and other proprietary information. We
cannot be sure that our pending patent applications will result in issued
patents. In addition, our issued patents or pending applications may be
challenged or circumvented by our competitors. Despite our efforts to protect
our intellectual property rights, unauthorized parties may attempt to obtain and
use information or technologies, which we regard as proprietary. Policing
unauthorized use of our intellectual property will be difficult and we cannot be
certain that we will be able to prevent misappropriation of our technology,
particularly in countries where the laws may not protect our proprietary rights
as fully as in the United States.
 
OUR COMPETITORS MAY CLAIM OUR TECHNOLOGY OR PRODUCTS INFRINGE UPON THE
TECHNOLOGY COVERED BY THEIR PATENTS OR PATENT APPLICATIONS, WHICH COULD RESULT
IN THE LOSS OF OUR RIGHTS, SUBJECT US TO LIABILITY AND DIVERT MANAGEMENT'S
ATTENTION.
 
Many of our competitors in the nuclear imaging business hold issued patents and
have filed, or may file, patent applications. Any claims by our competitors that
we are infringing their technology, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, cause product shipment delays, require us to enter into
royalty or licensing agreements, prevent us from manufacturing or selling some
or all of our products, or result in our liability to one or more of these
competitors. If a third party makes a successful claim of patent infringement
against us, we may be unable to license the infringed or similar technology on
acceptable terms, if at all, which may prevent us from manufacturing or selling
our products. If we are forced to enter into license agreements for infringed
technology, royalties paid under these agreements may increase our costs to
manufacture our products. If we cannot raise the price of our products to
recover royalties that we have paid without losing customers, our financial
results would be negatively impacted.
 
WE RELY SIGNIFICANTLY ON THIRD-PARTY VENDORS TO MANUFACTURE COMPONENTS FOR OUR
SOLID-STATE, DIGITAL GAMMA CAMERAS, WHICH COULD RESULT IN DELIVERY DELAYS, LOSS
OF CUSTOMERS AND LOSS OF REVENUES.
 

We contract with a limited number of independent suppliers to produce components
that we use in the manufacture of our products. Specifically, we currently use
one vendor to supply the crystal arrays used in the manufacture of our gamma
camera. If this vendor experiences difficulty in the production of the crystal
arrays or in meeting our standards, we may have delays in the production of our
gamma camera. This vendor could experience financial, operational, production or
quality assurance difficulties or a catastrophic event that reduces or
interrupts delivery of crystal arrays to us. In addition, to our knowledge,
there are only three suppliers in the world who produce these crystal

 
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arrays. While we have established a second vendor source and are evaluating a
third source to meet our future requirements, establishing alternative
arrangements could take several months. If we are required to switch vendors,
the manufacture and delivery of our products could be interrupted for an
extended period of time and may cause the loss of both customers and revenue.
Deliveries from our current third-party vendor or any substitute vendor may also
be delayed because of the potential inability of these vendors to meet high
demand for their products from their other customers. We cannot guarantee that
alternative suppliers will be able to meet our future requirements or that
alternative sources will be available to us at favorable prices, if at all. Our
ability to manufacture and deliver products in a timely manner could be harmed
if these vendors fail to maintain an adequate supply of these crystal arrays.

 
OUR PRODUCTS MAY BECOME OBSOLETE, WHICH COULD CAUSE US TO LOSE CUSTOMERS OR
INCUR SUBSTANTIAL COSTS.
 
Our products could become obsolete or unmarketable if other products utilizing
new technologies are introduced by our competitors or new industry standards
emerge. If we are unable to react to these events we may lose customers and
revenues. To be successful, we will need to continually enhance our products and
to design, develop and market new products that successfully respond to any
competitive developments, all of which may be expensive or time consuming. Our
failure to do so could have a material adverse effect on our business, financial
condition and results of operations.
 
LOSS OF KEY EXECUTIVES AND FAILURE TO ATTRACT QUALIFIED MANAGERS, ENGINEERS AND
SALES PERSONS COULD LIMIT OUR GROWTH AND NEGATIVELY IMPACT OUR OPERATIONS.
 
Our future performance is dependent on the efforts of our key technical, sales
and managerial personnel and our ability to retain them, particularly R. Scott
Huennekens, Gary J.G. Atkinson, Richard L. Conwell, Robert E. Johnson, David M.
Sheehan and John F. Sheridan. Furthermore, our future success will depend in
part upon our ability to identify, hire and retain additional key management and
sales personnel, engineers and technicians. Given the intense competition for
such qualified personnel, there can be no assurance that we will be able to
continue to attract and retain the personnel necessary to develop our business.
Failure to attract and retain key personnel could have an adverse effect on our
business, financial condition and results of operations. We do not have any
employment agreements with any of our employees. We do not maintain key person
insurance on any of our employees.
 
IF WE BECOME SUBJECT TO PRODUCT LIABILITY OR WARRANTY CLAIMS, WE MAY EXPERIENCE
REDUCED DEMAND FOR OUR PRODUCTS OR BE REQUIRED TO PAY DAMAGES THAT EXCEED OUR
INSURANCE LIMITATIONS.
 

The sale and support of our products entails the risk of product liability or
warranty claims, such as those based on claims that the failure of one of our
products resulted in a misdiagnosis, among other issues. The medical instrument
industry in general has been subject to significant products liability
litigation. We may incur significant liability in the event of such litigation.
Although we maintain product liability insurance, we cannot be sure that this
coverage is adequate or that it will continue to be available on acceptable
terms, if at all. We also may face warranty exposure, which could adversely
affect our operating results. Any unforeseen warranty exposure or insufficient
insurance could harm our business, financial condition and results of
operations.

 
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WE MAY NOT BE ABLE TO ACHIEVE THE EXPECTED BENEFITS FROM ANY FUTURE ACQUISITIONS
WHICH WOULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 
Although we have no current plans for acquisitions, if we decide to acquire any
other business and cannot successfully integrate such future acquisitions, we
may not realize anticipated operating advantages and cost savings. The
integration of companies that have previously operated separately involves a
number of risks, including:
 
-   demands on management related to the increase in our size after an
    acquisition;
 
-   the diversion of our management's attention from the management of daily
    operations to the integration of operations;
 
-   difficulties in the assimilation and retention of employees;
 
-   potential adverse effects on operating results; and
 
-   challenges in retaining clients.
 
Successful integration of operations will depend upon our ability to manage
those operations and to eliminate redundant and excess costs. Because of
difficulties in combining operations, we may not be able to achieve the cost
savings and other related benefits that we would hope to achieve after the
completion of these acquisitions which could harm our financial condition and
results of operations.
 
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 use hazardous and radioactive materials in our research, development and
manufacturing processes and the provision of our imaging services and must be
licensed to handle such materials. We are currently licensed in all states in
which we operate, and there can be no assurances that we will be able to retain
these licenses indefinitely. In addition, we must become licensed in all states
in which we plan to expand. Obtaining these additional licenses is an expensive
and time consuming process, and in some cases we may not be able to obtain these
licenses at all. We are subject to federal, state and local regulation governing
the use, handling, storage and disposal of hazardous materials. We cannot
completely eliminate the risk of contamination or injury resulting from
hazardous materials and we may incur liability as a result of any contamination
or injury. We have incurred and may continue to incur expenses related to
compliance with environmental laws. Such future expenses or liability could have
a significant negative impact on our business, financial condition and results
of operations. Further, we cannot assure you that the cost of complying with
these laws and regulations will not increase materially in the future.

 
WE AND OUR CUSTOMERS DEPEND ON PAYMENTS FROM GOVERNMENT HEALTHCARE PROGRAMS AND
THIRD-PARTY PAYORS. ANY FUTURE REDUCTION IN THESE PAYMENTS COULD CAUSE US TO
LOSE CUSTOMERS AND REVENUES.
 
We expect that substantially all of our revenues in the foreseeable future will
be derived from the sale of products or the providing of imaging services in the
nuclear imaging market. Our imaging services model consists of two primary
delivery options. Under our first option, which we refer to as "mixed billing,"
we provide the technical component of nuclear imaging services and bill either
the physician or the patient's third party payor, such as Medicare. We also bill
the patient for any copayment. The
 
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physician performs and bills for the technical component, such as the
interpretation of the test. Under our second option, we lease cameras, related
equipment and technical personnel to physicians on a turn-key basis so that they
may deliver imaging services to their patients. The physician then bills
globally for both the technical and professional component. When we refer to
"imaging services" in this prospectus, we are referring both to our mixed
billing option and our leasing services option.
 
Our success in the foreseeable future depends directly upon the financial
success of the customers who either buy our cameras or use our imaging services,
and their continued demand for our products and imaging services. These
customers generally rely on third-party payors, principally federal Medicare,
and private health insurance plans, to pay for all or a portion of the cost of
imaging procedures. We also rely on these third-party payors for payment of the
technical services component provided as part of our Digirad Imaging Solutions
imaging services. Some third-party payors, including some state Medicaid
programs, currently do not cover our services, and it is possible that other
payors will adopt coverage restrictions that adversely affect us in the future.
We may be unable to sell our products or imaging services on a profitable basis
if third-party payors deny coverage or reduce current levels of payment.
 
Third-party payors continue to undertake efforts to contain or reduce healthcare
costs through various means, including the movement to managed care systems
where healthcare providers contract to provide comprehensive healthcare for a
fixed fee per patient. These efforts to reduce healthcare costs may make
third-party payors unwilling to reimburse patients or healthcare providers for
our imaging services or allow only specific providers to provide imaging
services, which would reduce demand for our imaging services, and in turn, our
products as well. To the extent that such efforts adversely affect the business,
financial conditions and profitability of our customers, our customers may be
less able to afford our products and our imaging services, which may cause our
sales to decrease.
 
COMPLIANCE WITH EXTENSIVE PRODUCT REGULATIONS COULD BE EXPENSIVE AND
TIME-CONSUMING AND ANY FAILURE TO COMPLY WITH THESE REGULATIONS COULD HARM OUR
ABILITY TO SELL AND MARKET OUR PRODUCTS AND IMAGING SERVICES.
 

U.S. and foreign regulatory agencies, including the United States Food and Drug
Administration, or the FDA, and comparable international agencies, govern the
testing, marketing and registration of new medical devices or modifications to
medical devices, in addition to regulating manufacturing practices, reporting,
labeling and record keeping procedures. The regulatory process makes it longer,
harder and more costly to bring our products to market, and we cannot assure you
that any of our future products will be approved. All of our planned services,
products and manufacturing activities, as well as the manufacturing activities
of third-party medical device manufacturers who supply components to us, are
subject to this regulation. We and such third-party manufacturers are or will be
required to:

 
-   undergo rigorous inspections by domestic and international agencies;
 
-   obtain the prior approval of these agencies before we can market and sell
    our products; and
 
-   satisfy content requirements for all of our sales and promotional materials.
 

Compliance with the regulations of these agencies may delay or prevent us from
introducing new or improved products, which could in turn affect our ability to
achieve or maintain a profitable level of sales. We may be subject to sanctions,
including monetary fines and criminal penalties, the temporary or permanent
suspension of operations, product recalls and marketing restrictions, if we fail
to comply with the laws and regulations pertaining to our business. Our
third-party component manufacturers may also be subject to the same sanctions
and, as a result, may be unable to supply components for our products. Any
failure to retain governmental approvals that we currently hold or obtain
additional

 
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similar approvals could prevent us from successfully marketing our technology
and could harm our operating results. Furthermore, changes in the applicable
governmental regulations could prevent further commercialization of our
technologies and harm our business.

 
Even if regulatory approval or clearance of a product is granted, regulatory
agencies could impose limitations on uses for which the product may be labeled
and promoted. Further, for a marketed product, its manufacturer and
manufacturing facilities are subject to periodic review and inspection. Later
discovery of problems with a product, manufacturer or facility may result in
restrictions on the product, manufacturer or facility, including withdrawal of
the product from the market or other enforcement actions.
 
WE WILL SPEND CONSIDERABLE TIME AND MONEY COMPLYING WITH FEDERAL AND STATE
REGULATIONS AND, IF WE ARE UNABLE TO FULLY COMPLY WITH SUCH REGULATIONS, WE
COULD FACE SUBSTANTIAL PENALTIES.
 
We are directly or indirectly through our clients subject to extensive
regulation by both the federal government and the states in which we conduct our
business. The laws that directly or indirectly affect our ability to operate our
business include, but are not limited to, the following:
 
-   the federal Medicare and Medicaid Anti-Kickback Law, which prohibits persons
    from soliciting, offering, receiving or providing remuneration, directly or
    indirectly, in cash or in kind, to induce either the referral of an
    individual, or furnishing or arranging for a good or service, for which
    payment may be made under federal healthcare programs such as the Medicare
    and Medicaid Programs;
 
-   the federal False Claims Act, which imposes civil and criminal liability on
    individuals and entities who submit, or cause to be submitted, false or
    fraudulent claims for payment to the government;
 
-   the federal Health Insurance Portability and Accountability Act of 1996,
    which prohibits executing a scheme to defraud any healthcare benefit
    program, including private payors;
 
-   the federal False Statements Statute, which prohibits knowingly and
    willfully falsifying, concealing or covering up a material fact or making
    any materially false statement in connection with the delivery of or payment
    for healthcare benefits, items or services;
 

-   the federal physician self-referral prohibition, commonly known as the Stark
    Law, which, in the absence of a statutory or regulatory exception, prohibits
    the referral of Medicare or Medicaid patients by a physician to an entity
    for the provision of certain designated healthcare services, if the
    physician or a member of the physician's immediate family has an ownership
    interest in, or a compensation arrangement with, the entity and also
    prohibits that entity from submitting a bill to a federal payor for services
    rendered pursuant to a prohibited referral;

 
-   the federal Food, Drug and Cosmetic Act, which regulates the sale,
    manufacture, administration and prescribing of drugs;
 
-   state law equivalents of the foregoing; and
 
-   state laws that prohibit the practice of medicine by non-physicians and
    fee-splitting arrangements between physicians and non-physicians.
 

If our operations are found to be in violation of any of the laws described
above or the other governmental regulations to which we or our clients are
subject, we may be subject to the applicable penalty associated with the
violation, including civil and criminal penalties, damages, fines and the
curtailment or restructuring of our operations. Any penalties, damages, fines,
curtailment or

 
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restructuring of our operations would adversely affect our ability to operate
our business and our financial results. The risk of our being found in violation
of these laws is increased by the fact that many of them have not been fully
interpreted by the regulatory authorities or the courts, and their provisions
are open to a variety of interpretations. Any action against us for violation of
these laws, even if we successfully defend against it, could cause us to incur
significant legal expenses, divert our management's attention from the operation
of our business and damage our reputation. For a more detailed discussion of the
various state and federal regulations to which we are subject see "Business--
Government Regulation."

 
HEALTHCARE REFORM LEGISLATION COULD LIMIT THE PRICES WE CAN CHARGE FOR OUR
IMAGING SERVICES, WHICH WOULD REDUCE OUR REVENUES AND HARM OUR OPERATING
RESULTS.
 
In addition to extensive existing government healthcare regulation, there are
numerous initiatives at the federal and state levels for comprehensive reforms
affecting the payment for and availability of healthcare services, including a
number of proposals that would significantly limit reimbursement under the
Medicare and Medicaid Programs. It is not clear at this time what proposals, if
any, will be adopted or, if adopted, what effect these proposals would have on
our business. Aspects of certain of these healthcare proposals, such as
reductions in the Medicare and Medicaid Programs and containment of healthcare
costs on an interim basis by means that could include a short-term freeze on
prices charged by healthcare providers, could limit the demand for our imaging
services or affect the revenue per procedure that we can collect, which would
harm our business and results of operations.
 

THE IMPACT OF RECENTLY ENACTED FEDERAL LAWS COULD HAVE A NEGATIVE IMPACT ON
CAMERA SALES TO HOSPITALS DESIRING TO USE THE CAMERA IN OUT-PATIENT FACILITIES.

 

In order for institutional healthcare providers, such as hospitals, to be
eligible for cost-based Medicare reimbursement for their out-patient facilities,
these facilities must meet specific requirements. If these requirements are met,
a facility will be classified as "provider-based" and therefore eligible for
cost-based Medicare reimbursement, which is potentially more favorable than
other types of Medicare reimbursement. However, recently promulgated federal
regulations affect the ability of a Medicare provider to include a facility as
provider-based for purposes of Medicare reimbursement. While recent federal
legislation offers some relief for facilities previously recognized as
provider-based, some of our hospital customers may have difficulty qualifying
their out-patient facilities for provider-based status. If a hospital customer
cannot obtain provider-based status for their out-patient nuclear imaging
facility and therefore may not be eligible for cost-based Medicare
reimbursement, then the provider may not purchase a camera from us.

 
THE APPLICATION OF STATE CERTIFICATE OF NEED REGULATIONS COULD HARM OUR BUSINESS
AND FINANCIAL RESULTS.
 
Some states currently require, or may require in the future, a certificate of
need or similar regulatory approval prior to the acquisition of high-cost
capital items including diagnostic imaging systems or provision of diagnostic
imaging services by us or our clients. In many cases, a limited number of these
certificates are available in a given state. If we or our clients are unable to
obtain the applicable certificate or approval or additional certificates or
approvals necessary to expand our operations, these regulations may limit or
preclude our operations in the relevant jurisdictions.
 
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IF WE FAIL TO COMPLY WITH VARIOUS LICENSURE, OR CERTIFICATION STANDARDS, WE MAY
BE SUBJECT TO LOSS OF LICENSURE OR CERTIFICATION, WHICH WOULD ADVERSELY AFFECT
OUR OPERATIONS.

 
All of the states in which we operate require that the imaging technicians that
operate our camera be licensed or certified. Obtaining such licenses may take
significant time as we expand into additional states. Further, we are currently
enrolled by Medicare contractors, or "carriers", as an independent diagnostic
testing facility, or IDTF, in five (5) states and are seeking such enrollment by
Medicare contractors in additional states. Enrollment is essential for us to
receive payment for healthcare services directly from Medicare. There can be no
assurances we will be able to maintain such enrollment or that we will be able
to gain such enrollment in other states. Any lapse in our licenses or
enrollment, or the licensure or certification of our technicians, could increase
our costs and adversely affect our operations and financial results.
 
In the healthcare industry, various types of organizations are accredited to
facilitate meeting certain Medicare certification requirements, expedite
third-party payment, and fulfill state licensure requirements. Some managed care
providers prefer to contract with accredited organizations. Thus far, we have
not found it necessary to seek or obtain accreditation from any established
accreditation agency. If it becomes necessary for us to do so in the future in
order to satisfy the requirements of third party payors or regulatory agencies,
there can be no assurances that we will be able to obtain or continuously
maintain this accreditation.
 
RISKS RELATED TO THIS OFFERING
 
CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK AMONG OUR EXISTING EXECUTIVE
OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM
INFLUENCING SIGNIFICANT CORPORATE DECISIONS.
 
Upon completion of this offering, our executive officers, directors and
beneficial owners of 5% or more of our common stock and their affiliates will,
in aggregate, beneficially own approximately       % of our outstanding common
stock or   % if the underwriters' over-allotment option is exercised in full. As
a result, these persons, acting together, may have the ability to determine the
outcome of matters submitted to our stockholders for approval, including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets. In addition, such persons, acting together,
may have the ability to control the management and affairs of our company.
Accordingly, this concentration of ownership may harm the market price of our
common stock by:
 
-   delaying, deferring or preventing a change in control of our company;
 
-   impeding a merger, consolidation, takeover or other business combination
    involving our company; or
 
-   discouraging a potential acquirer from making a tender offer or otherwise
    attempting to obtain control of our company.
 
Please see "Principal stockholders" for additional information on concentration
of ownership of our common stock.
 
--------------------------------------------------------------------------------
16
<Page>

RISK FACTORS
--------------------------------------------------------------------------------
 
THERE MAY NOT BE AN ACTIVE, LIQUID TRADING MARKET FOR OUR COMMON STOCK.
 
We cannot assure you that there will be an active trading market for our common
stock following this offering. You may not be able to sell your shares quickly
or at the market price if trading in our stock is not active. The initial public
offering price was determined by negotiations between us and the representatives
of the underwriters based upon a number of factors. The initial public offering
price may not be indicative of prices that will prevail in the trading market.
Please see "Underwriting" for more information regarding our arrangement with
the underwriters and the factors considered in setting the initial public
offering price.
 
OUR STOCK PRICE COULD BE VOLATILE, AND YOUR INVESTMENT COULD SUFFER A DECLINE IN
VALUE WHICH MAY PREVENT INVESTORS IN OUR COMMON STOCK FROM SELLING THEIR SHARES
ABOVE THE INITIAL PUBLIC OFFERING PRICE.
 
The trading price of our common stock is likely to be highly volatile and could
be subject to wide fluctuations in price in response to various factors, many of
which are beyond our control, including:
 
-   actual or anticipated variations in quarterly operating results;
 
-   announcements of technological innovations by us or our competitors;
 
-   new products or services introduced or announced by us or our competitors;
 
-   changes in financial estimates by securities analysts;
 
-   conditions or trends in the medical device industry and the imaging service
    industry;
 
-   changes in the market valuations of other similar companies;
 
-   announcements by us of significant acquisitions, strategic partnerships,
    joint ventures or capital commitments;
 
-   adverse action by regulatory agencies or changes in law;
 
-   additions or departures of key personnel; and
 
-   sales of our common stock.
 
In addition, the stock market in general, and the Nasdaq National Market in
particular, have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of listed
companies. Further, there has been particular volatility in the market prices of
securities of medical device companies and imaging services companies. These
broad market and industry factors may seriously harm the market price of our
common stock, regardless of our operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against that company. Such
litigation, if instituted against us, could result in substantial costs and a
diversion of management's attention and resources, which could seriously harm
our business, financial condition and results of operations.
 
THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD
CAUSE OUR STOCK PRICE TO DECLINE.
 

Sales of substantial amounts of our common stock in the public market after this
offering could seriously harm prevailing market prices for our common stock.
These sales might make it difficult or impossible for us to sell additional
securities when we need to raise capital. Based upon the number of

 
--------------------------------------------------------------------------------
                                                                              17
<Page>

RISK FACTORS
--------------------------------------------------------------------------------
 

shares outstanding at August 23, 2001, upon the closing of this offering, we
will have outstanding              shares of common stock, assuming no exercise
of the underwriters' over-allotment option and no exercise of options or
warrants to purchase shares of our common stock. Of these shares, the
             shares being sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act of 1933, unless
these shares are purchased by "affiliates" as that term is defined in Rule 144
of the Securities Act of 1933. The              remaining shares of our common
stock were issued and sold by us in reliance on exemptions from the registration
requirements of the Securities Act of 1933. These shares may be sold in the
public market only if they are registered or if they qualify from an exemption,
such as Rule 144 or 701 under the Securities Act of 1933.

 
Please see "Shares eligible for future sale" for a description of the number of
shares which may be sold by existing stockholders in the future.
 
INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
 
The initial public offering price will be substantially higher than the pro
forma book value per share of our common stock. Purchasers of common stock in
this offering will experience immediate and substantial dilution in the pro
forma net tangible book value of their stock of $          per share, assuming
an initial public offering price for our common stock of $          per share.
This dilution is due in large part to the fact that prior investors paid an
average price of $          per share when they purchased their shares of common
stock, which is substantially less than the assumed initial public offering
price of $          per share.
 
WE HAVE NOT PAID DIVIDENDS AND DO NOT ANTICIPATE PAYING DIVIDENDS ON OUR COMMON
STOCK IN THE FORESEEABLE FUTURE.
 
We currently anticipate that we will retain all future earnings, if any, to
finance the growth and development of our business and do not anticipate paying
cash dividends on our common stock in the foreseeable future. Any payment of
cash dividends will depend upon our financial condition, capital requirements,
earnings and other factors deemed relevant by our board of directors. Under the
terms of some of our credit agreements, we are restricted from paying cash
dividends and making other distributions to our stockholders.
 
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD MAKE A
THIRD-PARTY ACQUISITION OF US DIFFICULT OR DECREASE THE PRICE INVESTORS MIGHT BE
WILLING TO PAY FOR OUR COMMON STOCK IN THE FUTURE.
 
The anti-takeover provisions in our certificate of incorporation, our bylaws and
Delaware law could make it more difficult for a third party to acquire us
without approval of our board of directors. As a result of these provisions, we
could delay, deter or prevent a takeover attempt or third-party acquisition that
our stockholders consider to be in their best interests, including a takeover
attempt that results in a premium over the market price for the shares held by
our stockholders. Please see "Description of capital stock" for more information
on these anti-takeover provisions.
 
--------------------------------------------------------------------------------
18
<Page>
--------------------------------------------------------------------------------
 
Forward-looking information
 
This prospectus may contain forward-looking statements relating to our
operations and strategy that are based on our current expectations, estimates
and projections. Words such as "expect," "intend," "plan," "project," "believe,"
"estimate" and other similar expressions are used to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. Further, any forward-looking statements are based upon assumptions
as to future events that may not prove to be accurate. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. We undertake no obligation to publicly
update any forward-looking statement for any reason, even if new information
becomes available or other events occur in the future.
 
A number of important factors could cause actual results to differ materially
from those indicated by such forward-looking statements. Such factors include,
among others, those set forth in this prospectus under the heading "Risk
factors."
 
Market and industry data and forecasts
 
This prospectus includes market and industry data and forecasts that we obtained
from market research, consultant surveys, publicly available information and
industry publications and surveys, and internal company surveys. Reports
prepared or published by Frost & Sullivan were the primary sources for
third-party industry data and forecasts. Industry surveys, publications,
consultant surveys and forecasts generally state they obtain the information
contained therein from sources believed to be reliable, but there can be no
assurance as to the accuracy and completeness of such information. We have not
independently verified any of the data from third-party sources nor have we
ascertained the underlying economic assumptions relied upon therein. Similarly,
independent sources have not verified internal company surveys, industry
forecasts and market research, which we believe to be reliable based upon
management's knowledge of the industry. In addition, we do not know what
assumptions regarding general economic growth are used in preparing the
forecasts we cite.
 
--------------------------------------------------------------------------------
                                                                              19
<Page>
--------------------------------------------------------------------------------
 

Use of proceeds
 
We expect to receive approximately $  million in net proceeds from the sale of
shares of common stock in this offering at an assumed initial public offering
price of $      per share, or approximately $      million if the underwriters'
over-allotment option is exercised in full, after deducting underwriting
discounts and commissions and estimated offering expenses, which we expect to be
approximately $      million, or approximately $      million if the
underwriters' over-allotment option is exercised in full.
 
We intend to use approximately $5.7 million of the net proceeds of this offering
to repay in full the following outstanding debt or financing obligations:
 
-   approximately $2,500,000, including principal, accrued and unpaid interest
    and prepayment penalties, under working capital term loans, with interest
    rates ranging from 13.53% to 14.4%;
 
-   approximately $2,500,000, including principal, accrued and unpaid interest
    and prepayment penalties, under a line of credit with an interest rate of
    prime plus 2% (which was 8% at June 30, 2001); and
 
-   approximately $730,000, including principal, accrued and unpaid interest and
    prepayment penalties, under a line of credit with an interest rate at the
    greater of prime plus 1.25% or 10.25% (which was 10.25% at June 30, 2001).
 
The working capital term loans that we are repaying with proceeds from this
offering were issued under a loan and security agreement with MMC/GATX
Partnership No. 1 dated October 1999, as amended in August 2000 and
November 2000, and the proceeds were used to fund expansion of our manufacturing
operations. These term loans require monthly amortization and the final payment
is due November 2002.
 
The lines of credit that we are repaying with proceeds from this offering were
funded under various loan and security agreements, and the proceeds were used to
fund general corporate working capital requirements.
 
We intend to use the remainder of the net proceeds primarily for general
corporate purposes, including product development, marketing, capital
expenditures and working capital. We may also use a portion of the proceeds of
this offering for acquisitions or investments in complementary businesses. We
have no current plans, arrangements or understandings related to any acquisition
or investment.
 
The amounts and timing of any such use may vary significantly depending upon a
number of factors, including our revenue growth, asset growth, cash flows and
acquisition activities. Pending such uses, the net proceeds of this offering
will be invested in short-term, investment-grade, interest-bearing securities.
We currently anticipate that the net proceeds to be received by us from this
offering and existing cash balances will be sufficient to satisfy our operating
cash needs for at least 12 months following the closing of this offering. See
"Management's discussion and analysis of financial condition and results of
operations--Liquidity and Capital Resources."
 

Dividend policy
 
We have never declared or paid any cash dividends on our common stock. We do not
expect to pay any cash dividends for the foreseeable future. We currently intend
to retain future earnings, if any, to finance the expansion of our business. Any
future determination to pay cash dividends will be at the discretion of our
board of directors and will be dependent on our financial condition, operating
results, capital requirements and other factors that our board deems relevant.
 
--------------------------------------------------------------------------------
20
<Page>
--------------------------------------------------------------------------------
 

Capitalization
 
The following table sets forth our capitalization as of June 30, 2001:
 
-   on an actual basis;
 
-   on a pro forma basis to give effect to the issuance of 2,618,462 shares of
    Series F preferred stock in August 2001 and the automatic conversion of all
    shares of preferred stock outstanding as of August 23, 2001 into 29,748,030
    shares of common stock in connection with this offering; and
 
-   on a pro forma as adjusted basis to give effect to the sale of
    shares of our common stock in this offering at an assumed initial public
    offering price of $                       per share and the application of
    the net proceeds to repay a portion of our outstanding indebtedness.
 
You should read this table together with "Use of proceeds," "Management's
discussion and analysis of financial condition and results of operations" and
the consolidated financial statements and related notes included elsewhere in
this prospectus.
 

<Table>
<Caption>
                                                                         JUNE 30, 2001
                                                              -----------------------------------
                                                                                       PRO FORMA
                                                               ACTUAL    PRO FORMA    AS ADJUSTED
                                                                        (in thousands)
-------------------------------------------------------------------------------------------------
<S>                                                           <C>        <C>          <C>
Cash and cash equivalents...................................  $  3,510    $ 11,920
                                                              ========    ========
 
Total debt:
  Current portion of long-term debt.........................     5,614       5,614
  Long-term debt, net of current portion....................     5,076       5,076
  Notes payable to stockholders.............................       735         735
 
Redeemable convertible preferred stock:
  Authorized shares--27,582,646 actual, 10,000,000 pro forma
    and pro forma as adjusted; Issued and outstanding
    shares--27,129,568 actual, none pro forma and pro forma
    as adjusted.............................................    58,109          --
 
Stockholders' equity (deficit):
  Common Stock:
    Authorized shares--38,091,807 actual, 250,000,000 pro
      forma and pro forma as adjusted; Issued and
      outstanding shares--4,574,603 actual, 34,322,633 pro
      forma and       pro forma as adjusted.................         5          34
  Additional paid-in capital................................     4,707      71,197
  Deferred compensation.....................................    (1,713)     (1,713)
  Notes receivable from stockholders........................      (112)       (112)
  Accumulated deficit.......................................   (50,998)    (50,998)
                                                              --------    --------
  Total stockholders' equity (deficit)......................   (48,111)     18,408
                                                              --------    --------
  Total capitalization......................................  $ 21,423    $ 29,833
                                                              ========    ========
</Table>

 
The table above does not include:
 
-   the issuance of up to 5,952,426 shares of common stock upon the exercise of
    stock options outstanding as of August 23, 2001 at a weighted average
    exercise price of $0.64 per share;
 
-   the issuance of up to 603,578 shares of common stock upon the exercise of
    warrants outstanding as of August 23, 2001 at a weighted average exercise
    price of $2.59 per share, of which warrants
 
--------------------------------------------------------------------------------
                                                                              21
<Page>

CAPITALIZATION
--------------------------------------------------------------------------------
 
   to purchase 65,875 shares will expire if not exercised at the time of this
    offering and warrants to purchase 60,000 shares will expire if a consulting
    agreement is terminated before July 31, 2002;
 
-   the issuance of up to 250,000 shares of common stock, as well as additional
    shares of common stock issuable based upon future earnings results, as
    additional consideration in connection with our acquisitions of Nuclear
    Imaging Systems, Inc. and Florida Cardiology and Nuclear Medicine Group;
 
-   the issuance of up to 4,725,883 shares of common stock reserved for future
    issuance under our stock option plans; and
 
-   the issuance of 10,000 shares of common stock at fair market value for every
    three of our digital cameras sold by a consultant, up to a maximum of 40,000
    shares, and thereafter 1,500 shares of common stock at fair market value for
    each of our digital cameras sold by the consultant, in each case upon the
    exercise of warrants issuable to the consultant.
 
--------------------------------------------------------------------------------
22
<Page>
--------------------------------------------------------------------------------
 
Dilution
 
If you invest in our common stock, your interest will be diluted to the extent
of the difference between the initial public offering price per share of our
common stock and the pro forma net tangible book value per share of our common
stock after this offering.
 
Pro forma net tangible book value per share represents the amount of total
tangible assets less total liabilities, divided by the pro forma number of
shares of common stock then outstanding. Our pro forma net tangible book value
at June 30, 2001, would have been $15.9 million, or $    per share of common
stock, after giving effect to the issuance of 2,618,462 shares of Series F
preferred stock in August 2001 and the automatic conversion of all shares of
preferred stock outstanding as of August 23, 2001 into 29,748,030 shares of
common stock in connection with this offering. After giving further effect to
the sale of       shares of common stock in this offering at an assumed initial
public offering price of $      per share, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses, our pro
forma net tangible book value at June 30, 2001, would have been $      million,
or $      per share. This represents an immediate increase in pro forma net
tangible book value of $      per share to existing stockholders and an
immediate dilution of $      per share to new investors purchasing common stock
in this offering. The following table illustrates this per share dilution:
 

<Table>
<S>                                                           <C>      <C>
Assumed initial public offering price per share.............           $
  Pro forma net tangible book value per share before this
    offering................................................  $
  Increase attributable to new investors in this offering...
                                                              ------
Pro forma net tangible book value per share after this
  offering..................................................           $
                                                                       ------
Dilution in pro forma net tangible book value per share to
  new investors after this offering.........................           $
                                                                       ======
</Table>

 
The following table summarizes as of June 30, 2001, on the pro forma basis
described above, the total number of shares of common stock purchased from us,
the total consideration paid to us, and the average price per share paid by
existing stockholders and by new investors purchasing shares of common stock
from us in this offering at an assumed initial public offering price of $
per share and before deducting underwriting discounts and commissions and
estimated offering expenses:
 

<Table>
<Caption>
                                        SHARES PURCHASED        TOTAL CONSIDERATION
                                     ----------------------   -----------------------       AVERAGE PRICE
                                       NUMBER      PERCENT       AMOUNT      PERCENT          PER SHARE
---------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>        <C>            <C>            <C>
Existing stockholders..............  34,322,633          %    $68,071,703          %            $1.98
New investors......................                                                             $
                                     ----------     -----     -----------     -----             -----
Total..............................                      %    $                    %            $
                                     ==========     =====     ===========     =====             =====
</Table>

 
If the underwriters exercise their over-allotment option in full, the following
will occur:
 
-   our pro forma net tangible book value after the offering will increase
    $      per share to existing stockholders and our pro forma net tangible
    book value after the offering will be diluted $                per share to
    new investors;
 
-   the percentage of shares of our common stock held by existing stockholders
    will decrease to approximately   % of the total number of shares of our
    common stock outstanding after this offering; and
 
-   the number of shares of our common stock held by new investors will increase
    to              , or approximately   % of the total number of shares of our
    common stock outstanding after this offering.
 
--------------------------------------------------------------------------------
                                                                              23
<Page>
DILUTION
--------------------------------------------------------------------------------
 
The tables and calculations above assume no issuance of the following shares
described below:
 
-   the issuance of up to 5,952,426 shares of common stock upon the exercise of
    stock options outstanding as of August 23, 2001 at a weighted average
    exercise price of $0.64 per share;
 
-   the issuance of up to 603,578 shares of common stock upon the exercise of
    warrants outstanding as of August 23, 2001 at a weighted average exercise
    price of $2.59 per share, of which warrants to purchase 65,875 shares will
    expire if not exercised at the time of this offering and warrants to
    purchase 60,000 shares will expire if a consulting agreement is terminated
    before July 31, 2002;
 
-   the issuance of up to 250,000 shares of common stock, as well as additional
    shares of common stock issuable based upon future earnings results, as
    additional consideration in connection with our acquisitions of Nuclear
    Imaging Systems, Inc. and Florida Cardiology and Nuclear Medicine Group;
 
-   the issuance of up to 4,725,883 shares of common stock reserved for future
    issuance under our stock option plans; and
 
-   the issuance of 10,000 shares of common stock at fair market value for every
    three of our digital cameras sold by a consultant, up to a maximum of 40,000
    shares, and thereafter 1,500 shares of common stock at fair market value for
    each of our digital cameras sold by the consultant, in each case upon the
    exercise of warrants issuable to the consultant.
 

If we assume the exercise of all stock options and warrants outstanding as of
August 23, 2001, our pro forma net tangible book value after the offering will
increase $          per share to existing stockholders and our pro forma net
tangible book value after the offering will be diluted $          per share to
new investors.

 

To the extent that any of the other shares of common stock described above are
issued, there will be further dilution to new investors. See "Capitalization,"
"Management--Benefit Plans," and the notes to our consolidated financial
statements included elsewhere in this prospectus for further information.

 
--------------------------------------------------------------------------------
24
<Page>
--------------------------------------------------------------------------------
 
Selected historical financial and operating data
 
Our selected statement of operations data for the years ended December 31, 1996
and 1997, and our selected balance sheet data as of December 31, 1996, 1997 and
1998, are derived from our audited consolidated financial statements for such
years and as of such dates, which are not included in this prospectus. Our
selected statement of operations data for the years ended December 31, 1998,
1999 and 2000 and our selected balance sheet data as of December 31, 1999 and
2000, are derived from our audited financial statements for such years and as of
such dates, which are included elsewhere in this prospectus. Our selected
statement of operations data for the six month periods ended June 30, 2000 and
2001, and our selected balance sheet data as of June 30, 2001, are derived from
our unaudited financial statements for such years and as of such date, which are
included elsewhere in this prospectus. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals, which we
consider necessary for a fair representation of the financial position and the
results of operations for these periods.
 
Operating results for the six months ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2001. You should read the data set forth below in conjunction with
"Management's discussion and analysis of financial condition and results of
operations" and our consolidated financial statements and related notes included
elsewhere in this prospectus.
 


<Table>
<Caption>
                                                                                                                 SIX MONTHS
                                                                    YEARS ENDED DECEMBER 31,                   ENDED JUNE 30,
STATEMENT OF OPERATIONS DATA:                         ----------------------------------------------------   -------------------
                                                          1996       1997       1998       1999       2000       2000       2001
                                                             (In thousands, except per share and selected operating data)
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>        <C>        <C>        <C>        <C>        <C>        <C>
Revenues:
  Products..........................................  $   101    $   167    $   340    $    284   $  5,815   $ 1,456    $ 9,802
  Imaging services..................................       --         --         --          --      1,260        --      4,217
  Licensing and other...............................      487        252      1,581          --         --        --         --
                                                      -------    -------    -------    --------   --------   -------    -------
    Total revenues..................................      588        419      1,921         284      7,075     1,456     14,019
Cost of revenues:
  Products..........................................      687        417        388         265      9,834     3,602      6,438
  Imaging services..................................       --         --         --          --        839        --      3,394
                                                      -------    -------    -------    --------   --------   -------    -------
    Total cost of revenues..........................      687        417        388         265     10,673     3,602      9,832
                                                      -------    -------    -------    --------   --------   -------    -------
Gross profit (loss).................................      (99)         2      1,533          19     (3,598)   (2,146)     4,187
Operating expenses:
  Research and development..........................    1,602      4,073      5,426      10,063      2,372     1,083      1,327
  Sales and marketing...............................      121        557        623       1,455      3,586     1,291      4,028
  General and administrative........................      609      1,198      2,533       1,967      2,878     1,072      2,899
  Amortization of intangible assets.................       --         --         --          --        209         3        315
  Stock-based compensation..........................       --         --         --          --        296        --      1,063
                                                      -------    -------    -------    --------   --------   -------    -------
    Total operating expenses........................    2,332      5,828      8,582      13,485      9,341     3,449      9,632
                                                      -------    -------    -------    --------   --------   -------    -------
Loss from operations................................   (2,431)    (5,826)    (7,049)    (13,466)   (12,939)   (5,595)    (5,445)
Other income (expense), net.........................      (71)      (552)       857         274       (537)      (97)      (401)
                                                      -------    -------    -------    --------   --------   -------    -------
Net loss............................................  $(2,502)   $(6,378)   $(6,192)   $(13,192)  $(13,476)  $(5,692)   $(5,846)
                                                      =======    =======    =======    ========   ========   =======    =======
Net loss applicable to common stockholders..........  $(2,502)   $(6,378)   $(6,192)   $(13,192)  $(13,524)  $(5,692)   $(5,902)
                                                      =======    =======    =======    ========   ========   =======    =======
Basic and diluted net loss per share(1):
  Historical........................................  $ (0.77)   $ (1.95)   $ (1.87)   $  (3.90)  $  (3.61)  $ (1.65)   $ (1.35)
                                                      =======    =======    =======    ========   ========   =======    =======
  Pro forma.........................................                                              $  (0.53)             $ (0.19)
                                                                                                  ========              =======
Shares used to compute basic and diluted net loss
  per share(1):
  Historical........................................    3,256      3,273      3,306       3,381      3,745     3,455      4,366
                                                      =======    =======    =======    ========   ========   =======    =======
  Pro forma.........................................                                                25,474               30,436
                                                                                                  ========              =======
</Table>


 
--------------------------------------------------------------------------------
                                                                              25
<Page>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
--------------------------------------------------------------------------------
 

<Table>
<Caption>
                                                                                                                 SIX MONTHS
                                                                    YEARS ENDED DECEMBER 31,                   ENDED JUNE 30,
STATEMENT OF OPERATIONS DATA:                         ----------------------------------------------------   -------------------
                                                          1996       1997       1998       1999       2000       2000       2001
                                                             (In thousands, except per share and selected operating data)
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>        <C>        <C>        <C>        <C>        <C>        <C>
SELECTED OPERATING DATA:
Product sales
  Number of gamma cameras sold to third parties.....       --         --         --          --         23         6         36
Imaging services
  Number of imaging procedures performed............       --         --         --          --          *        --      6,953
</Table>

 
------------
 

(1) Please see Note 1 to our financial statements for an explanation of the
    method used to calculate the historical and pro forma net loss per share and
    the number of shares used in the computation of per share amounts.

 

*  Not available because the methodology for tracking the number of procedures
    performed in 2000 under acquired customer contracts was not consistent with
    our current methodology.

 

<Table>
<Caption>
                                                                    AS OF DECEMBER 31,
BALANCE SHEET DATA                                 ----------------------------------------------------        AS OF
                                                       1996       1997       1998       1999       2000    JUNE 30, 2001
                                                                               (In thousands)
-------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>        <C>        <C>        <C>        <C>        <C>
Cash and cash equivalents........................  $ 5,634    $ 19,293   $ 13,680   $  2,626   $  6,555      $  3,510
Working capital..................................  $ 5,344    $ 18,382   $ 12,636   $    801   $  5,481      $  4,504
Total assets.....................................  $ 6,576    $ 20,697   $ 16,365   $  5,699   $ 23,207      $ 28,557
Long-term debt...................................  $ 6,756    $    735   $    735   $  2,156   $  5,679      $  5,811
Redeemable convertible preferred stock...........  $ 4,759    $ 30,759   $ 32,259   $ 32,259   $ 52,255      $ 58,109
Total stockholders' equity (deficit).............  $(5,461)   $(11,833)  $(17,990)  $(31,050)  $(43,322)     $(48,111)
</Table>

 
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Management's discussion and analysis of financial condition and results of
operations
 
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE NOTES TO
THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION MAY
CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. AS A
RESULT OF MANY FACTORS, SUCH AS THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS, OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.
 
OVERVIEW
 
We are the first and only company to have developed and commercialized a
solid-state, digital gamma camera for use in nuclear medicine. We sell our
solid-state, digital gamma cameras and related equipment to physician practices,
imaging centers, hospitals and research laboratories in the United States,
Canada and Japan. We also use our proprietary technology to provide mobile
nuclear imaging services to physician offices and imaging centers through our
Digirad Imaging Solutions business unit, or DIS.
 

We incorporated as San Diego Semiconductor in 1985. In 1994, we changed our name
to Digirad Corporation and began development of a solid-state gamma camera for
nuclear imaging applications. Between 1994 and 1998, we developed and tested our
proprietary technology, financing our research operations with equity
investments. We began production of the current generation solid-state digital
gamma camera in 1999, and commercial shipments commenced in March 2000. As of
June 30, 2001, we had taken orders for 117 gamma cameras, of which 59 have been
shipped. We expect that 38 units in our backlog will be shipped by December 31,
2001 with the remainder expected to be shipped in 2002.

 
In the second half of 2000, we formed DIS to provide turn-key nuclear cardiac
imaging services to physician offices. We entered the service business via the
strategic acquisition of certain assets of two operators that provide us with
both critical mass and platforms for growth of our imaging services business:
 
-   During the third quarter of 2000, we acquired some of the customer contracts
    and select assets relating to the mobile nuclear imaging services of Florida
    Cardiology and Nuclear Medicine Group, a provider of mobile and fixed site
    nuclear imaging services in Florida. At the time of the acquisition, Florida
    Cardiology was operating two mobile routes.
 
-   During the fourth quarter of 2000, we acquired some of the customer
    contracts and select assets relating to the mobile nuclear imaging services
    of Nuclear Imaging Systems, Inc. and Cardiovascular Concepts, P.C., which
    together provided mobile and fixed site nuclear imaging services in New
    Jersey, North Carolina, Maryland and Pennsylvania. At the time of the
    acquisition, these two companies were operating nine mobile routes.
 
We have incurred substantial operating losses since our inception. As of
June 30, 2001, our accumulated deficit was $51.0 million. We expect to spend
substantial additional amounts to increase marketing, direct sales, imaging
services, training and customer support needed to support our increasing
revenues.
 
We derive revenues both from selling our products and providing imaging
services. We generated approximately 70% of our revenues for the six months
ended June 30, 2001 from sales of our
 
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products. Our product revenue consists of sales of solid-state gamma cameras,
custom designed chairs and accessories such as printers and collimators. We
generated approximately 30% of our revenues for the six months ended June 30,
2001 from our imaging services business. We derive our imaging services revenue
from the provision of mobile nuclear imaging services. We provide mobile nuclear
imaging services to physician offices, which include cardiology and internal
medicine practices, on a turn-key basis utilizing our proprietary DIGIRAD(TM)
2020TC Imager(TM) gamma camera and the SPECTour(TM) chair. We offer this imaging
service on a contract basis, with the typical contract length being one to three
years and comprised of one day of service per week. As we continue to grow, we
expect our imaging services revenue to account for a majority of total revenues.
 

We sell our products to customers in North America and Japan. A relatively small
number of customers account for a significant percentage of our revenues. For
the year ended December 31, 2000, three product customers accounted for 15.9%,
11.6% and 10.1% of our consolidated revenues. However, for the six months ended
June 30, 2001, no product customers accounted for 10% or more of consolidated
revenues. No imaging services customer accounted for 10% or more of our
consolidated revenues for the year ended December 31, 2000 or the six months
ended June 30, 2001.

 
We experience seasonality in the service of our DIS customers. For example, our
study volumes typically decline from our second fiscal quarter to our third
fiscal quarter due to summer holidays and vacation schedules. We may also
experience declining study volumes in December due to holidays and in the first
quarter due to weather conditions in certain parts of the country. These
seasonal factors may lead to fluctuations in our quarterly operating results. It
is difficult for us to evaluate the degree to which the summer slowdown, winter
holiday variations and inclement weather may make our revenues unpredictable in
the future. We may not be able to reduce our expenses, including our debt
service obligations, quickly enough to respond to these declines in revenue,
which would make our business difficult to operate and would harm our financial
results.
 
RESULTS OF OPERATIONS
 
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2001 AND 2000
 
REVENUES
 
TOTAL REVENUES--Total revenues increased to $14.0 million for the six months
ended June 30, 2001 from $1.5 million for the comparable period in 2000.
 
PRODUCTS--Our product revenue increased to $9.8 million for the six months ended
June 30, 2001 from $1.5 million for the comparable period in 2000. This increase
was due to increased sales of our gamma cameras, from six in the first six
months of 2000 to 36 in the comparable period in 2001. Our backlog of gamma
camera orders was 58 as of June 30, 2001. Product revenue accounted for 70% of
total revenues for the first six months of 2001 versus 100% for the first six
months of 2000.
 
IMAGING SERVICES--Our imaging services revenue was $4.2 million for the six
months ended June 30, 2001. We did not have any imaging services revenue during
the six months ended June 30, 2000, as we did not start this business until the
second half of 2000. We performed approximately 6,900 procedures for the six
months ended June 30, 2001, and were operating 18 mobile servicing routes as of
June 30, 2001. Imaging services revenue accounted for 30% of total revenues for
the first six months of 2001.
 
COST OF REVENUES
 
TOTAL COST OF REVENUES--Total cost of revenues increased to $9.8 million for the
six months ended June 30, 2001 from $3.6 million for the same period in 2000.
 
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PRODUCTS--Cost of product revenue consists primarily of materials, labor and
other costs associated with the products we sell. Our cost of product revenue
increased to $6.4 million for the six months ended June 30, 2001 from
$3.6 million for the comparable period in 2000. The increase in the cost of
product revenue for the first six months of 2001 was due primarily to the
increase in the volume of cameras and accessories sold. However, cost reductions
in the manufacturing process partially offset the increase. As a percentage of
product revenue, cost of product revenue was 66% in the first six months of
2001.
 
IMAGING SERVICES--Cost of imaging services revenue consists primarily of labor,
radiopharmaceuticals, equipment depreciation and other costs associated with
provision of services. Our cost of imaging services revenue was $3.4 million for
the six months ended June 30, 2001. There was no cost of imaging services
revenue for the comparable period in 2000. As a percentage of imaging services
revenue, cost of services revenue was 81% in the first six months of 2001.
 

GROSS PROFIT

 

TOTAL GROSS PROFIT--Total gross profit increased to $4.2 million for the six
months ended June 30, 2001 from a loss of $2.1 million for the comparable period
in 2000.

 

PRODUCTS--Our product gross profit increased to $3.4 million for the six months
ended June 30, 2001 from a loss of $2.1 million for the comparable period in
2000. This increase was primarily due to reductions in our cost per unit from
volume discounts, design modifications, and better utilization of our
manufacturing capacity. Although we expect continued gross profit improvements
with increased sales as we better utilize our existing manufacturing capacity
and benefit from economies of scale, we expect such improvements, if any, to
occur at a slower rate than those experienced between 2000 and 2001.

 

IMAGING SERVICES--Our imaging services gross profit was $0.8 million for the six
months ended June 30, 2001. There was no comparable gross profit from imaging
services for the six months ended June 30, 2000 because at that date we had not
yet entered the imaging services business.

 
OPERATING EXPENSES
 
RESEARCH AND DEVELOPMENT--Research and development expenses consist primarily of
costs associated with the design, development, testing, deployment and
enhancement of our products and manufacturing capabilities. Research and
development expenses increased to $1.3 million for the six months ended
June 30, 2001 from $1.1 million in the comparable period in 2000. An increase in
headcount, materials and other direct and indirect costs in support of our
continued product development account primarily for the increase in research and
development expenses for the first six months of 2001. For the first six months
of 2001, research and development expenses amounted to 9% of total revenue.
 
SALES AND MARKETING--Sales and marketing expenses consist primarily of salaries,
commissions, bonuses, recruiting costs, travel, marketing materials and trade
shows. Sales and marketing expenses increased to $4.0 million for the six months
ended June 30, 2001 from $1.3 million in the comparable period in 2000. Our
continued development of our sales and marketing functions to support the sales
of our gamma camera and the growth of our mobile nuclear imaging services
business accounted primarily for the increase in sales and marketing expenses.
For the first six months of 2001, sales and marketing expenses amounted to 29%
of total revenue.
 
GENERAL AND ADMINISTRATIVE--General and administrative expenses consist
primarily of salaries and other related costs for finance, human resources and
other personnel, as well as accounting, legal and other professional fees.
General and administrative expenses increased to $2.9 million for the six
 
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months ended June 30, 2001 from $1.1 million in the comparable period in 2000.
Increased headcount and related costs account primarily for the increase in
general and administrative expenses. For the first six months of 2001, general
and administrative expenses amounted to 21% of total revenue.
 
AMORTIZATION OF INTANGIBLE ASSETS--Intangible assets primarily represent
acquired customer contracts, a covenant not-to-compete, and the capitalized
costs related to our patent and trademark portfolio. Amortization of intangibles
increased to $315,000 for the six months ended June 30, 2001 from $3,000 in the
comparable period in 2000. The acquisition of customer contracts from Florida
Cardiology and Nuclear Imaging Systems, Inc. in the third and fourth quarters of
2000 primarily accounted for the increase in amortization of intangible assets.
 

DEFERRED COMPENSATION AND OTHER NON-CASH STOCK COMPENSATION CHARGES--Deferred
stock compensation represents the difference between the estimated fair value of
our common stock and the exercise price of options at the date of grant. In
connection with the grant of stock options to employees and directors, we
recorded deferred compensation of $2.0 million for the six months ended
June 30, 2001. We recorded this amount as a component of stockholders' equity
and will amortize the amount as a charge to operations over the vesting period
of the options. We recorded amortization of deferred compensation and other
non-cash compensation charges of $1.1 million for the six months ended June 30,
2001. The compensation charges relate to cost of revenues, research and
development, sales and marketing, and general and administrative expenses in the
amount of $197,000, $61,000, $421,000 and $384,000, respectively, for the six
months ended June 30, 2001. No deferred compensation was incurred or amortized
during the six months ended June 30, 2000.

 
INTEREST EXPENSE
 
Interest expense increased to $545,000 for the six months ended June 30, 2001
from $221,000 for the comparable period in 2000. Increased borrowing under notes
payable and capital leases in the latter part of 2000 and the first six months
of 2001 account primarily for the increase in interest expense.
 
INTEREST INCOME
 
Interest income increased moderately to $145,000 for the six months ended
June 30, 2001 from $124,000 for the comparable period in 2000 primarily due to
slightly higher average cash balances.
 
NET LOSS
 
Net loss increased to $5.8 million for the six months ended June 30, 2001 from
$5.7 million in the comparable period in 2000 as a result of the factors
described above.
 
COMPARISON OF YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
 
REVENUES
 
TOTAL REVENUES--Total revenues increased to $7.1 million in 2000 from
$0.3 million in 1999. Total revenues decreased in 1999 from $1.9 million in
1998. The decrease in 1999 from 1998 was due to $1.6 million of non-recurring
license fees and milestone payments recognized in 1998 under a collaborative
supply and development agreement.
 
PRODUCTS--Our product revenue increased to $5.8 million in 2000 from
$0.3 million in 1999 and $0.3 million in 1998. Sales of our gamma cameras, first
sold in 2000, account for the increase in product revenue. Product revenue
accounted for 82% of total revenues in 2000 versus 100% in 1999 and 18% in 1998.
 
IMAGING SERVICES--Our imaging services revenue was $1.3 million in 2000. We did
not have any imaging services revenue in 1999 or 1998. The 2000 imaging services
revenue was the result of our
 
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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entry into the mobile nuclear imaging services business. Imaging services
revenue accounted for 18% of total revenues in 2000.
 
COST OF REVENUES
 
TOTAL COST OF REVENUES--Total cost of revenues increased to $10.7 million in
2000 from $0.3 million in 1999 and $0.4 million in 1998.
 
PRODUCTS--Our cost of product revenue increased to $9.8 million in 2000 from
$0.3 million in 1999 and $0.4 million in 1998. Costs associated with the launch
of our gamma cameras were the primary reason for the increase in cost of product
revenue in 2000.
 
IMAGING SERVICES--Our cost of imaging services revenue was $0.8 million in 2000.
There was no cost of service revenue for 1999 or 1998. As a percentage of
imaging services revenue, cost of service revenue was 67% in 2000.
 
OPERATING EXPENSES
 
RESEARCH AND DEVELOPMENT--Research and development expenses decreased to
$2.4 million in 2000 from $10.1 million in 1999. Research and development
expenses increased in 1999 from $5.4 million in 1998. Our transition from
development to production prior to the first shipments of our gamma cameras in
the first quarter of 2000 was the primary reason for the decrease in research
and development expenses. Most direct and indirect expenses charged to research
and development expenses in 1999 and 1998 were accounted for as manufacturing
expenses in 2000 when we began commercial production. Research and development
expenses amounted to 34% of total revenues in 2000. The increase in research and
development expenses from 1998 to 1999 was related primarily to an increase in
headcount, materials and other direct and indirect costs for the completion of
alpha and beta units of our gamma camera.
 
SALES AND MARKETING--Sales and marketing expenses increased to $3.6 million in
2000 from $1.5 million in 1999 and $0.6 million in 1998. These increases in
sales and marketing expense were related primarily to the build out of our sales
infrastructure to support the sales of our gamma camera and the start-up of our
mobile nuclear imaging services business. Sales and marketing expenses amounted
to 51% of total revenues in 2000.
 
GENERAL AND ADMINISTRATIVE--General and administrative expenses increased to
$2.9 million in 2000 from $2.0 million in 1999 and decreased in 1999 from
$2.5 million in 1998. The changes in general and administrative expense were
primarily due to corresponding changes in headcount and related costs. General
and administrative expenses amounted to 41% of total revenues in 2000.
 
AMORTIZATION OF INTANGIBLE ASSETS--Amortization of intangible assets was
$209,000 in 2000. We had no significant intangible asset amortization in 1999
and 1998. The acquisition of customer contracts from Florida Cardiology and
Nuclear Imaging Systems, Inc. primarily accounted for the increase.
 

DEFERRED COMPENSATION AND OTHER NON-CASH STOCK COMPENSATION CHARGES--In
connection with the grant of stock options to employees and directors, we
recorded deferred compensation of $0.8 million for 2000. We recorded this amount
as a component of stockholders' equity and will amortize the amount as a charge
to operations over the vesting period of the options. We recorded amortization
of deferred compensation and other non-cash stock compensation charges of
$0.3 million during 2000. The compensation charges relate to cost of revenues,
research and development, sales and marketing, and general and administrative
expenses in the amount of $64,000, $6,000, $37,000, and $189,000, respectively,
during 2000.

 
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INTEREST EXPENSE
 
Interest expense increased to $780,000 in 2000 from $87,000 in 1999 and $46,000
in 1998. The addition of $2.0 million in notes payable for general corporate
purposes and working capital, as well as a $4.2 million increase in capital
leases, were the primary reasons for the increase in interest expense.
 
INTEREST INCOME
 
Interest income decreased to $243,000 in 2000 from $360,000 in 1999 and $903,000
in 1998. Declining average cash balances resulting from operational spending
along with asset and property and equipment acquisitions are primarily
responsible for the decrease in interest income.
 
NET LOSS
 
Net loss increased to $13.5 million in 2000 from $13.2 million in 1999 and
$6.2 million in 1998 as a result of the factors described above.
 
LIQUIDITY AND CAPITAL RESOURCES
 
We have funded our operations principally through private equity financings
supplemented with long-term debt and equipment financing arrangements. The
equity investments were in the form of six series of preferred stock offerings
between March 1995 and August 2001, which yielded aggregate net proceeds
totaling approximately $66 million. At June 30, 2001, our outstanding borrowings
totaled $11.4 million.
 
As of June 30, 2001, cash and cash equivalents totaled $3.5 million compared to
$6.6 million at December 31, 2000. We currently invest our cash reserves in
United States investment grade corporate-debt securities with maturities not
exceeding 12 months and money market funds.
 
Net cash used in operating activities amounted to approximately $15.0 million,
$12.1 million, $5.5 million and $9.1 million for the years ended December 31,
2000, 1999, 1998 and for the six months ended June 30, 2001, respectively. For
these periods, net cash used in operating activities resulted primarily from
operating losses and net increases in accounts receivable and inventories
resulting from the growth in our business.
 
Net cash used in investing activities amounted to approximately $7.2 million,
$0.9 million, $1.7 million and $2.5 million for the years ended December 31,
2000, 1999, 1998 and the six months ended June 30, 2001, respectively. Investing
activities consist primarily of capital expenditures and asset acquisitions.
 
Net cash provided by financing activities amounted to approximately
$26.2 million, $2.0 million, $1.5 million and $8.6 million for the years ended
December 31, 2000, 1999, 1998 and the six months ended June 30, 2001,
respectively. Private placement of preferred stock and proceeds from bank
borrowings and lease financings were primarily responsible for the net cash
provided by financing activities. We raised $17.9 million in 2000 and
$5.8 million in the first six months of 2001 through the private placement of
Series E preferred stock. In addition, we raised an additional $8.4 million in
August 2001 through the private placement of Series F preferred stock.
 
In July 2001, we entered into an agreement with a bank for a $4.3 million
revolving line of credit to provide working capital for the product business.
Borrowings under the line of credit accrue interest at the bank's floating prime
rate plus 2% and are limited based on a formula that takes into account eligible
amounts of accounts receivables, inventory and other factors. We are required to
make monthly interest payments on this line of credit, which expires in
July 2002 with any unpaid balance
 
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due upon expiration. At June 30, 2001, the outstanding balance under this
facility was $2.4 million. We intend to repay this loan in full with proceeds
from this offering.
 
In January 2001, we entered into a loan and security agreement for a revolving
line of credit to provide working capital for our imaging services business. We
are authorized to draw up to $2.5 million and can draw an additional
$2.5 million upon approval by the lender's credit committee. The borrowings
under the line of credit accrue interest at the higher of prime plus 1.25% or
10.25%. The revolving line of credit expires in January 2004. As of June 30,
2001, the outstanding balance under this loan and security agreement totaled
$0.6 million. We intend to repay this loan in full with proceeds from this
offering.
 
In November 1999, we entered into a bank loan and security agreement to borrow
up to $3.0 million. In August 2000, we modified the November 1999 loan agreement
to borrow an additional $1.0 million. Borrowings under this agreement accrue
interest at rates between 13.53% and 14.4%. We are required to make monthly
principal and interest payments of $156,273 through November 2002. As of
June 30, 2001, $2.4 million is outstanding under these loan and security
agreements. We intend to repay this loan in full with proceeds from this
offering.
 
We have notes payable to stockholders totaling $0.7 million, which bear interest
at 6.35% per year. The notes mature on December 31 of the year immediately
following the first year in which the Company generates cash from operations,
which is expected to be after 2001.
 
As of June 30, 2001, we had capital lease obligations totaling $5.5 million.
These obligations are secured by the specific equipment financed under each
lease and will be repaid monthly over the lease terms, which range from 36 to
63 months.
 
As of December 31, 2000, we had federal and California income tax net operating
loss carryforwards of approximately $39.9 million and $27.9 million,
respectively. The difference between the federal and California tax operating
loss carryforwards is primarily attributable to the 50% limitation in the
utilization of California tax net operating loss carryforwards. The federal and
California tax net operating loss carryforwards will begin to expire in 2006 and
2002, respectively, unless previously used. We also have federal and California
research and development and other tax credit carryforwards of approximately
$1.6 million and $1.3 million, respectively, which will begin to expire in 2005
unless previously used. We have provided a 100% valuation allowance against the
related deferred tax assets as realization of such tax benefits is not assured.
Our ability to use the net operating losses and credits may be subject to
substantial annual limitations due to the "change of ownership" provisions of
the Internal Revenue Code and similar state provisions. The annual limitation
may result in the expiration of the net operating losses before utilization.
 
We believe that our existing cash and cash equivalents, revenues to be derived
from the sale of our products and imaging services, current and anticipated
credit facilities and the net proceeds of this offering will be sufficient to
fund our operations for at least twelve months. However, our future capital
requirements will depend on numerous factors, including market acceptance of our
products and imaging services, the resources we devote to expanding the market
for our current products and imaging services and to developing new products,
regulatory changes, competition and technological developments, and potential
future merger and acquisition activity.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 

Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt

 
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instruments. Our risk associated with fluctuating interest rates is limited,
however, to certain of our long-term debt and capital lease obligations, the
interest rates under which are closely tied to market rates, and our investments
in interest rate sensitive financial instruments. Under our current policies, we
do not use interest rate derivative instruments to manage exposure to interest
rate changes. We attempt to ensure the safety and preservation of our invested
principal funds by limiting default risk, market risk and reinvestment risk. We
mitigate default risk by investing in investment grade securities. A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair value of our
interest sensitive financial instruments. Declines in interest rates over time
will, however, reduce our interest income while increases in interest rates over
time will increase our interest expense.

 
INFLATION
 
We do not believe that inflation has had a material impact on our business or
operating results during the periods presented.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
On January 1, 2001, we adopted Statement of Financial Accounting Standards, or
SFAS, No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
This statement establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments imbedded
in other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. We believe the adoption of SFAS No. 133 will not
have an effect on our financial statements because we do not engage in
derivative or hedging activities.
 
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND INTANGIBLE ASSETS. SFAS
No. 141 is effective for all business combinations completed after June 30,
2001. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001; however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of SFAS
No. 142. Major provisions of these statements and their effective dates for the
Company are as follows: (i) all business combinations initiated after June 30,
2001 must use the purchase method of accounting. The pooling of interest method
of accounting is prohibited except for transactions initiated before July 1,
2001; (ii) intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal rights or
are separable from the acquired entity and can be sold, transferred, licensed,
rented or exchanged, either individually or as part of a related contract, asset
or liability; (iii) goodwill and intangible assets with indefinite lives
acquired after June 30, 2001, will not be amortized. Effective January 1, 2002,
all previously recognized goodwill and intangible assets with indefinite lives
will no longer be subject to amortization; (iv) effective January 1, 2002,
goodwill and intangible assets with indefinite lives will be tested for
impairment annually and whenever there is an impairment indicator and (v) all
acquired goodwill must be assigned to reporting units for purpose of impairment
testing and segment reporting. The Company is currently evaluating the impact
that SFAS Nos. 141 and 142 will have on its financial reporting requirements.
 
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B
usiness
 
OVERVIEW
 
We are the first and only company to have developed and commercialized a
solid-state, digital gamma camera for use in nuclear medicine. We believe this
will allow us to become a leading provider of gamma cameras and mobile nuclear
cardiac imaging services. Our patented solid-state camera offers many advantages
over a conventional vacuum tube camera, such as smaller size, increased
mobility, increased durability, improved image quality, expanded clinical
applications and enhanced patient comfort. All other gamma cameras on the market
currently use conventional vacuum tube technology. We believe the features and
benefits of our technology will encourage healthcare providers to choose our
camera over conventional cameras for both initial and replacement purchases. In
addition, because of our camera's increased mobility and durability, we believe
it is ideally suited for use in a mobile imaging services application that has
not been widely available until now. We are initially focusing on the nuclear
cardiology segment of the nuclear imaging market, which is the largest and
fastest growing segment of that market.
 

Our proprietary technology allows for both a significant reduction in the size
of a gamma camera and a significant improvement in spatial resolution which is a
measurement of the quality of the image produced. Conventional gamma camera
photo-detectors are approximately four inches in height. Our photo-detectors are
only 0.012 inches high, providing an approximate 350-to-1 reduction in detector
size that makes the camera both thinner and lighter. While conventional cameras
use an average calculation to approximate the location of the gamma rays used to
create the image, our cameras determine the precise location of these gamma
rays. This improves spatial resolution and allows our camera to offer a
significant improvement in image quality over the conventional vacuum tube
technology.

 
We are currently addressing the rapidly growing nuclear cardiology market in the
following two ways:
 
-   NUCLEAR CAMERA SALES--We are selling our camera and related products to
    physician offices, imaging centers, hospitals and research laboratories,
    thus providing customers with a technologically advanced alternative to
    conventional vacuum tube gamma cameras.
 
-   MOBILE NUCLEAR CARDIAC IMAGING SERVICES--We are also providing mobile
    nuclear imaging services, as described in this prospectus, to physician
    offices, including cardiology and internal medicine practices. Our turn-key
    mobile imaging solution provides on-site access to all the benefits of our
    advanced diagnostic imaging technology, without requiring customers to make
    an up-front payment, hire additional personnel, obtain regulatory approval
    or establish a dedicated nuclear imaging suite. Our service model enables
    physicians to capture the revenue that would have otherwise been lost
    because the patient was referred elsewhere. In addition, it provides us with
    a recurring revenue stream from the servicing of our customers on a routine
    basis.
 

We began commercial production of our first solid-state, digital gamma camera
product, marketed as the DIGIRAD-TM- 2020TC Imager-TM- gamma camera, in
January 2000 and shipped our first unit in March 2000. From our first shipment
through June 30, 2001, we had received orders for 117 cameras, 59 of which had
been shipped. We expect that 38 units in our backlog will be shipped by
December 31, 2001 with the remainder expected to be shipped in 2002. In addition
to numerous independent cardiologists, customers that have purchased our cameras
include hospitals, such as The University of Texas M.D. Anderson Cancer Center
and Children's Hospital Boston and research laboratories, such as the Proctor &
Gamble Company and Nihon Medi-Physics Co., Ltd. Of the 117 cameras, 111 were
ordered by customers in the United States and six were purchased by customers in

 
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Japan. For the fiscal year ended December 31, 2000, three of our product
customers each accounted for over ten percent of our consolidated revenues.

 

We established our mobile nuclear cardiac imaging services operations in the
third quarter of 2000. As of June 30, 2001, we were providing nuclear cardiac
imaging services to approximately 101 physician offices in California, Delaware,
Florida, Indiana, Maryland, New Jersey, North Carolina, Ohio and Pennsylvania,
and were operating 18 mobile servicing routes, each of which is serviced by one
van and one camera. During the six month period ended June 30, 2001, our mobile
imaging services business performed approximately 6,900 imaging procedures. No
one physician office has accounted for more than ten percent of our consolidated
revenues.

 
We intend to continue expanding our imaging services business throughout the
United States, and we have completed license applications to expand into another
12 states.
 
INDUSTRY OVERVIEW
 
DIAGNOSTIC IMAGING
 
Diagnostic imaging technology generates representations of the internal anatomy
or physiology, primarily through non-invasive means. Diagnostic imaging
facilitates the early diagnosis of diseases and disorders, often minimizing the
cost and amount of care required and reducing the need for more costly and
invasive procedures. Currently, there are five major types of non-invasive
diagnostic imaging technologies available: x-ray; magnetic resonance imaging, or
MRI; computerized tomography, or CT; ultrasound; and nuclear imaging.
 
The first four of these technologies, x-ray, MRI, CT and ultrasound primarily
allow the physician to see the anatomical structure of internal organs.
Anatomical imaging offers the physician a limited structural assessment of the
patient's anatomy. Nuclear imaging, however, offers the ability to
non-invasively measure varying degrees of physiological activity, including
blood flow, organ function, metabolic activity, biochemical activity, and other
functional activity within the body. This functional information allows for the
earlier diagnosis of certain diseases than the information provided by
anatomical imaging procedures.
 
NUCLEAR IMAGING
 
Nuclear medicine is used primarily in cardiovascular, oncology and neurological
applications. According to a 2001 study by Frost & Sullivan, a leading marketing
consulting company, there were approximately 15.5 million nuclear imaging
procedures performed in the U.S. in 2000. We believe over 25 million procedures
were performed worldwide. The nuclear imaging market consists of two primary
technologies, gamma cameras and dedicated positron emission tomography, or PET,
machines. Frost & Sullivan states that gamma cameras are currently the preferred
choice for the majority of nuclear medicine procedures. The most widely used
type of gamma camera is a single photon emission computed tomography, or SPECT,
camera.
 
In a typical nuclear imaging procedure, the patient is injected with a small
amount of radioactive drug, or radiopharmaceutical, which is quickly broken down
by the body. Depending on the composition of the radiopharmaceutical, the
functionality of the tissue and the procedure being used, the
radiopharmaceutical localizes differently in normal versus abnormal tissues. The
physician uses images taken from a gamma camera and related clinical information
to evaluate the physiological performance of the organ being examined.
 
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TRENDS IN NUCLEAR CARDIAC IMAGING
 
Nuclear cardiology is the largest and fastest growing segment of the nuclear
imaging market. Frost & Sullivan reports that of the 15.5 million nuclear
imaging procedures done in the U.S. in 2000, 7.9 million, or 51%, were
cardiology related procedures. Nuclear imaging of the heart provides healthcare
professionals valuable information related to blood flow, to, through, and from
the heart as well as information on the heart muscle. Radiopharmaceuticals are
unique in their ability to remain in the heart muscle, enabling visualization
during a nuclear cardiac imaging procedure.
 

Increasingly, a nuclear cardiac imaging procedure is the first non-invasive,
diagnostic imaging procedure performed on patients with suspected heart disease.
Following a nuclear study, patients with suspected heart disease will often be
referred to more invasive diagnostic or therapeutic treatments. These treatments
may include: angiography, an x-ray procedure by which catheters are inserted
into an artery or vein to take pictures of blood vessels; angioplasty, a
procedure by which catheters with balloon tips are used to widen narrowed
arteries; or cardiac surgery. Given the clinical advantages of nuclear cardiac
images, many payors are requiring nuclear studies prior to the more invasive and
expensive diagnostic and therapeutic procedures.

 
The number of nuclear cardiac imaging procedures grew approximately 23% from
1999 to 2000, and is projected to grow 25% in 2001. Additionally, outpatient
cardiology is projected to grow 25% annually from 2001 to 2005. Reasons for the
rapid growth in nuclear cardiac imaging procedures include:
 
-   Valuable clinical information;
 
-   Cost-effectiveness;
 
-   Non-invasive nature;
 
-   Established reimbursement; and
 
-   An increase in heart disease.
 
Frost & Sullivan divides the nuclear cardiac imaging procedure market into four
segments: hospital in-patient, hospital out-patient, cardiology practices and
diagnostic imaging centers. Traditionally, nuclear medicine procedures have been
performed in hospitals under the supervision of nuclear physicians. Although a
number of cardiology practices with more than five cardiologists have
incorporated nuclear medicine into their practice setting, most nuclear cardiac
procedures are currently referred to hospitals and imaging centers, where the
cardiologist loses clinical control and receives minimal or no economic benefit.
 
DIGIRAD'S MARKET OPPORTUNITY
 
Our technology allows us to address the following two markets:
 
-   NUCLEAR CAMERA SALES--Frost & Sullivan projects that the U.S. gamma camera
    market for nuclear imaging will be approximately $325 million in 2001, and
    is expected to grow at an average annual rate of approximately 5% from 2001
    to 2007. We estimate that the non-U.S. gamma camera market is approximately
    $300 million. In addition, we estimate that the market for technical
    services is an additional 10% to 15% of a camera's purchase price per year
    over the life of the contract, which is typically 4 to 5 years.
 
-   MOBILE NUCLEAR CARDIAC IMAGING SERVICES--We believe the market opportunity
    for our mobile nuclear imaging services business is approximately $2.6
    billion. This market size is based on our target market of procedures
    performed in hospital, outpatient facilities, diagnostic imaging centers,
    physician offices and the following:
 
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           - A report by Frost & Sullivan that approximately 7.9 million nuclear
             cardiac imaging procedures were performed in the U.S. in 2000;
 
           - Frost & Sullivan's estimate, based on a more limited study, that
             approximately 56% of U.S. nuclear cardiac imaging procedures were
             performed in a hospital outpatient facility, diagnostic imaging
             center or physician office in 2000; and
 
           - Our average net revenue of approximately $600 per procedure.
 
Our proprietary technology enables physicians to perform office-based nuclear
imaging procedures that were previously referred elsewhere, with limited
disruption to their current practice. Therefore, we believe our solutions will
accelerate the transition of nuclear cardiac imaging procedures to non-hospital
sites, in particular cardiology and internal medicine practices.
 
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THE DIGIRAD ADVANTAGE
 
Our proprietary technology has enabled us to develop a gamma camera with many
unique features compared to conventional gamma cameras. The following chart
summarizes some of the major advantages of the Digirad solid-state camera versus
conventional vacuum tube gamma cameras:
 

<Table>
<Caption>
                    DIGIRAD SOLID-STATE CAMERA                  VACUUM TUBE CAMERA
              --------------------------------------  --------------------------------------
<S>           <C>                                     <C>
SMALLER SIZE  425-pound camera and 350-pound          1,500 to 5,000 pound SPECT camera is
              SPECTour-TM- chair requires only 7      large and virtually immobile. Requires
              feet by 9 feet of working space. Can    a dedicated room, reinforced floors
              be used in physicians' offices without  and extensive room renovations.
              requiring additional dedicated space.
 
INCREASED     The mobility of our camera facilitates  Typically, cameras are permanently
MOBILITY      our imaging services business. In       installed in hospitals or imaging
              addition, hospitals can use in          centers, thus requiring a physician to
              examination rooms or easily roll it     transfer patients there for their
              out for use in emergency rooms,         nuclear cardiac imaging studies.
              operating rooms, intensive care units
              or critical care units for bedside
              applications.
 
INCREASED     Relatively insensitive to physical      Single scintillation crystal is easily
DURABILITY    shock or temperature variations.        damaged and/or destroyed by physical
              Lightweight detector head is easily     shock and/or temperature variations,
              supported and should offer much         leading to expensive and
              greater reliability and lower           time-consuming replacement. Heavy
              maintenance costs.                      detector heads cause reliability
                                                      issues because of the complicated
                                                      supports required for such weight.
                                                      Expensive to maintain.
 
IMPROVED      Images on the perimeter of the          Best image quality obtained only in
IMAGE         detector head are as clear as images    center of camera, or its "sweet spot."
QUALITY       at the center. Offers fixed intrinsic   Spatial resolution is based on
              spatial resolution at any energy, and   probabilistic algorithms that are a
              true digital positioning that           function of gamma ray energy.
              pinpoints the source of gamma           Intrinsic spatial resolution varies
              radiation.                              with gamma ray energy.
 
EXPANDED      Smaller and lighter camera head can     Heads are less flexible and have a
CLINICAL      easily be shifted to various angles     limited number of available positions.
APPLICATIONS  and positions, providing ability to
              use in multiple applications in many
              areas of the hospital.
 
ENHANCED      Patients sit upright with their arms    Patients required to lie down for the
PATIENT       resting in front of them.               procedure while holding their arms
COMFORT                                               above their heads for an extended
                                                      period of time.
</Table>

 
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OUR BUSINESS STRATEGY
 
Our goal is to rapidly expand our business and increase our revenues by offering
a complete nuclear imaging solution to physician offices, imaging centers,
hospitals and research laboratories. The key elements of our business strategy
include:
 
-   LEVERAGE OUR PROPRIETARY TECHNOLOGY TO INCREASE SALES OF PRODUCTS AND
    IMAGING SERVICES--Our proprietary technology provides us with the unique
    opportunity to capitalize on both the camera sales and mobile imaging
    services market. We intend to increase sales of our camera and related
    products by capturing increased market share in existing channels and
    selling to physicians who can now for the first time place our camera into
    their practice with limited disruption. We also plan on increasing the
    number of routes and cardiologists served through our imaging services
    business, allowing office-based physicians to offer patients the convenience
    of receiving high quality nuclear imaging services in the office setting. In
    addition, our imaging services model, which includes a leasing services
    option, provides us with a recurring revenue stream through the servicing of
    our customers on a routine basis;
 
-   AGGRESSIVELY TARGET THE GROWING NUCLEAR CARDIOLOGY MARKET--Our sales force
    is primarily focused on the cardiology market, the largest and fastest
    growing segment of the nuclear imaging market. While we also sell our
    products to hospitals and imaging centers, our main focus is to office-based
    cardiologists and internal medicine practices. We are currently the only
    company to commercially offer office-based cardiologists a small, mobile,
    solid-state, digital gamma camera solution. This allows cardiologists to
    capture business that is currently referred to hospitals or imaging centers,
    creating additional income, and improving the service they provide to their
    patients;
 
-   EXPAND OUR INTEGRATED, DIRECT SALES FORCE--We use a direct sales force,
    supplemented by distributors internationally and in selected domestic
    geographies. This improves our ability to control our customer interface as
    well as focus and direct our sales efforts to a much greater extent than if
    we relied solely on third-party distributors. Investing in our own direct
    sales organization allows us to build a distribution asset that can be of
    great value over time as we look to grow the business by potentially
    providing additional products and services through this sales channel. Our
    direct sales force is integrated, in that there is a sales team within each
    geographic region that shares responsibility for customers and overall
    results. Although each member of the team has a particular focus, either
    selling cameras or imaging services, collectively, they are responsible for
    the success of the geographic region. This allows us to better forecast
    sales and manage the cost of our selling efforts, better meet the demands of
    our customers, and truly offer our customers a solution tailored to their
    needs;
 

-   LEVERAGE OUR PROPRIETARY MANUFACTURING PROCESSES--We believe our
    manufacturing process gives us a key competitive advantage by enabling us to
    manufacture products that use our proprietary technology in a cost efficient
    manner. Our manufacturing strategy combines our internal design expertise
    and proprietary process technology with the advanced manufacturing
    capabilities and capacity of our strategic manufacturing relationships. We
    have achieved, and anticipate additional, significant reductions in our
    manufacturing costs due to increased production volumes, improved yields and
    product design enhancements;

 

-   EXPAND ACCEPTANCE OF ADDITIONAL CLINICAL APPLICATIONS--The design of our
    camera provides the capability to perform some nuclear imaging procedures
    that were not previously available. Additionally, our current technology
    allows nuclear imaging to be performed in locations within the hospital,
    including the operating room, emergency department, ICU, and bedside. We are
    working with clinicians to understand the ways in which they use our camera
    to validate the use of

 
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   our camera for these new clinical applications. In addition, we believe that
    these new applications of our camera do not constitute new procedures for
    which we would have to obtain further regulatory approval. We believe this
    validation will increase the number of hospitals interested in purchasing
    our camera; and

 

-   CONTINUE TECHNOLOGICAL DEVELOPMENT--We continue to refine and improve our
    proprietary solid-state detector technology. By improving our technology, we
    plan to improve the performance of our cameras while at the same time reduce
    manufacturing costs. We also plan on designing and building a large field of
    view gamma camera using our technology that will expand clinical
    applications for our product. In addition, we plan to expand our technology
    for other uses such as computed tomography, which generates
    three-dimensional images of the body's internal organs. We also plan to
    develop gamma cameras specifically designed for research.

 
CURRENT PRODUCTS
 

2020TC IMAGER-TM- CAMERA--Our initial product is the 2020TC Imager camera, which
has an imaging area of eight inches by eight inches. The imaging area of most
conventional vacuum tube cameras is approximately fifteen inches by twenty
inches. In addition, in significant contrast to conventional vacuum tube camera
heads, which are typically greater than 14 inches thick and weigh upwards of
1,500 pounds, our imager heads are less than four inches thick and weigh about
60 pounds. The DIGIRAD 2020TC Imager provides true camera mobility, solid-state
reliability, excellent image quality and expanded clinical applications.
Approximately 75% of all nuclear imaging procedures are organ-specific rather
than whole body imaging. Our 2020TC Imager can perform all organ specific
imaging because these procedures do not require the large field-of-view
associated with the conventional gamma camera imaging heads.

 
SPECTOUR(TM) CHAIR--Unlike conventional systems where the patient lies on their
back with their left arm above their head while the camera circles around the
patient, the DIGIRAD SPECTour chair allows the patient to be seated upright with
their arms resting at shoulder level as they slowly rotate in front of the
2020TC Imager camera's head. The seated position produces improved image quality
and is more comfortable to the patient.
 
SPECTPAK-TM---This product was recently introduced in the second quarter of 2001
and is sold exclusively to the nuclear cardiology market. It combines a
modified, feature enhanced version of our 2020TC Imager camera with our SPECTour
chair, to provide a more optimal product for the cardiology market segment.
 
We have developed an image acquisition and processing software system for the
DIGIRAD 2020TC Imager camera and SPECTour chair under a license agreement with
Segami Corporation. The image acquisition software is designed to take advantage
of the unique characteristics of our solid-state detector technology. The
processing software is Segami's industry popular Mirage-TM- package. It runs on
a Microsoft NT platform and has a graphical user interface.
 
PRODUCTS UNDER DEVELOPMENT
 
We plan to introduce a next generation single platform device that incorporates
our camera and chair into one unit in late 2002. This configuration is designed
to enhance image quality in cardiac applications and requires less working
space.
 
We intend to introduce a multiple-head large field-of-view camera in 2003. This
camera will be suitable for whole body imaging and will compete directly with
the current large field of view vacuum
 
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tube designs. We believe that we will be able to offer significantly improved
products based on solid-state detector technology such as a camera head that can
be placed closer to the body and multiple heads that will decrease the
processing time.
 
OPERATIONS
 
MANUFACTURING
 

We have been manufacturing our cameras since March 2000. Our manufacturing
strategy combines our internal design expertise and proprietary process
technology with the advanced manufacturing capabilities and capacities of third
parties. We believe our manufacturing processes give us a key competitive
advantage by enabling us to manufacture products that use our proprietary
technology in a cost-efficient manner.

 

The general manufacturing process for the detector module includes procurement
of key components from key semiconductor manufacturers. We first perform
electrical tests on these components and then we deliver these components to
microelectronics packaging, either to our internal operation or to third
parties, for component sub-assembly. We then perform final assembly of the
detector module and test the detector module. The detector modules are then
assembled into a motherboard that is mounted in the camera detector head. The
camera's mechanical and electronics systems are assembled separately in our
facilities. As is done with the modules, the key components of the camera's
mechanical and electrical systems are designed by us, and either outsourced or
built internally. These key components include a personal computer, power
supplies, cooling system, liquid crystal display, controller boards, data
acquisition and communication system, and the mechanical structure of the
camera. We perform sub-assembly tests and final system performance tests in our
facilities.

 

All components used in the product are available from multiple sources with the
exception of the Segami image acquisition and processing software. All suppliers
of critical materials, components and subassemblies undergo ongoing quality
certification by us, with the objective of maintaining strong relationships with
the best suppliers. We utilize enterprise resource planning software and
collaborative web-based software to ensure efficient and secure handling of
inventory and material. The enterprise resource planning software helps us to
manage our inventory and materials by centralizing our purchasing procedures,
monitoring our inventory supplies and streamlining our billing methods. The
collaborative web-based software is a secure electronic network that enables our
employees to access our documents from anywhere in the world via the Internet.

 

We successfully completed a certification audit performed by the state of
California's Food and Drug Branch in the first quarter of 2000. As part of this
audit, the California Food and Drug Branch recognized our compliance with the
"Good Manufacturing Practices" requirements of the federal Food and Drug
Administration, or the FDA. The FDA has issued us an Establishment Registration.
We have also obtained pre-market clearance from the FDA, enabling us to market
our 2020TC Imager camera and SPECTour chair. California's Food and Drug Branch
also issued us a State of California Medical Device Manufacturing License. We
also received regulatory approval from the Japanese Ministry of Health in
October 2000, which is similar to our FDA Establishment Registration, and expect
to receive a Canadian Medical Device license in the third quarter of 2001. In
addition, the Canadian government requires approval of a gamma camera model by
the Canadian Standards Association before the model can be sold in Canada, and
we expect to receive such approval in the third quarter of 2001. In conjunction
with implementing Good Manufacturing Practices and product safety standards, we
expect to obtain a product approval in the third quarter of 2001 from
Underwriters Laboratories Inc. Underwriters Laboratories Inc. is an independent,
not-for-profit product safety testing and certification organization, and some
gamma camera customers in the United States require that the model of the

 
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camera they purchase pass a test developed for medical products by this
organization. In early 2002, we plan to initiate the drive for ISO-9000 quality
certification with the expectation of receiving certification in late 2002.
ISO-9000 is a compilation of quality standards promulgated by the International
Organization for Standardization, and a manufacturer that has been certified to
use a quality program that meets ISO-9000 does not have to independently test
each product that it sells in the European Community.

 
IMAGING SERVICES
 
Our imaging services business is operated by our Digirad Imaging Solutions
business unit. We established our imaging services operations in the third and
fourth quarters of 2000 by acquiring certain assets of two regional providers of
mobile nuclear imaging services. As of June 30, 2001, we were operating 18
mobile routes, each of which is serviced by one van and camera, and were
providing nuclear cardiac imaging services to approximately 101 physician
offices in California, Delaware, Florida, Indiana, Maryland, New Jersey, North
Carolina, Ohio, and Pennsylvania. In addition, we have completed licenses or
license applications and plan to expand into another 12 states in 2001.
 
Our imaging services model consists of two primary delivery options. Under our
first option, which we refer to as "mixed billing," we provide the technical
component of nuclear imaging services and bill either the physician or the
patient's third party payor, such as Medicare, on a per procedure basis. When we
bill some third party payors, such as Medicare, we also bill the patient for any
copayment. The physician performs and bills for the technical component, such as
the interpretation of the test. Under our second option, we lease cameras,
related equipment and technical personnel to physicians on a turn-key basis so
that they may deliver imaging services to their patients. The physician then
bills globally for both the technical and professional component. The physician
pays us on a fixed daily lease basis. When we refer to "imaging services" in
this prospectus, we are referring both to our mixed billing option and our
leasing services option. We provide services under a minimum one year contract.
 
We intend to provide our imaging services in two ways:
 

-   MOBILE ROUTES: Currently, all of our mobile imaging services are performed
    using mobile routes. We provide a 2020TC Imager camera, a SPECTour chair,
    equipment used to handle and measure the radiopharmaceuticals used in the
    procedure, nuclear technician and other services to a clinician's office on
    a daily lease basis or a combination of direct payor billing and fee per
    study basis; and

 
-   FIXED SITES: We may, in the future, deliver services using fixed sites. We
    would install a 2020TC Imager camera, a SPECTour chair, and hot lab
    equipment in a clinician's office or other site. Also, we would provide the
    nuclear technician and other services to the clinician or site on a per
    month or other periodic basis.
 

We seek to maximize revenue, cash flow and return on assets by actively managing
our fleet to maximize utilization. We employ logistics management systems and
typically schedule imaging services vans for one day per week at a particular
physician's office. Generally, each van consists of a 2020TC Imager camera, a
SPECTour chair, equipment used to handle and measure the radiopharmaceuticals
used in the procedure, a nuclear medicine technician and a clinical assistant.
The vans are typically operated from a regionally-centralized base location and
stored at the base location each evening. Radiopharmaceuticals are ordered each
day in sufficient quantity for the next day's scheduled procedures and are
delivered in the morning before the van leaves for its scheduled appointments
from the base location.

 
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SALES AND DISTRIBUTION
 
We sell our camera products and our imaging services through a direct sales
force, supplemented by two independent distributors in the United States, an
independent distributor in Canada and a corporate partner in Japan. Our direct
sales force in the United States is responsible for selling both gamma cameras
and imaging services. We utilize a team selling approach with Territory
Managers, and Sales Representatives. Our Territory Managers typically have over
10 years of experience selling sophisticated capital equipment in the medical
market and focus primarily on selling our gamma cameras to end users. Our Sales
Representatives typically have over five years of selling experience and focus
primarily on selling the imaging services solutions, which are marketed under
the Digirad Imaging Solutions name. In addition, our selling teams include Sales
Specialists, which focus on pre-sales support, and Application Specialists,
which focus on post-sales training and support. Both the Sales Specialist and
Application Specialist positions require significant prior work experience as a
Nuclear Medicine Clinical Technologist. We will maintain independent
distributors in those territories where the distributor has demonstrated a
commitment to our business by providing dedicated resources, and where
acceptable performance metrics are met.
 
Our target markets for the sale of our camera are cardiology practices,
hospitals, and imaging centers. Our experience to date suggests the sales cycle
for camera sales typically ranges from 90 to 180 days for a cardiology practice
and from 180 to 365 days for a hospital, with imaging centers being somewhere in
between. The complexity of the buying organization and their
budgeting/purchasing process for capital equipment determine the length of the
sales cycle.
 
Our target markets for our mobile nuclear imaging services are primarily
cardiology practices. Our experience to date indicates the sales cycle for these
imaging services customers is generally between 21 and 90 days.
 
Currently, our United States direct sales organization is made up of a Vice
President of Sales, a Western Region Director, an Eastern Region Director, a
Southern Region Director, eleven direct Territory Managers, eleven Sales
Representatives, four Sales Specialists and three Application Specialists.
Additionally, we have three direct technical service technicians that interact
with our independent technical service provider around the country. Our
independent technical service provider is Universal Service Trends, which has
over 50 technicians covering the entire continental United States.
 
Though our sales have been primarily focused on the domestic market, we have
established sales channels for international expansion into Japan and Canada. In
January 2000, we entered into a distribution agreement with Mitsui Corporation
to distribute DIGIRAD-TM- products in Japan, primarily to hospitals. In
conjunction with this distribution agreement, Mitsui made a $1 million equity
investment in Digirad in March 2000. We received Japanese Ministry of Health
regulatory approval in October 2000. Product shipments and sales started in
Japan in the fourth quarter of 2000, and as of June 30, 2001, we had sold six
units in Japan. In Canada, we currently have a distributor representing Digirad
and expect Canadian sales and shipments to begin in the fourth quarter of 2001.
 

All of our cameras are warranted for one year after shipment. The philosophy of
our warranty service is to locate in the field and replace faulty assemblies
with workable units from the service inventory. This approach is greatly
facilitated by the design of the 2020TC Imager camera because all of our cameras
are equipped with diagnostic software and a telephone modem enabling the
diagnostic software to be accessed remotely. This capability allows us to assist
field service personnel in rapidly locating a faulty assembly, and because no
critical assembly weighs more than 50 pounds, shipping assemblies is easily
accomplished via air courier. Service contracts supplement to the one year
warranty

 
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for nuclear medicine equipment are typically four to five years in length, and
cost the customer 10% to 15% of the purchase price of the cameras annually.

 
MARKETING
 
We formally launched the 2020TC Imager camera and the SPECTour chair at the
Society of Nuclear Medicine meeting in June 1999 in Los Angeles. We began
limited product shipments in March 2000, and began full product release in
July 2000. Our continuing marketing efforts include the following:
 
-   Establishing Centers of Excellence for demonstration sites and clinical
    studies;
 
-   Participating in major trade show exhibits at meetings sponsored by
    organizations such as the American College of Cardiology, the American Heart
    Association, the Society of Nuclear Medicine, the Radiological Society of
    North America, the European Association of Nuclear Medicine and the Japanese
    Society of Nuclear Medicine;
 
-   Advertising in key nuclear medicine and cardiology journals;
 
-   Developing an active medical advisory board;
 
-   Participating in clinical studies and authoring publications through the
    Digirad North American Working Group;
 
-   Sending direct mailings to cardiology and nuclear medicine clinicians and
    decision makers;
 
-   Preparing sales collateral material, including product brochures, product
    CDs, specification sheets, training materials, presentation materials, and
    image sheets; and
 
-   Participating in the American College of Nuclear Physicians.
 
We have been very active in the nuclear medicine community over the last five
years and exhibited earlier prototypes of our product at the last five Society
of Nuclear Medicine meetings. We plan to pursue strategic alliances and
co-promotional efforts with appropriate partners. Such partners may be
pharmaceutical companies selling radiopharmaceuticals, imaging companies,
radiopharmacies, or cardiology companies. These partnerships may consist of
marketing partnerships, joint development efforts, or manufacturing alliances.
 
TECHNOLOGY
 
OVERVIEW
 
The challenge of any camera system is to accurately map the spatial location of
the objects in its field-of-view from the real world to the camera's world.
Optical cameras use lenses to focus the light from a large real-world image
field onto a small image plane where a detector (film or electronic) is located.
However, since gamma rays cannot be focused, the area of the detector of a gamma
camera must be approximately as large as the area of the object being imaged.
 
CONVENTIONAL TECHNOLOGY
 

It is very difficult to build a gamma detector that can directly convert the
kinetic energy of a gamma ray photon into an electrical charge. Therefore, most
gamma ray detectors employ a scintillation crystal, or scintillator, to convert
the high energy of a single gamma ray photon into a large number of low energy
optical photons. The vast majority of nuclear medicine gamma cameras in use
today use a single crystal sheet as the scintillator. The area of this crystal
defines the field of view of the camera. Typical fields of view range from 64
square inches to 300 square inches.

 
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Once the gamma rays are converted into optical photons, these photons are then
converted into electrical charges by the next part of the detector, the
photo-detector. Almost all gamma cameras in use today use vacuum tube devices
called photomultiplier tubes as their photo-detectors. The typical
photomultiplier tube has a photosensitive surface of approximately 7 square
inches. In order to cover the entire field of view of the scintillation crystal,
square or hexagonal shaped photomultiplier tubes are packed together in an array
of anywhere from nine to 100 tubes. Optical photons striking anywhere on the
surfaces of the photomultiplier tubes are converted into electrons which are
then multiplied to produce a small electrical current output. These electronic
charges are then passed to the final part of the detector, the readout
electronics, and then into the camera's computer system to be processed into the
digital images viewed by the physician.

 

A problem with the conventional gamma camera is that it attempts to use an array
of photomultiplier tubes, to spatially resolve the point at which a gamma ray
strikes the surface of the camera. This method, called the Anger method, can
only estimate where the gamma ray strikes. It does so by combining the output
signals of all of the photomultiplier tubes and computing a position as a
function of the weighted average of the individual photomultiplier tube signals.

 

Because there can be considerable discrepancies between where the gamma ray is
reported to have struck the detector versus where it actually struck the
detector, Anger style gamma cameras can produce blurred images, which in turn
can impede the physician's ability to accurately read the image. While there has
been a large amount of effort spent in improving the performance of Anger style
gamma cameras, the underlying problem still exists: a single-scintillation
crystal, multi-photomultiplier tube based detector must rely upon probabilistic
position estimation.

 
DIGIRAD'S TECHNOLOGY
 

Digirad has overcome the fundamental drawback of the Anger method by
constructing a detector which provides total certainty of the spatial location
of the gamma ray. We achieve this certainty by dividing or segmenting the
detector into a large array of individual detection elements whose size equals
the spatial resolution desired, in our case, 3 millimeters by 3 millimeters. A
gamma ray emitted from a patient strikes the detector and the spatial location
of this event is mapped directly to the image. The response function of our
segmented detector is much more precise than that of the Anger style
photomultiplier tube. Furthermore, a segmented detector processes gamma ray
events in parallel; each pixel is an independent detector. In a single-crystal,
Anger style detector, events are processed in a series, one event at a time. In
general, this means segmented gamma cameras can achieve much higher gamma ray
detection rates than single-crystal gamma cameras.

 

Previous attempts to construct a segmented detector by both industry groups and
academics have been unsuccessful, primarily due to the Anger camera's
photodetector. Given their relative size, instability, and numerous other
factors, Anger style photomultiplier tubes are unsuitable for use in a segmented
detector. A more optimal photodetector is a high-performance silicon photodiode.
Silicon photodiodes can be packed closer, provide solid-state reliability, and
are more efficient at converting the scintillation photons coming from the
scintillation crystal. However, technical difficulties in producing high quality
photodiodes that are reliable and can be used for gamma cameras have been a
major impediment to their use in this application.

 
We have developed a photodiode that meets these stringent performance
requirements. In addition, over the last 2 years, we have developed a patent
pending manufacturing process for cost-effectively producing these photodiodes
in volume. Our use of silicon photodiodes as photodetectors has, in turn,
enabled the use of a more efficient scintillation crystal in the DIGIRAD-TM-
detector module. A photomultiplier tube is at peak efficiency using blue
wavelengths of light. Therefore, conventional gamma cameras use a single, planar
crystal of thallium activated sodium iodide, or NaI(Tl), which
 
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emits blue wavelengths of light during scintillation. Silicon photodiodes,
however, are most sensitive to the longer wavelengths of the visible spectrum.
For this reason, thallium activated cesium iodide, or CsI(Tl), is a better
scintillator for silicon photodiodes than NaI(Tl). Significantly, CsI(Tl) is
also 36% more efficient than NaI(Tl) at converting the energy of the gamma ray
to optical photons. In addition, CsI(Tl) is denser, and is therefore better at
absorbing gamma rays, than NaI(Tl); a 6 millimeter thick CsI(Tl) detector
absorbs the same number of 140 keV gamma rays as does a 9 millimeter thick
NaI(Tl) scintillator. The DIGIRAD camera uses a six millimeter thick CsI(Tl)
segmented scintillation crystal.
 
The key components of the segmented CsI(Tl) scintillation crystal, silicon
photodiode and readout electronics are all packaged into a detector module. Our
detector module is designed so that it can be tiled with several other modules
to create a large area detector of essentially any shape. Digirad holds several
patents covering this concept of modules than can be tiled.
 
The current DIGIRAD 2020TC Imager camera uses 32 modules to create its 8 inch by
8 inch detection area. The array of detection modules is then placed behind a
collimator and into a lead-shielded head case. A collimator is a device
constructed from lead with thousands of small parallel holes that are aligned
perpendicular to the camera's detector surface. The collimator's purpose is to
only allow gamma rays that are perpendicular to the camera surface to be
detected, thereby helping prevent blurred images. Below is a view of the 2020TC
Imager camera detector head assembly and illustrates the arrangement of the
modules, collimator and lead-shielded head case.
 
                          [Picture of detection head.]
 
THE DIGIRAD CAMERA'S TECHNICAL ADVANTAGES
 

SMALLER SIZE--The main advantage that our photodiode technology provides is a
significant reduction in the size of a gamma camera. As previously described, a
conventional gamma camera uses photomultiplier tubes, 4 inches in height, as its
photo-detectors. The photo-detectors in our camera are silicon photodiodes,
0.012 inches in height. This almost 350-to-1 reduction in the photo-detector
size enables the DIGIRAD camera head to be significantly thinner than a
conventional camera's head. Furthermore, because all gamma camera heads are
lead-shielded, the much thinner DIGIRAD camera head is also much lighter. The
smaller, lighter head of the DIGIRAD camera results in a smaller and lighter
overall camera assembly, which increases the mobility of the camera and its
scope of clinical applications.

 
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         [Picture of photo multiplier tube versus Digirad photodiode.]
 
IMAGE QUALITY--Digirad's segmented gamma camera offers significant improvement
in intrinsic image quality compared to conventional Anger style cameras because
the DIGIRAD camera's detector is segmented. Segmentation offers fixed intrinsic
spatial resolution which provides for true digital positioning. Today, the word
"digital" is used in virtually every gamma camera sold. While this can describe
various aspects of the electronics and the stage at which the signals are
converted from their inherent analog type to a digital signal, only a segmented
detector has true digital event positioning. We call this process Digital
Position Sensing(SM).
 

LARGER USEFUL FIELD OF VIEW / LESS "DEAD SPACE"--Another advantage of the
DIGIRAD camera is that our detector head has a larger useful field of view. In
an Anger style camera, gamma rays that strike the perimeter of the scintillation
crystal are viewed by fewer photomultiplier tubes than those striking in the
middle of the crystal. Because the Anger camera requires input from multiple
photomultiplier tubes in order to calculate an average spatial position, this
creates an area of dead space around the edge of the detector head in which the
image is not useful. As a result, the useful field of view on Anger style
cameras is smaller than the area of the detector. However, Digital Position
Sensing eliminates any dead space around the edge of the detector head, thus
making the useful field of view on the DIGIRAD camera almost equal to the entire
area of the detector surface.

 

ENHANCED OPERABILITY AND RELIABILITY--In addition to a smaller size gamma
camera, our solid-state technology enables a more convenient to operate, power
efficient and more reliable gamma camera. Conventional Anger style gamma cameras
must be powered continuously in order to temperature stabilize their vacuum
photomultiplier tubes, which complicates significantly the design and
construction of portable Anger style cameras. Since Anger cameras draw
electrical power 24 hours per day, they dissipate heat that must be removed by a
heating and ventilation system. The DIGIRAD camera does not need to be powered
continuously and is ready to image minutes after turn on. These qualities enable
a DIGIRAD unit to be mobile and also saves on electrical power; less power is
required to operate the camera and cool the room in which it is operated.
Solid-state detectors are more mechanically rugged than photomultiplier tubes.
The shock of crossing a curb cut or a door threshold will not change the
performance characteristics of our solid-state detector as it can with a

 
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photomultiplier tube. Our solid-state detectors also can tolerate more rapid
changes in temperature than can an Anger style camera, another important
capability for a portable camera that is moved in and out of buildings and
vehicles.

 
INTELLECTUAL PROPERTY
 
We have developed a broad intellectual property portfolio that includes overall
product, component level and process patents. Currently, we have 15 patents
issued and have eight additional patents pending in the United States. We also
have one patent licensed from a third party for exclusive use in nuclear
imaging. The Japanese and European equivalents for several of these United
States patents are pending, with one Japanese and one Korean patent issued. In
addition to our broad solid-state detector and photodiode technology patents, we
hold specific patents for an alternative solid-state method using Cadmium Zinc
Telluride, or CZT, that we previously pursued for use in gamma cameras. While
each of our patents apply to nuclear medicine, many also apply to the
construction of area detectors for other types of medical imagers and imaging
methods. A summary of our intellectual property portfolio is as follows:
 
-   Fifteen United States patents issued;
 
-   One Japanese patent issued;
 
-   One Korean patent issued;
 
-   Eight utility applications that are pending with the United States Patent
    and Trademark Office, with office actions having been received on two; and
 
-   One provisional application is in progress.
 
We believe it would be difficult to develop an economically viable competitive
solid-state, digital gamma camera without infringing our patents.
 
COMPETITION
 

CAMERA SALES--The major manufacturers of nuclear medicine cameras, all of whose
cameras are based on the conventional vacuum tube technology, include Philips
Medical Systems through its subsidiary ADAC Laboratories, General Electric
Medical Systems, Siemens Medical Systems, Marconi Medical Systems (pending
acquisition by Phillips Medical Systems) and Toshiba Medical Systems. All of
these competitors offer a full line of imaging cameras for each diagnostic
imaging technology, including x-ray, magnetic resonance imaging, computed
tomography, ultrasound and nuclear medicine. The possibility exists that one or
more of these companies could decide to develop its own solid-state, digital
gamma camera. However, we believe it would be difficult to develop an
economically viable competitive camera without infringing our patents.

 
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IMAGING SERVICES--Competition in the mobile nuclear imaging services business is
limited. Competitors tend to be small, undercapitalized businesses employing
conventional vacuum tube cameras that must be transported in large trucks and
cannot be moved in and out of physician offices. We expect to have a distinct
competitive advantage by controlling the enabling technology that provides the
convenience, quality and high level of service physicians will expect. As a
result, we believe that our imaging services business will have a proprietary
technological position. Additionally, we do not expect competition in the mobile
imaging service business from traditional nuclear imaging manufacturers because
their focus is on camera sales to hospitals.

 
GOVERNMENT REGULATION
 

Our business is subject to extensive federal and state government regulation.
Some of these laws have not been fully interpreted by the regulatory authorities
or the courts, and their provisions are open to a variety of interpretations. In
addition, these laws and their interpretations are subject to change.

 
FRAUD AND ABUSE LAWS
 
The healthcare industry is subject to extensive federal, state and local
regulation relating to licensure, conduct of operations, ownership of
facilities, addition of facilities and services and payment for services.
 

In particular, the federal Anti-Kickback Law prohibits persons from knowingly
and willfully soliciting, offering, receiving or providing remuneration,
directly or indirectly, in exchange for or to induce either the referral of an
individual, or furnishing or arranging for a good or service, for which payment
may be made under a federal healthcare program such as the Medicare and Medicaid
programs. The definition of "remuneration" has been broadly interpreted to
include gifts, discounts, the furnishing of supplies or equipment, credit
arrangements, payments of cash and waivers of payments. The statute itself has
been broadly interpreted to mean that if any ONE purpose of an arrangement
involving remuneration is to induce referrals of federal healthcare covered
business, the statute has been violated. The penalties for violating the
Anti-Kickback Law can be severe. These sanctions include criminal penalties and
civil sanctions, including fines, imprisonment and possible exclusion from
Medicare, Medicaid and other federal healthcare Programs.

 
The Anti-Kickback Law is broad, and it prohibits many arrangements and practices
that are lawful in businesses outside of the healthcare industry. Recognizing
that the Anti-Kickback law is broad and may technically prohibit many innocuous
or beneficial arrangements within the healthcare industry, the United States
Department of Health and Human Services has issued a series of regulations,
known as the "safe harbors," beginning in July of 1991. These regulations set
forth certain safe harbors which, if all applicable requirements are met, will
assure healthcare providers and other parties that they will not be prosecuted
under the Anti-Kickback Law. Additional provisions providing similar protections
have been published intermittently since 1991. Although full compliance with all
applicable safe harbors ensures against prosecution under the Anti-Kickback Law,
the failure of a transaction or arrangement to fit within one or more safe
harbors does not necessarily mean that the transaction or arrangement is illegal
or that prosecution under the Anti-Kickback Law will be pursued. However,
conduct and business arrangements that do not fully satisfy each applicable safe
harbor may result in increased scrutiny by government enforcement authorities
such as the Office of the Inspector General of the United States Department of
Health and Human Services, or OIG. To provide specific guidance on the
application of the Anti-Kickback Law, Congress required the OIG to implement an
advisory opinion process. In an advisory opinion, the OIG may determine that it
will not sanction the advisory opinion's requestor even if the arrangement or
practice in question technically violates the
 
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Anti-Kickback Law. Although these advisory opinions are binding on the OIG and
the parties requesting the opinions, no third-party may legally rely on them.
 

Many states have adopted laws similar to the Anti-Kickback Law. Some of these
state prohibitions apply to referral of patients for healthcare services
reimbursed by any source, not only the Medicare and Medicaid programs. Some of
these state prohibitions may be more restrictive than the Anti-Kickback Law in
material respects, and the federal safe harbors may not apply.

 
Our nuclear imaging services model includes providing services and supplies to
physicians, for which the physicians pay us, for the use in treating their
privately insured patients. These physicians also refer Medicare patients to us,
for which we bill the Medicare program directly. This type of arrangement, if
not properly structured, may violate the Anti-Kickback Law and also raises
issues under another Medicare statute, 42 U.S.C. Section 1320a-7(b)(6). That
statute prohibits providers from charging Medicare substantially in excess of
the provider's usual and customary charges unless the Secretary of Health and
Human Services finds good cause. We have attempted to structure such
arrangements and our other services to comply with the Anti-Kickback Law and
similar state laws, as well as with 42 U.S.C. Section 1320a-7(b)(6). However,
there can be no assurances to this effect. We have attempted to structure our
business arrangements for the provision of single photon emission imaging and
other services comply with the Anti-Kickback Law and similar state laws, but
there can be no assurances to this effect.
 
In addition, the Ethics in Patient Referral Act of 1989, commonly referred to as
the federal physician self-referral prohibition or Stark Law, prohibits
physician referrals of Medicare patients to an entity for certain designated
healthcare services if the physician or an immediate family member has an
ownership interest in, or compensation arrangement with, the entity and no
statutory or regulatory exception applies. It also prohibits an entity receiving
a prohibited referral from billing and collecting for services rendered pursuant
to such referral. Initially, the Stark Law applied only to clinical laboratory
services and regulations applicable to clinical laboratory services were issued
in 1995. Earlier that same year, the Stark Law's self-referral prohibition
expanded to additional goods and services, including radiology services,
magnetic resonance imaging, computerized axial tomograph scans, and ultrasound
services. In 1998, the Healthcare Financing Administration, now known as the
Centers for Medicare and Medicaid Services, or CMS, published proposed rules for
the remaining designated healthcare services, that would have included nuclear
imaging within the meaning of "radiology services." However, in January of 2001,
CMS published a final rule which it characterized as the first phase of what
will be a two-phase final rule, which reversed this position and indicated that
nuclear medicine would not be a service covered under the Stark Law. CMS has
also indicated that other supplies provided by us do not constitute designated
healthcare services. However, it is possible that CMS will again reverse its
interpretation in the future to include nuclear imaging as a Stark covered
service, or that such supplies could be interpreted in the future to constitute
designated healthcare services under the Stark Law.
 

A person who engages in a scheme to circumvent the Stark Law's prohibitions may
be fined up to $100,000 for each such arrangement or scheme. In addition, anyone
who presents or causes to be presented a claim to the Medicare program in
violation of Stark is subject to monetary penalties of up to $15,000 per
service, an assessment of several times the amount claimed, and possible
exclusion from participation in federal healthcare programs. Claims submitted in
violation of Stark may also be subject to liability under the federal False
Claims Act and its whistleblower provisions (as discussed below).

 

Several states in which we operate have enacted or are considering legislation
that prohibits physician self-referral arrangements and/or requires physicians
to disclose any financial interest they may have

 
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with a healthcare provider to their patients when referring patients to that
provider. Possible sanctions for violating state physician self-referral laws
vary, but may include loss of license and civil and criminal sanctions. State
laws vary from jurisdiction to jurisdiction and, at least in certain states, are
more restrictive than the federal Stark Law in a number of material respects. In
certain states, these restrictions may add considerable expense to or limit
altogether the types of business models we may successfully utilize. Some states
have indicated they will interpret their own self-referral statutes the same way
that the Centers for Medicare & Medicaid Services interpret the Stark Law, but
it is possible the states will interpret their own laws differently in the
future. We have attempted to structure our operations to comply with these
federal and state physician self-referral prohibition laws, but there can be no
assurances to this effect.

 
The Health Insurance Portability and Accountability Act of 1996 created two new
federal crimes: healthcare fraud and false statements relating to healthcare
matters. The healthcare fraud statute prohibits knowingly and willfully
executing a scheme to defraud any healthcare benefit program, including private
payors. A violation of this statute is a felony and may result in fines,
imprisonment or exclusion from government sponsored programs. The false
statements statute prohibits knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false, fictitious or
fraudulent statement in connection with the delivery of or payment for
healthcare benefits, items or services. A violation of this statute is a felony
and may result in fines or imprisonment. The Health Insurance Portability and
Accountability Act of 1996 also will require us to follow federal privacy,
security and transaction standards for the transmission, storage and use of
individually identifiable health information, which may add significant costs
and potential burden to our operations. A violation of these privacy standards
may result in criminal and civil penalties.
 
Both federal and state government agencies are continuing heightened and
coordinated civil and criminal enforcement efforts. As part of announced
enforcement agency work plans, the federal government will continue to
scrutinize, among other things, the billing practices of hospitals and other
providers of healthcare services. The federal government also has increased
funding to fight healthcare fraud, and it is coordinating its enforcement
efforts among various agencies, such as the United States Department of Justice,
the OIG, and state Medicaid fraud control units. We believe that the healthcare
industry will continue to be subject to increasing government scrutiny and
investigations.
 
FEDERAL FALSE CLAIMS ACT
 
Another trend affecting the healthcare industry is the increased use of the
federal False Claims Act and, in particular, actions under the False Claims
Act's "whistleblower" provisions. Those provisions allow a private individual to
bring actions on behalf of the government alleging that the defendant has
defrauded the federal government. After the individual has initiated the
lawsuit, the government must decide whether to intervene in the lawsuit and to
become the primary prosecutor. If the government declines to join the lawsuit,
then the individual may choose to pursue the case alone, in which case the
individual's counsel will have primary control over the prosecution, although
the government must be kept apprised of the progress of the lawsuit. Whether or
not the federal government intervenes in the case, it will receive the majority
of any recovery. If the litigation is successful, the individual is entitled to
no less than 15%, but no more than 30%, of whatever amount the government
recovers. The percentage of the individual's recovery varies, depending on
whether the government intervened in the case and other factors.
 
Recently, the number of suits brought against healthcare providers by private
individuals has increased dramatically, many of which are still under seal from
the public. In addition, various states are considering or have enacted laws
modeled after the federal False Claims Act. We are unable to predict whether we
will be subject to future actions or the impact of any future actions.
 
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When a person is determined to have violated the federal False Claims Act, it
must pay three times the actual damages sustained by the government, plus
mandatory civil penalties of between $5,500 to $11,000 for each separate false
claim. There are many potential bases for liability under the federal False
Claims Act. Liability arises, primarily, when an entity knowingly submits, or
causes another to submit, a false claim for reimbursement to the federal
government. Although simple negligence should not give rise to liability,
submitting a claim with reckless disregard or deliberate ignorance of its truth
or falsity could result in substantial civil liability.
 
UNLAWFUL PRACTICE OF MEDICINE AND FEE SPLITTING
 
The marketing and operation of our diagnostic imaging systems are subject to
state laws prohibiting the practice of medicine by non-physicians, or the
employment or excessive control of the medical judgment of physicians by
non-physicians (often referred to as the corporate practice of medicine). We
have attempted to structure our operations so that they do not involve the
practice of medicine, or violate corporate practice of medicine statutes. For
example, all professional medical services relating to our operations, including
the interpretation of scans and related diagnoses, are separately provided by
licensed physicians not employed by us. Some states also have laws that prohibit
any fee-splitting arrangement between a physician and a non-physician. We have
also attempted to structure our operations so that they do not violate these
state laws with respect to fee splitting. However, there can be no such
assurance to that effect with respect to these two sets of laws.
 
CERTIFICATE OF NEED LAWS
 
Some states require a certificate of need, or similar regulatory approval, prior
to the acquisition of high-cost capital items or services, including diagnostic
imaging systems or provision of diagnostic imaging services by us or our
clients. Certificate of need regulations may limit or preclude us or our clients
from providing diagnostic imaging services or systems.
 
REIMBURSEMENT
 
We derive a substantial percentage of our revenues from government programs,
such as Medicare, or direct billings to physicians. We derive a smaller
percentage of our revenues from direct billings to other third-party payors.
Services for which we submit direct billings for Medicare patients typically are
reimbursed by Medicare on a fee schedule basis.
 

As a result of federal cost-containment legislation that has been in effect for
many years, Medicare generally pays for inpatient services under a prospective
payment system based upon a fixed amount for each Medicare patient discharge.
Each discharge is classified into one of many diagnosis related groups. A
pre-determined payment amount covers all inpatient operating costs, regardless
of the services actually provided or the length of the patient's stay. Because
Medicare reimburses most hospitals for all services rendered to a Medicare
inpatient on the basis of a pre-determined amount based on the diagnosis related
groups, most hospitals, and all free-standing facilities, cannot be separately
reimbursed by Medicare for a single photon emission imaging scan or other
procedure performed on hospital inpatients. Many state Medicaid programs have
adopted comparable payment policies.

 

On August 1, 2000, the Centers for Medicare and Medicaid Services implemented a
Medicare outpatient prospective payment system under which services and items
furnished in hospital outpatient departments are reimbursed using a
pre-determined amount for each ambulatory payment classification. Each
ambulatory payment classification is based on the specific procedures performed
and items furnished during a patient visit. Certain items and services are paid
on a fee schedule, and hospitals are reimbursed additional amounts for certain
drugs, biologics and new technologies. We

 
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cannot predict what impact the new Medicare outpatient reimbursement system will
have on the demand for our cameras and services from hospitals.

 

MEDICARE BILLING AND ENROLLMENT

 

We can bill Medicare directly for services only to the extent we are enrolled as
an independent diagnostic testing facility. Medicare has delegated the function
of enrollment to contractors known as the Medicare carriers, each of whose
jurisdiction varies, as some carriers govern several states, some just one state
and some just a portion of a state. Although federal regulations and program
memoranda from the Centers for Medicare and Medicaid Services set forth uniform
rules governing independent diagnostic testing facility billing and enrollment,
each carrier is free to interpret these rules to a certain extent. For example,
an independent diagnostic testing facility is required to have one or more
supervising physicians, each of whom meets certain proficiency requirements;
these precise proficiency requirements vary from carrier to carrier. The nature
of a particular carrier's proficiency and other requirements may add
considerable expense to or limit the types of business models we may be able to
utilize successfully in the carrier's jurisdiction.

 
Part of our business involves the leasing of equipment and personnel to
physicians, who then bill Medicare and other third party payors directly for
nuclear imaging services. Medicare rules permit physicians to bill for certain
diagnostic tests performed using leased equipment and personnel, and to receive
payment based on the applicable Medicare fee schedule, if certain conditions are
satisfied. We have attempted to structure our equipment and personnel leases so
that physicians are able to bill in this manner if they comply with the terms of
the leases, but there can be no assurance to that effect. If any of our leasing
physicians are deemed not to meet these conditions, payment to the affected
physicians could be denied or recouped. If the failure to comply is deemed to be
"knowing" and/or "willful," as defined in federal statutes, the government could
seek to impose fines or penalties. This may require us to restructure our
agreements with these physicians and/or respond to any resultant claims by
physicians or the government.
 
NON-GOVERNMENTAL THIRD PARTY PAYOR LIMITATIONS
 
Non-governmental third party payors, such as commercial health maintenance
organizations, or HMOs, preferred provider organizations, or PPOs, and other
insurers, may impose varying requirements and limitations on our ability to
receive payment directly for services we provide. For instance, some payors will
not reimburse us separately for the nuclear imaging tests we perform, and
instead require that reimbursement be paid only on a "global" basis to the
physician who provides the professional interpretation of the nuclear imaging
test. Such payor requirements and limitations restrict the types of business
models we can successfully utilize for patients covered by these payors.
 
PHARMACEUTICAL LAWS
 
Our services involve radiopharmaceuticals and other substances regulated as
drugs by state and federal agencies, including the federal Food and Drug
Administration and state pharmacy boards. These agencies administer laws
governing the manufacturing, distribution, use, administration and prescribing
of drugs. These laws include the federal Food, Drug and Cosmetic Act, state food
and drug laws and state pharmacy acts. Some of our activities may be deemed to
require additional permits or licensure under laws which impose substantial
restrictions on who can qualify for such permits or licensure. If any of these
agencies deemed our activities to require additional permits or licensure, we
would be required to either obtain such permits or licensure, if possible, or
modify the types of business models we can utilize in the affected
jurisdiction(s).
 
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ENVIRONMENTAL, HEALTH AND SAFETY LAWS
 
Our imaging services involve the controlled storage, use and disposal of
material containing radioactive isotopes. While this material has a short
half-life, meaning it quickly breaks down into inert, or non-radioactive
substances, using such materials presents the risk of accidental environmental
contamination and physical injury. We are subject to federal, state and local
regulations governing the use, storage, handling and disposal of materials and
waste products. Although we believe that our safety procedures for handling and
disposing of these hazardous materials comply with the standards prescribed by
law and regulation, we cannot completely eliminate the risk of accidental
contamination or injury from those hazardous materials. In the event of an
accident, we could be held liable for any damages that result, and any liability
could exceed the limits or fall outside the coverage of our insurance. We may
not be able to maintain insurance on acceptable terms, or at all. We could incur
significant costs and the diversion of our management's attention in order to
comply with current or future environmental laws and regulations. We have not
had material expenses related to environmental, health and safety laws or
regulations to date and we have no inspection for which a plan of correction has
not been accepted.
 
U.S. FOOD AND DRUG ADMINISTRATION, OR FDA, AND STATE OR FOREIGN APPROVALS
 
The manufacture and sale of medical devices intended for commercial distribution
are subject to extensive governmental regulation in the United States. Medical
devices are regulated in the United States primarily by the FDA and also by
certain similar state agencies, such as the California Food and Drug Branch. The
FDA requires that medical devices be manufactured in registered establishments.
California's Food and Drug Branch requires medical device manufacturers to
obtain a Medical Device Manufacturing License.
 
As part of the regulatory framework, medical devices require pre-market
clearance (demonstrating substantial equivalence to a legally marketed device)
or pre-market approval (indicating the device is safe and effective for intended
use) prior to commercial distribution. In addition, certain material changes or
modifications to, and changes in intended use of, medical devices also are
subject to FDA review and clearance or approval. The FDA regulates the research,
testing, manufacture, safety, effectiveness, labeling, storage, record keeping,
promotion and distribution of medical devices in the United States and the
export of unapproved medical devices from the United States to other countries.
Noncompliance with applicable requirements can result in failure of the
government to grant pre-market clearance or approval for devices, withdrawal or
suspension of approval, total or partial suspension of production, fines,
injunctions, civil penalties, refunds, recall or seizure of products and
criminal prosecution. The State of California imposes similar state requirements
and may impose similar sanctions on us.
 
One way a new device can be introduced into the market in the United States is
for the manufacturer or distributor to obtain FDA clearance by a 510(k)
notification that such device is substantially equivalent to a prior approved
device. The FDA requires a rigorous demonstration of substantial equivalence. A
medical device manufacturer must obtain a new 510(k) each time it makes a change
or modification to a legally marketed device that could significantly affect the
safety or effectiveness of the device, or where there is a major change or
modification in the intended use of the device or a new indication for use of
the device. When any change or modification is made to a device or its intended
use, the manufacturer is expected to make the initial determination as to
whether the change or modification is of a kind that would necessitate the
filing of a new 510(k). We have received 510(k) clearance to market our 2020TC
Imager camera and SPECTour chair, and may require similar FDA clearances for
additional products or improvements to our current products.
 
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Any products manufactured or distributed by us are subject to continuing
regulation by the FDA and the State of California, which includes record keeping
requirements, reporting of adverse experience with the use of the device, Good
Manufacturing Practices requirements and post-market surveillance. It may also
include post-market registry and other actions deemed necessary by the FDA.
 
Sales of medical device products outside the United States are subject to
foreign regulatory requirements that vary from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for licensing may
differ from FDA requirements.
 
We will spend considerable time and effort to comply with the FDA, state, and
foreign regulatory requirements described above. Any failure to obtain and
maintain compliance with such requirements could have a material adverse effect
on our business and subject us to sanction.
 
FACILITIES
 
As of June 30, 2001, we lease in aggregate approximately 48,000 square feet in
San Diego, California. These facilities serve as our executive headquarters and
as the base for our marketing and product support operations, research and
development and manufacturing activities. These leased facilities also include
approximately 7,000 square feet of clean room space.
 
In addition, Digirad Imaging Solutions, our wholly-owned subsidiary, leases
office space in eight locations in Indiana, Maryland, New Jersey, North
Carolina, Ohio, Pennsylvania and Florida which together represent approximately
18,000 combined square feet of office space These leased facilities serve as a
base for the marketing and imaging services operations of Digirad Imaging
Solutions.
 
EMPLOYEES
 
As of June 30, 2001, we had 257 employees, including 18 in our research and
development department, 43 in our sales and marketing department, 105 in our
manufacturing department, 25 in general and administrative functions and 66 in
mobile imaging services operations. We believe that our relations with our
employees are good.
 
LEGAL PROCEEDINGS
 
In July 2001, we were served with notice that a complaint had been filed by
Medical Management Concepts, Inc. in the United States District Court for the
Eastern District of Pennsylvania. The complaint alleges, among other things,
breach of the terms of a Services Agreement and an Employee Lease Agreement,
each dated September 2000 and entered into by and between our wholly owned
subsidiary, Digirad Imaging Systems, Inc., and Medical Management Concepts as
part of our acquisition of some of the customer contracts and select assets
relating to the mobile nuclear imaging services of Nuclear Imaging
Systems, Inc. and Cardiovascular Concepts, P.C. This complaint seeks recovery of
damages for approximately $81,000 plus 12.5% of the adjusted estimated net
revenue generated from gross sums billed to our mobile nuclear imaging customers
from May 1, 2001 to October 31, 2003. We intend to vigorously defend against
this complaint.
 
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--------------------------------------------------------------------------------
 

Management
 
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
 
The following table sets forth certain information regarding our executive
officers, key employees and directors as of August 23, 2001:
 

<Table>
<Caption>
NAME                                                         AGE            POSITION(S)
-----------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                    <C>
EXECUTIVE OFFICERS AND KEY EMPLOYEES:
R. Scott Huennekens................................  37                     President, Chief Executive Officer and
                                                                            Director
Gary J.G. Atkinson.................................  49                     Vice President of Finance and Chief
                                                                            Financial Officer
Richard L. Conwell.................................  50                     Vice President of Marketing
Robert E. Johnson..................................  44                     Vice President of Sales and Service
John F. Sheridan...................................  46                     Vice President of Operations
David M. Sheehan...................................  38                     President, Digirad Imaging Solutions, Inc.
 
DIRECTORS:
Timothy J. Wollaeger(1)............................  57                     Chairman of the Board of Directors
R. King Nelson(2)..................................  44                     Director
Brad Nutter........................................  49                     Director
Kenneth E. Olson(1)(2).............................  64                     Director
Douglas Reed, M.D.(2)..............................  47                     Director
</Table>

 
---------
 
(1) Members of Compensation Committee
 
(2) Members of Audit Committee
 
R. SCOTT HUENNEKENS has been our President and a member of our board of
directors since May 1999 and our Chief Executive Officer since June 1999. Prior
to being appointed as our President and Chief Executive Officer, from
March 1997 to April 1999, Mr. Huennekens served as our Chief Financial Officer
and Vice President of Sales and Marketing. Prior to joining us, from July 1993
to March 1997, Mr. Huennekens held various positions at Baxter Healthcare
Corporation, a medical products and services company, including Vice President
of Sales & Marketing for the Novacor division and its sales of left ventricular
assist devices, and Business Unit Manager/Director of Marketing for the Bentley
division and its sales of cardiopulmonary products. Mr. Huennekens is a
Certified Public Accountant and received a B.S. in business administration from
the University of Southern California and an M.B.A. from the Harvard Business
School.
 
GARY J.G. ATKINSON has been our Vice President of Finance and Chief Financial
Officer since May 2001. Prior to joining us, from April 2000 to February 2001,
Mr. Atkinson served as Chief Financial Officer at Situs Corporation, a company
which develops drugs and drug delivery devices for intravesical applications.
Prior to that, from November 1992 to April 2000, Mr. Atkinson served as Vice
President of Finance at Isis Pharmaceuticals, a publicly held pharmaceutical
research and development company. Mr. Atkinson is a Certified Public Accountant
and received a B.S. from Brigham Young University.
 
RICHARD L. CONWELL has been our Vice President of Marketing since January 2001.
From January 1998 to January 2001, Mr. Conwell served as our Vice President of
Research and Development. From June 1995 to January 1998, Mr. Conwell served as
our Vice President of Operations. Prior to joining us, Mr. Conwell served as
Vice President of Thermo Gamma-Metrics, a company which develops and markets
on-line, high-speed process-optimization systems for raw-materials analysis,
where he was
 
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responsible for the company's bulk material analyzer business. Mr. Conwell
received a B.S. in physics and computer science from Ball State University.
 
ROBERT E. JOHNSON has been our Vice President of Sales and Service since
April 1999. Prior to joining us, from February 1993 to March 1999, Mr. Johnson
served as Region Vice President and Vice President of United States Sales for
ADAC Laboratories, a provider of nuclear medicine and radiation therapy planning
systems. Prior to that, Mr. Johnson held various sales management and sales
positions with Siemens Medical Systems, a company that develops and manufactures
medical equipment. Mr. Johnson received a B.A. in marketing from the University
of South Florida.
 
JOHN F. SHERIDAN has been our Vice President of Operations since March 1998 and
leads the development and manufacturing efforts for our scintillator/photodiode
detector system. Prior to joining us, from October 1983 to March 1998,
Mr. Sheridan held various positions, including Director of Operations, at Analog
Devices, Inc., a semiconductor company that develops, manufacturers and markets
high performance integrated circuits used in signal-processing applications.
Mr. Sheridan received a B.S. in chemistry from the University of West Florida
and an M.B.A. from Boston University.
 
DAVID M. SHEEHAN has been the President of Digirad Imaging Solutions, Inc., our
wholly owned subsidiary, since September 2000. Prior to joining us, from
May 1999 to September 2000, Mr. Sheehan served as the President and Chief
Executive Officer of Rapidcare.com, an e-health company that connects physicians
with families and children who suffer from chronic disease. Prior to that, from
May 1997 to May 1999, Mr. Sheehan served as Vice President of Sales & Marketing
for a division of Baxter Healthcare Corporation which provided cardiopulmonary
services to hospitals. Prior to that, from July 1991 to May 1997, Mr. Sheehan
worked at Haemonetics Corporation, a supplier of blood processing services and
equipment, in various sales, marketing, and business development positions.
Mr. Sheehan received a B.S. in mechanical engineering from Worcester Polytechnic
Institute and an M.B.A. from the Tuck School of Business at Dartmouth College.
 

TIMOTHY J. WOLLAEGER has been a member of our board of directors since
June 1994, and our Chairman since January 1996. In addition, Mr. Wollaeger
served as our Chief Executive Officer in May 1999. Mr. Wollaeger is the general
partner of Kingsbury Associates, L. P., a venture capital firm he founded in
December 1993 which focuses on investments in the healthcare industry. From
May 1990 until December 1993, Mr. Wollaeger served as Senior Vice President and
a director of Columbia Hospital Corporation, a hospital management company now
known as HCA Healthcare Corporation. From October 1986 until July 1993,
Mr. Wollaeger was a general partner of Biovest Partners, a seed venture capital
firm. Mr. Wollaeger is chairman of the board of directors of Biosite
Incorporated. Mr. Wollaeger received a B.A. in economics from Yale University
and an M.B.A. from Stanford University.

 
R. KING NELSON has been a member of our board of directors since May 2000. Since
May 1999, Mr. Nelson has served as the Chief Executive Officer of VenPro
Corporation, a medical device company which develops bioprosthetic implants for
venous vascular and cardiovascular medicine. Prior to that, from January 1996 to
December 1998, Mr. Nelson served as President of the perfusion service business
of Baxter Healthcare Corporation. Prior to that, from January 1980 to
December 1995, Mr. Nelson held various positions at Baxter Healthcare
Corporation. Mr. Nelson received a B.S. from Texas Tech University and an M.B.A.
in international business from the University of Miami.
 
BRAD NUTTER has been a member of our board of directors since August 2001. From
February 2000 to October 2000, Mr. Nutter served as Executive Vice President of
Gambro AB, an international medical technology and healthcare company, and
President and Chief Executive Officer of Gambro Healthcare, a division of Gambro
AB which provides dialysis services to out-patient centers. Prior to that, from
 
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June 1997 to January 2000, Mr. Nutter served as Executive Vice President and
Chief Operating Officer of Syncor International Corporation, an international
provider of radiopharmaceuticals and medical imaging services. From May 1996 to
June 1997, Mr. Nutter served as a partner at The Align Group, a privately-held
international healthcare marketing organization, which Mr. Nutter founded. Prior
to that, from January 1995 to April 1996, Mr. Nutter held various positions,
including Senior Vice President of Corporate Marketing, at Sunrise
Medial, Inc., an international healthcare manufacturer of homecare and
institutional products. Mr. Nutter received a B.A. in business administration
from Texas Christian University.
 
KENNETH E. OLSON has been a member of our board of directors since March 1996.
From December 1990 to February 1996 and from March 1997 to June 1998, Mr. Olson
served as Chief Executive Officer at Proxima Corporation, a supplier of display
projection systems for professional desktop computers. Mr. Olson also serves on
the board of directors for Avanir Pharmaceuticals and WD-40 Company. Mr. Olson
received a B.S. in electrical engineering from the University of California at
Los Angeles and an M.B.A. from Pepperdine University.
 
DOUGLAS REED, M.D. has been a member of our board of directors since
September 2000. He is a managing director of Vector Fund Management, a venture
capital firm which focuses on investments in the life sciences and healthcare
industry. Prior to that, from October 1998 to July 2000, Dr. Reed served as Vice
President of Business Development for GelTex Pharmaceuticals, Inc., a company
that develops and markets non-absorbed polymer drugs. From April 1996 to
September 1998, Dr. Reed served as Vice President of Business Development at NPS
Pharmaceuticals, Inc., a company which develops small molecule drugs and
recombinant peptides. From June 1988 to April 1996, Dr. Reed served as Vice
President at S.R. One, Limited, a venture capital fund focused on investments in
biopharmaceuticals and the life sciences. Dr. Reed received a B.A. in biology
and an M.D., each from the University of Missouri--Kansas City, and an M.B.A.
from the Wharton School at the University of Pennsylvania. Dr. Reed is board
certified as a neuro-radiologist and has held faculty positions at the
University of Washington and Yale University in the department of radiology.
 
COMPOSITION OF OUR BOARD OF DIRECTORS
 
We currently have six directors. Upon completion of this offering, our amended
and restated certificate of incorporation will provide for a classified board of
directors consisting of three classes of directors, each serving a staggered
three-year term. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, two of the nominees to
the board of directors will be elected to a one-year term, two will be elected
to a two-year term and two will be elected to a three-year term. After the
offering, directors will be elected for three-year terms. Dr. Reed and
Mr. Nutter will be designated Class I Directors, whose terms expire at the 2002
annual meeting of stockholders. Messrs. Olson and Wollaeger will be designated
Class II Directors, whose terms expire at the 2003 annual meeting of
stockholders. Messrs. Huennekens and Nelson will be designated the Class III
Directors, whose terms expire at the 2004 annual meeting of the stockholders.
This classification of the board of directors may delay or prevent a change in
control of our company or in our management. See "Description of capital
stock--Possible Anti-Takeover Matters."
 
BOARD COMMITTEES
 
-   AUDIT COMMITTEE--The audit committee of the board of directors reviews, acts
    on and reports to the board of directors with respect to various auditing
    and accounting matters, including the recommendation of our auditors, the
    scope of the annual audits, fees to be paid to the auditors, the performance
    of our independent auditors and our accounting practices. As of the closing
    of this offering, the members of the audit committee will be Messrs. Nelson
    and Olson and Dr. Reed.
 
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-   COMPENSATION COMMITTEE--The compensation committee of the board of directors
    recommends, reviews and oversees the salaries, benefits and stock option
    plans for our executive officers, employees, consultants, directors and
    other individuals compensated by us. The compensation committee also
    administers our compensation plans. As of the closing of this offering, the
    members of the compensation committee will be Messrs. Olson and Wollaeger.
 
DIRECTOR COMPENSATION
 
All directors are reimbursed for the reasonable expenses of attending the
meetings of the board of directors or committees. We will also be granting
options to our outside directors as compensation, as described below under the
heading "Benefit plans--Automatic Option Grant Program."
 
From time to time during the fiscal year ended December 31, 2000, some of our
directors were granted options to purchase shares of our common stock under our
1998 Stock Option/Stock Issuance Plan. For information concerning these grants,
please see the description under the heading "Certain relationships and related
transactions--Option Agreements with Directors."
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
Our compensation committee consists of Messrs. Olson and Wollaeger. Neither
member of the compensation committee is currently an officer or employee of
ours. Mr. Wollaeger served as our Chief Executive Officer for the month of May
1999. Prior to the formation of the compensation committee, the board of
directors as a whole made decisions relating to compensation of our executive
officers. Upon completion of this offering, the compensation committee will make
all compensation decisions regarding our executive officers.
 

EXECUTIVE COMPENSATION
 
The following table sets forth the compensation received during the fiscal year
ended December 31, 2000 by our Chief Executive Officer, the three other most
highly compensated executive officers who were serving at the end of the fiscal
year ended December 31, 2000 whose annual salaries and bonuses exceeded $100,000
and to David M. Sheehan, the President of Digirad Imaging Solutions. We refer to
these officers as our named executive officers in other parts of this
prospectus.
 
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EXECUTIVE COMPENSATION TABLE
--------------------------------------------------------------------------------
 

<Table>
<Caption>
                                                                                                LONG-TERM
                                                                                               COMPENSATION
                                                                                                  AWARDS
                                                                                              --------------
                                                                                                NUMBER OF
                                                                  ANNUAL COMPENSATION           SECURITIES
                                                            -------------------------------     UNDERLYING
NAME AND PRINCIPAL POSITION(S)                               SALARY      BONUS      OTHER        OPTIONS
------------------------------------------------------------------------------------------------------------
<S>                                                         <C>         <C>        <C>        <C>
R. Scott Huennekens ......................................  $213,462    $70,000         --       575,000
  President and Chief Executive Officer
Robert E. Johnson ........................................  $155,423         --    $85,000(1)    200,000
  Vice President of Sales and Service
John F. Sheridan .........................................  $171,904    $35,000    $19,800(2)    150,000
  Vice President of Operations
Richard L. Conwell .......................................  $152,557    $15,000         --        50,000
  Vice President of Marketing
David M. Sheehan(3) ......................................  $ 47,308    $ 9,500         --       400,000
  President, Digirad Imaging Solutions
</Table>

 
----------
 
(1) Consists of commissions paid to Mr. Johnson for the fiscal year ended
    December 31, 2000.
 
(2) Consists of $15,000 paid to Mr. Sheridan for relocation expenses and $4,800
    in benefits received under our health and benefit plans.
 
(3) Mr. Sheehan commenced his employment as President of Digirad Imaging
    Solutions, Inc. in September 2000 with an annual base salary of $175,000.
 
OPTION GRANTS
 
The following table sets forth information concerning stock options granted to
our named executive officers during the fiscal year ended December 31, 2000:
 
OPTION GRANTS IN LAST FISCAL YEAR
--------------------------------------------------------------------------------
 


<Table>
<Caption>
                                                                                     POTENTIAL               POTENTIAL
                                         INDIVIDUAL GRANTS                      REALIZABLE VALUE AT     REALIZABLE VALUE AT
                       -----------------------------------------------------      ASSUMED ANNUAL          ASSUMED ANNUAL
                        NUMBER OF    PERCENTAGE OF                                RATES OF STOCK          RATES OF STOCK
                       SECURITIES    TOTAL OPTIONS    EXERCISE                  PRICE APPRECIATION      PRICE APPRECIATION
                       UNDERLYING      GRANTED TO       PRICE                   FOR OPTION TERM(1)      FOR OPTION TERM(2)
                         OPTIONS      EMPLOYEES IN       PER      EXPIRATION   ---------------------   ---------------------
NAME                     GRANTED      FISCAL YEAR       SHARE        DATE         5%          10%         5%          10%
----------------------------------------------------------------------------------------------------------------------------
<S>                    <C>           <C>              <C>         <C>          <C>         <C>         <C>         <C>
R. Scott Huennekens..    575,000         22.3%          $0.35      03/09/10    $126,565    $320,741
Robert E. Johnson....    200,000          7.8%          $0.35      03/09/10    $ 44,023    $111,562
John F. Sheridan.....    150,000          5.8%          $0.35      03/09/10    $ 33,017    $ 83,671
Richard L. Conwell...     50,000          1.9%          $0.35      03/09/10    $ 11,006    $ 27,890
David M. Sheehan.....    400,000         15.5%          $0.50      12/29/10    $125,779    $318,748
</Table>


 
----------
 

(1) Potential realizable value is based upon fair market value of our common
    stock on the grant date of the options as determined by our board of
    directors.

 

(2) Potential realizable value is based upon the initial public offering price
    of our common stock of $     .

 
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The figures above represent options to purchase shares of our common stock
granted under our 1998 Stock Option/Stock Issuance Plan. We granted options to
purchase an aggregate of 2,574,964 shares of our common stock in 2000. The
options granted to our employees typically vest in a 25% increment on the first
annual anniversary of the date of grant and thereafter vest on a daily basis
over a three-year period. The options granted to the named executive officers
listed in the table above began to vest on a daily basis over a four-year period
beginning on each of their respective dates of grant. Options granted to the
persons listed above expire 10 years from the dates of grant.
 
The potential realizable value at assumed annual rates of stock price
appreciation for the option term represents hypothetical gains that could be
achieved for the respective options if exercised at the end of the option term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
required by rules of the Securities and Exchange Commission and do not represent
our estimate or projection of our future common stock prices. These amounts
represent assumed rates of appreciation in the value of our common stock from
the fair market value on the date of grant. Actual gains, if any, on stock
option exercises are dependent on the future performance of our common stock and
overall stock market conditions. The actual value realized may be greater or
less than the potential realizable value set forth in the table.
 
We have never granted any stock appreciation rights.
 
OPTIONS EXERCISED AND YEAR-END VALUES
 
The following table sets forth information concerning the number and value of
options exercised by each of the named executive officers as of December 31,
2000 and the number and value of unexercised options held by each of the named
executive officers as of December 31, 2000. Options shown as exercisable in the
table below are immediately exercisable; however, we have the right to purchase
the shares of common stock underlying some of these options upon termination of
the holder's employment with us. There was no public trading price for the
common stock as of December 31, 2000. Accordingly, the value of unexercised
in-the-money options at December 31, 2000 represents an amount equal to the
difference between the assumed fair market value of $0.50 of the common stock as
determined by our board of directors and the applicable exercise price per
share, multiplied by the number of unexercised in-the-money options. An option
is in-the-money if the fair market value of the underlying shares exceeds the
exercise price of the options.
 
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
--------------------------------------------------------------------------------


<Table>
<Caption>
                                                       NUMBER OF SECURITIES
                                                      UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED
                                                            OPTIONS AT              IN-THE-MONEY OPTIONS AT
                         SHARES                         DECEMBER 31, 2000            DECEMBER 31, 2000(2)
                       ACQUIRED ON      VALUE      ----------------------------   ---------------------------
NAME                    EXERCISE     REALIZED(1)   EXERCISABLE   UNEXERCISABLE    EXERCISABLE   UNEXERCISABLE
-------------------------------------------------------------------------------------------------------------
<S>                    <C>           <C>           <C>           <C>              <C>           <C>
R. Scott
  Huennekens.........    28,572        $4,286       1,221,428          --          $216,214           --
Robert E. Johnson....    28,572        $4,286         421,428          --          $ 63,214           --
John F. Sheridan.....    28,572        $4,286         496,428          --          $ 94,464           --
Richard L. Conwell...    28,572        $4,286         346,428          --          $ 76,964           --
David M. Sheehan.....        --            --         400,000          --                --           --
 
<Caption>
 
                          VALUE OF UNEXERCISED
                         IN-THE-MONEY OPTIONS AT
                          DECEMBER 31, 2000(3)
                       ---------------------------
NAME                   EXERCISABLE   UNEXERCISABLE
---------------------  ---------------------------
<S>                    <C>           <C>
R. Scott
  Huennekens.........                      --
Robert E. Johnson....                      --
John F. Sheridan.....                      --
Richard L. Conwell...                      --
David M. Sheehan.....                      --
</Table>


 
------------
 
(1) Amount based on the difference between the fair market value of our common
    stock on the date of exercise as determined by our board of directors, and
    the exercise price of the option.
 
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(2) Amount based on the difference between the fair market value of our common
    stock on December 31, 2000 of $0.50, as determined by our board of
    directors, and the exercise price of the option.
 

(3) Amount based on the difference between the initial public offering price of
    our common stock and the exercise price of the option.

 
BENEFIT PLANS
 
2001 STOCK INCENTIVE PLAN
 
INTRODUCTION--Our 2001 Stock Incentive Plan is intended to serve as the
successor equity incentive program to our 1995 Stock Option Plan, 1997 Stock
Option/Stock Issuance Plan and 1998 Stock Option/Stock Issuance Plan, which we
collectively refer to as our predecessor plans. Our 2001 incentive plan is to be
adopted by our board of directors, and we intend to seek the approval of our
stockholders, prior to the closing of this offering. Our 2001 incentive plan
will become effective on the date the underwriting agreement for this offering
is signed. At that time, all outstanding options under the predecessor plans
will be transferred to our 2001 incentive plan, and no further option grants
will be made under those predecessor plans. The transferred options will
continue to be governed by their existing terms, unless our compensation
committee elects to extend one or more features of our 2001 incentive plan to
those options. Except as otherwise noted below, the transferred options will
have substantially the same terms as in effect for grants made under the
discretionary option grant program of our 2001 incentive plan.
 
SHARE RESERVE--Twelve million shares of common stock have been authorized for
issuance under our 2001 incentive plan. Such share reserve consists of the
number of shares we estimate will be carried over from our predecessor plans,
including the shares subject to outstanding options thereunder, plus an
additional increase of approximately 3,500,000 shares. The number of shares of
common stock reserved for issuance under our 2001 incentive plan will
automatically increase on the first trading day in January each calendar year,
beginning in calendar year 2002, by an amount equal to 2% of the total number of
shares of common stock outstanding on the last trading day in December of the
preceding calendar year.
 
EQUITY INCENTIVE PROGRAMS--Our 2001 incentive plan is divided into five separate
components:
 
-   the discretionary option grant program, under which eligible individuals in
    our employ or service may be granted options to purchase shares of common
    stock at an exercise price not less than 100% of the fair market value of
    those shares on the grant date;
 
-   the stock issuance program, under which such individuals may be issued
    shares of common stock directly, through the purchase of such shares at a
    price not less than 100% of their fair market value at the time of issuance
    or as a bonus tied to the attainment of performance milestones or the
    completion of a specified period of service;
 
-   the salary investment option grant program, under which our executive
    officers and other highly compensated employees may be given the opportunity
    to apply a portion of their base salary to the acquisition of special
    below-market stock option grants;
 
-   the automatic option grant program, under which option grants will
    automatically be made at periodic intervals to our non-employee board
    members to purchase shares of common stock at an exercise price equal to
    100% of the fair market value of those shares on the grant date; and
 
-   the director fee option grant program, under which our non-employee board
    members may be given the opportunity to apply a portion of the annual
    retainer fee otherwise payable to them in cash each year to the acquisition
    of special below-market option grants.
 
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ELIGIBILITY--The individuals eligible to participate in our 2001 incentive plan
include our officers and other employees, our non-employee board members and any
consultants we hire.
 
ADMINISTRATION--The discretionary option grant program and the stock issuance
program will be administered by the compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when such option grants or
stock issuances are to be made, the number of shares subject to each such grant
or issuance, the status of any granted option as either an incentive stock
option or a non-statutory stock option under the federal tax laws, the vesting
schedule to be in effect for the option grant or stock issuance and the maximum
term for which any granted option is to remain outstanding. The compensation
committee will also have the exclusive authority to select the executive
officers and other highly compensated employees who may participate in the
salary investment option grant program in the event that program is activated
for one or more calendar years.
 
PLAN FEATURES--Our 2001 incentive plan will include the following features:
 
-   the exercise price for the shares of common stock subject to option grants
    made under our 2001 incentive plan may be paid in cash or in shares of
    common stock valued at fair market value on the exercise date. The option
    may also be exercised through a same-day sale program without any cash
    outlay by the optionee. In addition, the plan administrator may provide
    financial assistance to one or more optionees in the exercise of their
    outstanding options or the purchase of their unvested shares by allowing
    such individuals to deliver a full-recourse, interest-bearing promissory
    note in payment of the exercise price and any associated withholding taxes
    incurred in connection with such exercise or purchase;
 
-   the compensation committee will have the authority to cancel outstanding
    options under the discretionary option grant program, including options
    transferred from the predecessor plans, in return for the grant of new
    options for the same or a different number of option shares with an exercise
    price per share based upon the fair market value of our common stock on the
    new grant date; and
 
-   stock appreciation rights are authorized for issuance under the
    discretionary option grant program. Such rights will provide the holders
    with the election to surrender their outstanding options for an appreciation
    distribution from us equal to the fair market value of the vested shares of
    common stock subject to the surrendered option, less the aggregate exercise
    price payable for those shares. Such appreciation distribution may be made
    in cash or in shares of common stock. None of the outstanding options under
    our predecessor plans contain any stock appreciation rights.
 
The 2001 incentive plan will include the following change in control provisions
which may result in the accelerated vesting of outstanding option grants and
stock issuances:
 
-   in the event that we are acquired by merger or asset sale, each outstanding
    option under the discretionary option grant program which is not to be
    assumed by the successor corporation will automatically accelerate in full,
    and all unvested shares under the discretionary option grant and stock
    issuance programs will immediately vest, except to the extent our repurchase
    rights with respect to those shares are to be assigned to the successor
    corporation;
 
-   the compensation committee will have complete discretion to structure one or
    more options under the discretionary option grant program so those options
    will vest as to all the option shares in the event those options are assumed
    in the acquisition but the optionee's service with us or the acquiring
    entity is subsequently terminated. The vesting of outstanding shares under
    the stock issuance program may be accelerated upon similar terms and
    conditions;
 
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-   the compensation committee will also have the authority to grant options
    which will immediately vest in the event we are acquired, whether or not
    those options are assumed by the successor corporation;
 
-   the compensation committee may grant options and structure repurchase rights
    so that the shares subject to those options or repurchase rights will
    immediately vest in connection with a successful tender offer for more than
    50% of our outstanding voting stock or a change in the majority of our board
    through one or more contested elections for board membership. Such
    accelerated vesting may occur either at the time of such transaction or upon
    the subsequent termination of the individual's service; and
 
-   the options currently outstanding under our predecessor plans will
    immediately vest in the event we are acquired by merger or sale of
    substantially all our assets, unless those options are assumed by the
    acquiring entity or our repurchase rights with respect to any unvested
    shares subject to those options are assigned to such entity. However, a
    number of those options may also contain a special acceleration provision
    pursuant to which the shares subject to those options will immediately vest
    upon an involuntary termination of the optionee's employment within
    18 months following an acquisition in which the repurchase rights with
    respect to those shares are assigned to the acquiring entity.
 
SALARY INVESTMENT OPTION GRANT PROGRAM--In the event the compensation committee
elects to activate the salary investment option grant program for one or more
calendar years, each of our executive officers and other highly compensated
employees selected for participation may elect, prior to the start of the
calendar year, to reduce his or her base salary for that calendar year by a
specified dollar amount not less than $10,000 nor more than $50,000. Each
selected individual who files such a timely election will automatically be
granted, on the first trading day in January of the calendar year for which his
or her salary reduction is to be in effect, an option to purchase that number of
shares of common stock determined by dividing the salary reduction amount by
two-thirds of the fair market value per share of our common stock on the grant
date. The option will be exercisable at a price per share equal to one-third of
the fair market value of the option shares on the grant date. As a result, the
option will be structured so that the fair market value of the option shares on
the grant date less the exercise price payable for those shares will be equal to
the amount by which the optionee's salary is reduced under the program. The
option will become exercisable in a series of 12 equal monthly installments over
the calendar year for which the salary reduction is to be in effect.
 
AUTOMATIC OPTION GRANT PROGRAM--Under the automatic option grant program, each
individual who first becomes a non-employee board member at any time after the
completion of this offering will automatically receive on the date such
individual joins the board an option grant for a number of shares of common
stock to be determined prior to the closing of this offering, provided such
individual has not been in our prior employ. In addition, on the date of each
annual stockholders meeting held after the completion of this offering, each
non-employee board member who is to continue to serve as a non-employee board
member, including each of our current non-employee board members, will
automatically be granted an option to purchase a number of shares of common
stock to be determined prior to the closing of this offering, provided such
individual has served on our board for at least six months.
 
Each automatic grant will have an exercise price per share equal to the fair
market value per share of our common stock on the grant date and will have a
term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid per
share, any shares purchased under the option which are not vested at the time of
the optionee's cessation of board
 
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                                                                              65
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MANAGEMENT
--------------------------------------------------------------------------------
 
service. The shares subject to each initial automatic option grant will vest in
a series of 3 successive annual installments upon the optionee's completion of
each year of board service over the 3-year period measured from the grant date.
The shares subject to each annual automatic option grant will vest upon the
optionee's completion of one year of board service measured from the grant date.
However, the shares will immediately vest in full upon certain changes in
control or ownership or upon the optionee's death or disability while a board
member.
 
DIRECTOR FEE OPTION GRANT PROGRAM--Should the director fee option grant program
be activated in the future, each non-employee board member will have the
opportunity to apply all or a portion of any cash retainer fee for the year to
the acquisition of a below-market option grant. The option grant will
automatically be made on the first trading day in January in the year for which
the retainer fee would otherwise be payable in cash. The option will have an
exercise price per share equal to one-third of the fair market value of the
option shares on the grant date, and the number of shares subject to the option
will be determined by dividing the amount of the retainer fee applied to the
program by two-thirds of the fair market value per share of our common stock on
the grant date. As a result, the option will be structured so that the fair
market value of the option shares on the grant date less the exercise price
payable for those shares will be equal to the portion of the retainer fee
applied to that option. The option will become exercisable in a series of 12
equal monthly installments over the calendar year for which the election is to
be in effect. However, the option will become immediately exercisable for all
the option shares upon the optionee's death or disability while serving as a
board member.
 
Our 2001 incentive plan will also have the following features:
 
-   outstanding options under the salary investment and director fee option
    grant programs will immediately vest if we are acquired by a merger or asset
    sale or if there is a successful tender offer for more than 50% of our
    outstanding voting stock or a change in the majority of our board through
    one or more contested elections;
 
-   limited stock appreciation rights will automatically be included as part of
    each grant made under the salary investment option grant program and the
    automatic and director fee option grant programs, and these rights may also
    be granted to one or more officers as part of their option grants under the
    discretionary option grant program. Options with this feature may be
    surrendered to us upon the successful completion of a hostile tender offer
    for more than 50% of our outstanding voting stock. In return for the
    surrendered option, the optionee will be entitled to a cash distribution
    from us in an amount per surrendered option share based upon the highest
    price per share of our common stock paid in that tender offer; and
 
-   the board may amend or modify the 2001 incentive plan at any time, subject
    to any required stockholder approval. The 2001 incentive plan will terminate
    no later than ten years after the completion of this offering.
 
EMPLOYMENT ARRANGEMENTS
 
None of our employees are employed for a specified term, and each employee's
employment with us is subject to termination at any time by either party for any
reason, with or without cause.
 
All of our current employees have entered into agreements with us which contain
restrictions and covenants relating to the protection of our confidential
information.
 
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MANAGEMENT
--------------------------------------------------------------------------------
 
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
 
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
 
-   any breach of their duty of loyalty to the corporation or its stockholders;
 
-   acts or omissions not in good faith or that involve intentional misconduct
    or a knowing violation of law;
 
-   unlawful payments of dividends or unlawful stock repurchases or redemptions;
    and
 
-   any transaction from which the director derived an improper personal
    benefit.
 
The limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission. Our certificate of
incorporation and bylaws provide that we will indemnify our directors and
officers and may indemnify our employees and other agents to the fullest extent
permitted by law. We believe that indemnification under our bylaws covers at
least negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in their capacity as an
officer, director, employee or other agent, regardless of whether the bylaws
would permit indemnification.
 
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification for judgments,
fines, settlement amounts and expenses, including attorneys' fees incurred by
the director, or executive officer in any action or proceeding, including any
action by or in our right, arising out of the person's services as a director or
executive officer, any of our subsidiaries or any other company or enterprise to
which the person provides services at our request. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.
 
At present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
 
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                                                                              67
<Page>
--------------------------------------------------------------------------------
 

Certain relationships and related transactions
 
SALES OF SECURITIES
 
SERIES E PREFERRED STOCK FINANCING--From June 1998 to June 2000, we issued and
sold 4,004,965 shares of Series E preferred stock to 17 accredited investors at
a price of $3.036 per share. The shares of Series E preferred stock will
automatically convert into 4,004,965 shares of common stock in connection with
this offering. Investors owning 5% or more of our capital stock who participated
in this transaction include:
 

<Table>
<Caption>
                                                                                    NUMBER OF SHARES OF
                                                                                        COMMON STOCK
                                                                  NUMBER OF            ISSUABLE UPON
                                                              SHARES OF SERIES E   CONVERSION OF SERIES E
INVESTORS                                                      PREFERRED STOCK        PREFERRED STOCK
---------------------------------------------------------------------------------------------------------
<S>                                                           <C>                  <C>
Entities affiliated with Kingsbury Associates...............       329,380                329,380
Entities affiliated with Sorrento Associates................       329,380                329,380
Entities affiliated with Vector Fund Management.............       329,379                329,379
</Table>

 
Mr. Wollaeger, one of our directors, is a general partner of Kingsbury
Associates, L.P., which is a general partner of Kingsbury Capital Partners,
L.P., I, Kingsbury Capital Partners, L.P., II, Kingsbury Capital Partners, L.P.,
III and Kingsbury Capital Partners, L.P., IV. In this prospectus, we refer to
Kingsbury Capital Partners, L.P., I, Kingsbury Capital Partners, L.P., II,
Kingsbury Capital Partners, L.P., III and Kingsbury Capital Partners, L.P., IV,
collectively, as entities affiliated with Kingsbury Associates.
 
In this prospectus, we refer to Sorrento Growth Partners I, L.P., Sorrento
Ventures II, L.P., Sorrento Ventures III, L.P. and Sorrento Ventures CE, L.P.,
collectively, as entities affiliated with Sorrento Associates.
 
Dr. Reed, one of our directors, is a managing director of Vector Fund
Management, L.L.C., which is a general partner of Vector Later-Stage Equity
Fund, L.P., and is a managing director of Vector Fund Management, II, L.L.C.,
which is a general partner of Vector Later-Stage Equity Fund II, L.P. and Vector
Later-Stage Equity Fund II (Q.P.), L.P. In this prospectus, we refer to Vector
Later-Stage Equity Fund, L.P., Vector Later-Stage Equity Fund II, L.P., and
Vector Later-Stage Equity Fund II (Q.P.), L.P., collectively, as entities
affiliated with Vector Fund Management.
 
BRIDGE LOAN FINANCING AND ADDITIONAL SERIES E PREFERRED STOCK FINANCING--In
September 2000, we issued and sold an aggregate of $2,000,000 of convertible
promissory notes to 5 accredited investors. In November 2000, the convertible
promissory notes automatically converted into 658,759 shares of Series E
preferred stock at a price of $3.036 per share. In addition, in consideration
for the bridge loans, we issued to the investors warrants to purchase up to
65,875 shares of our Series E preferred stock at an exercise price of $3.036 per
share. These warrants will terminate in connection with this
 
--------------------------------------------------------------------------------
68
<Page>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------------------------
 
offering if not previously exercised. Investors owning 5% or more of our capital
stock who participated in this transaction include:
 

<Table>
<Caption>
                                                 NUMBER OF                                AGGREGATE NUMBER OF
                                             SHARES OF SERIES E         NUMBER OF           SHARES OF COMMON
                           AGGREGATE          PREFERRED STOCK          WARRANTS TO        STOCK ISSUABLE UPON
                           PRINCIPAL            ISSUED UPON              PURCHASE        CONVERSION OF SERIES E
                           AMOUNT OF           CONVERSION OF        SHARES OF SERIES E    PREFERRED STOCK AND
INVESTORS               PROMISSORY NOTE       PROMISSORY NOTES       PREFERRED STOCK            WARRANTS
---------------------------------------------------------------------------------------------------------------
<S>                     <C>                <C>                      <C>                  <C>
Entities affiliated
  with Kingsbury
  Associates..........     $1,000,000             329,380                 32,938                362,318
Entities affiliated
  with Vector Fund
  Management..........     $  500,000             164,689                 16,468                181,157
</Table>

 
ADDITIONAL SERIES E PREFERRED STOCK FINANCING--From November 2000 to
April 2001, we issued and sold 5,125,463 shares of Series E preferred stock to
34 accredited investors at a price of $3.036 per share. The shares of Series E
preferred stock will automatically convert into 5,125,463 shares of common stock
in connection with this offering. Investors owning 5% or more of our capital
stock who participated in this transaction include:
 

<Table>
<Caption>
                                                                                    NUMBER OF SHARES OF
                                                                                        COMMON STOCK
                                                                  NUMBER OF            ISSUABLE UPON
                                                              SHARES OF SERIES E   CONVERSION OF SERIES E
INVESTORS                                                      PREFERRED STOCK        PREFERRED STOCK
---------------------------------------------------------------------------------------------------------
<S>                                                           <C>                  <C>
Entities affiliated with Merrill Lynch Ventures.............       658,761                658,761
Entities affiliated with Kingsbury Associates...............       454,380                454,380
Entities affiliated with Vector Fund Management.............       164,689                164,689
Palavacinni Partners, LLC...................................        24,703                 24,703
</Table>

 
In this prospectus, we refer to Merrill Lynch Ventures, LLC and Merrill Lynch
Ventures, L.P. 2001, collectively, as entities affiliated with Merrill Lynch
Ventures.
 
Dr. Reed, one of our directors, is a member of Palavacinni Partners, LLC.
 
SERIES F PREFERRED STOCK FINANCING--In August 2001, we issued and sold 2,618,462
shares of Series F preferred stock to 25 accredited investors at a price of
$3.25 per share. The shares of Series F preferred stock will automatically
convert into 2,618,462 shares of common stock in connection with
 
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                                                                              69
<Page>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------------------------
 
this offering. Investors owning 5% or more of our capital stock and directors
who participated in this transaction include:
 

<Table>
<Caption>
                                                                                    NUMBER OF SHARES OF
                                                                                        COMMON STOCK
                                                                  NUMBER OF            ISSUABLE UPON
                                                              SHARES OF SERIES F   CONVERSION OF SERIES F
INVESTORS                                                      PREFERRED STOCK        PREFERRED STOCK
---------------------------------------------------------------------------------------------------------
<S>                                                           <C>                  <C>
Entities affiliated with Kingsbury Associates...............       184,616                184,616
Entities affiliated with Vector Fund Management.............       153,847                153,847
Entities affiliated with Merrill Lynch Ventures.............       107,692                107,692
Entities affiliated with Sorrento Associates................        76,923                 76,923
Kenneth E. Olson Trust dated March 16, 1989.................        30,769                 30,769
Palavacinni Partners, LLC...................................        20,000                 20,000
</Table>

 
Mr. Olson, one of our directors, is the trustee of the Kenneth E. Olson Trust
dated March 16, 1989.
 
Dr. Reed, one of our directors, is a member of Palavacinni Partners, LLC.
 
REGISTRATION RIGHTS--In connection with the preferred stock financings
referenced above, we entered into agreements with the investors providing for
registration rights with respect to their shares. For a more complete
description of the rights we granted to these stockholders, please see
"Description of capital stock--Registration Rights."
 
For additional information regarding the sale of securities to executive
officers, directors and holders of more than 5% of our outstanding common stock,
please see "Principal stockholders."
 
OPTION AGREEMENTS WITH DIRECTORS
 

Since January 1, 1998, we have granted options to purchase shares of our common
stock to our directors in the following transactions:

 


<Table>
<Caption>
NAME OF DIRECTOR                                     DATE OF GRANT    NUMBER OF SHARES    EXERCISE PRICE
--------------------------------------------------------------------------------------------------------
<S>                                                 <C>               <C>                 <C>
Kenneth E. Olson .................................  April 1998               3,000            $0.21
                                                    April 1998               3,000            $0.25
                                                    December 1998            5,000            $0.35
                                                    May 1999                 3,000            $0.35
                                                    March 2000               5,000            $0.35
                                                    May 2000                30,000            $0.50
                                                    March 2001               5,000            $1.00
 
R. Scott Huennekens ..............................  December 1998          225,000            $0.35
                                                    May 1999               220,000            $0.35
                                                    March 2000             575,000            $0.35
                                                    January 2001           120,000            $1.00
 
R. King Nelson ...................................  May 2000                50,000            $0.50
                                                    March 2001               5,000            $1.00
 
Timothy J. Wollaeger..............................  November 2000           30,000            $0.50
 
Brad Nutter.......................................  August 2001             50,000            $1.50
</Table>


 
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70
<Page>
--------------------------------------------------------------------------------
 
Principal stockholders
 
The following table sets forth information with respect to the beneficial
ownership of our common stock as of August 23, 2001, as adjusted to reflect the
sale of the shares of common stock in this offering by:
 
-   each person or group of affiliated persons who we know beneficially owns 5%
    or more of our common stock;
 
-   each of our named executive officers listed in "Executive Compensation"
    above and our current Vice President and Chief Financial Officer;
 
-   each of our current directors; and
 
-   all of the executive officers and directors as a group.
 
Beneficial ownership is calculated according to the rules of the Securities and
Exchange Commission. Except as indicated in the footnotes to this table, the
persons named in the table have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them, subject to
community property laws where applicable. The number of shares beneficially
owned by a person includes the number of shares underlying options and warrants
that are exercisable within 60 days from August 23, 2001. These shares are also
deemed outstanding for the purpose of computing the percentage of outstanding
shares owned by the person. The shares are not deemed outstanding, however, for
the purpose of computing the percentage ownership of any other person.
Percentage ownership is based upon 34,274,504 shares of common stock outstanding
at August 23, 2001, assuming the conversion of all outstanding shares of
preferred stock into common stock. Unless otherwise indicated, the address for
each of the following stockholders is: c/o Digirad Corporation, 9350 Trade
Place, San Diego, California 92126-6334.
 

<Table>
<Caption>
                                                                                         PERCENTAGE OF
                                                                                      SHARES BENEFICIALLY
                                                    NUMBER OF     NUMBER OF SHARES           OWNED
                                                       SHARES   UNDERLYING OPTIONS   ----------------------
                                                 BENEFICIALLY         AND WARRANTS     BEFORE         AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER                    OWNED   BENEFICIALLY OWNED   OFFERING      OFFERING
-----------------------------------------------------------------------------------------------------------
<S>                                              <C>            <C>                  <C>           <C>
Entities affiliated with Kingsbury
  Associates(1)................................    6,615,721          132,938          19.2%
  3655 Nobel Drive, Suite 490
  San Diego, CA 92122
Entities affiliated with Vector Fund
  Management(2)................................    5,106,807           16,468          14.9%
  1751 Lake Cook Road, Suite 350
  Deerfield, IL 60015
Entities affiliated with Sorrento
  Associates(3)................................    4,506,524               --          13.1%
  4370 La Jolla Village Drive,
    Suite 1040
  San Diego, CA 92122
Entities affiliated with Merrill Lynch
  Ventures(4)..................................    2,234,051               --           6.5%
  2 World Financial Center, 31st Floor
  New York, NY 10281
R. Scott Huennekens............................    1,370,000        1,341,428           3.8%
Robert E. Johnson..............................      550,000          521,428           1.6%
John F. Sheridan...............................      575,000          546,428           1.7%
Richard L. Conwell.............................      400,000          371,428           1.2%
Gary J.G. Atkinson.............................      250,000          250,000             *
David M. Sheehan...............................      410,000          410,000           1.2%
Timothy J. Wollaeger(5)........................    6,645,721          132,938          19.3%
R. King Nelson.................................       55,000           55,000             *
Brad Nutter....................................       50,000           50,000             *
Kenneth E. Olson(6)............................      296,770          166,000             *
Douglas Reed, M.D.(7)..........................    5,151,510           16,468          15.0%
All Executive Officers and Directors as a Group
  (11 persons).................................   15,754,001        3,811,712          41.3%
</Table>

 
  * Less than one percent.
 
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                                                                              71
<Page>
PRINCIPAL STOCKHOLDERS
--------------------------------------------------------------------------------
 
 (1) In this prospectus, we refer to Kingsbury Capital Partners, L.P., I,
     Kingsbury Capital Partners, L.P., II, Kingsbury Capital
     Partners, L.P., III, and Kingsbury Capital Partners, L.P., IV,
     collectively, as entities affiliated with Kingsbury Capital Partners.
     Timothy J. Wollaeger, a member of our board of directors, is a general
     partner of Kingsbury Associates, L.P., which is a general partner of each
     of the previously-mentioned investment funds, and Mr. Wollaeger shares
     investment and voting power over these shares with the other general
     partners of Kingsbury Associates, L.P. Mr. Wollaeger disclaims beneficial
     ownership of such shares, except to the extent of his pecuniary interest,
     if any.
 
 (2) In this prospectus, we refer to Vector Later-Stage Equity Fund, L.P.,
     Vector Later-Stage Equity Fund II, L.P., and Vector Later-Stage Equity
     Fund II (Q.P.), L.P., collectively, as entities affiliated with Vector Fund
     Management. Douglas Reed, M.D., a member of our board of directors, is a
     managing director of the general partner of each of the
     previously-mentioned investment funds, and Dr. Reed shares investment and
     voting power over these shares with the other managing directors of each of
     the general partners of these funds. Dr. Reed disclaims beneficial
     ownership of all such shares, except to the extent of his pecuniary
     interest, if any.
 
 (3) In this prospectus, we refer to Sorrento Growth Partners I, L.P., Sorrento
     Ventures II, L.P., Sorrento Ventures III, L.P., and Sorrento
     Ventures CE, L.P., collectively, as entitles affiliated with Sorrento
     Associates.
 
 (4) In this prospectus, we refer to Merrill Lynch Ventures, LLC and Merrill
     Lynch Ventures, L.P. 2001, collectively, as entitles affiliated with Merril
     Lynch Ventures.
 
 (5) Includes 6,615,721 shares held by entities affiliated with Kingsbury
     Associates and 30,000 shares of common stock held by Mr. Wollaeger.
 
 (6) Includes 130,770 shares held by the Kenneth E. Olson Trust dated March 16,
     1989 and options to purchase 166,000 shares of common stock held by
     Mr. Olson.
 
 (7) Includes 5,106,807 shares held by entities affiliated with Vector Fund
     Management and 44,703 shares held by Palivacinni Partners, LLC. Dr. Reed is
     a member of Palivacinni Partners, LLC and shares investment and voting
     power over these shares with the other members. Dr. Reed disclaims
     beneficial ownerhip of such shares except to the extent of his pecuniary
     interest, if any.
 
--------------------------------------------------------------------------------
72
<Page>
--------------------------------------------------------------------------------
 

Description of capital stock
 
Upon the closing of this offering, our authorized capital stock will consist of
250,000,000 shares of common stock, $0.001 par value per share, and 10,000,000
shares of undesignated preferred stock, $0.001 par value per share.
 
The following description of our capital stock does not purport to be complete
and is subject to and qualified by our certificate of incorporation and bylaws,
which are included as exhibits to the registration statement of which this
prospectus forms a part, and by the provisions of applicable Delaware law.
 
COMMON STOCK
 
As of August 23, 2001, there were 4,526,474 shares of common stock outstanding.
There will be              shares of common stock outstanding upon the closing
of this offering, which gives effect to the              shares of common stock
offered by us in this offering and the conversion of shares of preferred stock
as discussed below. The outstanding shares of common stock are, and the shares
offered by us in this offering will be, when issued in consideration for payment
thereof, fully paid and nonassessable.
 
The following summarizes the rights of holders of our common stock:
 
-   the holders of our common stock are entitled to dividends and other
    distributions as may be declared from time to time by the board of directors
    out of funds legally available for that purpose, if any;
 
-   the holders of common stock have no preemptive or other subscription rights
    to purchase shares of our stock, nor are they entitled to the benefits of
    any redemption or sinking fund provisions;
 
-   each holder of shares of common stock is entitled to one vote per share on
    all matters to be voted on by stockholders generally, including the election
    of directors;
 
-   there are no cumulative voting rights; and
 
-   upon our liquidation, dissolution or winding up, the holders of shares of
    common stock will be entitled to share ratably in the distribution of all of
    our assets remaining available for distribution after satisfaction of all
    our liabilities and the payment of the liquidation preference of any
    outstanding preferred stock.
 
PREFERRED STOCK
 
As of August 23, 2001, there were 29,748,030 shares of redeemable convertible
preferred stock outstanding. All outstanding shares of redeemable convertible
preferred stock will be converted into 29,748,030 shares of common stock in
connection with this offering and such shares of redeemable convertible
preferred stock will no longer be authorized, issued or outstanding. In
addition, if the final price per share of shares in this offering is less then
$    per share, a small number of additional shares of common stock will be
issued upon conversion of the Series F preferred stock.
 
Upon the closing of this offering, our board of directors will be authorized,
without further stockholder approval, to issue from time to time one or more
series of preferred stock and to fix or alter the designations, powers,
preferences, rights and any qualifications, limitations or restrictions of the
shares of such series, including:
 
-   the number of shares constituting the series and the distinctive designation
    of the series;
 
--------------------------------------------------------------------------------
                                                                              73
<Page>

DESCRIPTION OF CAPITAL STOCK
--------------------------------------------------------------------------------
 
-   the dividend rate on the share of the series, whether dividends will be
    cumulative, and if so, from which date or dates, and the relative rights of
    priority, if any, of payment of dividends on shares of the series;
 
-   whether the series will have conversion privileges and, if so, the terms and
    conditions of conversion;
 
-   whether the series will have a sinking fund for the redemption or purchase
    of shares of that series, and, if so, the terms and amount of the sinking
    fund;
 
-   whether or not the shares of the series will be redeemable or exchangeable,
    and, if so, the dates, terms and conditions of redemption or exchange, as
    the case may be;
 
-   whether the series will have voting rights in addition to the voting rights
    provided by law, and if so, the terms of the voting rights; and
 
-   the rights of the shares of the series in the event of our voluntary or
    involuntary liquidation, dissolution or winding up and the relative rights
    or priority, if any, of payment of shares of the series.
 
The board of directors may authorize the issuance of preferred stock with terms
and conditions which could discourage a takeover or other transaction that
holders of some or a majority of common stock might believe to be in their best
interests or in which holders of common stock might receive a premium for their
shares over the then market price.
 
We have no present plans to issue any shares of preferred stock.
 
WARRANTS
 
As of August 23, 2001, we had outstanding warrants to purchase 603,578 shares of
common stock, at a weighted average exercise price of $2.59 per share. Of the
outstanding warrants, warrants to purchase 65,875 shares will terminate upon the
closing of this offering and warrants to purchase 60,000 shares will expire if a
consulting agreement is terminated before July 31, 2002.
 
In addition, we have entered into a consulting agreement under which we will
issue additional warrants to purchase 10,000 shares of common stock at fair
market value for every three digital cameras sold by the consultant, up to a
maximum of 40,000 shares, and thereafter issue warrants to purchase 1,500 shares
of common stock at fair market value for each of our digital cameras sold by the
consultant.
 
OPTIONS
 
As of August 23, 2001, options to purchase an aggregate total of 5,952,426
shares of common stock were outstanding under our 1995 Stock Option Plan, our
1997 Stock Option/Stock Issuance Plan and our 1998 Stock Option/Stock Issuance
Plan. Options to purchase a total of 4,725,883 shares of common stock remain
available for grant under our option plans. Please see "Management--Benefit
Plans" and "Shares eligible for future sale" for a detailed description of the
stock option plans.
 
REGISTRATION RIGHTS
 
The holders of the shares of common stock which will be issued upon conversion
of the preferred stock in connection with this offering, which holders are
referred to below as our preferred investors, have the right to cause us to
register their shares under the Securities Act of 1933 as follows:
 
-   DEMAND REGISTRATION RIGHTS: Preferred investors holding at least 30% of the
    shares of common stock issued upon conversion of the preferred stock have
    the right to demand that we register their
 
--------------------------------------------------------------------------------
74
<Page>

DESCRIPTION OF CAPITAL STOCK
--------------------------------------------------------------------------------
 
   shares, subject to limitations, commencing one year after the effective date
    of the registration statement for this offering. We are not required to
    effect more than two registrations pursuant to such demand registration
    rights;
 
-   PIGGYBACK REGISTRATION RIGHTS: In the event we propose to register any
    shares of common stock either for our account or for the account of other
    security holders, our preferred investors are entitled to receive notice of
    such registration and to have their shares included in any such
    registration, subject to limitations; and
 
-   S-3 REGISTRATION RIGHTS: At any time after we become eligible to file a
    registration statement on Form S-3, our preferred investors may require us
    to file up to two registration statements on Form S-3 during any twelve
    month period with respect to their shares of common stock, subject to
    limitations.
 
These registration rights are subject to conditions and limitations, among them
the right of the underwriters of an offering to limit the number of shares of
common stock held by our preferred investors to be included in a registration.
We are generally required to bear all of the expenses of all such registrations,
including the reasonable fees of a single counsel acting on behalf of all
selling holders, but excluding underwriting discounts and selling commissions.
Registration of any of the shares of common stock held by our preferred
investors would result in such shares becoming freely tradable without
restriction under the Securities Act of 1933 immediately upon effectiveness of
such registration.
 
POSSIBLE ANTI-TAKEOVER MATTERS
 
GENERAL--Provisions of Delaware law, as well as our certificate of incorporation
and bylaws, could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, control of us. Such
provisions could limit the price that some investors might be willing to pay in
the future for our common stock. These provisions of Delaware law and our
certificate of incorporation and bylaws may also have the effect of discouraging
or preventing certain types of transactions involving an actual or threatened
change of control of us, including unsolicited takeover attempts, even though
such a transaction may offer our stockholders the opportunity to sell their
stock at a price above the prevailing market price.
 
DELAWARE TAKEOVER STATUTE--We are subject to the "business combination"
provisions of Section 203 of the Delaware General Corporation Law. Subject to
certain exceptions, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless:
 
-   the transaction is approved by the board of directors prior to the date the
    interested stockholder obtained interested stockholder status;
 
-   upon consummation of the transaction that resulted in the stockholders
    becoming an interested stockholder, the interested stockholder owned at
    least 85% of our voting stock outstanding at the time the transaction
    commenced, excluding for purposes of determining the number of shares
    outstanding those shares owned by (a) persons who are directors and also
    officers and (b) employee stock plans in which employee participants do not
    have the right to determine confidentially whether shares held subject to
    the plan will be tendered in a tender or exchange offer; or
 
-   at or subsequent to the date the person became an interested stockholder,
    the business combination is approved by the board of directors and
    authorized at an annual or special meeting of
 
--------------------------------------------------------------------------------
                                                                              75
<Page>

DESCRIPTION OF CAPITAL STOCK
--------------------------------------------------------------------------------
 
   stockholders by the affirmative vote of at least two-thirds of the
    outstanding voting stock that is not owned by the interested stockholder.
 
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock. This statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control attempts with
respect to us and, accordingly, may discourage attempts to acquire us.
 
CHARTER AND BYLAW PROVISIONS--In addition, certain provisions of our certificate
of incorporation and bylaws summarized in the following paragraphs may be deemed
to have an anti-takeover effect and may delay, defer or prevent a tender offer
or takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the then market
price for the shares held by stockholders.
 
-   CLASSIFIED BOARD OF DIRECTORS; REMOVAL; FILLING VACANCIES AND AMENDMENT: Our
    certificate of incorporation and bylaws provide that the board will be
    divided into three classes of directors serving staggered, three-year terms.
    The classification of the board has the effect of requiring at least two
    annual stockholder meetings, instead of one, to replace a majority of
    members of the board. Subject to the rights of the holders of any
    outstanding series of preferred stock, the certificate of incorporation
    authorizes only the board to fill vacancies, including newly created
    directorships. Accordingly, this provision could prevent a stockholder from
    obtaining majority representation on the board by enlarging the board of
    directors and filling the new directorships with its own nominees. The
    certificate of incorporation also provides that directors may be removed by
    stockholders only for cause and only by the affirmative vote of holders of
    two-thirds of the outstanding shares of voting stock.
 
-   STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS: The certificate of
    incorporation provides that stockholders may not take action by written
    consent, but may only take action at duly called annual or special meetings
    of stockholders. The certificate of incorporation further provides that
    special meetings of our stockholders may be called by the chairman of the
    board of directors, the chief executive officer or a majority of the board
    of directors. This limitation on the right of stockholders to call a special
    meeting could make it more difficult for stockholders to initiate actions
    that are opposed by the board of directors. These actions could include the
    removal of an incumbent director or the election of a stockholder nominee as
    a director. They could also include the implementation of a rule requiring
    stockholders' ratification of specific defensive strategies that have been
    adopted by the board of directors with respect to unsolicited takeover bids.
    In addition, the limited ability of the stockholders to call a special
    meeting of stockholders may make it more difficult to change the existing
    board and management.
 
-   ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
    NOMINATION: The bylaws provide that stockholders seeking to bring business
    before an annual meeting of stockholders, or to nominate candidates for
    election as directors at an annual meeting of stockholders, must provide
    timely notice thereof in writing. To be timely, a stockholder's notice must
    be delivered to or mailed and received at our principal executive offices
    not less than 120 days prior to the date of our annual meeting. The bylaws
    also specify certain requirements as to the form and content of a
    stockholder's notice. These provisions may preclude stockholders from
    bringing matters before an annual meeting of stockholders or from making
    nominations for directors at an annual meeting of stockholders.
 
-   AUTHORIZED BUT UNISSUED SHARES: The authorized but unissued shares of common
    stock and preferred stock are available for future issuance without
    stockholder approval. These additional
 
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76
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DESCRIPTION OF CAPITAL STOCK
--------------------------------------------------------------------------------
 
   shares may be utilized for a variety of corporate purposes, including future
    public offerings to raise additional capital, corporate acquisitions,
    employee benefit plans and "poison pill" rights plans. The existence of
    authorized but unissued shares of common stock and preferred stock could
    render more difficult or discourage an attempt to obtain control of us by
    means of a proxy contest, tender offer, merger or otherwise.
 
NASDAQ NATIONAL MARKET
 
We have applied to list our common stock on the Nasdaq National Market under the
trading symbol "DRAD."
 
TRANSFER AGENT AND REGISTRAR
 
The transfer agent and registrar for the common stock is              .
 
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                                                                              77
<Page>
--------------------------------------------------------------------------------
 
Shares eligible for future sale
 
Prior to this offering, there has been no public market for our common stock. We
cannot predict what effect, if any, market sales of shares or the availability
of shares for sale will have on the market price of our common stock prevailing
from time to time. The market price of our common stock could decline as a
result of sales of a large number of shares of our common stock in the market
after this offering, or the perception that such sales could occur. Such sales
also might make it more difficult for us to sell equity securities in the future
at a time and price that we deem appropriate. Based upon the number of shares
outstanding at August 23, 2001, upon the closing of this offering, we will have
             shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of options or warrants to
purchase shares of our common stock. Of these shares, the              shares
being sold in this offering will be freely tradable without restriction or
further registration under the Securities Act of 1933, unless these shares are
purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act of 1933. The remaining              shares of our common stock
were issued and sold by us in reliance on exemptions from the registration
requirements of the Securities Act of 1933. These shares may be sold in the
public market only if they are registered or if they qualify for an exemption
from registration, such as Rule 144 or 701 under the Securities Act of 1933,
which are summarized below. The remaining shares are eligible for sale in the
public market as follows:
 
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET
 

<Table>
<Caption>
                                                                        NUMBER
DATE                                                                 OF SHARES
------------------------------------------------------------------------------
<S>                                                           <C>
After the date of this prospectus (subject, in some cases,
  to volume limitations)....................................
At various times after 90 days from the date of this
  prospectus (subject, in some cases, to volume
  limitations)..............................................
At various times after 180 days from the date of this
  prospectus (subject, in some cases, to volume
  limitations)..............................................
</Table>

 
RULE 144
 
In general, under Rule 144 of the Securities Act of 1933 as currently in effect,
beginning 90 days after the date of this offering, a person who has beneficially
owned shares of our common stock for at least one year is entitled to sell,
within any three month period, a number of shares of our common stock that does
not exceed the greater of:
 
-   1% of the number of shares of common stock then outstanding; or
 
-   the average weekly trading volume in our common stock during the four
    calendar weeks preceding the date on which notice of such sale is filed with
    the Securities and Exchange Commission.
 
Sales made under Rule 144 must also comply with manner of sale and notice
requirements and are subject to the availability of current public information
about us.
 
RULE 144(k)
 
Under Rule 144(k) of the Securities Act of 1933 as currently in effect, a person
who is not deemed to have been our affiliate at any time during the 90 days
preceding a sale, and who has beneficially
 
--------------------------------------------------------------------------------
78
<Page>
SHARES ELIGIBLE FOR FUTURE SALE
--------------------------------------------------------------------------------
 
owned the shares proposed to be sold for at least two years, would be entitled
to sell such shares under Rule 144(k) without regard to the volume limitations
or the manner of sale, notice or public information requirements of Rule 144.
 
RULE 701
 
Under Rule 701 of the Securities Act of 1933 as currently in effect, any of our
employees, consultants, directors or advisors who have purchased shares from us
under a stock option plan or other written agreement can resell those shares
90 days after the effective date of this offering in reliance on Rule 144 but
without complying with some of its restrictions, including the holding period.
The sale of such shares may still remain subject, however, to contractual
restrictions contained in lock-up agreements, described below.
 
LOCK-UP AGREEMENTS
 

Each of our stockholders and holders of options and warrants to purchase shares
of our common stock who individually own more than 1% of our common stock
(assuming the exercise of such options or warrants), as well as each of our
directors and officers, have entered into lock-up agreements pursuant to which
they have agreed that they will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, any shares of our common stock or
any securities convertible into, or exercisable or exchangeable for, our common
stock without the prior written consent of UBS Warburg for a period of 180 days
from the date of this offering. Collectively, over 90% of our issued or issuable
shares prior to this offering are subject to this lock-up agreement. Upon
expiration of the lock-up agreements,       shares will become eligible for sale
in the public market, subject to volume and holding requirements of Rule 144 or
701 of the Securities Act of 1933.

 
STOCK PLANS
 
Following 90 days after the date of this prospectus, shares issued upon the
exercise of options that we granted prior to the date of this offering will also
be eligible for sale in the public market under Rule 701 of the Securities Act
of 1933, as described above. As of August 23, 2001, options to purchase a total
of 5,952,426 shares of common stock were outstanding. Each option grant is
subject to a market stand-off provision, which allows us to restrict the sale of
shares obtained through the exercise of options for up to 180 days from the date
of this offering. Of these              shares,              shares may be
eligible for sale in the public market beginning 180 days from the date of this
prospectus.
 
We also intend to file a registration statement to register for resale an
additional              shares of common stock for issuance under our stock
option plans. This registration statement will become effective immediately upon
filing. Shares of common stock registered under this registration statement will
be available for sale in the public market from time to time subject to vesting
and the expiration of the market stand-off provisions referred to above.
 
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                                                                              79
<Page>
--------------------------------------------------------------------------------
 
Material United States federal tax consequences to non-United States holders of
common stock
 
The following is a general discussion of the material United States federal
income and estate tax considerations with respect to the ownership and
disposition of our common stock applicable to non-U.S. holders. In general, a
"Non-U.S. Holder" is any holder of our common stock other than:
 
-   a citizen or individual resident of the United States,
 
-   a corporation or other entity created or organized in the United States or
    under the laws of the United States or of any state or political subdivision
    of the United States,
 
-   an estate, the income of which is included in gross income for United States
    federal income tax purposes regardless of its source, or
 
-   a trust whose administration is subject to the primary supervision of a
    United States court and which has one or more United States persons who have
    the authority to control all substantial decisions of the trust.
 
This discussion is based on current provisions of the Internal Revenue Code,
Treasury Regulations promulgated under the Internal Revenue Code, judicial
opinions, published positions of the Internal Revenue Service, and all other
applicable authorities, all of which are subject to change, possibly with
retroactive effect. This discussion does not address all aspects of United
States federal income and estate taxation or any aspects of state, local, or
non-U.S. taxation, nor does it consider any specific facts or circumstances that
may apply to particular Non-U.S. Holders that may be subject to special
treatment under the United States federal income tax laws, such as insurance
companies, tax-exempt organizations, financial institutions, brokers, dealers in
securities, and United States expatriates.
 
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE
UNITED STATES FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX
CONSIDERATIONS OF ACQUIRING, HOLDING AND DISPOSING OF SHARES OF COMMON STOCK.
 
DIVIDENDS--In general, dividends paid to a Non-U.S. Holder will be subject to
United States withholding tax at a 30% rate of the gross amount, or a lower rate
prescribed by an applicable income tax treaty, unless the dividends are
effectively connected with a trade or business carried on by the Non-U.S. Holder
within the United States. Dividends that are effectively connected with such a
United States trade or business generally will not be subject to United States
withholding tax if the Non-U.S. Holder files the required forms, including IRS
Form W-8ECI, or any successor form, with the payor of the dividend, and
generally will be subject to United States federal income tax on a net income
basis, in the same manner as if the Non-U.S. Holder were a resident of the
United States. A corporate Non-U.S. Holder that receives effectively connected
dividends may be subject to an additional branch profits tax at a rate of 30%,
or at a lower rate as may be specified by an applicable income tax treaty, on
the repatriation from the United States of its "effectively connected earnings
and profits," subject to adjustments.
 
Under Treasury Regulations generally effective for payments made after
December 31, 2000, referred to in this prospectus as the "Final Regulations," a
Non-U.S. Holder will be required to satisfy certification requirements, directly
or through an intermediary, in order to claim a reduced rate of withholding
under an applicable income tax treaty. A Non-U.S. Holder generally certifies
entitlement to benefits under a treaty by providing an IRS Form W-8BEN. In
addition, under the Final Regulations, in the case of dividends paid to a
foreign partnership, the certification requirement would
 
--------------------------------------------------------------------------------
80
<Page>
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS OF
COMMON STOCK
--------------------------------------------------------------------------------
 
generally be applied to the partners of the partnership, unless the partnership
agrees to become a "withholding foreign partnership," and the partnership would
be required to provide various information, including a United States taxpayer
identification number. The Final Regulations also provide "look-through" rules
for tiered partnerships.
 
A Non-U.S. Holder of our common stock that is eligible for a reduced rate of
United States federal income tax withholding under a tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the IRS.
 
GAIN ON SALE OR OTHER DISPOSITION OF COMMON STOCK--In general, a Non-U.S. Holder
will not be subject to United States federal income tax on any gain realized
upon the sale or other taxable disposition of the holders shares of common stock
unless:
 
-   the gain is effectively connected with a trade or business carried on by the
    Non-U.S. Holder within the United States, in which case the branch profits
    tax discussed above may also apply if the Non-U.S. Holder is a corporation,
 
-   the Non-U.S. Holder is an individual who holds shares of common stock as a
    capital asset and is present in the United States for 183 days or more in
    the taxable year of disposition and various other conditions are met,
 
-   the Non-U.S. Holder is subject to tax under the provisions of the Internal
    Revenue Code regarding the taxation of United States expatriates, or
 
-   we are or have been a "U.S. real property holding corporation" within the
    meaning of Section 897(c)(2) of the Internal Revenue Code at any time within
    the shorter of the five-year period preceding such disposition or such
    holders holding period. We do not believe that we are, and do not anticipate
    becoming, a United States real property holding corporation.
 
BACKUP WITHHOLDING AND INFORMATION REPORTING--Generally, we must report annually
to the IRS the amount of dividends paid, the name and address of the recipient,
and the amount, if any, of tax withheld. A similar report is sent to the
recipient. These information reporting requirements apply even if withholding
was not required because the dividends were effectively connected dividends or
withholding was reduced by an applicable income tax treaty. Under tax treaties
or other agreements, the IRS may make its reports available to tax authorities
in the recipients country of residence.
 
Payments made to a Non-U.S. Holder that is not an exempt recipient generally
will be subject to backup withholding at a rate of 31%, rather than withholding
at a 30% rate or lower treaty rate discussed above, unless a Non-U.S. Holder
certifies as to its foreign status, which certification may be made on IRS
Form W-8 BEN.
 
Proceeds from the disposition of common stock by a Non-U.S. Holder effected by
or through a United States office of a broker will be subject to information
reporting and to backup withholding at a rate of 31% of the gross proceeds
unless the Non-U.S. Holder certifies to the payor under penalties of perjury as
to, among other things, its address and status as a Non-U.S. Holder or otherwise
establishes an exemption. Generally, United States information reporting and
backup withholding will not apply to a payment of disposition proceeds if the
transaction is effected outside the United States by or through a non-United
States office of a broker. However, if the broker is, for United States federal
income tax purposes, a United States person, a controlled foreign corporation, a
foreign person who derives 50% or more of its gross income for specified periods
from the conduct of a United States trade or business, specified United States
branches of foreign banks or insurance companies, or, a
 
--------------------------------------------------------------------------------
                                                                              81
<Page>
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS OF
COMMON STOCK
--------------------------------------------------------------------------------
 
foreign partnership with various connections to the United States, information
reporting but not backup withholding will apply unless:
 
-   the broker has documentary evidence in its files that the holder is a
    Non-U.S. Holder and other conditions are met; or
 
-   the holder otherwise establishes an exemption.
 
Backup withholding is not an additional tax. Rather, the United States federal
income tax liability of persons subject to backup withholding will be reduced by
the amount of tax withheld. If backup withholding results in an overpayment of
United States federal income taxes, a refund may be obtained, provided the
required documents are filed with the IRS.
 
ESTATE TAX--Our common stock owned or treated as owned by an individual who is
not a citizen or resident, as defined for United States federal estate tax
purposes, of the United States at the time of death will be included in the
individuals gross estate for United States federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise.
 
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82
<Page>
--------------------------------------------------------------------------------
 

Underwriting
 
We and the underwriters for the offering named below have entered into an
underwriting agreement concerning the shares being offered. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. UBS Warburg LLC and First Union
Securities, Inc. are the representatives of the underwriters.
 

<Table>
<Caption>
                                                                NUMBER OF
UNDERWRITER                                                        SHARES
-------------------------------------------------------------------------
<S>                                                           <C>
UBS Warburg LLC.............................................
First Union Securities, Inc.................................
                                                               ---------
Total.......................................................
                                                               =========
</Table>

 
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy from us up to an
additional              shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If any shares are
purchased under this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above. The following
table shows the per share and total underwriting discounts and commissions we
will pay to the underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase up to an additional
             shares.
 

<Table>
<Caption>
                                                           NO EXERCISE   FULL EXERCISE
--------------------------------------------------------------------------------------
<S>                                                        <C>           <C>
Per share................................................  $              $
Total....................................................  $              $
</Table>

 
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $             .
 
Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $             per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $             per share from
the initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
selling terms. The underwriters have informed us that they do not expect
discretionary sales to exceed   % of the shares of common stock to be offered.
 

Our company and each of our directors, officers and our stockholders and
optionholders owning 1% or more of our common stock (assuming the exercise of
such options) have agreed with the underwriters not to offer, sell, contract to
sell, hedge or otherwise dispose of, directly or indirectly, or file with the
SEC a registration statement under the Securities Act of 1933 relating to, any
shares of our common stock or securities convertible into or exchangeable for
shares of common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, without
the prior written consent of UBS Warburg LLC.

 
The underwriters have reserved for sale, at the initial public offering price,
             shares of our common stock being offered for sale to our customers
and business partners. At the discretion of
 
--------------------------------------------------------------------------------
                                                                              83
<Page>
--------------------------------------------------------------------------------
 
our management, other parties, including our employees, may participate in the
reserved shares program. The number of shares available for sale to the general
public in the offering will be reduced to the extent these persons purchase
reserved shares. Any reserved shares not so purchased will be offered by the
underwriters to the general public on the same terms as the other shares.
 
Prior to this offering, there has been no public market for our common stock.
The initial public offering price was negotiated by us and the representatives.
The principal factors to be considered in determining the initial public
offering price included:
 
-   the information set forth in this prospectus and otherwise available to the
    representatives;
 
-   the history and the prospects for the industry in which we compete;
 
-   the ability of our management;
 
-   our prospects for future earnings, the present state of our development and
    our current financial position;
 
-   the general condition of the securities markets at the time of this
    offering; and
 
-   recent market prices of, and demand for, publicly traded common stock of
    comparable companies.
 
In connection with the offering, the underwriters may purchase and sell shares
of our common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from us in the offering. The underwriters
may close out any covered short position by either exercising their option to
purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the overallotment option. "Naked" short sales are any
sales in excess of the overallotment option. The underwriters must close out any
naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who purchase in the
offering.
 
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of our common stock while
the offering is in progress. The underwriters also may impose a penalty bid.
This occurs when a particular underwriter repays to the underwriters a portion
of the underwriting discount received by it because the representatives have
repurchased shares sold by or for the account of that underwriter in stabilizing
or short covering transactions. These activities by the underwriters may
stabilize, maintain or otherwise affect the market price of our common stock. As
a result, the price of our common stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued by the underwriters at any time. These transactions may
be effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
 
We have agreed to indemnify the several underwriters against liabilities,
including liabilities under the Securities Act of 1933, and to contribute to
payments that the underwriters may be required to make in respect thereof.
 
--------------------------------------------------------------------------------
84
<Page>
--------------------------------------------------------------------------------
 

Legal matters
 
The validity of the shares of common stock offered in this prospectus will be
passed upon for us by Brobeck, Phleger & Harrison LLP, San Diego, California.
Certain legal matters in connection with the offering will be passed upon for
the underwriters by Alston & Bird LLP, New York, New York.
 

Experts
 
The consolidated financial statements as of December 31, 1999 and 2000, and for
each of the three years in the period ended December 31, 2000, included in this
prospectus and registration statement have been audited by Ernst & Young, LLP,
independent auditors, as stated in their report appearing in this prospectus and
registration statement, and are included in reliance upon the report of that
firm given upon their authority as experts in accounting and auditing.
 
Where you can find more information
 
We have filed with the SEC a registration statement on Form S-1 (including the
exhibits, schedules and amendments to the registration statement) under the
Securities Act of 1933 with respect to the shares of common stock to be sold in
this offering. This prospectus does not contain all the information set forth in
the registration statement. For further information with respect to our company
and the shares of common stock to be sold in this offering, reference is made to
the registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
 
Our SEC filings, including the registration statement, are also available to you
on the Commission's website (http://www.sec.gov). You may read and copy all or
any portion of the registration statement or any other information we file at
the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. You can request copies of these documents, upon payment of a duplicating
fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms.
 
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, and in accordance
with those requirements, we will file periodic reports, proxy statements and
other information with the SEC. Upon approval of the common stock for quotation
on the Nasdaq National Market, such reports, proxy and information statements
and other information may also be inspected at the offices of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006.
 
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                                                                              85
<Page>
--------------------------------------------------------------------------------
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

<Table>
<Caption>
                                                                  PAGE
----------------------------------------------------------------------
<S>                                                           <C>
Report of Ernst & Young LLP, Independent Auditors...........     F-2
 
Consolidated Balance Sheets as of December 31, 1999 and 2000
  and June 30, 2001 (unaudited).............................     F-3
 
Consolidated Statements of Operations for the years ended
  December 31, 1998, 1999 and 2000 and the six months ended
  June 30, 2000 and 2001 (unaudited)........................     F-4
 
Consolidated Statements of Stockholders' Equity (Deficit)
  for the years ended December 31, 1998, 1999 and 2000 and
  the six months ended June 30, 2001 (unaudited)............     F-5
 
Consolidated Statements of Cash Flows for the years ended
  December 31, 1998, 1999 and 2000 and the six months ended
  June 30, 2000 and 2001 (unaudited)........................     F-6
 
Notes to Consolidated Financial Statements..................     F-7
</Table>

 
--------------------------------------------------------------------------------
                                                                             F-1
<Page>
--------------------------------------------------------------------------------
 

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
Digirad Corporation
 
We have audited the accompanying consolidated balance sheets of Digirad
Corporation as of December 31, 1999 and 2000, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Digirad
Corporation at December 31, 1999 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
 
                                                           /s/ ERNST & YOUNG LLP
 
San Diego, California
June 5, 2001, except for the first paragraph of Note 4 and

Note 11, as to which the date is August 23, 2001.
 
--------------------------------------------------------------------------------
F-2
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
CONSOLIDATED BALANCE SHEETS
 

<Table>
<Caption>
                                                                                            PRO FORMA
                                                 DECEMBER 31,                             STOCKHOLDERS'
                                          ---------------------------                        EQUITY
                                              1999           2000        JUNE 30, 2001    JUNE 30, 2001
                                                                         (unaudited)       (unaudited)
--------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>            <C>              <C>
ASSETS
Current assets:
  Cash and cash equivalents.............  $  2,625,713   $  6,555,281    $  3,510,477
  Accounts receivable, net..............            --      3,054,021       4,987,020
  Inventories, net......................       288,788      3,875,961       7,765,410
  Other current assets..................       221,162        590,644         989,732
                                          ------------   ------------    ------------
Total current assets....................     3,135,663     14,075,907      17,252,639
Property and equipment, net.............     2,151,484      6,307,967       7,910,174
Intangibles, net........................       412,157      2,823,535       2,557,619
Other assets............................            --             --         836,880
                                          ------------   ------------    ------------
Total assets............................  $  5,699,304   $ 23,207,409    $ 28,557,312
                                          ============   ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
  (DEFICIT)
Current liabilities:
  Accounts payable......................  $  1,290,581   $  2,622,778    $  3,557,442
  Accrued compensation..................       500,859      1,078,517       1,451,275
  Accrued warranty......................        22,523      1,034,000         832,759
  Other accrued liabilities.............       106,245        925,138       1,292,969
  Current portion of debt...............       414,672      2,934,580       5,613,945
                                          ------------   ------------    ------------
Total current liabilities...............     2,334,880      8,595,013      12,748,390
Long-term debt, net of current
  portion...............................     1,420,758      4,944,422       5,075,883
Notes payable to stockholders...........       735,000        735,000         735,000
Commitments and contingencies
Redeemable convertible preferred stock--
  $.001 par value; 18,690,839,
  27,129,568 and 27,582,646 shares
  authorized at December 31, 1999, 2000
  and June 30, 2001 (unaudited),
  respectively; 18,493,211, 25,190,857
  and 27,129,568 shares issued and
  outstanding at December 31, 1999, 2000
  and June 30, 2001, respectively;
  liquidation value--$52,593,153 and
  $58,479,080 at December 31, 2000 and
  June 30, 2001 (unaudited),
  respectively. None outstanding pro
  forma (unaudited).....................    32,259,100     52,254,742      58,109,136     $         --
Stockholders' equity (deficit):
  Common stock--$.001 par value;
    27,000,000, 36,438,729 and
    38,091,807 shares authorized at
    December 31, 1999, 2000 and
    June 30, 2001 (unaudited),
    respectively; 3,401,034, 4,364,040
    and 4,574,603 shares issued and
    outstanding at December 31, 1999,
    2000 and June 30, 2001 (unaudited),
    respectively, 31,704,170 shares
    outstanding pro forma (unaudited)...         3,401          4,364           4,575           31,704
  Additional paid-in capital............       523,055      2,393,036       4,707,535       62,789,542
  Deferred compensation.................            --       (536,820)     (1,712,989)      (1,712,989)
  Notes receivable from stockholders....        (4,180)       (85,919)       (111,919)        (111,919)

  Accumulated deficit...................   (31,572,710)   (45,096,429)    (50,998,299)     (50,998,299)
                                          ------------   ------------    ------------     ------------
Total stockholders' equity (deficit)....   (31,050,434)   (43,321,768)    (48,111,097)    $  9,998,039
                                          ------------   ------------    ------------     ============
Total liabilities and stockholders'
  equity (deficit)......................  $  5,699,304   $ 23,207,409    $ 28,557,312
                                          ============   ============    ============
</Table>

 
See accompanying notes.
 
--------------------------------------------------------------------------------
                                                                             F-3
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 

<Table>
<Caption>
                                                                                   SIX MONTHS ENDED
                                           YEARS ENDED DECEMBER 31,                    JUNE 30,
                                   -----------------------------------------   -------------------------
                                          1998           1999           2000          2000          2001
                                                                               (unaudited)   (unaudited)
--------------------------------------------------------------------------------------------------------
<S>                                <C>           <C>            <C>            <C>           <C>
REVENUES:
  Products.......................  $   339,802   $    283,889   $  5,815,474   $1,456,480    $ 9,802,365
  Imaging services...............           --             --      1,259,948           --      4,216,575
  Licensing and other............    1,581,167             --             --           --             --
                                   -----------   ------------   ------------   -----------   -----------
Total revenues...................    1,920,969        283,889      7,075,422    1,456,480     14,018,940
 
COST OF REVENUES:
  Products.......................      388,172        264,545      9,834,351    3,601,803      6,437,769
  Imaging services...............           --             --        839,296           --      3,394,363
                                   -----------   ------------   ------------   -----------   -----------
Total cost of revenues...........      388,172        264,545     10,673,647    3,601,803      9,832,132
                                   -----------   ------------   ------------   -----------   -----------
Gross profit (loss)..............    1,532,797         19,344     (3,598,225)  (2,145,323)     4,186,808
 
OPERATING EXPENSES:
  Research and development.......    5,425,678     10,062,957      2,372,412    1,082,770      1,327,317
  Sales and marketing............      622,881      1,455,292      3,585,433    1,291,098      4,027,934
  General and administrative.....    2,533,452      1,967,050      2,878,199    1,071,668      2,898,832
  Amortization of intangible
    assets.......................           --             --        208,624        3,347        314,532
  Stock-based compensation.......           --             --        296,187           --      1,063,043
                                   -----------   ------------   ------------   -----------   -----------
Total operating expenses.........    8,582,011     13,485,299      9,340,855    3,448,883      9,631,658
                                   -----------   ------------   ------------   -----------   -----------
Loss from operations.............   (7,049,214)   (13,465,955)   (12,939,080)  (5,594,206)    (5,444,850)
Interest income..................      903,294        360,476        242,831      123,736        144,732
Interest expense.................      (46,041)       (86,942)      (780,123)    (220,704)      (545,391)
                                   -----------   ------------   ------------   -----------   -----------
Net loss.........................   (6,191,961)   (13,192,421)   (13,476,372)  (5,691,174)    (5,845,509)
Accretion of deferred issuance
  costs on preferred stock.......           --             --        (47,347)          --        (56,361)
                                   -----------   ------------   ------------   -----------   -----------
Net loss applicable to common
  stockholders...................  $(6,191,961)  $(13,192,421)  $(13,523,719)  $(5,691,174)  $(5,901,870)
                                   ===========   ============   ============   ===========   ===========
Basic and diluted net loss per
  share..........................  $     (1.87)  $      (3.90)  $      (3.61)  $    (1.65)   $     (1.35)
                                   ===========   ============   ============   ===========   ===========
Shares used to compute basic and
  diluted net loss per share.....    3,305,804      3,380,530      3,745,049    3,454,822      4,366,429
                                   ===========   ============   ============   ===========   ===========
----------
The composition of stock-based
  compensation is as follows:
  Cost of revenues...............                               $     64,392                 $   196,809
  Research and development.......                                      5,954                      61,116
  Sales and marketing............                                     36,950                     421,264
  General and administrative.....                                    188,891                     383,854
                                                                ------------                 -----------
                                                                $    296,187                 $ 1,063,043
                                                                ============                 ===========
</Table>

 
See accompanying notes.
 
--------------------------------------------------------------------------------
F-4
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
 
 YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THE SIX MONTHS ENDED JUNE 30,
                                2001(UNAUDITED)
 

<Table>
<Caption>
                                                                                    NOTES
                               COMMON STOCK    ADDITIONAL                      RECEIVABLE                              TOTAL
                       --------------------       PAID-IN         DEFERRED           FROM     ACCUMULATED      STOCKHOLDERS'
                          SHARES     AMOUNT       CAPITAL     COMPENSATION   STOCKHOLDERS         DEFICIT   EQUITY (DEFICIT)
----------------------------------------------------------------------------------------------------------------------------
<S>                    <C>         <C>        <C>           <C>              <C>            <C>             <C>
Balance at
  December 31,
  1997...............  3,284,423    $3,284    $  351,509     $        --      $      --     $(12,188,328)     $(11,833,535)
  Exercise of common
    stock options....     80,886        81        35,058              --             --               --            35,139
  Net loss...........         --        --            --              --             --       (6,191,961)       (6,191,961)
                       ---------    ------    ----------     -----------      ---------     ------------      ------------
Balance at
  December 31,
  1998...............  3,365,309     3,365       386,567              --             --      (18,380,289)      (17,990,357)
  Exercise of common
    stock options....     35,725        36        10,324              --         (4,180)              --             6,180
  Issuance of
    warrants in
    conjunction with
    debt.............         --        --       126,164              --             --               --           126,164
  Net loss...........         --        --            --              --             --      (13,192,421)      (13,192,421)
                       ---------    ------    ----------     -----------      ---------     ------------      ------------
Balance at
  December 31,
  1999...............  3,401,034     3,401       523,055              --         (4,180)     (31,572,710)      (31,050,434)
  Repayment of note
    receivable from
    stockholder......         --        --            --              --          4,180               --             4,180
  Exercise common
    stock options....    663,006       663       195,168              --        (85,919)              --           109,912
  Issuance of common
    stock in asset
    acquisitions
    (Note 2).........    300,000       300       410,700              --             --               --           411,000
  Commitment to issue
    common stock
    (Note 2).........         --        --       172,000              --             --               --           172,000
  Issuance of
    warrants in
    conjunction with
    debt.............         --        --       259,106              --             --               --           259,106
  Issuance of options
    and warrants to
    consultants......         --        --        32,272              --             --               --            32,272
  Deferred
    compensation.....         --        --       800,735        (800,735)            --               --                --
  Amortization of
    deferred
    compensation.....         --        --            --         263,915             --               --           263,915
  Net loss...........         --        --            --              --             --      (13,476,372)      (13,476,372)
  Accretion of
    deferred issuance
    costs on
    preferred
    stock............         --        --            --              --             --          (47,347)          (47,347)
                       ---------    ------    ----------     -----------      ---------     ------------      ------------
Balance at
  December 31,
  2000...............  4,364,040     4,364     2,393,036        (536,820)       (85,919)     (45,096,429)      (43,321,768)
  Exercise of common
    stock options
    (unaudited)......    214,128       214        76,637              --        (26,000)              --            50,851
  Repurchase of
    unvested
    restricted stock
    (unaudited)......     (3,565)       (3)       (1,350)             --             --               --            (1,353)
  Issuance of options
    and warrants to
    consultants
    (unaudited)......         --        --       243,029              --             --               --           243,029
  Deferred
    compensation
    (unaudited)......         --        --     1,996,183      (1,996,183)            --               --                --
  Amortization of
    deferred
    compensation
    (unaudited)......         --        --            --         820,014             --               --           820,014
  Net loss
    (unaudited)......         --        --            --              --             --       (5,845,509)       (5,845,509)
  Accretion of
    deferred issuance
    costs on
    preferred stock
    (unaudited)......         --        --            --              --             --          (56,361)          (56,361)
                       ---------    ------    ----------     -----------      ---------     ------------      ------------
Balance at June 30,
  2001(unaudited)....  4,574,603    $4,575    $4,707,535     $(1,712,989)     $(111,919)    $(50,998,299)     $(48,111,097)
                       =========    ======    ==========     ===========      =========     ============      ============
</Table>

 
See accompanying notes.
 
--------------------------------------------------------------------------------
                                                                             F-5
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 

<Table>
<Caption>
                                                                                                 SIX MONTHS ENDED
                                                        YEARS ENDED DECEMBER 31,                     JUNE 30,
                                               ------------------------------------------   ---------------------------
                                                       1998           1999           2000           2000           2001
                                                                                             (unaudited)    (unaudited)
-----------------------------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>            <C>            <C>            <C>
OPERATING ACTIVITIES
  Net loss...................................  $(6,191,961)   $(13,192,421)  $(13,476,372)  $(5,691,174)   $(5,845,509)
  Adjustments to reconcile net loss to net
    cash used by operating activities:
    Depreciation and amortization............      573,030         733,947        939,959       367,794        866,516
    Amortization of intangibles..............           --              --        208,624         3,347        314,530
    Amortization of deferred compensation....           --              --        263,915            --        820,014
    Amortization of debt discount related to
      warrants issued in conjunction with
      debt...................................           --           6,942        174,949        20,957         55,482
    Stock options and warrants issued to
      consultants............................           --              --         32,272         2,640        243,029
    Changes in operating assets and
      liabilities:
      Accounts receivable....................      (83,977)        113,296     (2,952,106)   (1,298,786)    (1,932,999)
      Other assets...........................     (106,223)       (306,711)      (361,853)     (202,442)    (1,235,968)
      Inventories............................           --              --     (3,587,173)   (3,448,369)    (3,889,449)
      Accounts payable.......................      621,590         300,109      1,373,532       166,684        934,664
      Accrued compensation...................       (7,833)        169,122        577,657       130,593        372,758
      Accrued warranty and other accrued
        liabilities..........................     (267,700)         89,682      1,789,035       860,592        166,590
                                               -----------    ------------   ------------   -----------    -----------
Net cash used by operating activities........   (5,463,074)    (12,086,034)   (15,017,561)   (9,088,164)    (9,130,342)
 
INVESTING ACTIVITIES
  Asset acquisitions.........................           --              --     (2,172,000)           --             --
  Purchases of property and equipment........   (1,559,695)       (916,649)    (5,040,938)     (894,265)    (2,468,723)
  Patents and other assets...................     (103,859)        (12,664)       (30,050)        2,530        (48,614)
                                               -----------    ------------   ------------   -----------    -----------
Net cash used by investing activities........   (1,663,554)       (929,313)    (7,242,988)     (891,735)    (2,517,337)
 
FINANCING ACTIVITIES
  Net issuances of common stock..............       35,139           6,180        109,912        15,888         49,498
  Net borrowings under line of credit........           --              --        788,348            --      2,168,675
  Proceeds from issuance of notes payable....           --       2,000,000      4,000,000     1,000,000             --
  Repayment of obligation under notes
    payable..................................           --         (45,349)      (812,691)     (353,805)      (741,646)
  Net proceeds from sale of preferred
    stock....................................    1,500,000              --     17,948,295    10,637,321      5,798,033
  Proceeds from lease financing..............           --              --      4,239,075            --      1,596,708
  Repayment of obligations under capital
    leases...................................      (21,341)             --        (87,002)           --       (268,393)
  Repayment of note receivable from
    stockholder..............................           --              --          4,180            --             --
                                               -----------    ------------   ------------   -----------    -----------
Net cash provided by financing activities....    1,513,798       1,960,831     26,190,117    11,299,404      8,602,875
                                               -----------    ------------   ------------   -----------    -----------
Net increase (decrease) in cash and cash
  equivalents................................   (5,612,830)    (11,054,516)     3,929,568     1,319,505     (3,044,804)
Cash and cash equivalents at beginning of
  period.....................................   19,293,059      13,680,229      2,625,713     2,625,713      6,555,281
                                               -----------    ------------   ------------   -----------    -----------
Cash and cash equivalents at end of period...  $13,680,229    $  2,625,713   $  6,555,281   $ 3,945,218    $ 3,510,477
                                               ===========    ============   ============   ===========    ===========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest.....  $    59,283    $     89,526   $    480,576   $   208,222    $   553,102
                                               ===========    ============   ============   ===========    ===========
Issuance of warrants in conjunction with
  debt.......................................  $        --    $    126,164   $    259,106   $    49,621    $        --
                                               ===========    ============   ============   ===========    ===========
Conversion of bridge notes into Series E
  preferred stock............................  $        --    $         --   $  2,000,000   $        --    $        --
                                               ===========    ============   ============   ===========    ===========
Stock issued for asset acquisitions..........  $        --    $         --   $    411,000   $        --    $        --
                                               ===========    ============   ============   ===========    ===========
</Table>

 
See accompanying notes.
 
--------------------------------------------------------------------------------
F-6
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 

THE COMPANY
 
Digirad Corporation (the "Company"), a Delaware corporation, designs, develops,
manufactures and markets solid-state digital gamma cameras for use in nuclear
medicine and provides mobile nuclear medicine imaging services. Nuclear medicine
imaging provides unique information about organ function and physiology and can
be used for the early detection of many forms of cancer and cardiovascular
disease. The Company's portable gamma cameras, which incorporate its proprietary
semiconductor detector technology, provide improved images, solid-state
reliability, and can be formatted into unique lightweight sizes and shapes. In
addition to conventional nuclear medicine applications, the Company's
solid-state cameras offer the medical profession imagers that can be used in a
variety of new clinical diagnostic imaging applications, which include cost
saving applications in the surgical centers, emergency rooms, intensive care
units, critical care units and other shared facilities.
 
BASIS OF PRESENTATION
 
In 2000, the Company formed two Delaware corporations, Digirad Imaging
Solutions, Inc. and its subsidiary Digirad Imaging Systems, Inc., together
"DIS", to provide turn-key nuclear cardiology imaging to physicians in their
offices on a national basis. DIS is a wholly owned subsidiary of Digirad and was
capitalized by contributing certain acquired assets (see Note 2). The
accompanying consolidated financial statements include the operations of DIS.
Intercompany accounts have been eliminated in consolidation.
 
INTERIM FINANCIAL DATA
 
The accompanying consolidated financial statements for the six months ended
June 30, 2000 and 2001 are unaudited. The unaudited financial statements have
been prepared on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting of only normal
recurring adjustments, necessary to state fairly the financial information set
forth therein, in accordance with generally accepted accounting principles.
 
The results of operations for the interim period ended June 30, 2001 are not
necessarily indicative of the results which may be reported for any other
interim period or for the year ending December 31, 2001.
 
USE OF ESTIMATES
 
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and disclosures made in the accompanying notes to the consolidated
financial statements. Actual results could differ from those estimates.
 
PRO FORMA STOCKHOLDERS' EQUITY
 
If an initial public offering contemplated by this Prospectus is consummated
under the terms presently anticipated, all shares of redeemable convertible
preferred stock outstanding at June 30, 2001 will automatically convert into
27,129,568 common shares. Unaudited pro forma stockholders' equity at June 30,
2001, as adjusted for the conversion of the redeemable convertible preferred
stock is disclosed in the accompanying balance sheet.
 
--------------------------------------------------------------------------------
                                                                             F-7
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
CASH AND CASH EQUIVALENTS
 
The Company considers all investments with an original maturity of three months
or less when purchased to be cash equivalents. Cash equivalents primarily
represent funds invested in money market funds whose cost equals market value.
 
OTHER ASSETS
 
Other assets primarily consist of legal, accounting and other costs incurred in
connection with a proposed public offering of common stock in the Company. These
deferred offering costs total $626,572 and will be charged against the proceeds
received in connection with the offering. In the event the offering is
unsuccessful, these costs will be charged against the operations of the Company.
 
CONCENTRATION OF CREDIT RISK
 

The Company sells its products to customers in the United States and Japan. A
relatively small number of customers account for a significant percentage of the
Company's revenues. For the year ended December 31, 2000, three product
customers accounted for 15.9%, 11.6% and 10.1% of our consolidated revenues.
However, for the six months ended June 30, 2001, no product customers accounted
for 10% or more of consolidated revenues. No imaging services customers
accounted for 10% or more of our consolidated revenues for the year ended
December 31, 2000 or the six months ended June 30, 2001. Revenues in 1998 and
1999 were for sales of various pre-commercialization components of the Company's
products, licensing and contract research and were not representative of the
Company's current products.

 
A significant percentage of the Company's net imaging services revenue in 2000
and 2001 is derived from governmental agencies, such as Medicare. Management
believes that there are minimal credit risks associated with transactions and
balances with these governmental agencies. However, there is a potential risk
that reimbursement rates can be reduced in the future.
 
The Company maintains reserves for potential credit losses and contractual
allowances, which historically have been within management's estimates.
 
INVENTORIES
 
Inventories are stated at the lower of cost or market, cost being determined on
a first-in, first-out basis.
 
PROPERTY AND EQUIPMENT
 
Depreciation and amortization of property and equipment, including assets
recorded under capital leases, is provided using the straight-line method over
the shorter of the estimated useful lives of the related assets, which is
generally 3 to 10 years, or the lease term if applicable.
 
INTANGIBLES
 
Intangibles include acquired customer contracts, a covenant not-to-compete,
patents and trademarks and are recorded at cost. Intangibles, except for
patents, are amortized over their estimated useful lives, which range from three
to five years. Patents are amortized over the lesser of their estimated useful
or legal lives (up to 20 years).
 
--------------------------------------------------------------------------------
F-8
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
IMPAIRMENT OF LONG-LIVED ASSETS
 

The Company follows Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the projected discounted future net cash flows arising from the
assets. SFAS 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. To date, no such impairments have been identified.

 
REVENUE RECOGNITION
 
The Company recognizes revenue when all four of the following criteria are met:
(i) persuasive evidence that an arrangement exists; (ii) delivery of the
products and/or services has occurred; (iii) the selling price is fixed or
determinable; and (iv) collectibility is reasonably assured. In addition, the
Company complies with SEC Staff Accounting Bulletin No. 101, REVENUE RECOGNITION
IN FINANCIAL STATEMENTS ("SAB 101"), which became effective in the fourth
quarter of 2000. SAB 101 sets forth guidelines on the timing of revenue
recognition based upon factors such as passage of title, installation, payment
and customer acceptance.
 
The Company has two primary sources of revenue which are product sales and
imaging services. Product revenues consist of revenues from the sales of gamma
cameras and revenues are recognized generally upon shipment and passage of
title. Revenue for products that have not previously satisfied customer
acceptance requirements or from sales where customer payments are based solely
on customer acceptance are recognized upon customer acceptance. The Company also
provides installation and training for camera sales. The installation is
outsourced to a national service company and training is provided by Company
representatives. Neither service is essential to the functionality of the
product. Both services are performed shortly after delivery and represent an
insignificant cost to the Company. The Company accrues these costs at the time
of shipment.
 
Imaging services revenue is derived from the Company's mobile nuclear imaging
services. Revenue related to mobile imaging services is recognized at the time
services are performed and collection is reasonably assured. Imaging services
revenue is billed on a per procedure or per day basis. The Company is reimbursed
for mobile imaging services provided to patients under certain programs
administered by governmental agencies and private insurance companies. Laws and
regulations governing the Medicare and Medicaid programs are complex and subject
to interpretation. The Company believes that they are in compliance with all
applicable laws and regulations and they are not aware of any pending or
threatened investigations involving allegations of potential wrongdoing.
Non-compliance can result in significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs.
 
In 1998, in addition to certain grant revenues, the Company also received
$1,250,000 from a collaboration agreement that was terminated in 1999.
 
STOCK-BASED COMPENSATION
 
The Company has elected to follow Accounting Principles Board ("APB") Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEEs, and related Interpretations in
accounting for its employee stock
 
--------------------------------------------------------------------------------
                                                                             F-9
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
options. Under APB 25, if the exercise price of the Company's employee stock
options is not less than the fair market value of the underlying stock on the
date of grant, no compensation expense is recognized. In conjunction with the
Company's initial public offering contemplated by this prospectus and other
events that occurred in 2000, the Company reviewed its exercise prices and
arrived at a revised fair value for certain stock options granted subsequent to
June 30, 2000. With respect to the options granted between June 30, 2000 and
December 31, 2000 and for the six months ended June 30, 2001, the Company has
recorded deferred stock compensation of $800,735 and $1,996,183, respectively,
for the difference between the original exercise price per share determined by
the Board of Directors and the revised estimate of fair value per share at the
respective grant date. The approximate weighted average exercise price and
approximate weighted average revised fair value per share for the 798,250
options granted between June 30, 2000 and December 31, 2000 was $0.50 and $1.50,
respectively. The approximate weighted average exercise price and approximate
weighted average revised fair value per share for the 1,169,200 options granted
during the six months ended June 30, 2001 was $1.13 and $2.84, respectively.
Deferred stock compensation is recognized and amortized on an accelerated basis
in accordance with Financial Accounting Standards Board Interpretation ("FIN")
No. 28, ACCOUNTING FOR STOCK APPRECIATION RIGHTS AND OTHER VARIABLE STOCK OPTION
OR AWARD PLANs, over the vesting period of the related options, generally four
years.
 
Deferred compensation for stock options and warrants granted to non-employees is
recorded at fair value as determined in accordance with SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATIOn, and Emerging Issues Task Force ("EITF")
No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN
EMPLOYEES FOR ACQUIRING OR IN CONJUNCTION WITH SELLING GOODS OR SERVICES. The
fair value of the unvested options and warrants is periodically remeasured and
the related amortization is adjusted as necessary. Compensation expense related
to stock options and warrants to purchase common stock issued to non-employees
was $32,272 for the year ended December 31, 2000 and $243,029 for the six months
ended June 30, 2001.
 
WARRANTY COSTS
 
The Company provides a warranty on certain of its products, generally for
periods of up to 12 months and accrues the estimated cost at the time revenue is
recorded.
 
RESEARCH AND DEVELOPMENT
 
Research and development costs are expensed as incurred.
 
ADVERTISING COSTS
 
Advertising costs are expensed as incurred. Total advertising costs for the
years ended December 31, 1998, 1999 and 2000 and for the six months ended
June 30, 2000 and 2001, were $63,183, $205,500, $133,987, $117,787 and $174,883,
respectively.
 
COMPREHENSIVE INCOME
 
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources, including unrealized gains and
losses on investments and foreign currency translation adjustments. The
Company's comprehensive loss is the same as the reported net loss for all
periods.
 
--------------------------------------------------------------------------------
F-10
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
NET LOSS PER SHARE
 
The Company calculated net loss per share in accordance with SFAS 128, EARNINGS
PER SHARE, and SAB No. 98. Basic earnings per share ("EPS") is calculated by
dividing the net income or loss available to common stockholders by the weighted
average number of common shares outstanding for the period, without
consideration for common stock equivalents. Diluted EPS is computed by dividing
the net income available to common stockholders by the weighted average number
of common shares outstanding for the period and the weighted average number of
dilutive common stock equivalents outstanding for the period determined using
the treasury-stock method. For purposes of this calculation, common stock
subject to repurchase by the Company, convertible preferred stock, options, and
warrants are considered to be common stock equivalents and are only included in
the calculation of diluted earnings per share when their effect is dilutive.
Under the provisions of SAB No. 98, common shares issued for nominal
consideration (as defined), if any, would be included in the per share
calculations as if they were outstanding for all periods presented. No common
shares have been issued for nominal consideration.
 
Potentially dilutive securities totaling 21,973,776, 21,752,688, 30,412,668 and
33,466,687 for the years ended December 31, 1998, 1999 and 2000 and the six
months ended June 30, 2001, respectively, were excluded from historical basic
and diluted earnings per share because of their anti-dilutive effect.
 
--------------------------------------------------------------------------------
                                                                            F-11
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
The unaudited pro forma basic and diluted net loss per share calculations assume
the conversion of all outstanding shares of preferred stock into common shares
using the as-if converted method as of January 1, 2000 or the date of issuance,
if later.
 

<Table>
<Caption>
                                              YEARS ENDED DECEMBER 31,             SIX MONTHS ENDED JUNE 30,
                                      -----------------------------------------   ----------------------------
                                             1998           1999           2000          2000             2001
--------------------------------------------------------------------------------------------------------------
<S>                                   <C>           <C>            <C>            <C>              <C>
Numerator:
  Net loss..........................  $(6,191,961)  $(13,192,421)  $(13,476,372)  $(5,691,174)     $(5,845,509)
  Accretion of deferred issuance
    costs on preferred stock........           --             --        (47,347)           --          (56,361)
                                      -----------   ------------   ------------   -----------      -----------
Net loss applicable to common
  stockholders......................  $(6,191,961)  $(13,192,421)  $(13,523,719)  $(5,691,174)     $(5,901,870)
                                      ===========   ============   ============   ===========      ===========
Denominator:
  Weighted average common shares....    3,305,804      3,384,212      3,809,507     3,483,857        4,536,135
  Weighted average unvested common
    shares subject to repurchase....           --         (3,682)       (64,458)      (29,035)        (169,706)
                                      -----------   ------------   ------------   -----------      -----------
Denominator for basic and diluted
  earnings per share................    3,305,804      3,380,530      3,745,049     3,454,822        4,366,429
                                      ===========   ============   ============   ===========      ===========
Basic and diluted net loss per
  share.............................  $     (1.87)  $      (3.90)  $      (3.61)  $     (1.65)     $     (1.35)
                                      ===========   ============   ============   ===========      ===========
Pro forma basic and diluted net loss
  per share.........................                               $      (0.53)                   $     (0.19)
                                                                   ============                    ===========
Shares used above...................                                  3,745,049                      4,366,429
Pro forma adjustment to reflect
  assumed weighted average effect of
  conversion of preferred stock.....                                 21,729,208                     26,069,875
                                                                   ------------                    -----------
Pro forma shares used to compute
  basic and diluted net loss per
  share.............................                                 25,474,257                     30,436,304
                                                                   ============                    ===========
</Table>

 
--------------------------------------------------------------------------------
F-12
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In June 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF EFFECTIVE DATE OF FASB STATEMENT
NO. 133. SFAS No. 137 defers for one year the effective date of SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which was
originally issued in June 1998. SFAS No. 133 now will apply to all fiscal
quarters of all fiscal years beginning after June 15, 2000.
 
SFAS No. 133 requires the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings. As
of December 31, 2000, the Company did not hold any derivative instruments, or
conduct any hedging activities. Therefore there is no anticipated impact to the
consolidated financial statements for the adoption of SFAS No. 133.
 
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS
No. 142, GOODWILL AND INTANGIBLE ASSETS. SFAS No. 141 is effective for all
business combinations completed after June 30, 2001. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001; however, certain provisions
of this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS No. 142. Major provisions of these
Statements and their effective dates for the Company are as follows: (i) all
business combinations initiated after June 30, 2001 must use the purchase method
of accounting. The pooling of interest method of accounting is prohibited except
for transactions initiated before July 1, 2001; (ii) Intangible assets acquired
in a business combination must be recorded separately from goodwill if they
arise from contractual or other legal rights or are separable from the acquired
entity and can be sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or liability; (iii)
Goodwill and intangible assets with indefinite lives acquired after June 30,
2001, will not be amortized. Effective January 1, 2002, all previously
recognized goodwill and intangible assets with indefinite lives will no longer
be subject to amortization; (iv) Effective January 1, 2002, goodwill and
intangible assets with indefinite lives will be tested for impairment annually
and whenever there is an impairment indicator; and (v) all acquired goodwill
must be assigned to reporting units for purpose of impairment testing and
segment reporting. The Company is currently evaluating the impact that SFAS
Nos. 141 and 142 will have on its financial reporting requirements.
 
2. ASSET ACQUISITIONS
 
On August 31, 2000, the Company entered into an Asset Purchase Agreement with
Florida Cardiology and Nuclear Medicine Group ("FC"), a provider of fixed site
and mobile nuclear imaging services that operates in Florida. The Company paid
$1,648,000 (including 300,000 shares of common stock valued at $411,000) to
acquire the accounts receivables, customer contracts of the mobile nuclear
imaging services of FC and a covenant not-to-compete from the seller. The
Company utilizes its technology, products, processes and procedures to provide
services to the customers acquired. The Company allocated the purchase price to
the assets acquired as follows: $101,000 to accounts receivable and
 
--------------------------------------------------------------------------------
                                                                            F-13
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
$1,547,000 to customer contracts. The cost of the customer contracts is being
amortized over five years.
 
As additional consideration for the purchase of the assets, the Company shall
pay to FC a payment based on earnings before interest, income taxes,
depreciation and amortization ("EBITDA") during the six months ending
August 31, 2001. The payout is payable 50% in cash and 50% in common stock to be
issued at the fair value at the date of issuance. In addition, if the Company
meets certain revenue collection thresholds during the nine-month period ending
one year from the closing of the purchase, the Company will issue 100,000 shares
of common stock to FC.
 
As part of the agreement with FC, the Company entered into a service agreement
with FC, whereby FC provided medical billing and collection services. In 2001,
the Company replaced FC with another third-party billing and collections service
provider.
 
In November 2000, the Company completed an Asset Purchase Agreement with Nuclear
Imaging Systems, Inc. and Cardiovascular Concepts, P.C. (together, "NIS"), a
provider of fixed site and mobile nuclear imaging services, which operated in
several Mid-Atlantic states. The Company paid $935,000 primarily to acquire
NIS's customer contracts. The Company utilizes its technology, products,
processes and procedures to provide imaging services to the customers acquired.
The Company allocated the purchase price to the assets acquired as follows:
$56,000 to fixed assets, $7,000 to deposits and $872,000 to customer contracts.
The cost of the customer contracts is being amortized over five years.
 
As part of the Asset Purchase Agreement, the Company entered into a medical
billing and collection service agreement with Medical Management Concepts, Inc.
("MMC"), a subsidiary of NIS. In 2001 the agreement with MMC was terminated and
the Company replaced MMC with another third-party billing and collections
service provider.
 
In addition to the Asset Purchase Agreement, the Company entered into a
consulting agreement with the principal shareholder of NIS, whereby the
consultant agreed to provide consulting services (as defined) for a period of
three years ending on September 29, 2003. As compensation, the consultant could
receive up to 150,000 shares of the Company's common stock, based on achieving
certain revenue targets; however, as long as the consultant does not breach the
non-competition conditions, he will receive a minimum of 100,000 shares of
common stock. The fair value of the minimum 100,000 shares of common stock is
$172,000 and has been recorded as a covenant not-to-compete on the accompanying
balance sheet and amortized over three years.
 
3. FINANCIAL STATEMENT DETAILS
 
The composition of certain balance sheet accounts is as follows:
 
ACCOUNTS RECEIVABLE
 

<Table>
<Caption>
                                                                    DECEMBER 31,
                                                              -------------------------      JUNE 30,
                                                                     1999          2000          2001
-----------------------------------------------------------------------------------------------------
<S>                                                           <C>           <C>           <C>
Accounts receivable.........................................  $       --    $3,093,142    $5,221,011
Less allowance for doubtful accounts........................          --       (39,121)     (233,991)
                                                              ----------    ----------    ----------
                                                              $       --    $3,054,021    $4,987,020
                                                              ==========    ==========    ==========
</Table>

 
--------------------------------------------------------------------------------
F-14
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
INVENTORIES
 

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              -----------------------      JUNE 30,
                                                                   1999          2000          2001
---------------------------------------------------------------------------------------------------
<S>                                                           <C>         <C>           <C>
Raw materials...............................................  $266,574    $1,620,999    $2,074,876
Work-in-progress............................................    22,214     2,110,857     4,909,053
Finished goods..............................................        --       144,105       781,481
                                                              --------    ----------    ----------
                                                              $288,788    $3,875,961    $7,765,410
                                                              ========    ==========    ==========
</Table>

 
PROPERTY AND EQUIPMENT
 

<Table>
<Caption>
                                                                    DECEMBER 31,
                                                              -------------------------       JUNE 30,
                                                                     1999          2000           2001
------------------------------------------------------------------------------------------------------
<S>                                                           <C>           <C>           <C>
Machinery and equipment.....................................  $ 2,155,228   $ 6,074,846   $ 8,176,057
Furniture and fixtures......................................      212,932       239,505       227,495
Computers and software......................................    1,121,685     1,313,903     1,531,845
Leasehold improvements......................................      773,167       891,757       919,711
Construction in process.....................................      140,451       365,279       425,546
                                                              -----------   -----------   -----------
                                                                4,403,463     8,885,290    11,280,654
Less accumulated depreciation and amortization..............   (2,251,979)   (2,577,323)   (3,370,480)
                                                              -----------   -----------   -----------
                                                              $ 2,151,484   $ 6,307,967   $ 7,910,174
                                                              ===========   ===========   ===========
</Table>

 
During 2000 and 2001, the Company entered into a series of financing
transactions structured as capital leases. The equipment, consisting of vans
equipped with the Company's portable gamma cameras, is used by DIS to provide
mobile nuclear imaging services. The terms of these leases generally range from
36 to 63 months. The cost of the equipment was $2,973,636 ($106,899 of
accumulated depreciation) at December 31, 2000 and $4,112,650 ($396,939 of
accumulated depreciation) at June 30, 2001.
 
INTANGIBLES
 

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              -----------------------      JUNE 30,
                                                                   1999          2000          2001
---------------------------------------------------------------------------------------------------
<S>                                                           <C>         <C>           <C>
Acquired customer contracts.................................  $     --    $2,419,000    $2,419,000
Patents and trademarks......................................   421,458       370,335       418,949
Covenant not-to-compete.....................................        --       172,000       172,000
                                                              --------    ----------    ----------
                                                               421,458     2,961,335     3,009,949
Less accumulated amortization...............................    (9,301)     (137,800)     (452,330)
                                                              --------    ----------    ----------
                                                              $412,157    $2,823,535    $2,557,619
                                                              ========    ==========    ==========
</Table>

 
--------------------------------------------------------------------------------
                                                                            F-15
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
OTHER ACCRUED LIABILITIES
 

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                              ---------------------      JUNE 30,
                                                                   1999        2000          2001
-------------------------------------------------------------------------------------------------
<S>                                                           <C>         <C>         <C>
Accrued interest............................................  $ 29,817    $154,415    $   91,217
Customer deposits...........................................        --     125,200        11,200
Sales tax payable...........................................     9,675     118,255       183,435
Accrued royalties...........................................        --      96,000       125,500
Accrued offering costs......................................        --          --       337,814
Other accrued liabilities...................................    66,753     431,268       543,803
                                                              --------    --------    ----------
                                                              $106,245    $925,138    $1,292,969
                                                              ========    ========    ==========
</Table>

 
4. DEBT
 
The composition of the Company's debt balance is as follows:
 

<Table>
<Caption>
                                                                    DECEMBER 31,
                                                              -------------------------       JUNE 30,
                                                                     1999          2000           2001
------------------------------------------------------------------------------------------------------
<S>                                                           <C>           <C>           <C>
Lines of credit.............................................  $       --    $   788,348   $ 2,957,023
Loan and security agreement.................................   1,954,650      3,141,960     2,400,314
Capital lease obligations (Note 5)..........................          --      4,152,074     5,480,389
Debt discount...............................................    (119,220)      (203,380)     (147,898)
                                                              ----------    -----------   -----------
                                                               1,835,430      7,879,002    10,689,828
Current portion of debt.....................................    (414,672)    (2,934,580)   (5,613,945)
                                                              ----------    -----------   -----------
Long-term debt, less current portion........................  $1,420,758    $ 4,944,422   $ 5,075,883
                                                              ==========    ===========   ===========
</Table>

 
NOTES PAYABLE TO FINANCIAL INSTITUTIONS
 
In April 2000, the Company entered into a line of credit with a bank for a
$2,500,000 revolving line of credit. Borrowings under the line of credit accrue
interest at the bank's floating prime rate plus 1% (9.75% at December 31, 2000)
and are limited to the available borrowing base (as defined). In July 2001, the
line of credit was increased to $4,300,000 and the amended line of credit
accrues interest at the bank's floating prime rate plus 2%. The Company is
required to make monthly interest payments. The revolving line of credit expires
July 31, 2002 with any unpaid balance due upon expiration.
 
In November 1999, the Company entered into a loan and security agreement to
borrow up to $3,000,000. In August 2000, the Company modified its November 1999
loan agreement to borrow an additional $1,000,000. Borrowings under this
agreement accrue interest at rates between 13.53% and 14.40%. The Company is
required to make monthly payments of $156,273 on principal and interest through
November 2002.
 
During 1999 and 2000, in conjunction with the loan and security agreement (as
amended), the Company issued the lender warrants to purchase 294,713 shares of
Series E preferred stock at a price of $3.036 per share and valued the warrants
at $280,529. The warrants are exercisable immediately. The value of the warrant
is recorded as debt discount and is amortized to interest expense on a
straight-line basis over the term of the debt. The fair value of the warrants
was determined using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%; expected volatility of 75%; risk-free
interest rate of 6%; and a term of three years.
 
--------------------------------------------------------------------------------
F-16
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
 
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
In January 2001, the Company entered into a loan and security agreement related
to DIS for a revolving line of credit. The Company can draw up to $2,500,000 and
an additional $2,500,000 upon approval by the lender's credit committee. The
borrowings under the line of credit are limited to 85% of Qualified Account (as
defined) and accrue interest at the higher of prime plus 1.25% or 10.25%. The
revolving credit line expires in January 2004.
 
NOTES PAYABLE TO STOCKHOLDERS
 
The Company has notes payable to stockholders totaling $735,000 that bear
interest at 6.35% per year. The notes mature on March 31 of the year immediately
following the first year in which the Company generates cash from operations.
Since the Company does not expect to generate cash from operations in the year
ended December 31, 2001, these notes have been classified as long-term.
 
Principal maturities on long-term debt, excluding capital lease obligations (see
Note 5), and notes payable to stockholders are as follows at December 31, 2000:
 

<Table>
<S>                          <C>
2001.......................  $1,536,023
2002.......................   1,605,937
                             ----------
                             $3,141,960
                             ==========
</Table>

 
The Company's borrowings are generally subject to financial and other
restrictive covenants. Substantially all of the Company's assets have been
pledged as collateral.
 
5. LEASE COMMITMENTS
 
The Company leases its facilities under non-cancelable operating leases which
expire through 2002. Rent expense was $303,475, $390,919, $418,470, $199,549,
and $346,188 for the years ended December 31, 1998, 1999 and 2000 and the six
months ended June 30, 2000 and 2001, respectively.
 
Annual future minimum lease payments as of December 31, 2000 are as follows:
 

<Table>
<Caption>
                                                               OPERATING       CAPITAL
                                                                  LEASES        LEASES
--------------------------------------------------------------------------------------
<S>                                                           <C>          <C>
2001........................................................   $351,872    $ 1,240,640
2002........................................................    158,122      1,305,916
2003........................................................     69,375      1,199,575
2004........................................................     28,125        880,552
2005........................................................     24,375        880,552
Thereafter..................................................      4,063             --
                                                               --------    -----------
Total minimum lease payments................................   $635,932      5,507,235
                                                               ========
Less amount representing interest...........................                (1,355,161)
                                                                           -----------
Present value of future minimum capital lease obligations...                 4,152,074
Less amounts due in one year................................                  (721,163)
                                                                           -----------
Long-term portion of capital lease obligations..............               $ 3,430,911
                                                                           ===========
</Table>

 
--------------------------------------------------------------------------------
                                                                            F-17
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
 
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
 

<Table>
<Caption>
                                                                   DECEMBER 31, 2000              JUNE 30, 2001
                                                               --------------------------   --------------------------
                                                                               REDEMPTION                   REDEMPTION
                                                                                      AND                          AND
                                                   PRICE PER        NUMBER    LIQUIDATION        NUMBER    LIQUIDATION
DATE ISSUED                               SERIES       SHARE     OF SHARES          VALUE     OF SHARES          VALUE
----------------------------------------------------------------------------------------------------------------------
<S>                                     <C>        <C>         <C>           <C>            <C>           <C>
March 1995............................   A          $  1.00     2,250,000    $ 2,250,000     2,250,000    $ 2,250,000
December 1995.........................   B          $  1.10     2,281,000      2,509,100     2,281,000      2,509,100
August 1997...........................   C          $  1.25     4,800,000      6,000,000     4,800,000      6,000,000
August 1997...........................   D          $2.3073     8,668,140     20,000,000     8,668,140     20,000,000
June 1998.............................   E          $ 3.036       494,071      1,500,000       494,071      1,500,000
March, April, June, November and
  December 2000.......................   E          $ 3.036     6,697,646     20,334,053     6,697,646     20,334,053
January, March and April 2001.........   E          $ 3.036            --             --     1,938,711      5,885,927
                                                               ----------    -----------    ----------    -----------
                                                               25,190,857     52,593,153    27,129,568     58,479,080
                                                               ==========                   ==========
Less: Unamortized deferred issuance
  costs                                                                         (338,411)                    (369,944)
                                                                             -----------                  -----------
                                                                             $52,254,742                  $58,109,136
                                                                             ===========                  ===========
</Table>

 
Deferred issuance costs through December 31, 2000 and June 30, 2001 for all
series of preferred stock totaled $385,758 and $473,652, respectively, and are
being accreted up to the redemption value through July 31, 2004 (the earliest
redemption date).
 
The preferred stock is redeemable on or after July 31, 2004, upon the request of
at least 66 2/3% of the holders of preferred stock. The Company shall redeem all
outstanding shares of preferred stock by paying in cash its liquidation value
plus declared but unpaid dividends. No dividends have been declared through
June 30, 2001.
 
The preferred stock will automatically be converted into shares of common stock
upon the closing of a sale of the Company's common stock in a public offering
registered under the Securities Act of 1933 which results in aggregate gross
proceeds equal to or exceeding $15,000,000 at a price equal to or exceeding
$7.50 per share of common stock, or with the approval of holders of at least 75%
of the outstanding shares of preferred stock and the approval of 60% of the
holders of Series D. Each share of the Series A, B, C, D, and E preferred stock
is convertible, at the option of the holder, into one share of the Company's
common stock, which has been reserved for issuance upon conversion of the
preferred stock, subject to certain antidilution adjustments.
 
Holders of the Series A, B, C, D, and E preferred stock are entitled to receive
dividends, if and when declared by the Board of Directors, at a rate of $0.10,
$0.11, $0.125, $0.231, and $0.304 per share per annum, respectively. The holder
of each share of preferred stock is entitled to the number of votes equal to the
number of shares of common stock into which the preferred stock could be
converted. The Company is subject to certain covenants under the agreements that
require the vote or written consent by a majority of the then outstanding
preferred shares regarding certain changes in the rights and interests of the
preferred shares. The shareholders also have certain antidilutive rights.
 
--------------------------------------------------------------------------------
F-18
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
 
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
In the event of any liquidation, dissolution or winding up of the Company, the
holders of preferred stock are entitled to receive their liquidation value prior
and in preference to any distribution of the assets or surplus funds of the
Company to the holders of common stock. If, upon the occurrence of such event,
the assets and funds distributed among the holders of preferred stock are
insufficient to permit full payment, the entire assets and funds of the Company
would be distributed among the preferred shareholders in proportion to the
product of the liquidation preference of each such share and the number of such
shares owned by each such holder.
 
7. STOCKHOLDERS' EQUITY (DEFICIT)
 
WARRANTS
 
During 2000, in conjunction with two consulting agreements, the Company issued
two warrants to purchase 10,000 and 500 shares of the Company's common stock at
$1.50 and $3.04 per share, respectively. The warrants are exercisable
immediately and expire in November 2005. The fair value of the warrants was
$5,670.
 
During the six months ended June 30, 2001, in conjunction with various sales and
marketing arrangements, the Company issued warrants to purchase 90,000 shares of
the Company's common stock at prices ranging from $1.50 to $3.04 per share. The
warrants are exercisable immediately and expire five years from the date of
issuance. The fair value of the warrants was $138,300.
 
In September 2000, in conjunction with convertible bridge note financing the
Company issued warrants to purchase up to 65,875 shares of Series E preferred
stock at $3.036 per share. The warrants are exercisable immediately and expire
the earlier of (i) September 2005 or (ii) the closing of an initial public
offering. The fair value of the warrants was $104,741 and was recognized as
interest expense in December 2000 due to the conversion of the bridge notes.
 
During 1999 and 2000, in connection with the Company's loan security agreements,
the Company issued 294,713 warrants to purchase Series E preferred stock at a
price of $3.036 per share. The fair value of the warrants issued was $126,164 in
1999 and $154,365 in 2000.
 

All of the warrants above were valued using the Black-Scholes option pricing
model with the following assumptions: dividend yield of 0%; expected volatility
of 75%; risk-free interest rate of 6%; and a term of three years.

 
STOCK OPTIONS
 
In December 1998, the Company's 1997 Stock Option/Stock Issuance Plan was
replaced with the 1998 Stock Option/Stock Issuance Plan ("1998 Plan") under
which 1,000,000 shares of common stock were reserved for issuance upon exercise
of options granted by the Company. Under all stock option plans, the Company is
authorized to issue an aggregate of 6,654,860 shares of common stock. Terms of
the stock option agreements, including vesting requirements (which is generally
four years), are determined by the Board of Directors. Upon grant, the options
are exercisable immediately; however any exercised but unvested shares are
subject to repurchase by the Company at the original exercise price. Options
granted have a term of up to ten years.
 
--------------------------------------------------------------------------------
                                                                            F-19
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
The following table summarizes option activity under the stock option plans:
 

<Table>
<Caption>
                                                                            WEIGHTED
                                                                             AVERAGE
                                                                            EXERCISE
                                                                  SHARES       PRICE
------------------------------------------------------------------------------------
<S>                                                           <C>          <C>
Outstanding at December 31, 1997............................   2,506,360    $   0.31
  Granted...................................................   1,248,170    $   0.33
  Cancelled.................................................    (193,079)   $   0.42
  Exercised.................................................     (80,886)   $   0.43
                                                              ----------
Outstanding at December 31, 1998............................   3,480,565    $   0.31
  Granted...................................................     773,500    $   0.35
  Cancelled.................................................  (1,164,991)   $   0.26
  Exercised.................................................     (35,725)   $   0.29
                                                              ----------
Outstanding at December 31, 1999............................   3,053,349    $   0.34
  Granted...................................................   2,574,964    $   0.48
  Cancelled.................................................    (333,754)   $   0.36
  Exercised.................................................    (663,006)   $   0.30
                                                              ----------
Outstanding at December 31, 2000............................   4,631,553    $   0.42
  Granted...................................................   1,230,700    $   1.14
  Cancelled.................................................     (58,209)   $   0.68
  Exercised.................................................    (214,127)   $   0.37
                                                              ----------
Outstanding at June 30, 2001................................   5,589,917    $   0.58
                                                              ==========
</Table>

 
As of December 31, 2000 and June 30, 2001, 1,202,190 and 40,264 shares,
respectively, were available for future grant.
 
Following is a further breakdown of the options outstanding as of December 31,
2000:
 

<Table>
<Caption>
                                                             WEIGHTED                     WEIGHTED
                                            WEIGHTED          AVERAGE                      AVERAGE
                                             AVERAGE   EXERCISE PRICE               EXERCISE PRICE
                             OPTIONS     CONTRACTUAL       OF OPTIONS      VESTED        OF VESTED
EXERCISE PRICE           OUTSTANDING   LIFE IN YEARS      OUTSTANDING     OPTIONS          OPTIONS
--------------------------------------------------------------------------------------------------
<S>                     <C>            <C>             <C>              <C>         <C>
    $            0.21        606,995             5.0    $       0.21      579,584    $       0.21
    $            0.25        360,527             7.1    $       0.25      265,919    $       0.25
    $            0.35      2,155,174             8.6    $       0.35      646,971    $       0.35
    $            0.50      1,158,057             9.6    $       0.50       98,984    $       0.50
    $            0.75        300,000             5.2    $       0.75      285,000    $       0.75
    $    3.04 - $3.50         50,800             9.4    $       3.41       50,800    $       3.41
                        ------------    ------------   -------------    ---------   -------------
                           4,631,553             8.1    $       0.42    1,927,258    $       0.44
                        ============    ============   =============    =========   =============
</Table>

 
The weighted average fair values of options granted in 1998, 1999, and 2000 were
$0.08, $0.07, and $0.59, respectively.
 
Adjusted pro forma information regarding net loss is required by SFAS 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that
 
--------------------------------------------------------------------------------
F-20
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
Statement. The fair value for these options was estimated at the date of grant
using the Minimum Value pricing model with the following weighted- average
assumptions for 1998, 1999 and 2000: a risk-free interest rates of 5%, 5% and
6%, respectively; a dividend yield of 0%; and a life of the option of five, five
and six years, respectively.
 
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized on an accelerated basis in accordance with FIN 28 over the vesting
period. The Company's pro forma net loss information is as follows:
 

<Table>
<Caption>
                                                                      YEARS ENDED DECEMBER 31,
                                                              -----------------------------------------
                                                                     1998           1999           2000
-------------------------------------------------------------------------------------------------------
<S>                                                           <C>           <C>            <C>
Pro forma net loss..........................................  $(6,244,166)  $(13,307,042)  $(13,632,212)
Pro forma net loss per share-basic and diluted..............  $     (1.89)  $      (3.94)  $      (3.64)
</Table>

 
The pro forma results above are not likely to be representative of the effects
of applying SFAS 123 on reported net income or loss for future years.
 
NOTES RECEIVABLE FROM STOCKHOLDERS
 
At December 31, 1999 and 2000 and June 30, 2001, the Company had notes
receivable from employee stockholders of $4,180, $85,919 and $111,919,
respectively. The notes relate to the exercise of common stock options, are full
recourse and bear interest at 6% per year. The notes are due on the earlier of
(i) the date on which the employee ceases to be employed by the Company,
(ii) 90 days after an initial public offering of the Company's common stock; or
(iii) May 15, 2010.
 
COMMON SHARES RESERVED FOR ISSUANCE
 
The following table summarizes common shares reserved for future issuance:
 

<Table>
<Caption>
                                                               DECEMBER 31,      JUNE 30,
                                                                       2000          2001
-----------------------------------------------------------------------------------------
<S>                                                           <C>             <C>
Redeemable convertible preferred stock......................     25,190,857    27,129,568
Convertible preferred stock warrants........................        360,588       360,588
Common stock warrants.......................................         10,500       100,500
Common stock options........................................      5,833,743     5,630,181
Commitment to issue common stock (Note 2)...................        150,000       150,000
                                                              -------------   -----------
Total common shares reserved for issuance...................     31,545,688    33,370,837
                                                              =============   ===========
</Table>

 
8. INCOME TAXES
 
As of December 31, 2000, the Company had federal and California income tax net
operating loss carryforwards of approximately $39,896,000 and $27,920,000,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the 50% limitation in the utilization
of California net operating loss carryforwards. The federal tax loss
carryforwards will begin expiring in 2006 unless previously utilized. The
California tax loss carryforwards will begin to expire in 2002 unless previously
utilized. The Company also has federal and California research and development
and other credit carryforwards of approximately $1,570,000 and $1,250,000,
respectively. The federal research and development and other credit
carryforwards begin to expire in 2005 unless previously utilized.
 
--------------------------------------------------------------------------------
                                                                            F-21
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
 
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
The Company's net operating loss and credit carryforwards are subject to an
annual limitation on their use as a result of changes in ownership during 1995
and 1997, pursuant to Internal Revenue Code Sections 382 and 383. However, these
annual limitations are not expected to have a material affect on the Company's
ability to utilize its carryforwards.
 
Significant components of the Company's deferred tax assets are shown below. A
valuation allowance, of which $5,402,000 relates to 2000, has been recognized to
offset the deferred tax assets, as realization of such assets is uncertain.
 

<Table>
<Caption>
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                      1999           2000
-----------------------------------------------------------------------------------------
<S>                                                           <C>            <C>
Deferred tax assets:
  Capitalized research expense..............................  $  1,517,000   $  1,011,000
  Net operating loss carryforwards..........................    10,535,000     15,569,000
  Research and development and other credits................     1,332,000      2,193,000
  Other, net................................................       536,000        963,000
                                                              ------------   ------------
Total deferred tax assets...................................    13,920,000     19,736,000
Deferred tax liabilities--expensed patents..................       (53,000)      (467,000)
                                                              ------------   ------------
Total net deferred tax assets...............................    13,867,000     19,269,000
Valuation allowance for deferred tax assets.................   (13,867,000)   (19,269,000)
                                                              ------------   ------------
Net deferred tax assets.....................................  $         --   $         --
                                                              ============   ============
</Table>

 
9. SEGMENTS
 
During 2000, the Company commenced commercial operations and realigned its
operating structure into two reportable segments, products and imaging services.
The Company's new reporting segments have been determined based on the nature of
the products and/or services offered to customers or the nature of their
function in the organization. The Company evaluates performance and allocates
certain costs based on the percentage of sales contributed by each segment. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies. In prior years, the Company
operated in one reportable segment, which is not comparable to the two
 
--------------------------------------------------------------------------------
F-22
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
 
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
reportable segments in fiscal 2000 and thereafter. As a result, prior years have
been presented as "Other" in the information shown below.
 

<Table>
<Caption>
                                                                                           SIX MONTHS ENDED
                                                  YEARS ENDED DECEMBER 31,                     JUNE 30,
                                         ------------------------------------------   ---------------------------
                                                 1998           1999           2000           2000           2001
-----------------------------------------------------------------------------------------------------------------
<S>                                      <C>            <C>            <C>            <C>            <C>
REVENUES BY SEGMENT:
Products...............................  $        --    $         --   $  5,815,474   $ 1,456,480    $ 9,802,365
Imaging services.......................           --              --      1,259,948            --      4,216,575
Other..................................    1,920,969         283,889             --            --             --
                                         -----------    ------------   ------------   -----------    -----------
  Consolidated revenues................  $ 1,920,969    $    283,889   $  7,075,422   $ 1,456,480    $14,018,940
                                         ===========    ============   ============   ===========    ===========
GROSS PROFIT (LOSS) BY SEGMENT:
Products...............................  $        --    $         --   $ (4,018,877)  $(2,145,323)   $ 3,364,596
Imaging services.......................           --              --        420,652            --        822,212
Other..................................    1,532,797          19,344             --            --             --
                                         -----------    ------------   ------------   -----------    -----------
  Consolidated gross profit (loss).....  $ 1,532,797    $     19,344   $ (3,598,225)  $(2,145,323)   $ 4,186,808
                                         ===========    ============   ============   ===========    ===========
NET LOSS BY SEGMENT:
LOSS FROM OPERATIONS
Products...............................  $        --    $         --   $(12,324,646)  $(5,594,206)   $(3,041,840)
Imaging services.......................           --              --       (614,434)           --     (2,403,010)
Other..................................   (7,049,214)    (13,465,955)            --            --             --
                                         -----------    ------------   ------------   -----------    -----------
  Consolidated loss from operations....   (7,049,214)    (13,465,955)   (12,939,080)   (5,594,206)    (5,444,850)
RECONCILING ITEMS
Interest income........................      903,294         360,476        242,831       123,736        144,732
Interest expense.......................      (46,041)        (86,942)      (780,123)     (220,704)      (545,391)
                                         -----------    ------------   ------------   -----------    -----------
  Consolidated net loss................  $(6,191,961)   $(13,192,421)  $(13,476,372)  $(5,691,174)   $(5,845,509)
                                         ===========    ============   ============   ===========    ===========
DEPRECIATION AND AMORTIZATION BY
  SEGMENT:
Products...............................  $        --    $         --   $    890,763   $   371,141    $   542,249
Imaging services.......................           --              --        257,820            --        638,797
Other..................................      573,030         733,947             --            --             --
                                         -----------    ------------   ------------   -----------    -----------
  Consolidated depreciation and
    amortization.......................  $   573,030    $    733,947   $  1,148,583   $   371,141    $ 1,181,046
                                         ===========    ============   ============   ===========    ===========
IDENTIFIABLE ASSETS BY SEGMENT:
Products...............................  $        --    $         --   $ 16,001,066   $12,489,000    $23,654,270
Imaging services.......................           --              --      7,206,343            --      4,903,042
Other..................................   16,365,039       5,699,304             --            --             --
                                         -----------    ------------   ------------   -----------    -----------
  Consolidated assets..................  $16,365,039    $  5,699,304   $ 23,207,409   $12,489,000    $28,557,312
                                         ===========    ============   ============   ===========    ===========
</Table>

 
Sales to a distributor in Japan represented 8.5% and 5.0% of total revenues for
the year ended December 31, 2000 and the six months ended June 30, 2001,
respectively. The Company did not have any foreign sales for the years ended
December 31, 1998 and 1999.
 
--------------------------------------------------------------------------------
                                                                            F-23
<Page>
DIGIRAD CORPORATION
--------------------------------------------------------------------------------
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
 
ENDED JUNE 30, 2000 AND 2001 IS UNAUDITED)
 
10. EMPLOYEE RETIREMENT PLAN
 
The Company has a 401(k) retirement plan (the "Plan"), under which all full-time
employees may contribute up to 15% of their annual salary, within limits. The
Company may elect to make discretionary contributions upon the approval of the
Board of Directors. Through June 30, 2001, the Company had not contributed to
the Plan.
 
11. SUBSEQUENT EVENTS
 
On August 23, 2001, the Company issued 2,618,462 shares of Series F preferred
stock at $3.25 per share for total proceeds of $8,510,002. These holders of the
Series F preferred stock are entitled to similar rights and privileges as
described in Note 6, except that the price-based antidilution provisions of the
Series F preferred stock were modified.
 
In July 2001, the Company was served with notice that a complaint had been filed
by Medical Management Concepts, Inc. in the United States District Court for the
Eastern District of Pennsylvania. The complaint alleges, among other things,
breach of the terms of a Services Agreement and an Employee Lease Agreement,
each dated September 2000 and entered into by and between DIS and MMC. This
complaint seeks recovery of damages for approximately $81,000 plus 12.5% of the
adjusted estimated net revenue generated from gross sums billed to our mobile
nuclear imaging customers from May 1, 2001 to October 31, 2003. The Company
believes it has meritorious defenses against this complaint and that its
ultimate resolution will not have a material impact on the financial statements.
 
--------------------------------------------------------------------------------
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                                     [LOGO]
<Page>
--------------------------------------------------------------------------------
 

P
art II
 
INFORMATION NOT REQUIRED IN PROSPECTUS
 

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
The expenses to be paid by the Registrant are as follows. All amounts other than
the SEC registration fee, the NASD filing fees and the Nasdaq National Market
listing fee are estimates.
 

<Table>
<Caption>
                                                                  AMOUNT
                                                                   TO BE
                                                                    PAID
                                                              ----------
<S>                                                           <C>
SEC registration fee........................................  $
NASD filing fee.............................................
Nasdaq National Market listing fee..........................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Printing and engraving......................................
Blue sky fees and expenses (including legal fees)...........
Transfer agent fees.........................................
Miscellaneous...............................................
    Total...................................................  $
                                                              ==========
</Table>

 

ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
 
Article IV of the Registrant's amended and restated certificate of incorporation
allows for the indemnification of directors and officers to the fullest extent
permissible under Delaware law.
 
Article VI of the Registrant's bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of us if such person
acted in good faith and in a manner reasonably believed to be in and not opposed
to our best interest, and, with respect to any criminal action or proceeding,
the indemnified party had no reason to believe his or her conduct was unlawful.
 
The Registrant has entered into indemnification agreements with our directors
and executive officers, in addition to indemnification provided for in our
bylaws, and intends to enter into indemnification agreements with any new
directors and executive officers in the future. The indemnification agreements
may require the Registrant, among other things, to indemnify our directors and
officers against certain liabilities that may arise by reason of their status or
service as directors and officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance, if available on reasonable terms. At
present, there is no litigation or proceeding pending involving a director,
officer or employee of the Registrant regarding which indemnification is sought,
nor is the Registrant aware of any threatened litigation that may result in
claims for indemnification.
 
Reference is also made to Section   of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provision in
the Registrant's amended and restated certificate of incorporation, bylaws and
the indemnification agreements entered into between the Registrant and each of
its
 
--------------------------------------------------------------------------------
                                                                            II-1
<Page>
PART II
--------------------------------------------------------------------------------
 
directors and executive officers may be sufficiently broad to permit
indemnification of the Registrant's directors and executive officers for
liabilities arising under the Securities Act of 1933.
 
The Registrant applied for liability insurance for our officers and directors.
 
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere in this prospectus:
 

<Table>
<Caption>
                                                              EXHIBIT
DOCUMENT                                                      NUMBER
----------------------------------------------------------------------
<S>                                                           <C>
Form of Underwriting Agreement..............................     1.1
Form of Amended and Restated Certificate of Incorporation to
  be in effect immediately prior to the closing of this
  offering..................................................     3.2
Form of Amended and Restated Bylaws to be in effect
  immediately prior to the closing of this offering.........     3.4
Form of Indemnification Agreement...........................   10.28
</Table>

 

ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES
 
    (1) On June 23, 1998, the Registrant issued and sold 494,071 shares of its
Series E Preferred Stock to Johnson & Johnson Development Corporation for an
aggregate purchase price of $1,500,000. The Registrant relied on the exemption
provided by Section 4(2) and/or Regulation D promulgated under the Securities
Act of 1933. The issuance was made without general solicitation or advertising.
The purchaser was a sophisticated investor with access to all relevant
information necessary to evaluate the investment and represented to the
Registrant that the securities were being acquired for investment;
 
    (2) On October 27, 1999, the Registrant issued warrants to purchase up to
197,628 shares of its Series E Preferred Stock with an exercise price of $3.036
per share to 2 purchasers in connection with a Loan and Security Agreement under
which the purchasers agreed to loan the Registrant up to $2,000,000. The
Registrant relied on the exemption provided by Section 4(2) and/or Regulation D
promulgated under the Securities Act of 1933. The issuances were made without
general solicitation or advertising. Each purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate the investment and
represented to the Registrant that the securities were being acquired for
investment;
 
    (3) On March 15, 2000, the Registrant issued and sold 2,194,797 shares of
its Series E Preferred Stock to 10 purchasers for an aggregate purchase price of
$6,663,415. The Registrant relied on the exemption provided by Section 4(2)
and/or Regulation D promulgated under the Securities Act of 1933. The issuances
were made without general solicitation or advertising. Each purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to the Registrant that the securities
were being acquired for investment;
 
    (4) On April 6, 2000, the Registrant issued and sold 1,151,407 shares of its
Series E Preferred Stock to 6 purchasers for an aggregate purchase price of
$3,495,676. The Registrant relied on the exemption provided by Section 4(2)
and/or Regulation D promulgated under the Securities Act of 1933. The issuances
were made without general solicitation or advertising. Each purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to the Registrant that the securities
were being acquired for investment;
 
    (5) On May 9, 2000, the Registrant issued warrants to purchase up to 31,208
shares of its Series E Preferred Stock with an exercise price of $3.036 per
share to 2 purchasers in connection with a Loan and Security Agreement between
the parties in which the purchasers agreed to loan the Registrant up to
$2,000,000. The Registrant relied on the exemption provided by Section 4(2)
and/or Regulation D promulgated under the Securities Act of 1933. The issuances
were made without general
 
--------------------------------------------------------------------------------
II-2
<Page>
PART II
--------------------------------------------------------------------------------
 
solicitation or advertising. Each purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate the investment and
represented to the Registrant that the securities were being acquired for
investment;
 
    (6) On June 9, 2000, the Registrant issued and sold 164,690 shares of its
Series E Preferred Stock to Ocean Avenue Investors, LLC--Anacapa Fund I for an
aggregate purchase price of $500,000. The Registrant relied on the exemption
provided by Section 4(2) and/or Regulation D promulgated under the Securities
Act of 1933. The issuance was made without general solicitation or advertising.
The purchaser was a sophisticated investor with access to all relevant
information necessary to evaluate the investment and represented to the
Registrant that the securities were being acquired for investment;
 
    (7) On September 29, 2000, the Registrant issued and sold to 5 purchasers
convertible promissory notes in the aggregate principal amount of $2,000,000
that were convertible into shares of the Registrant's Series E Preferred Stock.
In consideration for entering into the promissory notes, the Registrant also
issued the purchasers warrants to purchase up to 65,875 shares of the
Registrant's Series E Preferred Stock at an exercise price of $3.036 per share.
The Registrant relied on the exemption provided by Section 4(2) and/or
Regulation D promulgated under the Securities Act of 1933. The issuances were
made without general solicitation or advertising. Each purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to the Registrant that the securities
were being acquired for investment;
 
    (8) On August 14, 2000, the Registrant issued warrants to purchase up to
65,877 shares of its Series E Preferred Stock with an exercise price of $3.036
per share to 2 purchasers in connection with a Loan and Security Agreement
between the parties in which the purchasers agreed to loan the Registrant up to
$1,000,000. The Registrant relied on the exemption provided by Section 4(2)
and/or Regulation D promulgated under the Securities Act of 1933. The issuances
were made without general solicitation or advertising. Each purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to the Registrant that the securities
were being acquired for investment;
 
    (9) On November 10, 2000, the Registrant issued and sold 3,005,595 shares of
its Series E Preferred Stock to 10 purchasers for an aggregate purchase price of
$9,124,987, which amount reflected the conversion of $2,000,000 of the
Registrant's convertible promissory notes into shares of Series E Preferred
Stock. The Registrant relied on the exemption provided by Section 4(2) and/or
Regulation D promulgated under the Securities Act of 1933. The issuances were
made without general solicitation or advertising. Each purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to the Registrant that the securities
were being acquired for investment;
 
    (10) On November 14, 2000, the Registrant issued a warrant to purchase up to
10,000 shares of its Common Stock with an exercise price of $1.50 per share to
Cardiovascular Consultants in connection with a consulting relationship. The
Registrant relied on the exemption provided by Section 4(2) and/or Regulation D
promulgated under the Securities Act of 1933. The issuance was made without
general solicitation or advertising. The purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate the investment and
represented to the Registrant that the securities were being acquired for
investment;
 
    (11) On November 14, 2000, the Registrant issued a warrant to purchase up to
500 shares of its Common Stock with an exercise price of $3.04 per share to
Robert McKenzie in connection with a consulting relationship. The Registrant
relied on the exemption provided by Section 4(2) and/or Regulation D promulgated
under the Securities Act of 1933. The issuance was made without general
 
--------------------------------------------------------------------------------
                                                                            II-3
<Page>
PART II
--------------------------------------------------------------------------------
 
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate the investment and
represented to the Registrant that the securities were being acquired for
investment;
 
    (12) On December 8, 2000, the Registrant issued and sold 181,157 shares of
its Series E Preferred Stock to 6 purchasers for an aggregate purchase price of
$549,993. The Registrant relied on the exemption provided by Section 4(2) and/or
Regulation D promulgated under the Securities Act of 1933. The issuances were
made without general solicitation or advertising. Each purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to the Registrant that the securities
were being acquired for investment;
 
    (13) On December 14, 2000, the Registrant issued 300,000 shares of its
Common Stock to Dr. John F. Kilgore in connection with Dr. Kilgore's entering
into a Non-Competition and Non-Disclosure Agreement. The Registrant relied on
the exemption provided by Section 4(2) and/or Regulation D promulgated under the
Securities Act of 1933. The issuance was made without general solicitation or
advertising. Dr. Kilgore was a sophisticated investor with access to all
relevant information necessary to evaluate the investment and represented to the
Registrant that the securities were being acquired for investment;
 
    (14) On January 4, 2001, the Registrant issued warrants to purchase up to
20,000 shares of its Common Stock with an exercise price of $1.50 per share to 2
purchasers in connection with consulting relationships. The Registrant relied on
the exemption provided by Section 4(2) and/or Regulation D promulgated under the
Securities Act of 1933. The issuances were made without general solicitation or
advertising. Each purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment and represented to the
Registrant that the securities were being acquired for investment;
 
    (15) On January 19, 2001, the Registrant issued and sold 683,463 shares of
its Series E Preferred Stock to 4 purchasers for an aggregate purchase price of
$2,074,994. The Registrant relied on the exemption provided by Section 4(2)
and/or Regulation D promulgated under the Securities Act of 1933. The issuances
were made without general solicitation or advertising. Each purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to the Registrant that the securities
were being acquired for investment;
 
    (16) On January 26, 2001, the Registrant issued a warrant to purchase up to
20,000 shares of its Common Stock with an exercise price of $2.00 per share to
Oklahoma Cardiovascular Associates in connection with a consulting relationship.
The Registrant relied on the exemption provided by Section 4(2) and/or
Regulation D promulgated under the Securities Act of 1933. The issuance was made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment and represented to the Registrant that the securities were being
acquired for investment;
 
    (17) On March 1, 2001, the Registrant issued warrants to purchase up to
10,000 shares of its Common Stock with an exercise price of $3.04 per share to 2
purchasers in connection with consulting relationships. The Registrant relied on
the exemption provided by Section 4(2) and/or Regulation D promulgated under the
Securities Act of 1933. The issuances were made without general solicitation or
advertising. Each purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment and represented to the
Registrant that the securities were being acquired for investment;
 
    (18) On March 9, 2001, the Registrant issued and sold 150,362 shares of its
Series E Preferred Stock to 3 purchasers for an aggregate purchase price of
$456,499. The Registrant relied on the exemption provided by Section 4(2) and/or
Regulation D promulgated under the Securities Act of
 
--------------------------------------------------------------------------------
II-4
<Page>
PART II
--------------------------------------------------------------------------------
 
1933. The issuances were made without general solicitation or advertising. Each
purchaser was a sophisticated investor with access to all relevant information
necessary to evaluate the investment and represented to the Registrant that the
securities were being acquired for investment;
 
    (19) On March 16, 2001, the Registrant issued and sold 296,050 shares of its
Series E Preferred Stock to 11 purchasers for an aggregate purchase price of
$898,808. The Registrant relied on the exemption provided by Section 4(2) and/or
Regulation D promulgated under the Securities Act of 1933. The issuances were
made without general solicitation or advertising. Each purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to the Registrant that the securities
were being acquired for investment;
 
    (20) On March 28, 2001, the Registrant issued warrants to purchase up to
20,000 shares of its Common Stock with an exercise price of $3.04 per share to 2
purchasers in connection with consulting relationships. The Registrant relied on
the exemption provided by Section 4(2) and/or Regulation D promulgated under the
Securities Act of 1933. The issuances were made without general solicitation or
advertising. Each purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment and represented to the
Registrant that the securities were being acquired for investment;
 
    (21) On April 9, 2001, the Registrant issued and sold 808,836 shares of its
Series E Preferred Stock to Merrill Lynch Ventures, LLC for an aggregate
purchase price of $2,455,626. The Registrant relied on the exemption provided by
Section 4(2) and/or Regulation D promulgated under the Securities Act of 1933.
The issuance was made without general solicitation or advertising. The purchaser
was a sophisticated investor with access to all relevant information necessary
to evaluate the investment and represented to the Registrant that the securities
were being acquired for investment;
 
    (22) On May 15, 2001, the Registrant issued warrants to purchase up to
20,000 shares of its Common Stock with an exercise price of $3.04 per share to 3
purchasers in connection with consulting relationships. The Registrant relied on
the exemption provided by Section 4(2) and/or Regulation D promulgated under the
Securities Act of 1933. The issuances were made without general solicitation or
advertising. Each purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment and represented to the
Registrant that the securities were being acquired for investment;
 
    (23) On July 31, 2001, the Registrant issued a warrant to purchase up to
42,490 shares of its Series E Preferred Stock to Silicon Valley Bank in
connection with a Loan and Security Agreement. The Registrant relied on the
exemption provided by Section 4(2) and/or Regulation D promulgated under the
Securities Act of 1933. The issuance was made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment and represented to the
Registrant that the securities were being acquired for investment;
 
    (24) On July 31, 2001, the Registrant issued a warrant to purchase up to
100,000 shares of its Common Stock to McAdams and Whitman Consulting in
connection with a Consulting Agreement. The Registrant relied on the exemption
provided by Section 4(2) and/or Regulation D promulgated under the Securities
Act of 1933. The issuance was made without general solicitation or advertising.
The purchaser was a sophisticated investor with access to all relevant
information necessary to evaluate the investment and represented to the
Registrant that the securities were being acquired for investment;
 
    (25) On August 23, 2001, the Registrant issued and sold 2,618,462 shares of
its Series F Preferred Stock to 25 purchasers for an aggregate purchase price of
$8,510,002. The Registrant relied on the exemption provided by Section 4(2)
and/or Regulation D promulgated under the Securities Act of 1933. The issuances
were made without general solicitation or advertising. Each purchaser was a
 
--------------------------------------------------------------------------------
                                                                            II-5
<Page>
PART II
--------------------------------------------------------------------------------
 
sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to the Registrant that the securities
were being acquired for investment;
 
    (26) Prior to January 1, 1998, the Registrant granted options to purchase
shares of its Common Stock to various directors, employees and consultants
pursuant to its 1995 Stock Option Plan. With respect to all grants of options,
each of the issuances were exempt from the registration requirements of the
Securities Act of 1933 either by virtue of either (a) Section 4(2) as
transactions not involving a public offering, or (b) Rule 701;
 
    (27) From time to time since January 1, 1998, the Registrant has granted
options to purchase shares of its Common Stock to various directors, employees
and consultants pursuant to its 1997 Stock Option/Stock Issuance Plan. With
respect to all grants of options, each of the issuances were exempt from the
registration requirements of the Securities Act of 1933 either by virtue of
(a) Section 4(2) as transactions not involving a public offering, or
(b) Rule 701;
 
    (28) From time to time since January 1, 1998, the Registrant has granted
options to purchase shares of its Common Stock to various directors, employees
and consultants pursuant to its 1998 Stock Option/Stock Issuance Plan. With
respect to all grants of options, each of the issuances were exempt from the
registration requirements of the Securities Act of 1933 either by virtue of
(a) Section 4(2) as transactions not involving a public offering, or
(b) Rule 701;
 
    (29) As of August 23, 2001, the Registrant has issued and sold, in the
aggregate, 393,774 shares of its Common Stock at a per share exercise price of
$0.21 to $0.75 to directors, employees and consultants pursuant to their
exercise of options to purchase Common Stock issued pursuant under the
Registrant's 1995 Stock Option Plan;
 
    (30) As of August 23, 2001, the Registrant has issued and sold, in the
aggregate, 127,161 shares of its Common Stock at a per share exercise price of
$0.21 to $0.35 to employees and consultants pursuant to their exercise of
options to purchase Common Stock issued pursuant under the Registrant's 1997
Stock Option/Stock Issuance Plan; and
 
    (31) As of August 23, 2001, the Registrant has issued and sold, in the
aggregate, 518,789 shares of its Common Stock for per share exercise prices
ranging from $0.35 to $1.50 to directors, employees and consultants pursuant to
their exercise of options to purchase Common Stock issued pursuant under the
Registrant's 1998 Stock Option/Stock Issuance Plan.
 
The recipients of the above-described securities represented their intention to
acquire the securities for investment only and not with a view to distribution
thereof. Appropriate legends were affixed to the stock certificates issued in
such transactions. All recipients had adequate access, through employment or
other relationships, to information about the Registrant. No underwriters were
involved in the distribution of the above-described securities.
 
--------------------------------------------------------------------------------
II-6
<Page>
PART II
--------------------------------------------------------------------------------
 

ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a) Exhibits
 


<Table>
<Caption>
NUMBER                  DESCRIPTION
------------------------------------------------------------------------------------
<C>                     <S>
    1.1*                Form of Underwriting Agreement.
    3.1                 Amended and Restated Certificate of Incorporation.
    3.2*                Form of Amended and Restated Certificate of Incorporation to
                        be in effect immediately prior to the closing of the initial
                        public offering.
    3.3                 Bylaws.
    3.4*                Form of Amended and Restated Bylaws to be in effect
                        immediately prior to the closing of the initial public
                        offering.
    4.1*                Form of Specimen Common Stock Certificate.
    5.1*                Opinion of Brobeck, Phleger & Harrison LLP.
   10.1+                License Agreement by and between Registrant and the Regents
                        of the University of California, dated May 19, 1999, as
                        amended.
   10.2+                Software License Agreement by and between Registrant and
                        Segami Corporation, dated June 16, 1999.
   10.3+                Loan and Security Agreement by and between Registrant and
                        MMC/GATX Partnership No. I, dated October 27, 1999, as
                        amended.
   10.4                 Promissory Note Agreement by and between Registrant and
                        MMC/GATX Partnership No. I, dated November 1, 1999.
   10.5                 Promissory Note Agreement by and between Registrant and
                        MMC/GATX Partnership No. I, dated May 12, 2000, as amended.
   10.6                 Promissory Note Agreement by and between Registrant and
                        MMC/GATX Partnership No. I, dated August 15, 2000, as
                        amended.
   10.7+                Loan and Security Agreement by and between Registrant and
                        Silicon Valley Bank, dated April 1, 2000, as amended.
   10.8*                Loan and Security Agreement by and between Orion Imaging
                        Systems, Inc., Digirad Imaging Systems, Inc. and Heller
                        Healthcare Finance, Inc., dated January 9, 2001.
   10.9*                Master Lease Agreement by and between Registrant and GE
                        Healthcare Financial Services, dated September 26, 2000.
   10.10                Equipment Lease Agreement by and between Registrant and
                        MarCap Corporation, dated October 1, 2000.
   10.11                Lease Agreement by and between Registrant and Judd/King No.
                        1, a California general partnership, dated January 27, 1998,
                        as amended, for the property located at 9350 Trade Place,
                        San Diego, California.
   10.12                Asset Purchase Agreement by and among Digirad Imaging
                        Systems, Inc., Nuclear Imaging Systems, Inc. and
                        Cardiovascular Concepts, P.C., dated September 29, 2000.
   10.13*               Asset Purchase Agreement by and among Registrant, Orion
                        Imaging Systems, Inc., Florida Cardiology and Nuclear
                        Medicine Group, P.A. and Dr. John Kilgore, dated August 31,
                        2000, as amended.
   10.14                Convertible Promissory Note and Warrant Purchase Agreement
                        by and among Registrant and the investors listed on Exhibit
                        A, dated September 29, 2000.
   10.15                Form of Warrant to purchase shares of Series E Preferred
                        Stock by and between Registrant and the investors listed on
                        the attached schedule.
   10.16                Form of Warrant to purchase shares of Common Stock by and
                        between Registrant and the investors listed on the attached
                        schedule.
   10.17+               Fourth Additional Series E Preferred Stock Purchase
                        Agreement by and among Registrant and the investors listed
                        on Schedule 1 thereto, dated November 10, 2000, as amended.
</Table>


 
--------------------------------------------------------------------------------
                                                                            II-7
<Page>
PART II
--------------------------------------------------------------------------------
 


<Table>
<Caption>
NUMBER                  DESCRIPTION
------------------------------------------------------------------------------------
<C>                     <S>
   10.18+               Series F Preferred Stock Purchase Agreement by and among
                        Registrant and the investors listed on Schedule 1 thereto,
                        dated August 23, 2001.
   10.19                Amended and Restated Investors' Rights Agreement by and
                        among Registrant and the investors listed on Schedule A
                        thereto, dated August 23, 2001.
   10.20                Amended and Restated Co-Sale Agreement by and among
                        Registrant and the investors listed on Schedule A thereto,
                        dated November 10, 2000.
   10.21                Amended and Restated Series E Voting Agreement by and among
                        Registrant and the investors listed therein, dated November
                        10, 2000.
   10.22                1998 Stock Option/Stock Issuance Plan, as amended.
   10.23                1998 Stock Option/Stock Issuance Plan, Form of Notice of
                        Grant.
   10.24                1998 Stock Option/Stock Issuance Plan, Form of Stock Option
                        Agreement.
   10.25                1998 Stock Option/Stock Issuance Plan, Form of Stock
                        Purchase Agreement.
   10.26*               2001 Stock Incentive Plan.
   10.27*               Form of Indemnification Agreement.
   10.28+               Consulting Agreement dated July 31, 2001.
   10.29+               Service Agreement by and between Registrant and Universal
                        Servicetrends, Inc., dated August 25, 2000.
   10.30                Master Equipment Lease Agreement by and between Registrant
                        and DVI Financial Services, Inc., dated May 24, 2001.
   10.31                Loan Agreement by and between Registrant and Gerald G. Loehr
                        Trust, dated September 1, 1993, as amended.
   10.32                Loan Agreement by and between Registrant and Clinton L.
                        Lingren, dated September 1, 1993, as amended.
   10.33                Loan Agreement by and between Registrant and Jack F. Butler,
                        dated September 1, 1993, as amended.
   10.34*               Form of Warrant to purchase shares of Series E Preferred
                        Stock by and between Registrant and the investors listed on
                        the attached schedule.
   10.35                Warrant to purchase shares of Series E Preferred Stock by
                        and between Registrant and Silicon Valley Bank, dated
                        July 31, 2001.
   10.36+*              Warrant Issuance Agreement, dated July 31, 2001.
   10.37+*              Warrant to purchase shares of Common Stock, dated July 31,
                        2001.
   21.1                 Subsidiaries of Registrant.
   23.1                 Consent of Ernst & Young LLP, Independent Auditors.
   23.2*                Consent of Brobeck, Phleger & Harrison LLP (included in
                        Exhibit 5.1).
   24.1                 Powers of Attorney (included in the Signature Page).
</Table>


 
---------
 
*  To be filed by amendment.
 
+  Certain portions of this Exhibit for which confidential treatment has been
    requested have been redacted and filed separately with the Securities and
    Exchange Commission.
 
(b) Financial Statement Schedules.
 
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
All other schedules are omitted because they are not applicable or not required
or because the required information is shown in the Consolidated Financial
Statements of Digirad Corporation or the notes thereto.
 
--------------------------------------------------------------------------------
II-8
<Page>
PART II
--------------------------------------------------------------------------------
 

ITEM 17.  UNDERTAKINGS
 
The undersigned Registrant hereby undertakes to provide to the Underwriter at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
 
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
 
The undersigned Registrant hereby undertakes that:
 
    (1) For purposes of determining any liability under the Securities Act of
1933 the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424 (b)(1) or (4), or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective; and
 
    (2) For the purpose of determining any liability under the Securities Act of
1933 each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
 
--------------------------------------------------------------------------------
                                                                            II-9
<Page>
--------------------------------------------------------------------------------
 

Signatures
 

Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in San Diego, California, on this 5th day
of October 2001.

 


<Table>
<S>                                                    <C>  <C>
                                                       DIGIRAD CORPORATION
 
                                                       By:  /s/ GARY J. G. ATKINSON
                                                            -----------------------------------------
                                                            Name: Gary J. G. Atkinson
                                                            Title: CHIEF FINANCIAL OFFICER
</Table>


 

Pursuant to the requirements of the Securities Act of 1933 this Registration
Statement has been signed by the following persons in the capacities indicated
on October 5, 2001:

 


<Table>
<Caption>
SIGNATURE                                   TITLE                                 DATE
----------------------------------------------------------------------------------------------------
<S>                                         <C>                                   <C>
*
---------------------------------           President, Chief Executive Officer     October 5, 2001
R. Scott Huennekens                           and Director
 
/s/ GARY J. G. ATKINSON
---------------------------------           Chief Financial Officer (principal     October 5, 2001
Gary J. G. Atkinson                           financial and accounting officer)
 
---------------------------------           Chairman of the Board of Directors     October 5, 2001
Timothy J. Wollaeger
 
---------------------------------           Director                               October 5, 2001
R. King Nelson
 
---------------------------------           Director                               October 5, 2001
Brad Nutter
 
---------------------------------           Director                               October 5, 2001
Kenneth E. Olson
 
---------------------------------           Director                               October 5, 2001
Douglas Reed, M.D.
</Table>


 


<Table>
<S>   <C>                                         <C>                                   <C>
*By:           /s/ GARY J. G. ATKINSON
             ----------------------------
                 Gary J. G. Atkinson
                   ATTORNEY IN FACT
</Table>


 
--------------------------------------------------------------------------------
II-10
<Page>
                                                                     SCHEDULE II
 
--------------------------------------------------------------------------------
 
DIGIRAD CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 

<Table>
<Caption>
                                                                             RESERVES FOR
                                                                              EXCESS AND    RESERVES FOR
                                                              RESERVES FOR     OBSOLETE       PRODUCT
                                                                BAD DEBT      INVENTORY       WARRANTY
--------------------------------------------------------------------------------------------------------
<S>                                                           <C>            <C>            <C>
Balance at December 31, 1997................................    $    --        $     --     $        --
  Provision.................................................         --              --              --
  Write-offs and recoveries, net............................         --              --              --
                                                                -------        --------     -----------
Balance at December 31, 1998................................         --              --              --
  Provision.................................................         --              --          22,523
  Write-offs and recoveries, net............................         --              --              --
                                                                -------        --------     -----------
Balance at December 31, 1999................................         --              --          22,523
  Provision.................................................     39,121         135,000       2,062,427
  Write-offs and recoveries, net............................         --              --      (1,050,950)
                                                                -------        --------     -----------
Balance at December 31, 2000................................    $39,121        $135,000     $ 1,034,000
                                                                =======        ========     ===========
</Table>

 
--------------------------------------------------------------------------------
                                                                             S-1
<Page>
--------------------------------------------------------------------------------
 

Index to exhibits
 


<Table>
<Caption>
NUMBER                                                                   DESCRIPTION
------------------------------------------------------------------------------------
<C>                     <S>
    1.1*                Form of Underwriting Agreement.
    3.1                 Amended and Restated Certificate of Incorporation.
    3.2*                Form of Amended and Restated Certificate of Incorporation to
                        be in effect immediately prior to the closing of the initial
                        public offering.
    3.3                 Bylaws.
    3.4*                Form of Amended and Restated Bylaws to be in effect
                        immediately prior to the closing of the initial public
                        offering.
    4.1*                Form of Specimen Common Stock Certificate.
    5.1*                Opinion of Brobeck, Phleger & Harrison LLP.
   10.1+                License Agreement by and between Registrant and the Regents
                        of the University of California, dated May 19, 1999, as
                        amended.
   10.2+                Software License Agreement by and between Registrant and
                        Segami Corporation, dated June 16, 1999.
   10.3+                Loan and Security Agreement by and between Registrant and
                        MMC/GATX Partnership No. I, dated October 27, 1999, as
                        amended.
   10.4                 Promissory Note Agreement by and between Registrant and
                        MMC/GATX Partnership No. I, dated November 1, 1999.
   10.5                 Promissory Note Agreement by and between Registrant and
                        MMC/GATX Partnership No. I, dated May 12, 2000, as amended.
   10.6                 Promissory Note Agreement by and between Registrant and
                        MMC/GATX Partnership No. I, dated August 15, 2000, as
                        amended.
   10.7+                Loan and Security Agreement by and between Registrant and
                        Silicon Valley Bank, dated April 1, 2000, as amended.
   10.8*                Loan and Security Agreement by and between Orion Imaging
                        Systems, Inc., Digirad Imaging Systems, Inc. and Heller
                        Healthcare Finance, Inc., dated January 9, 2001.
   10.9*                Master Lease Agreement by and between Registrant and GE
                        Healthcare Financial Services, dated September 26, 2000.
   10.10                Equipment Lease Agreement by and between Registrant and
                        MarCap Corporation, dated October 1, 2000.
   10.11                Lease Agreement by and between Registrant and Judd/King No.
                        1, a California general partnership, dated January 27, 1998,
                        as amended, for the property located at 9350 Trade Place,
                        San Diego, California.
   10.12                Asset Purchase Agreement by and among Digirad Imaging
                        Systems, Inc., Nuclear Imaging Systems, Inc. and
                        Cardiovascular Concepts, P.C., dated September 29, 2000.
   10.13*               Asset Purchase Agreement by and among Registrant, Orion
                        Imaging Systems, Inc., Florida Cardiology and Nuclear
                        Medicine Group, P.A. and Dr. John Kilgore, dated August 31,
                        2000, as amended.
   10.14                Convertible Promissory Note and Warrant Purchase Agreement
                        by and among Registrant and the investors listed on Exhibit
                        A, dated September 29, 2000.
   10.15                Form of Warrant to purchase shares of Series E Preferred
                        Stock by and between Registrant and the investors listed on
                        the attached schedule.
   10.16                Form of Warrant to purchase shares of Common Stock by and
                        between Registrant and the investors listed on the attached
                        schedule.
   10.17+               Fourth Additional Series E Preferred Stock Purchase
                        Agreement by and among Registrant and the investors listed
                        on Schedule 1 thereto, dated November 10, 2000, as amended.
   10.18+               Series F Preferred Stock Purchase Agreement by and among
                        Registrant and the investors listed on Schedule 1 thereto,
                        dated August 23, 2001.
   10.19                Amended and Restated Investors' Rights Agreement by and
                        among Registrant and the investors listed on Schedule A
                        thereto, dated August 23, 2001.
</Table>


 
<Page>

INDEX TO EXHIBITS
--------------------------------------------------------------------------------
 


<Table>
<Caption>
NUMBER                                                                   DESCRIPTION
------------------------------------------------------------------------------------
<C>                     <S>
   10.20                Amended and Restated Co-Sale Agreement by and among
                        Registrant and the investors listed on Schedule A thereto,
                        dated November 10, 2000.
   10.21                Amended and Restated Series E Voting Agreement by and among
                        Registrant and the investors listed therein, dated November
                        10, 2000.
   10.22                1998 Stock Option/Stock Issuance Plan, as amended.
   10.23                1998 Stock Option/Stock Issuance Plan, Form of Notice of
                        Grant.
   10.24                1998 Stock Option/Stock Issuance Plan, Form of Stock Option
                        Agreement.
   10.25                1998 Stock Option/Stock Issuance Plan, Form of Stock
                        Purchase Agreement.
   10.26*               2001 Stock Incentive Plan.
   10.27*               Form of Indemnification Agreement.
   10.28+               Consulting Agreement dated July 31, 2001.
   10.29+               Service Agreement by and between Registrant and Universal
                        Servicetrends, Inc., dated August 25, 2000.
   10.30                Master Equipment Lease Agreement by and between Registrant
                        and DVI Financial Services, Inc., dated May 24, 2001.
   10.31                Loan Agreement by and between Registrant and Gerald G. Loehr
                        Trust, dated September 1, 1993, as amended.
   10.32                Loan Agreement by and between Registrant and Clinton L.
                        Lingren, dated September 1, 1993, as amended.
   10.33                Loan Agreement by and between Registrant and Jack F. Butler,
                        dated September 1, 1993, as amended.
   10.34*               Form of Warrant to purchase shares of Series E Preferred
                        Stock by and between Registrant and the investors listed on
                        the attached schedule.
   10.35                Warrant to purchase shares of Series E Preferred Stock by
                        and between Registrant and Silicon Valley Bank, dated
                        July 31, 2001.
   10.36+*              Warrant Issuance Agreement, dated July 31, 2001.
   10.37+*              Warrant to purchase shares of Common Stock, dated July 31,
                        2001.
   21.1                 Subsidiaries of Registrant.
   23.1                 Consent of Ernst & Young LLP, Independent Auditors.
   23.2*                Consent of Brobeck, Phleger & Harrison LLP (included in
                        Exhibit 5.1).
   24.1                 Powers of Attorney (included in the Signature Page).
</Table>


 
---------
 
*  To be filed by amendment.
 
+  Certain portions of this Exhibit for which confidential treatment has been
    requested have been redacted and filed separately with the Securities and
    Exchange Commission.




<Page>

                                                                     EXHIBIT 3.1


                AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

                                       OF

                               DIGIRAD CORPORATION

     Digirad Corporation, a corporation organized and existing under the laws 
of the state of Delaware, hereby certifies as follows:

     1. The name of the corporation is Digirad Corporation.  The date the 
Corporation filed its original Certificate of Incorporation with the 
Secretary of State was January 2, 1997.

     2. This Amended and Restated Certificate of Incorporation restates and 
amends the provisions of the original Certificate of Incorporation of this 
Corporation as heretofore in effect and was duly adopted by the Corporation's 
Board of Directors in accordance with Sections 242 and 245 of the General 
Corporation Law of the State of Delaware.

     3. The text of the Certificate of Incorporation is hereby amended and 
restated to read as herein set forth in full:

                                    ARTICLE I

     The name of the Corporation (hereinafter called "Corporation") is 
Digirad Corporation.

                                   ARTICLE II

     The address of the registered office of the Corporation in the State of 
Delaware is 30 Old Rudnick Lane, City of Dover, County of Kent 19901, and the 
name of the registered agent of the Corporation in the State of Delaware at 
such address is CorpAmerica, Inc.


                                   ARTICLE III

     The purpose of this Corporation is to engage in any lawful act or 
activity for which corporations may be organized under the General 
Corporation Law of the State of Delaware.

                                   ARTICLE IV

     A. CLASSES OF STOCK. This Corporation is authorized to issue two (2) 
classes of shares, to be designated "Common" and "Preferred" and referred to 
herein as the "Common Stock" or the "Preferred Stock" respectively. The total 
number of shares of Common Stock the Corporation is authorized to issue is 
Forty Two Million Seven Hundred Thirty Eight Thousand Four Hundred Sixty-Two 
(42,738,462). The par value is $0.001 per share. The total number of shares 
of Preferred Stock the Corporation is authorized to issue is Thirty Million 
Three Hundred Twenty One Thousand One Hundred Eight (30,321,108). The par 
value is $0.001 per share.

<Page>

          The Board of Directors of the Corporation may divide the Preferred 
Stock into any number of series. The Board of Directors shall fix the 
designation and number of shares of each such series. The Board of Directors 
may determine and alter the rights, preferences, privileges and restrictions 
granted to and imposed upon any wholly unissued series of the Preferred 
Stock. The Board of Directors (within the limits and restrictions of any 
resolution adopted by it, originally fixing the number of shares of any 
series) may increase or decrease the number of shares of any such series 
after the issue of shares of that series, but not below the number of then 
outstanding shares of such series.

     B. RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF THE SERIES A 
PREFERRED STOCK, SERIES B PREFERRED STOCK, SERIES C PREFERRED STOCK, SERIES D 
PREFERRED STOCK, SERIES E PREFERRED STOCK AND SERIES F PREFERRED STOCK.

          1. DESIGNATION OF SERIES A PREFERRED STOCK, SERIES B PREFERRED 
STOCK, SERIES C PREFERRED STOCK, SERIES D PREFERRED STOCK, SERIES E PREFERRED 
STOCK AND SERIES F PREFERRED STOCK.

               Two Million Two Hundred Fifty Thousand (2,250,000) shares of 
Preferred Stock are designated Series A Preferred Stock (the "Series A 
Preferred Stock") with the rights, preferences and privileges specified 
herein. Two Million Two Hundred Eighty One Thousand (2,281,000) shares of 
Preferred Stock are designated Series B Preferred Stock (the "Series B 
Preferred Stock") with the rights, preferences and privileges specified 
herein. Four Million Eight Hundred Thousand (4,800,000) shares of Preferred 
Stock are designated Series C Preferred Stock (the "Series C Preferred 
Stock") with the rights, preferences and privileges specified herein. Eight 
Million Six Hundred Sixty Eight Thousand One Hundred Forty (8,668,140) shares 
of Preferred Stock are designated Series D Preferred Stock (the "Series D 
Preferred Stock") with the rights, preferences and privileges specified 
herein. Nine Million Five Hundred Eighty Three Thousand Five Hundred Six 
(9,583,506) shares of Preferred Stock are designated Series E Preferred Stock 
(the "Series E Preferred Stock") with the rights, preferences and privileges 
specified herein. Two Million Seven Hundred Thirty Eight Thousand Four 
Hundred Sixty Two (2,738,462) shares of Preferred Stock are designated Series 
F Preferred Stock (the "Series F Preferred Stock") with the rights, 
preferences and privileges specified herein. As used in this Article IV, 
Division B, the term "Preferred Stock" shall refer to the Series A Preferred 
Stock, the Series B Preferred Stock, the Series C Preferred Stock, Series D 
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock.

          2. DIVIDEND PROVISIONS.

               The holders of shares of Preferred Stock shall be entitled to 
receive non-cumulative dividends, out of any assets legally available 
therefor, prior and in preference to any declaration or payment of any 
dividend (payable other than in Common Stock of this Corporation) on the 
Common Stock or any other junior equity security of this Corporation, at the 
rate of $.10 per share of Series A Preferred Stock, $.11 per share of Series 
B Preferred Stock, $.125 per share of Series C Preferred Stock, $.23073 per 
share of Series D Preferred Stock and $.3036 per share of Series E Preferred 
Stock and $.325 per share of Series F Preferred Stock per annum plus an 
amount equal to that paid on outstanding shares of Common Stock of this 
Corporation, whenever funds are legally available therefor, payable quarterly 
when, as and if 

                                     -2-

<Page>

declared by the Board of Directors and shall be non-cumulative. Dividends, if 
declared, must be declared and paid with respect to all series of Preferred 
Stock contemporaneously, and if less than full dividends are declared, the 
same percentage of the dividend rate will be payable to each series of 
Preferred Stock.

          3. LIQUIDATION PREFERENCE.

               (a) In the event of any liquidation, dissolution or winding up 
of this Corporation, either voluntary or involuntary, the holders of 
Preferred Stock shall be entitled to receive, prior and in preference to any 
distribution of any of the assets of this Corporation to the holders of 
Common Stock or any other junior equity security by reason of their ownership 
thereof an amount for each share of Series A Preferred Stock, Series B 
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E 
Preferred Stock and Series F Preferred Stock, respectively, held by such 
holder equal to the sum of (i) $1.00 for each such outstanding share of 
Series A Preferred Stock (the "Original Series A Issue Price"), (ii) $1.10 
for each such outstanding share of Series B Preferred Stock (the "Original 
Series B Issue Price"), (iii) $1.25 for each such outstanding share of Series 
C Preferred Stock (the "Original Series C Issue Price"), (iv) $2.3073 for 
each outstanding share of Series D Preferred Stock (the "Original Series D 
Issue Price"), (v) $3.036 for each outstanding share of Series E Preferred 
Stock (the "Original Series E Issue Price"), (vi) $3.25 for each outstanding 
share of Series F Preferred Stock (the "Original Series F Issue Price") and 
(vii) in each case, an amount equal to all declared but unpaid dividends on 
each such share. If upon the occurrence of such an event the assets and funds 
thus distributed among the holders of the Preferred Stock shall be 
insufficient to permit the payment to such holders of the full aforesaid 
preferential amounts, then the entire assets and funds of this Corporation 
legally available for distribution shall be distributed, ratably among the 
holders of the Preferred Stock in proportion to the product of the 
liquidation preference of each such share and the number of such shares owned 
by each such holder.

               (b) Upon the completion of the distribution required by 
subsection 3(a) above, if assets remain in the Corporation, the holders of 
the Common Stock shall receive an amount equal to $.21 per share (adjusted to 
reflect any subsequent stock splits, stock dividends, or other 
recapitalizations) for each share of Common Stock held by them. If, upon the 
occurrence of such event, the assets and funds thus distributed among the 
holders of the Common Stock shall be insufficient to permit payment to such 
holders of the full aforesaid preferential amounts, then the entire assets 
and funds of this Corporation legally available for distribution (after 
giving effect to the distribution referred to in Section 3(a) hereof) shall 
be distributed ratably among the holders of the Common Stock in proportion to 
the amount of such stock owned by each such holder.

               (c) After the distributions described in subsections 3(a) and 
(b) have been paid, the remaining assets of this Corporation available for 
distribution to stockholders shall be distributed among the holders of 
Preferred Stock and Common Stock pro rata based on the number of shares of 
Common Stock held by each (assuming conversion of all such Preferred Stock).

                                     -3-

<Page>

          4. REDEMPTION.

               (a) The outstanding Preferred Stock shall be redeemable as 
provided in this Section 4. The Series A Redemption Price shall be the total 
amount equal to $1.00 per share of Series A Preferred Stock to be redeemed 
together with any declared but unpaid dividends on such shares to the 
Redemption Date (as such term is hereinafter defined). The Series B 
Redemption Price shall be the total amount equal to $1.10 per share of Series 
B Preferred Stock to be redeemed together with any declared but unpaid 
dividends on such shares to the Redemption Date. The Series C Redemption 
Price shall be the total amount equal to $1.25 per share of Series C 
Preferred Stock to be redeemed together with any declared but unpaid 
dividends on such shares to the Redemption Date. The Series D Redemption 
Price shall be the total amount equal to $2.3073 per share of Series D 
Preferred Stock to be redeemed together with any declared but unpaid 
dividends on such shares to the Redemption Date. The Series E Redemption 
Price shall be the total amount equal to $3.036 per share of Series E 
Preferred Stock to be redeemed together with any declared but unpaid 
dividends on such shares to the Redemption Date. The Series F Redemption 
Price shall be the total amount equal to $3.25 per share of Series F 
Preferred Stock to be redeemed together with any declared but unpaid 
dividends on such shares to the Redemption Date.

               (b) On or at any time after July 31, 2004, upon the receipt by 
this Corporation from the holders of at least 66-2/3% of the then outstanding 
shares of Series A Preferred Stock, Series B Preferred Stock, Series C 
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and 
Series F Preferred Stock, voting together as a single class and on an 
as-converted basis, of a written request for redemption hereunder of their 
respective shares of Series A Preferred Stock, Series B Preferred Stock, 
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock 
and Series F Preferred Stock (the "Redemption Request"), this Corporation 
shall, from any source of funds legally available therefor, redeem all of the 
shares of Preferred Stock by paying in cash therefor a sum equal to the 
Series A Redemption Price, the Series B Redemption Price, the Series C 
Redemption Price, the Series D Redemption Price, the Series E Redemption 
Price and the Series F Redemption Price, respectively.

               (c) (i) At least 15, but no more than 30, days prior to the 
date fixed for any redemption of the Preferred Stock (the "Redemption Date"), 
which Redemption Date shall be no later than 45 days following the 
Corporation's receipt of the Redemption Request, this Corporation shall mail 
written notice, first class postage prepaid, to each holder of record (at the 
close of business on the business day next preceding the day on which notice 
is given) of the Series A Preferred Stock, Series B Preferred Stock, Series C 
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and 
Series F Preferred Stock to be redeemed at the address last shown on the 
records of this Corporation for such holder or given by the holder to this 
Corporation for the purpose of notice or if no such address appears or is 
given, at the place where the principal executive office of this Corporation 
is located, notifying such holder of the redemption to be effected, 
specifying the number of shares to be redeemed from such holder, the 
Redemption Date, the Series A Redemption Price, the Series B Redemption 
Price, the Series C Redemption Price, the Series D Redemption Price, the 
Series E Redemption Price or the Series F Redemption Price, as the case may 
be, the place at which payment may be obtained and the date on which such 
holder's Conversion Rights (as hereinafter defined) as to such shares 
terminate, and calling upon such holder to surrender to this Corporation, in 
the manner and at the place 

                                     -4-

<Page>

designated, such holder's certificate or certificates representing the shares 
to be redeemed (the "Redemption Notice"). Except as provided in subsection 
4(c)(iii), on or after the Redemption Date, each holder of Series A Preferred 
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred 
Stock, Series E Preferred Stock and Series F Preferred Stock to be redeemed 
shall surrender to this Corporation the certificate or certificates 
representing such shares, in the manner and at the place designated in the 
Redemption Notice, and thereupon the Series A Redemption Price, Series B 
Redemption Price, Series C Redemption Price, the Series D Redemption Price, 
the Series E Redemption Price or the Series F Redemption Price, as the case 
may be, of such shares shall be payable, to the order of the person whose 
name appears on such certificate or certificates as the owner thereof and 
each surrendered certificate shall be canceled. In the event less than all 
the shares represented by any such certificate are redeemed, a new 
certificate shall be issued representing the unredeemed shares.

                   (ii) If the funds of the Corporation legally available 
for redemption of outstanding shares of Preferred Stock on any Redemption 
Date are insufficient to redeem the total number of shares of Preferred Stock 
to be redeemed on such date, those funds which are legally available will be 
used to redeem the maximum possible number of such shares ratably among the 
holders of (A) first, such shares of Series B Preferred Stock, Series C 
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and 
Series F Preferred Stock to be redeemed, and (B) second, such shares of 
Series A Preferred Stock to be redeemed. The shares of Preferred Stock not 
redeemed shall remain outstanding and entitled to all the rights and 
preferences provided herein. At any time thereafter when additional funds of 
this Corporation are legally available for the redemption of shares of 
Preferred Stock, such funds shall immediately be used to redeem the balance 
of the shares which this Corporation has become obligated to redeem on any 
Redemption Date but which it has not redeemed.

                  (iii) From and after the Redemption Date, unless there 
shall have been a default in payment of the applicable Series A Redemption 
Price, Series B Redemption Price, Series C Redemption Price, Series D 
Redemption Price, Series E Redemption Price or Series F Redemption Price, all 
rights of the holders of such shares as holders of Series A Preferred Stock, 
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, 
Series E Preferred Stock and Series F Preferred Stock (except the right to 
receive the Series A Redemption Price, Series B Redemption Price, Series C 
Redemption Price, Series D Redemption Price, Series E Redemption Price or 
Series F Redemption Price, without interest, upon surrender of their 
certificate or certificates) shall cease with respect to such shares, and 
such shares shall not thereafter be transferred on the books of this 
Corporation or be deemed to be outstanding for any purpose whatsoever.

                   (iv) At least three days prior to the Redemption Date, 
this Corporation shall deposit the Series A Redemption Price, Series B 
Redemption Price, Series C Redemption Price, Series D Redemption Price, 
Series E Redemption Price and Series F Redemption Price, of all outstanding 
shares of the Series A Preferred Stock, Series B Preferred Stock, Series C 
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and 
Series F Preferred Stock, designated for redemption in the Redemption Notice, 
and not yet redeemed or converted, with a bank or trust company having 
aggregate capital and surplus in excess of $50,000,000, as a trust fund for 
the benefit of the holders of the shares designated for redemption and not 
yet redeemed. Simultaneously, this Corporation shall deposit irrevocable 
instructions 

                                     -5-

<Page>


and authority to such bank or trust company to pay, on and after the 
Redemption Date or prior thereto, the Series A Redemption Price, Series B 
Redemption Price, Series C Redemption Price, Series D Redemption Price, 
Series E Redemption Price and Series F Redemption Price, as the case may be, 
to the holders thereof upon surrender of their certificates. Any monies 
deposited by this Corporation pursuant to this subsection 4(c)(iv) for the 
redemption of shares which are thereafter converted into shares of Common 
Stock pursuant to Section 5 hereof no later than the close of business on the 
Redemption Date shall be returned to this Corporation forthwith upon such 
conversion. The balance of any monies deposited by this Corporation pursuant 
to this subsection 4(c)(iv) remaining unclaimed at the expiration of two 
years following the Redemption Date shall thereafter be returned to this 
Corporation, provided that the stockholder to which such monies would be 
payable hereunder shall be entitled, upon proof of its ownership of the 
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, 
Series D Preferred Stock, Series E Preferred Stock or Series F Preferred 
Stock, as the case may be, and payment of any bond requested by this 
Corporation, to receive such monies but without interest from the Redemption 
Date.

          5. CONVERSION. The holders of Preferred Stock shall have conversion 
rights as follows (the "Conversion Rights"):

               (a) RIGHT TO CONVERT.

                    (i) Subject to subsection 5(c), each outstanding share of 
Preferred Stock shall be convertible, at the option of the holder thereof at 
any time after the date of issuance of such share (and on or prior to the 
fifth day prior to the Redemption Date, if any, as may have been fixed in any 
Redemption Notice), at the office of this Corporation or any transfer agent 
for such series of Preferred Stock, into such number of fully paid and 
nonassessable shares of Common Stock as is determined by dividing the 
Original Series A Issue Price, the Original Series B Issue Price, the 
Original Series C Issue Price, the Original Series D Issue Price, the 
Original Series E Issue Price and the Original Series F Issue Price, 
respectively, by the Conversion Price at the time in effect for such series 
or shares of such series. The initial Conversion Price per share for shares 
of Preferred Stock shall be the Original Series A Issue Price, the Original 
Series B Issue Price, the Original Series C Issue Price, the Original Series 
D Issue Price, the Original Series E Issue Price and the Original Series F 
Issue Price, respectively, provided, however, that the Conversion Prices for 
the Series A Preferred Stock, the Series B Preferred Stock, the Series C 
Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock 
and the Series F Preferred Stock shall be subject to adjustment as set forth 
in subsection 5(c).

                    (ii) Each outstanding share of Preferred Stock shall 
automatically be converted into shares of Common Stock at the Conversion 
Price at the time in effect for such shares immediately upon:

                         (A) the closing of this Corporation's sale of its 
Common Stock in a bona fide, firm commitment underwritten public offering 
registered under the Securities Act of 1933, as amended (the "Securities 
Act"), which results in aggregate gross offering proceeds to this Corporation 
of at least $15,000,000, at a public offering price of not less 

                                     -6-

<Page>

than $7.50 per share (adjusted to reflect subsequent stock dividends, stock 
splits or recapitalizations) (a "Qualifying Public Offering"); or

                         (B) the approval of (i) holders of at least 75% of 
the then outstanding shares of Series A Preferred Stock, Series B Preferred 
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred 
Stock and Series F Preferred Stock, voting together as a single class and on 
an as-converted basis and (ii) holders of not less than 60% of the Series D 
Preferred Stock voting as a class, provided, however, that if such approval 
is in connection with an underwritten offer of securities registered pursuant 
to the Securities Act, the conversion may be conditioned upon the closing of 
the sale of securities pursuant to such offering, in which event each 
outstanding share of Preferred Stock shall not be deemed to have converted 
until immediately after the closing of such sale of securities.

               (b) MECHANICS OF CONVERSION. Before any holder of Preferred 
Stock shall be entitled to convert the same into shares of Common Stock, such 
holder shall surrender the certificate or certificates therefor, duly 
endorsed, at the office of this Corporation or of any transfer agent for such 
stock, and shall be given written notice by mail postage prepaid, to this 
Corporation at its principal corporate office, of the election to convert the 
same and shall state therein the name or names in which the certificate or 
certificates for shares of Common Stock are to be issued. This Corporation 
shall, as soon as practicable thereafter, issue and deliver at such office to 
such holder of Preferred Stock, or to the nominee or nominees of such holder, 
a certificate or certificates for the number of shares of Common Stock to 
which such holder shall be entitled as aforesaid. Such conversion shall be 
deemed to have been made immediately prior to the close of business on the 
date of such surrender of the shares of such series of Preferred Stock to be 
converted, and the person or persons entitled to receive the shares of Common 
Stock issuable upon such conversion shall be treated for all purposes as the 
record holder or holders of such shares of Common Stock as of such date. If 
the conversion is in connection with an underwritten offer of securities 
registered pursuant to the Securities Act, the conversion may, at the option 
of any holder tendering shares of such series of Preferred Stock for 
conversion, be conditioned upon the closing with the underwriter of the sale 
of securities pursuant to such offering, in which event the person(s) 
entitled to receive the Common Stock issuable upon such conversion of shares 
of such series of Preferred Stock shall not be deemed to have converted such 
shares of such series of Preferred Stock until immediately after the closing 
of such sale of securities.

               (c) CONVERSION PRICE ADJUSTMENTS OF THE PREFERRED STOCK. The 
Conversion Prices of the Series A Preferred Stock, Series B Preferred Stock, 
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock 
and Series F Preferred Stock shall be subject to adjustment from time to time 
as follows:

                    (i) (A) (1) If this Corporation shall issue any 
Additional Stock (as defined below) without consideration or for a 
consideration per share less than the Conversion Price for shares of the 
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, 
Series D Preferred Stock or Series E Preferred Stock in effect immediately 
prior to the issuance of such Additional Stock, the new Conversion Price for 
such shares of such series of Preferred Stock shall be determined by 
multiplying the Conversion Price 

                                     -7-

<Page>

for such series of Preferred Stock in effect immediately prior to the 
issuance of Additional Stock by a fraction:

                                   (x) the numerator of which shall be the
                  number of shares of Common Stock outstanding immediately prior
                  to such issuance (for purposes of this calculation only,
                  including the number of shares of Common Stock then issuable
                  upon the conversion of all outstanding shares of Preferred
                  Stock at the Conversion Price for such shares in effect
                  immediately prior to such issuance of Additional Stock) plus
                  the number of shares of Common Stock equivalents which the
                  aggregate consideration received by this Corporation for the
                  shares of such Additional Stock so issued would purchase at
                  the Conversion Price in effect at the time for the shares of
                  the series of Preferred Stock with respect to which the
                  adjustment is being made; and

                                   (y) the denominator of which shall be the
                  number of shares of Common Stock outstanding immediately prior
                  to such issuance (for purposes of this calculation only,
                  including the number of shares of Common Stock then issuable
                  upon the conversion of all outstanding shares of Preferred
                  Stock at the Conversion Price for such shares in effect
                  immediately prior to such issuance of Additional Stock) plus
                  the number of such shares of Additional Stock so issued.

                  Any series of issuances of Additional Stock consisting of 
Common Stock or the same series of Preferred Stock, issued at the same price 
and within a six-month period, shall be treated as one issuance of Additional 
Stock for the purposes of this calculation.

                              (2) If this Corporation shall issue, at any 
time after the date upon which any shares of Series F Preferred Stock were 
first issued (the "Series F Purchase Date") and on or before December 31, 
2001, any Additional Stock (other than shares of Series F Preferred Stock) 
without consideration or for a consideration per share less than $3.50 (as 
adjusted to reflect stock dividends, stock splits or recapitalizations), the 
new Conversion Price for such shares of Series F Preferred Stock shall be 
adjusted to a price equal to the greater of: (1) the product of 0.925 and the 
per share price of the Additional Stock, and (2) $3.036.

                              (3) (x) If this Corporation shall issue, 
                  at any time on or after January 1, 2002, any Additional 
                  Stock for a consideration per share (a) less than the 
                  Conversion Price for such shares of Series F Preferred 
                  Stock in effect immediately prior to the issuance of such 
                  Additional Stock, and (b) in an amount equal to or greater 
                  than $3.036 per share (as adjusted to reflect stock 
                  dividends, stock splits or recapitalizations), the new 
                  Conversion Price for such shares of Series F Preferred 
                  Stock in effect immediately prior to such issuance shall be 
                  adjusted to a price equal to the price paid per share for 
                  such Additional Stock.

                                   (y) If this Corporation shall issue, 
                  any time on or after January 1, 2002, any Additional Stock 
                  without consideration or for a consideration less than 
                  $3.036 per share (as adjusted to reflect stock dividends, 
                  stock splits or recapitalizations) at a time when the 
                  applicable Conversion Price for the shares of Series F 
                  Preferred Stock is greater than $3.036 per share (as 
                  adjusted to reflect stock dividends, stock splits or 
                  recapitalizations), the new Conversion Price for such 
                  shares of 

                                     -8-

<Page>

                  Series F Preferred Stock in effect immediately prior to 
                  such issuance shall first be adjusted to a price of $3.036 
                  (as adjusted to reflect stock dividends, stock splits or 
                  recapitalizations), and then this new Conversion Price of 
                  $3.036 (as adjusted to reflect stock dividends, stock 
                  splits or recapitalizations) shall be further adjusted by 
                  multiplying $3.036 (as adjusted to reflect stock dividends, 
                  stock splits or recapitalizations) by a fraction:

                                        (i) the numerator of which shall be the 
                  number of shares of Common Stock outstanding immediately 
                  prior to such issuance (for purposes of this calculation 
                  only, including the number of shares of Common Stock then 
                  issuable upon the conversion of all outstanding shares of 
                  Preferred Stock at the Conversion Price for such shares in 
                  effect immediately prior to such issuance of Additional 
                  Stock) plus the number of shares of Common Stock 
                  equivalents which the aggregate consideration received by 
                  this Corporation for the shares of such Additional Stock so 
                  issued would purchase at $3.036 per share (as adjusted to 
                  reflect stock dividends, stock splits or 
                  recapitalizations); and

                                       (ii) the denominator of which shall be 
                  the number of shares of Common Stock outstanding 
                  immediately prior to such issuance (for purposes of this 
                  calculation only, including the number of shares of Common 
                  Stock then issuable upon the conversion of all outstanding 
                  shares of Preferred Stock at the Conversion Price for such 
                  shares in effect immediately prior to such issuance of 
                  Additional Stock) plus the number of such shares of 
                  Additional Stock so issued.

                                   (z) If this Corporation shall issue, any 
                  time on or after January 1, 2002, any Additional Stock without
                  consideration or for a consideration less than $3.036 per 
                  share (as adjusted to reflect stock dividends, stock splits or
                  recapitalizations) and less than the then-applicable 
                  Conversion Price for the shares of Series F Preferred Stock, 
                  at a time when the applicable Conversion Price for the shares 
                  of Series F Preferred Stock is equal to or less than 
                  $3.036 per share (as adjusted to reflect stock dividends, 
                  stock splits or recapitalizations), the new Conversion Price 
                  for the shares of Series F Preferred Stock shall be determined
                  by multiplying the Conversion Price for the Series F Preferred
                  Stock in effect immediately prior to the issuance of such 
                  Additional Stock by a fraction:

                                        (i) the numerator of which shall be the
                  number of shares of Common Stock outstanding immediately prior
                  to such issuance (for purposes of this calculation only,
                  including the number of shares of Common Stock then issuable
                  upon the conversion of all outstanding shares of Preferred
                  Stock at the Conversion Price for such shares in effect
                  immediately prior to such issuance of Additional Stock) plus
                  the number of shares of Common Stock equivalents which the
                  aggregate consideration received by this Corporation for the
                  shares of such Additional Stock so issued would purchase at
                  the Conversion Price in effect at the time for the shares of
                  Series F Preferred Stock; and


                                     -9-

<Page>

                                       (ii) the denominator of which shall be 
                  the number of shares of Common Stock outstanding immediately 
                  prior to such issuance (for purposes of this calculation only,
                  including the number of shares of Common Stock then issuable
                  upon the conversion of all outstanding shares of Preferred
                  Stock at the Conversion Price for such shares in effect
                  immediately prior to such issuance of Additional Stock) plus
                  the number of such shares of Additional Stock so issued.

                  Any series of issuances of Additional Stock consisting of
Common Stock or the same series of Preferred Stock, issued at the same price and
within a six-month period, shall be treated as one issuance of Additional Stock
for the purposes of this calculation.

                         (B) Except for the adjustments required by Section 
(c)(i)(A)(2) and Section (c)(i)(A)(3)(x), no adjustment of the Conversion 
Price for such series of Preferred Stock shall be made in an amount less than 
one cent per share, provided that any adjustments which are not required to 
be made by reason of this sentence shall be carried forward and shall be 
either taken into account in any subsequent adjustment made prior to three 
years from the date of the event giving rise to the adjustment being carried 
forward, or shall be made at the end of three years from the date of the 
event giving rise to the adjustment being carried forward. Except to the 
limited extent provided for in subsections 5(c)(i)(E)(3) and (c)(i)(E)(4), no 
adjustment of such Conversion Price for such series of Preferred Stock 
pursuant to this subsection 5(c)(i) shall have the effect of increasing the 
Conversion Price for such series of Preferred Stock above the Conversion 
Price for such series in effect immediately prior to such adjustment.

                         (C) In the case of the issuance of Common Stock for 
cash, the consideration shall be deemed to be the amount of cash paid 
therefor before deducting any reasonable discounts, commissions or other 
expenses allowed, paid or incurred by this Corporation for any underwriting 
or otherwise in connection with the issuance and sale thereof.

                         (D) In the case of the issuance of the Common Stock 
for a consideration in whole or in part other than cash, the consideration 
other than cash shall be deemed to be the fair value thereof as determined by 
the Board of Directors irrespective of any accounting treatment.

                         (E) In the case of the issuance of options to 
purchase or rights to subscribe for Common Stock, securities by their terms 
convertible into or exchangeable for Common Stock or options to purchase or 
rights to subscribe for such convertible or exchangeable securities (which 
are not excluded from the definition of Additional Stock), the following 
provisions shall apply:

                              (1) The aggregate maximum number of shares of 
Common Stock deliverable upon exercise of such options to purchase or rights 
to subscribe for Common Stock shall be deemed to have been issued at the time 
such options or rights were issued and for a consideration equal to the 
consideration (determined in the manner provided in subsections 5(c)(i)(C) 
and (c)(i)(D)), if any, received by the Corporation upon the issuance of 

                                     -10-

<Page>

such options or rights plus the minimum purchase price provided in such 
options or rights for the Common Stock covered thereby.

                              (2) The aggregate maximum number of shares of 
Common Stock deliverable upon conversion of or in exchange for any such 
convertible or exchangeable securities or upon the exercise of options to 
purchase or rights to subscribe for such convertible or exchangeable 
securities and subsequent conversion or exchange thereof shall be deemed to 
have been issued at the time such securities were issued or such options or 
rights were issued and for a consideration equal to the consideration, if 
any, received by this Corporation for any such securities and related options 
or rights (excluding any cash received on account of accrued interest or 
accrued dividends), plus the additional consideration, if any, to be received 
by this Corporation upon the conversion or exchange of such securities or the 
exercise of any related options or rights (the consideration in each case to 
be determined in the manner provided in subsections 5(c)(i)(C) and (c)(i)(D)).

                              (3) In the event of any change in the number of 
shares of Common Stock deliverable or any increase in the consideration 
payable to this Corporation upon exercise of such options or rights or upon 
conversion of or in exchange for such convertible or exchangeable securities, 
including, but not limited to, a change resulting from the anti-dilution 
provisions thereof, the Conversion Price of the Series A Preferred Stock, 
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, 
Series E Preferred Stock or Series F Preferred Stock, as the case may be, 
obtained with respect to the adjustment which was made upon the issuance of 
such options, rights or securities, and any subsequent adjustments based 
thereon shall be recomputed to reflect such change, but no further adjustment 
shall be made for the actual issuance of Common Stock or any payment of such 
consideration upon the exercise of any such options or rights or the 
conversion or exchange of such securities; provided, however, that this 
section shall not have any effect on any conversion of such series of 
Preferred Stock prior to such change or increase.

                              (4) Upon the expiration of any such options or 
rights, the termination of any such rights to convert or exchange or the 
expiration of any options or rights related to such convertible or 
exchangeable securities, the Conversion Price of the Series A Preferred 
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred 
Stock, Series E Preferred Stock or Series F Preferred Stock, as the case may 
be, obtained with respect to the adjustment which was made upon the issuance 
of such options, rights or securities or options or rights related to such 
securities, and any subsequent adjustments based thereon, shall be recomputed 
to reflect the issuance of only the number of shares of Common Stock actually 
issued upon the exercise of such options or rights upon the conversion or 
exchange of such securities or upon the exercise of the options or rights 
related to such securities; provided, however, that this section shall not 
have any effect on any conversion of such series of Preferred Stock prior to 
such expiration or termination.

                   (ii) "Additional Stock" shall mean any shares of Common 
Stock issued (or deemed to have been issued pursuant to subsection 
5(c)(i)(E)) by this Corporation after June 22, 1998, other than:

                                     -11-

<Page>

                         (A) Common Stock issued pursuant to a transaction 
described in subsection 5(c)(iii) hereof; or

                         (B) 8,154,860 shares of Common Stock, net of 
repurchases and the cancellation or expiration of options, issued or issuable 
to employees, directors, consultants or advisors of this Corporation under 
stock option and restricted stock purchase agreements approved by the Board 
of Directors commencing as of May 1994, and such other number of shares of 
Common Stock as may be fixed from time to time by the Board of Directors and 
approved by a majority of then outstanding Series A Preferred Stock, Series B 
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E 
Preferred Stock and Series F Preferred Stock, voting as a single class, 
issued or issuable to employees, directors, consultants or advisors of this 
Corporation under stock option and restricted stock purchase agreements 
approved by the Board of Directors; or

                         (C) Common Stock issued or issuable upon conversion 
of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred 
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F 
Preferred Stock; or

                         (D) Common Stock issued or issuable in connection 
with a bona fide business acquisition of or by the Corporation, whether by 
merger, consolidation, sale of assets, sale or exchange of stock or otherwise 
upon terms approved by the Board of Directors (including such shares of 
Common Stock issued or issuable prior to the date hereof); or

                         (E) Common Stock issued or issuable in connection 
with services rendered or to be rendered to the Corporation by consultants 
upon terms approved by the Board of Directors (including such shares of 
Common Stock issued or issuable prior to the date hereof); or

                         (F) Common Stock issued or issuable in connection 
with credit agreements with equipment lessors or commercial lenders upon 
terms approved by the Board of Directors (including such shares of Common 
Stock issued or issuable prior to the date hereof); or

                         (G) any right, option or warrant to acquire any 
security convertible into the securities excluded from the definition of 
Additional Stock pursuant to subsections (A) through (F) above (including any 
such right, option or warrant issued or issuable prior to the date hereof).

                  (iii) In the event this Corporation should at any time or 
from time to time after the effective date hereof fix a record date for the 
effectuation of a split or subdivision of the outstanding shares of Common 
Stock or the determination of holders of Common Stock entitled to receive a 
dividend or other distribution payable in additional shares of Common Stock 
or other securities or rights convertible into, or entitling the holder 
thereof to receive directly or indirectly, additional shares of Common Stock 
(hereinafter referred to as 

                                     -12-

<Page>

"Common Stock Equivalents") without payment of any consideration by such 
holder for the additional shares of Common Stock or the Common Stock 
Equivalents (including the additional shares of Common Stock issuable upon 
conversion or exercise thereof), then as of such record date (or the date of 
such dividend distribution, split or subdivision if no record date is fixed), 
the Conversion Price for the Series A Preferred Stock, Series B Preferred 
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred 
Stock or Series F Preferred Stock, as the case may be, shall be appropriately 
decreased so that the number of shares of Common Stock issuable on 
conversion of each share of such series shall be increased in proportion 
to such increase of outstanding shares determined in accordance with 
subsection 5(c)(i)(E).

                   (iv) If the number of shares of Common Stock outstanding 
at any time after the effective date hereof is decreased by a combination of 
the outstanding shares of Common Stock, then, following the record date of 
such combination, the Conversion Price for the Series A Preferred Stock, 
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, 
Series E Preferred Stock or Series F Preferred Stock, as the case may be, 
shall be appropriately increased so that the number of shares of Common Stock 
issuable on conversion of each share of such series shall be decreased in 
proportion to such decrease in outstanding shares.

               (d) OTHER DISTRIBUTIONS. In the event this Corporation shall 
declare a distribution payable in securities of other persons, evidences of 
indebtedness issued by this Corporation or other persons, assets (excluding 
cash dividends) or options or rights not referred to in subsection 5(c)(iii), 
then, in each such case for the purpose of this subsection 5(d), the holders 
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred 
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F 
Preferred Stock, shall be entitled to a proportionate share of any such 
distribution as though they were the holders of the number of shares of 
Common Stock of this Corporation into which their shares of Series A 
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D 
Preferred Stock, Series E Preferred Stock or Series F Preferred Stock, as the 
case may be, are convertible as of the record date fixed for the 
determination of the holders of Common Stock of this Corporation entitled to 
receive such distribution.

               (e) RECAPITALIZATIONS. If at any time or from time to time 
there shall be a recapitalization of the Common Stock (other than a 
subdivision, combination or merger or sale of assets transaction provided for 
elsewhere in this Section 5 or Section 6) provision shall be made so that the 
holders of Series A Preferred Stock, Series B Preferred Stock, Series C 
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and 
Series F Preferred Stock, shall thereafter be entitled to receive upon 
conversion of such series of Preferred Stock the number of shares of stock or 
other securities or property of this Corporation or otherwise, to which a 
holder of Common Stock deliverable upon conversion would have been entitled 
on such recapitalization. In any such case, appropriate adjustment shall be 
made in the application of the provisions of this Section 5 with respect to 
the rights of the holders of Series A Preferred Stock, Series B Preferred 
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred 
Stock and Series F Preferred Stock, after the recapitalization to the end 
that the provisions of this Section 5 (including adjustment of the Conversion 
Price then in effect and the number of shares purchasable upon conversion of 
such series of Preferred Stock) shall be applicable after that event as 
nearly equivalent as may be practicable.

                                     -13-

<Page>

               (f) NO IMPAIRMENT. This Corporation will not, by amendment of 
its Certificate of Incorporation or through any reorganization, 
revitalization, transfer of assets, consolidation, merger, dissolution, issue 
or sale of securities or any other voluntary action, avoid or seek to avoid 
the observance or performance of any of the terms to be observed or performed 
hereunder by this Corporation, but will at all times in good faith assist in 
the carrying out of all the provisions of this Section 5 and in the taking of 
all such action as may be necessary or appropriate in order to protect the 
Conversion Rights of the holders of the Series A Preferred Stock, Series B 
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E 
Preferred Stock and Series F Preferred Stock against impairment.

               (g) FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.

                    (i) No fractional shares shall be issued upon conversion 
of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred 
Stock, Series D Preferred Stock, Series E Preferred Stock or Series F 
Preferred Stock, and the number of shares of Common Stock to be issued shall 
be rounded to the nearest whole share. Whether or not fractional shares are 
issuable upon such conversion shall be determined on the basis of the total 
number of shares of such series of Preferred Stock the holder is at the time 
converting into Common Stock and the number of shares of Common Stock 
issuable upon such aggregate conversion.

                   (ii) Upon the occurrence of each adjustment or, 
readjustment of the Conversion Price of Series A Preferred Stock, Series B 
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E 
Preferred Stock or Series F Preferred Stock, as the case may be, pursuant to 
this Section 5, this Corporation, at its expense, shall promptly compute such 
adjustment or readjustment in accordance with the terms hereof and prepare 
and furnish to each holder of Series A Preferred Stock, Series B Preferred 
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred 
Stock and Series F Preferred Stock, or instrument convertible into shares of 
any such series of Preferred Stock, as the case may be, a certificate setting 
forth such adjustment or readjustment and showing in detail the facts upon 
which such adjustment or readjustment is based. This Corporation shall, upon 
the written request furnish or cause to be furnished to such holder a like 
certificate setting forth (A) such adjustment and readjustment, (B) the 
Conversion Price at the time in effect, and (C) the number of shares of 
Common Stock and the amount, if any, of other property which at the time 
would be received upon the conversion of a share of such series of Preferred 
Stock.

               (h) NOTICES OF RECORD DATE. In the event of any taking by this 
Corporation of a record of the holders of any class of securities for the 
purpose of determining the holders thereof who are entitled to receive any 
dividend (other than a cash dividend) or other distribution, any right to 
subscribe for, purchase or otherwise acquire any shares of stock of any class 
or any other securities or property, or to receive any other right, this 
Corporation shall mail to each holder of Series A Preferred Stock, Series B 
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E 
Preferred Stock or Series F Preferred Stock at least 20 days prior to the 
date specified therein, a notice specifying the date on which by such record 
is to be taken for the purpose of such dividend, distribution or right and 
the amount and character of such dividend, distribution or right.

                                     -14-

<Page>

               (i) RESERVATION OF COMMON STOCK ISSUABLE UPON CONVERSION. This 
Corporation shall at all times reserve and keep available out of its 
authorized but unissued shares of Common Stock solely for the purpose of 
effecting the conversion of the shares of Series A Preferred Stock, Series B 
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E 
Preferred Stock and Series F Preferred Stock, such number of its shares of 
Common Stock as shall from time to time be sufficient to effect the 
conversion of all authorized shares of such series of Preferred Stock, and if 
at any time the number of authorized but unissued shares of Common Stock 
shall not be sufficient to effect the conversion of all then authorized 
shares of such series of Preferred Stock, in addition to such other remedies 
as shall be available to the holders of such series of Preferred Stock, this 
Corporation will take such corporate action as may, in the opinion of its 
counsel be necessary to increase its authorized but unissued shares of Common 
Stock to such number of shares as shall be sufficient for such purposes.

               (j) NOTICES. Any notice required by the provisions of this 
Section 5 to be given to the holders of shares of Series A Preferred Stock, 
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, 
Series E Preferred Stock and Series F Preferred Stock shall be deemed given 
if deposited in the United States postage prepaid, and addressed to each 
holder of record at such holder's address appearing on the books of this 
Corporation.

          6. MERGER; CONSOLIDATION. 

               (a) If at any time after the effective date hereof there is a 
merger, consolidation or other corporate reorganization in which stockholders 
of this Corporation immediately prior to such transaction own less than 50% 
of the voting securities of the surviving or controlling entity immediately 
after the transaction, or sale of all or substantially all of the assets of 
this Corporation (hereinafter, an "Acquisition"), then, as a part of such 
Acquisition, provision shall be made so that the holders of the Series A 
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, 
the Series D Preferred Stock, Series E Preferred Stock and Series F Preferred 
Stock shall be entitled to receive, prior to any distribution to holders of 
Common Stock or other junior equity security of the Corporation, the number 
of shares of stock or other securities or property to be issued to this 
Corporation or its stockholders resulting from such Acquisition in an amount 
per share equal to the Original Series A Issue Price, Original Series B Issue 
Price, Original Series C Issue Price, Original Series D Issue Price, Original 
Series E Issue Price and Original Series F Issue Price, as applicable, plus a 
further amount equal to any dividends declared but unpaid on such shares. 
Subject to the following sentence, the holders of Common Stock shall 
thereafter be entitled to receive, pro rata, the remainder of the number of 
shares of stock or other securities or property to be issued to this 
Corporation or its stockholders resulting from such Acquisition. 
Notwithstanding anything to the contrary in this Section 6, in the event the 
aggregate value of stock, securities and other property to be distributed to 
this Corporation or its stockholders with respect to an Acquisition is less 
than $5.25 per share (such dollar amount to be appropriately adjusted to 
reflect any subsequent stock splits, stock dividends or other 
recapitalizations) of Common Stock outstanding (for purpose of this 
calculation only, including in the number of shares of Common Stock 
outstanding the number of shares of Common Stock then issuable upon 
conversion of all outstanding Preferred Stock), then the stock, securities or 
other property shall be distributed among the holders of Series A Preferred 
Stock, Series B Preferred Stock, Series C Preferred Stock, the Series D 
Preferred Stock, Series E 

                                     -15-

<Page>

Preferred Stock, Series F Preferred Stock and the Common Stock according to 
the provisions of Section 3 hereof as if such Acquisition were deemed a 
liquidation.

               (b) Any securities to be delivered to the holders of Series A 
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, the 
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock 
and Common Stock pursuant to subsection 6(a) above shall be valued as follows:

                    (i) Securities not subject to investment letter or other 
similar restrictions on free marketability;

                         (A) If traded on a securities exchange, the value 
shall be deemed to be the average of the closing prices of the securities on 
such exchange over the 30-day period ending three days prior to the closing;

                         (B) If actively traded over-the-counter, the value 
shall be deemed to be the average of the closing bid or sale prices 
(whichever are applicable) over the 30-day period ending three days prior to 
the closing; and

                         (C) If there is no active public market, the value 
shall be the fair market value thereof, as mutually determined by the 
Corporation and the holders of not less than a majority of the then 
outstanding shares of Series A Preferred Stock, Series B Preferred Stock, 
Series C Preferred Stock, the Series D Preferred Stock, Series E Preferred 
Stock and Series F Preferred Stock.

                   (ii) The method of valuation of securities subject to 
investment letter or other restrictions on free marketability shall be to 
make an appropriate discount from the market value determined as above in 
subsections 6(b)(i)(A), (B) or (C) to reflect the approximate fair market 
value thereof, as mutually determined by this Corporation and the holders of 
a majority of the then outstanding shares of Series A Preferred Stock, Series 
B Preferred, Series C Preferred Stock, Series D Preferred Stock, Series E 
Preferred Stock and Series F Preferred Stock, voting as a single class.

               (c) In the event the requirements of subsection 6(a) are not 
complied with, this Corporation shall forthwith either:

                    (i) cause such closing to be postponed until such time as 
the requirements of this Section 6 have been complied with, or

                   (ii) cancel such transaction, in which event the rights, 
preferences and privileges of the holders of the Series A Preferred Stock, 
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, 
Series E Preferred Stock and Series F Preferred Stock shall revert to and be 
the same as such rights, preferences and privileges existing immediately 
prior to the date of the first notice referred to in subsection 6(d) hereof.

               (d) This Corporation shall give each holder of record of 
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, 
Series D Preferred Stock, Series E Preferred Stock or Series F Preferred 
Stock written notice of such impending transaction 

                                     -16-

<Page>

not later than 20 days prior to the stockholders' meeting called to approve 
such action, or 20 days prior to the closing of such transaction, whichever 
is earlier, and shall also notify such holders in writing of the final 
approval of such transaction. The first of such notices shall describe the 
material terms and conditions of the impending transaction and the provisions 
of this Section 6, and this Corporation shall thereafter give such holders 
prompt notice of any material changes. The transaction shall in no event take 
place earlier than 20 days after the Corporation has given the first notice 
provided for herein or earlier than 10 days after the Corporation has given 
notice of any material changes provided for herein; provided, however, that 
such periods may be shortened upon the written consent of the holders of a 
majority of the then outstanding Series A Preferred Stock, Series B Preferred 
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred 
Stock and Series F Preferred Stock voting as a class.

               (e) The provisions of this Section 6 are in addition to the 
protective provisions of Section 8 hereof.

          7. VOTING RIGHTS; DIRECTORS.

               (a) The holder of each outstanding share of Series A Preferred 
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred 
Stock, Series E Preferred Stock and Series F Preferred Stock shall have the 
right to one vote for each share of Common Stock into which such outstanding 
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, 
Series D Preferred Stock, Series E Preferred Stock or Series F Preferred 
Stock could be converted on the record date for the vote or written consent 
of stockholders. In all cases any fractional share, determined on an 
aggregate conversion basis, shall be rounded to the nearest whole share. With 
respect to such vote, such holder shall have full voting rights and powers 
equal to the voting rights and powers of the holders of Common Stock, and 
shall be entitled, notwithstanding any provision hereof to notice of any 
stockholders' meeting in accordance with the bylaws of this Corporation, and 
shall be entitled to vote, together with holders of Common Stock, with 
respect to any question upon which holders of Common Stock have the right to 
vote.

               (b) Notwithstanding subsection 7(a), (i) so long as at least 
fifty percent (50%) of the shares of Series A Preferred Stock and Series B 
Preferred Stock originally issued remain issued and outstanding, the holders 
of Series A Preferred Stock and Series B Preferred Stock, voting together as 
a separate class, shall be entitled to elect one member of the Board of 
Directors, (ii) so long as at least fifty percent (50%) of the shares of 
Series C Preferred Stock originally issued remain issued and outstanding, the 
holders of Series C Preferred Stock, voting as a separate class, shall be 
entitled to elect one member of the Board of Directors, (iii) so long as at 
least fifty percent (50%) of the shares of Series D Preferred Stock 
originally issued remain issued and outstanding, the holders of Series D 
Preferred Stock, voting as a separate class, shall be entitled to elect one 
member of the Board of Directors and (iv) so long as at least fifty percent 
(50%) of the shares of Series E Preferred Stock and Series F Preferred Stock 
originally issued remain issued and outstanding, the holders of Series E 
Preferred Stock and Series F Preferred Stock, voting together as a separate 
class, shall be entitled to elect one member of the Board of Directors. Any 
additional directors shall be elected by the holders of Preferred Stock and 
Common Stock, voting together as a single class.

                                     -17-

<Page>

          A vacancy in any directorship elected by the holders of Series A 
Preferred Stock and Series B Preferred Stock shall be filled only by vote of 
the holders of Series A Preferred Stock and Series B Preferred Stock, voting 
together as a separate class; a vacancy in any directorship elected by the 
holders of Series C Preferred Stock shall be filled only by vote of the 
holders of Series C Preferred Stock; a vacancy in any directorship elected by 
the holders of Series D Preferred Stock shall be filled only by a vote of the 
holders of Series D Preferred Stock; and a vacancy in any directorship 
elected by the holders of Series E Preferred Stock and Series F Preferred 
Stock shall be filled only by a vote of the holders of Series E Preferred 
Stock and Series F Preferred Stock, voting together as a single class. Any 
vacancy in any other directorship shall be elected by the holders of 
Preferred Stock and Common Stock, voting together as one class.

          This subsection 7(b) shall be void and of no further effect 
thereafter upon the occurrence of either of the following events:

                    (i) the closing of a Qualifying Public Offering;

                   (ii) upon the distribution to the stockholders pursuant 
to a liquidation as described in Section 3 hereof or an Acquisition as 
described in Section 6 hereof.

          8. PROTECTIVE PROVISIONS.

               (a) In addition to any approvals required by law, so long as 
shares of Series A Preferred Stock, Series B Preferred Stock, Series C 
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series 
F Preferred Stock are outstanding, this Corporation shall not without first 
obtaining the approval (by vote or written consent, as provided by law) of 
the holders of at least a majority of the then outstanding voting power of 
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, 
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred 
Stock (voting, as one class, in accordance with Section 7):

                    (i) sell, convey, or otherwise dispose of all or 
substantially all of its property or business or merge into or consolidate 
with any other corporation (other than a wholly-owned subsidiary corporation) 
in which this Corporation is not the surviving corporation or effect any 
transaction or series of related transactions in which more than fifty 
percent (50%) of the voting power of this Corporation is disposed of, 
provided, however, that this restriction shall not apply to any mortgage, 
deed of trust, pledge or other encumbrance or hypothecation of the 
Corporation's or any of its subsidiaries' assets for the purpose of securing 
any contract or obligation; or

                   (ii) alter or change the rights, preferences, privileges 
or restrictions of the shares of Series A Preferred Stock, Series B Preferred 
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred 
Stock or Series F Preferred Stock; or

                  (iii) increase the authorized number of shares of Common 
Stock or Preferred Stock; or

                                     -18-

<Page>

                   (iv) create (by reclassification or otherwise) any new 
class or series of stock having a preference over, or being on a parity with, 
the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred 
Stock, Series D Preferred Stock, Series E Preferred Stock or Series F 
Preferred Stock with respect to voting, dividends, redemption or conversion 
or upon liquidation or an Acquisition; or

                    (v) pay or declare any dividend or make any distribution 
(including without limitation by way of redemption, purchase or acquisition) 
on or with respect to its Common Stock or any other junior equity security 
other than a dividend in Common Stock of this Corporation; provided, however, 
that the foregoing shall not prevent this Corporation from (A) repurchasing 
at cost shares of its Common Stock issued to or held by employees, officers, 
directors or other persons performing services to this Corporation or its 
subsidiaries pursuant to agreements providing for such rights of repurchase 
upon the termination of such services to this Corporation or its 
subsidiaries, or (B) repurchasing shares of its Common Stock pursuant to any 
right of first refusal contained in this Corporation's bylaws as of the date 
hereof; or

                   (vi) change the authorized number of directors; or

                  (vii) do any act or thing which would result in taxation 
of the holders of shares of Preferred Stock under section 305(b) of the 
Internal Revenue Code of 1986, as amended (or any comparable provision of the 
Internal Revenue Code as hereafter from time to time amended).

               (b) In addition to any approvals required by law, so long as 
shares of Series C Preferred Stock are outstanding, this Corporation shall 
not without first obtaining the approval (by vote or written consent, as 
provided by law) of the holders of at least a majority of the then 
outstanding voting power of Series C Preferred Stock, voting as a single 
class:

                    (i) alter or change the rights, preferences, privileges 
or restrictions of the shares of Series C Preferred Stock; or

                   (ii) create (by reclassification or otherwise) any new 
class or series of stock having a preference over, or being on a parity with, 
the Series C Preferred Stock with respect to voting, dividends, redemption or 
conversion or upon liquidation or an Acquisition.

               (c) In addition to any approvals required by law, so long as 
shares of Series D Preferred Stock are outstanding, this Corporation shall 
not without first obtaining the approval (by vote or written consent, as 
provided by law) of the holders of at least a majority of the then 
outstanding voting power of Series D Preferred Stock, voting as a single 
class:

                    (i) sell, convey, or otherwise dispose of all or 
substantially all of its property or business or merge into or consolidate 
with any other corporation (other than a wholly-owned subsidiary corporation) 
in which this Corporation is not the surviving corporation or effect any 
transaction or series of related transactions in which more than fifty 
percent (50%) of the voting power of this Corporation is disposed of, 
provided, however, that this restriction shall not apply to any mortgage, 
deed of trust, pledge or other encumbrance or hypothecation of 

                                     -19-

<Page>

the Corporation's or any of its subsidiaries' assets for the purpose of 
securing any contract or obligation; or

                   (ii) alter or change the rights, preferences, privileges 
or restrictions of the shares of Series D Preferred Stock; or

                  (iii) increase the authorized number of shares of Series 
D Preferred Stock; or

                   (iv) increase the authorized number of directors; or

                    (v) create (by reclassification or otherwise) any new 
class or series of stock having a preference over, or being on a parity with, 
the Series D Preferred Stock with respect to voting, dividends, redemption or 
conversion or upon liquidation or an Acquisition.

               (d) In addition to any approvals required by law, so long as 
shares of Series E Preferred Stock are outstanding, this Corporation shall 
not without first obtaining the approval (by vote or written consent, as 
provided by law) of the holders of at least sixty-six percent (66%) of the 
then outstanding voting power of Series E Preferred Stock, voting as a single 
class:

                    (i) materially or adversely alter or change the rights, 
preferences or privileges of the shares of Series E Preferred Stock as a 
separate series in a manner that is dissimilar and disproportionate relative 
to the manner in which the rights, preferences or privileges of the other 
series of Preferred Stock are altered, or

                   (ii) increase the authorized number of shares of Series E 
Preferred Stock.

               (e) In addition to any approvals required by law, so long as 
shares of Series F Preferred Stock are outstanding, this Corporation shall 
not without first obtaining the approval (by vote or written consent, as 
provided by law) of the holders of at least sixty-six and two-thirds percent 
(66 2/3%) of the then outstanding voting power of Series F Preferred Stock, 
voting as a single class:

                    (i) materially or adversely alter or change the rights, 
preferences or privileges of the shares of Series F Preferred Stock as a 
separate series in a manner that is dissimilar and disproportionate relative 
to the manner in which the rights, preferences or privileges of the other 
series of Preferred Stock are altered, or

                   (ii) create (by reclassification or otherwise) any new 
class or series of stock having a preference over the Series F Preferred 
Stock with respect to voting, dividends, redemption or conversion or upon 
liquidation or an Acquisition;

                  (iii) amend Section B. 5(a)(ii)(B)of Article IV hereof; or

                                     -20-

<Page>

                   (iv) increase the authorized number of shares of Series F 
Preferred Stock.

          9. STATUS OF REDEEMED OR CONVERTED STOCK. In the event any shares 
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred 
Stock, Series D Preferred Stock, Series E Preferred Stock or Series F 
Preferred Stock shall be redeemed or converted pursuant to Section 4 or 5 
hereof the shares so redeemed or converted shall be cancelled and shall not 
be issuable by this Corporation, and the Certificate of Incorporation of this 
Corporation shall be appropriately amended to effect the corresponding 
reduction in this Corporation's authorized capital stock.

          10. REPURCHASE OF SHARES. In connection with this Corporation's 
repurchase at cost of shares of its Common Stock issued to or held by 
employees, officers, directors or other persons performing services to this 
Corporation or its subsidiaries pursuant to agreements providing for such 
rights of repurchase upon the termination of such services to this 
Corporation or its subsidiaries, or its repurchase of shares of its Common 
Stock pursuant to any rights of first refusal contained in this Corporation's 
bylaws as of the date hereof, each holder of Preferred Stock shall be deemed 
to have waived the application, in whole or in part, of any provisions of the 
Delaware General Corporation Law or any applicable law of any other state 
which might limit or prevent or prohibit such repurchases.

     C. COMMON STOCK.

          1. RELATIVE RIGHTS OF PREFERRED STOCK AND COMMON STOCK. All rights 
preferences, voting powers, relative, participating optional or other special 
rights and privileges, and qualifications, limitations, or restrictions of 
the Common Stock are expressly made subject and subordinate to those that may 
be fixed with respect to any shares of the Preferred Stock.

          2. VOTING RIGHTS. Except as otherwise required by law or this 
Certificate of Incorporation, each holder of Common Stock shall have one vote 
in respect of each share of stock held by such holder of record on the books 
of the Corporation for the election of directors and on all matters submitted 
to a vote of stockholders of the Corporation.

          3. DIVIDENDS. Subject to the preferential rights of the Preferred 
Stock, the holders of shares of Common Stock shall be entitled to receive, 
when, as and if declared by the Board of Directors, out of the assets of the 
Corporation which are by law available therefor, dividends payable either in 
cash, in property or in shares of capital stock.

          4. DISSOLUTION, LIQUIDATION OR WINDING UP. In the event of any 
dissolution, liquidation or winding up of the affairs of the Corporation, 
after distribution in full of the preferential amounts, if any, to be 
distributed to the holders of shares of the Preferred Stock, holders of 
Common Stock shall be entitled to participate in any distribution of the 
assets of the Corporation in accordance with Section 3 of Article IV, 
Division B hereof.

          5. NO PREEMPTIVE RIGHTS. The holders of the Series A Preferred 
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred 
Stock, Series E Preferred Stock, Series F Preferred Stock and Common Stock 
shall not have any preemptive rights. The 

                                     -21-

<Page>

foregoing shall not, however, prohibit the Corporation from granting 
contractual rights of first refusal to purchase securities to holders of 
Preferred Stock.

                                    ARTICLE V

         In furtherance and not in limitation of the powers conferred by the
laws of the State of Delaware:

     A. The Board of Directors of the Corporation is expressly authorized to 
adopt, amend or repeal the bylaws of the Corporation; provided, however, that 
the bylaws may only be amended in accordance with the provisions thereof and, 
provided further that, the authorized number of directors may be changed only 
with the approval of the holders of at least a majority of the then 
outstanding shares of Series A Preferred Stock, Series B Preferred Stock, 
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock 
and Series F Preferred Stock (voting as one class) in accordance with Section 
7 of Article IV. Division B hereof.

     B. Elections of directors need not be by written ballot unless the 
bylaws of the Corporation shall so provide.

     C. The books of the Corporation may be kept at such place within or 
without the State of Delaware as the bylaws of the Corporation may provide or 
as may be designated from time to time by the Board of Directors of the 
Corporation.

                                   ARTICLE VI

     A. EXCULPATION.

          1. CALIFORNIA. The liability of each and every director of this 
Corporation for monetary damages shall be eliminated to the fullest extent 
permissible under California law.

          2. DELAWARE. A director of the Corporation shall not be personally 
liable to the Corporation or its stockholders for monetary damages for breach 
of fiduciary duty as a director, except for liability (i) for any breach of 
the director's duty of loyalty to the Corporation or its stockholders, (ii) 
for acts or omissions not in good faith or which involve intentional 
misconduct or a knowing violation of law, (iii) under Section 174 of the 
Delaware General Corporation Law or (iv) for any transaction from which the 
director derived any improper personal benefit. If the Delaware General 
Corporation Law is hereafter amended to further reduce or to authorize, with 
the approval of the Corporation's stockholders, further reductions in the 
liability of the Corporation's directors for breach of fiduciary duty, then a 
director of the Corporation shall not be liable for any such breach to the 
fullest extent permitted by the Delaware General Corporation Law as so 
amended.

          3. CONSISTENCY. In the event of any inconsistency between Sections 
1 and 2 of this Division A, the controlling Section, as to any particular 
issue with regard to any particular matter, shall be the one which provides 
to the director in question the greatest protection from liability.

                                     -22-

<Page>

     B. INDEMNIFICATION.

          1. CALIFORNIA. This Corporation is authorized to indemnify the 
directors and officers of this Corporation to the fullest extent permissible 
under California law. Moreover, this Corporation is authorized to provide 
indemnification of (and advancement of expenses to) agents (as defined in 
Section 317 of the California Corporations Code) through bylaw provisions, 
agreements with agents, vote of stockholders or disinterested directors or 
otherwise, in excess of the indemnification and advancement otherwise 
permitted by Section 317 of the California Corporations Code, subject only to 
applicable limits set forth in Section 204 of the California Corporations 
Code, with respect to actions for breach of duty to the Corporation and its 
stockholders.

          2. DELAWARE. To the extent permitted by applicable law, this 
Corporation is also authorized to provide indemnification of (and advancement 
of expenses to) such agents (and any other persons to which Delaware law 
permits this Corporation to provide indemnification) through bylaw 
provisions, agreements with such agents or other persons, vote of 
stockholders or disinterested directors or otherwise, in excess of the 
indemnification and advancement otherwise permitted by Section 145 of the 
Delaware General Corporation Law, subject only to limits created by 
applicable Delaware law (statutory or non-statutory), with respect to actions 
for breach of duty to the Corporation, its stockholders and others.

          3. CONSISTENCY. In the event of any inconsistency between Sections 
1 and 2 of this Division B, the controlling Section, as to any particular 
issue with regard to any particular matter, shall be the one which authorizes 
for the benefit of the agent or other person in question the provision of the 
fullest, promptest, most certain or otherwise most favorable indemnification 
and/or advancement.

     C. EFFECT OF REPEAL OR MODIFICATION. Any repeal or modification of any 
of the foregoing provisions of this Article VI shall not adversely affect any 
right or protection of a director, officer, agent or other person existing at 
the time of, or increase the liability of any director of the Corporation 
with respect to any acts or omissions of such director occurring prior to, 
such repeal or modification.

                                   ARTICLE VII

         The Corporation shall have perpetual existence.

                                  ARTICLE VIII

         The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.

                [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]


                                     -23-

<Page>



         IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been executed as of this 22nd day of August, 2001.

                                DIGIRAD CORPORATION




                                By:      /s/ Scott Huennekens
                                   -------------------------------------
                                       Scott Huennekens, President






                                [SIGNATURE PAGE TO 
                  AMENDED AND RESTATED CERTIFICATE OF INCORPORATION]


<Page>



                                                                     EXHIBIT 3.3

                                     BYLAWS

                                       OF

                               DIGIRAD CORPORATION

                              ARTICLE I. - OFFICES

         Section 1. REGISTERED OFFICE. The registered office shall be in the
City of Dover, County of Kent, State of Delaware.

         Section 2. OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.

                     ARTICLE II. - MEETINGS OF STOCKHOLDERS

         Section 1. ANNUAL MEETINGS. The annual meeting of the stockholders of
the Corporation for the election of directors to succeed those whose terms
expire and for the transaction of such other business as may properly come
before the meeting shall be held between 30 and 120 days following the end of
the fiscal year of the Corporation and at such place as may be determined by the
Board of Directors. If the annual meeting of the stockholders be not held as
herein prescribed, the election of directors may be held at any meeting
thereafter called pursuant to these Bylaws.

         Section 2. SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose whatsoever, unless otherwise prescribed by statute, may be called at
any time by the Chairman of the Board, the President,
 or by the Board of
Directors, or by one or more stockholders holding not less than ten percent
(10%) of the voting power of the Corporation.



<Page>

         Section 3. PLACE. All meetings of the stockholders shall be at any
place within or without the State of Delaware designated either by the Board of
Directors or by written consent of the holders of a majority of the shares
entitled to vote thereat, given either before or after the meeting. In the
absence of any such designation, stockholders' meetings shall be held at the
principal executive office of the Corporation.

         Section 4. NOTICE. Notice of meetings of the stockholders of the
Corporation shall be given in writing to each stockholder entitled to vote,
either personally or by first-class mail or other means of written
communication, charges prepaid, addressed to the stockholder at his address
appearing on the books of the Corporation or given by the stockholder to the
Corporation for the purpose of notice. Notice of any such meeting of
stockholders shall be sent to each stockholder entitled thereto not less than
ten (10) nor more than sixty (60) days before the meeting. Said notice shall
state the place, date and hour of the meeting and, (i) in the case of special
meetings, the general nature of the business to be transacted, and no other
business may be transacted, or (ii) in the case of annual meetings, those
matters which the Board of Directors, at the time of the mailing of the notice,
intends to present for action by the stockholders and (iii) in the case of any
meeting at which directors are to be elected, the names of the nominees intended
at the time of the mailing of the notice to be presented by management for
election.

         Section 5. ADJOURNED MEETINGS. Any stockholders' meeting may be
adjourned from time to time by the vote of the holders of a majority of the
voting shares present at the meeting either in person or by proxy. Notice of any
adjourned meeting need not be given unless a meeting is adjourned for thirty
(30) days or more from the date set for the original meeting.

         Section 6. QUORUM. The presence in person or by proxy of the persons
entitled to vote a majority of the shares entitled to vote at any meeting
constitutes a quorum for the transaction of 


                                       2

<Page>

business. The stockholders present at a duly called or held meeting at which 
a quorum is present may continue to do business until adjournment, 
notwithstanding the withdrawal of enough stockholders to leave less than a 
quorum, if any action taken (other than adjournment) is approved by at least 
a majority of the shares required to constitute a quorum.

         In the absence of a quorum, any meeting of stockholders may be
adjourned from time to time by the vote of a majority of the shares, the holders
of which are either present in person or represented by proxy thereat, but no
other business may be transacted, except as provided above.

         Section 7. CONSENT TO STOCKHOLDER ACTION. Any action which may be taken
at any meeting of stockholders may be taken without a meeting and without prior
notice, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding shares having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted;
provided, however, that (i) notice of any stockholder approval without a meeting
by less than unanimous written consent shall be given as required by the General
Corporation Law of Delaware, and (ii) directors may not be elected by written
consent except by unanimous written consent of all shares entitled to vote for
the election of directors.

         Any written consent may be revoked by a writing received by the
Secretary of the Corporation prior to the time that written consents of the
number of shares required to authorize the proposed action have been filed with
the Secretary.

         Section 8. WAIVER OF NOTICE. The transactions of any meeting of
stockholders, however called and noticed, and whenever held, shall be as valid
as though had at a meeting duly held after regular call and notice, if a quorum
be present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by


                                      3

<Page>


proxy, signs a written waiver of notice, or a consent to the holding of the
meeting, or an approval of the minutes thereof. All such waivers, consents, or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.

         Section 9. VOTING. The voting at all meetings of stockholders need not
be by ballot, but any qualified stockholder before the voting begins may demand
a stock vote whereupon such stock vote shall be taken by ballot, each of which
shall state the name of the stockholder voting and the number of shares voted by
such stockholder, and if such ballot be cast by a proxy, it shall also state the
name of any such proxy.

         At any meeting of the stockholders, every stockholder having the right
to vote shall be entitled to vote in person, or by proxy appointed in a writing
subscribed by such stockholder and bearing a date not more than three years
prior to said meeting, unless the writing states that it is irrevocable and
satisfies Section 212(e) of the General Corporation Law of Delaware, in which
event it is irrevocable for the period specified in said writing and said
Section 212(e).

         Section 10. RECORD DATES. In the event the Board of Directors fixes a
day for the determination of stockholders of record entitled to vote as provided
in Section 1 of Article V of these Bylaws, then, subject to the provisions of
the General Corporation Law of Delaware only persons in whose name shares
entitled to vote stand on the stock records of the Corporation at the close of
business on such day shall be entitled to vote.

         If no record date is fixed:

         The record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
business day next preceding the day notice is given or, if notice is waived, at
the close of business on the business day next preceding the day on which the
meeting is held;


                                       4

<Page>

         The record date for determining stockholders entitled to give consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors is necessary, shall be the day on which the first written
consent is given; and

         The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto, or the sixtieth (60th) day prior to the
date of such other action, whichever is later.

         A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days.

         Section 11. CUMULATIVE VOTING FOR ELECTION OF DIRECTORS. Provided the
candidate's name has been placed in nomination prior to the voting and one or
more stockholders has given notice at the meeting prior to the voting of the
stockholder's intent to cumulate the stockholder's votes, every stockholder
entitled to vote at any election for directors shall have the right to cumulate
such stockholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which the
stockholder's shares are normally entitled, or distribute the stockholder's
votes on the same principle among as many candidates as the stockholder shall
think fit. The candidates receiving the highest number of votes of the shares
entitled to be voted for them up to the number of directors to be elected by
such shares are elected.

                        ARTICLE III. - BOARD OF DIRECTORS

         Section 1. POWERS. Subject to any limitations in the Certificate of
Incorporation or these Bylaws and to any provision of the General Corporation
Law of Delaware requiring stockholder 


                                       5

<Page>

authorization or approval for a particular action, the business and affairs 
of the Corporation shall be managed and all corporate powers shall be 
exercised by, or under the direction of, the Board of Directors. The Board of 
Directors may delegate the management of the day-to-day operation of the 
business of the Corporation to a management company or other person provided 
that the business and affairs of the Corporation shall be managed and all 
corporate powers shall be exercised, under the ultimate direction of the 
Board of Directors.

         Section 2. NUMBER, TENURE AND QUALIFICATIONS. The authorized number of
directors of the Corporation shall be not less than five (5) nor more than nine
(9), the exact number of directors to be fixed from time to time within such
limit by a duly adopted resolution of the Board of Directors or stockholders.
The exact number of directors presently authorized shall be six (6) until
changed within the limits specified above by a duly adopted resolution of the
Board of Directors or stockholders.

         Directors shall hold office until the next annual meeting of
stockholders and until their respective successors are elected. If any such
annual meeting is not held, or the directors are not elected thereat, the
directors may be elected at any special meeting of stockholders held for that
purpose. Directors need not be stockholders.

         Section 3. REGULAR MEETINGS. A regular annual meeting of the Board of
Directors shall be held without other notice than this bylaw immediately after,
and at the same place as, the annual meeting of stockholders. The Board of
Directors may provide for other regular meetings from time to time by
resolution.

         Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called at any time by the Chairman of the Board, or the President, or any
Vice President, or the Secretary or any two (2) directors. Written notice of the
time and place of all special meetings of 


                                       6

<Page>

the Board of Directors shall be delivered personally or by telephone, 
facsimile or telegraph to each director at least forty-eight (48) hours 
before the meeting, or sent to each director by first-class mail, postage 
prepaid, at least four (4) days before the meeting. Such notice need not 
specify the purpose of the meeting. Notice of any meeting of the Board of 
Directors need not be given to any director who signs a waiver of notice, 
whether before or after the meeting, or who attends the meeting without 
protesting prior thereto, or at its commencement, the lack of notice to such 
Director.

         Section 5. PLACE OF MEETINGS. Meetings of the Board of Directors may be
held at any place within or without the State of Delaware, which has been
designated in the notice, or if not stated in the notice or there is no notice,
the principal executive office of the Corporation or as designated by the
resolution duly adopted by the Board of Directors.

         Section 6. PARTICIPATION BY TELEPHONE. Members of the Board of
Directors may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another.

         Section 7. QUORUM. A majority of the directors shall constitute a
quorum. In the absence of a quorum, a majority of the directors present may
adjourn any meeting to another time and place. If a meeting is adjourned for
more than twenty-four (24) hours, notice of any adjournment to another time or
place shall be given prior to the time of the reconvened meeting to the
directors who were not present at the time of adjournment.

         Section 8. ACTION AT MEETING. Every act or decision done or made by a
majority of the directors present at a meeting duly held at which a quorum is
present is the act of the Board of Directors. A meeting at which a quorum is
initially present may continue to transact business 


                                       7

<Page>

notwithstanding the withdrawal of directors, if any action taken is approved 
by at least a majority of the required quorum for such meeting.

         Section 9. WAIVER OF NOTICE. The transactions of any meeting of the
Board of Directors, however called and noticed or wherever held, are as valid as
though had at a meeting duly held after regular call and notice if a quorum is
present and if, either before or after the meeting, each of the directors not
present signs a written waiver of notice, a consent to holding the meeting, or
an approval of the minutes thereof. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.

         Section 10. ACTION WITHOUT MEETING. Any action required or permitted to
be taken by the Board of Directors may be taken without a meeting, if all
members of the Board individually or collectively consent in writing to such
action. Such written consent or consents shall be filed with the minutes of the
proceedings of the Board. Such action by written consent shall have the same
force and effect as a unanimous vote of such directors.

         Section 11. REMOVAL. The Board of Directors may declare vacant the
office of a director who has been declared of unsound mind by an order of court
or who has been convicted of a felony. Subject to Article IV, Division B,
Section 7(b) of the Corporation's Certificate of Incorporation, the entire Board
of Directors or any individual director may be removed from office without cause
by a vote of stockholders holding a majority of the outstanding shares entitled
to vote at an election of directors; provided, however, that unless the entire
Board is removed, no individual director may be removed when the votes cast
against removal, or not consenting in writing to such removal, would be
sufficient to elect such director if voted cumulatively at an election at which
the same total number of votes cast were cast (or, if such 


                                       8

<Page>

action is taken by written consent, all shares entitled to vote were voted) 
and the entire number of directors authorized at the time of the director's 
most recent election were then being elected.

         Subject to Article IV, Division B, Section 7(b) of the Corporation's
Certificate of Incorporation, in the event an office of a director is so
declared vacant or in case the Board or any one or more directors be so removed,
new directors may be elected at the same meeting.

         Section 12. RESIGNATIONS. Any director may resign effective upon giving
written notice to the Chairman of the Board, the President, the Secretary or the
Board of Directors of the Corporation, unless the notice specifies a later time
for the effectiveness of such resignation. If the resignation is effective at a
future time, a successor may be elected to take office when the resignation
becomes effective.

         Section 13. VACANCIES. Except for a vacancy created by the removal of a
director, subject to Article IV, Division B, Section 7(b) of the Corporation's
Certificate of Incorporation, all vacancies in the Board of Directors, whether
caused by resignation, death or otherwise, may be filled by a majority of the
remaining directors, though less than a quorum, or by a sole remaining director,
and each director so elected shall hold office until his successor is elected at
an annual, regular or special meeting of the stockholders. Vacancies created by
the removal of a director may be filled only by approval of the stockholders.
Subject to Article IV, Division B, Section 7(b) of the Corporation's Certificate
of Incorporation, the stockholders may elect a director at any time to fill any
vacancy not filled by the directors. Any such election by written consent
requires the consent of all of the outstanding shares entitled to vote.

         Section 14. COMPENSATION. No stated salary shall be paid directors, as
such, for their services, but, by resolution of the Board of Directors, a fixed
sum and expenses of attendance, if any, may be allowed for attendance at each
regular or special meeting of such Board; provided 


                                       9

<Page>

that nothing herein contained shall be construed to preclude any director 
from serving the Corporation in any other capacity and receiving compensation 
therefor. Members of special or standing committees may be allowed like 
compensation for attending committee meetings.

         Section 15. COMMITTEES. The Board of Directors may, by resolution
adopted by a majority of the authorized number of directors, designate one or
more committees, each consisting of two (2) or more directors, to serve at the
pleasure of the Board of Directors. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of directors. Any such committee, to the extent provided in the resolution of
the Board of Directors, shall have all the authority of the Board of Directors
in the management of the business and affairs of the Corporation, except with
respect to (i) the approval of any action requiring stockholders' approval or
approval of the outstanding shares, (ii) the filling of vacancies on the Board
or any committee, (iii) the fixing of compensation of directors for serving on
the Board or a committee, (iv) the adoption, amendment or repeal of bylaws, (v)
the amendment or repeal of any resolution of the Board which by its express
terms is not so amendable or repealable, (vi) a distribution to stockholders,
except at a rate or in a periodic amount or within a price range determined by
the Board and (vii) the appointment of other committees of the Board or the
members thereof.

                             ARTICLE IV. - OFFICERS

         Section 1. NUMBER AND TERM. The officers of the Corporation shall be a
President, a Secretary and a Chief Financial Officer, all of which shall be
chosen by the Board of Directors. In addition, the Board of Directors may
appoint a Chairman of the Board, one or more Vice 


                                       10

<Page>

Presidents and such other officers as may be deemed expedient for the proper 
conduct of the business of the Corporation, each of whom shall have such 
authority and perform such duties as the Board of Directors may from time to 
time determine. The officers to be appointed by the Board of Directors shall 
be chosen annually at the regular meeting of the Board of Directors held 
after the annual meeting of stockholders and shall serve at the pleasure of 
the Board of Directors. If officers are not chosen at such meeting of the 
Board of Directors, they shall be chosen as soon thereafter as shall be 
convenient. Each officer shall hold office until his successor shall have 
been duly chosen or until his removal or resignation.

         Section 2. INABILITY TO ACT. In the case of absence or inability to act
of any officer of the Corporation and of any person herein authorized to act in
his place, the Board of Directors may from time to time delegate the powers or
duties of such officer to any other officer or any director or other person whom
it may select.

         Section 3. REMOVAL AND RESIGNATION. Any officer chosen by the Board of
Directors may be removed at any time, with or without cause, by the affirmative
vote of a majority of all the members of the Board of Directors. 

         Any officer chosen by the Board of Directors may resign at any time 
by giving written notice of said resignation to the Corporation. Unless a 
different time is specified therein, such resignation shall be effective upon 
its receipt by the Chairman of the Board, the President, the Secretary or the 
Board of Directors.

         Section 4. VACANCIES. A vacancy in any office because of any cause may
be filled by the Board of Directors for the unexpired portion of the term.

         Section 5. CHAIRMAN OF THE BOARD. The Chairman of the Board shall 
preside at all meetings of the Board. 


                                       11

<Page>

         Section 6. PRESIDENT. The President shall be the general manager and 
chief executive officer of the Corporation, subject to the control of the 
Board of Directors, and as such shall preside at all meetings of 
stockholders, shall have general supervision of the affairs of the 
Corporation, shall sign or countersign or authorize another officer to sign 
all certificates, contracts, and other instruments of the Corporation as 
authorized by the Board of Directors, shall make reports to the Board of 
Directors and stockholders, and shall perform all such other duties as are 
incident to such office or are properly required by the Board of Directors.

         Section 7. VICE PRESIDENT. In the absence of the President, or in the
event of such officer's death, disability or refusal to act, the Vice President,
or in the event there be more than one Vice President, the Vice Presidents in
the order designated at the time of their selection, or in the absence of any
such designation, then in the order of their selection, shall perform the duties
of President, and when so acting, shall have all the powers and be subject to
all restrictions upon the President. Each Vice President shall have such powers
and discharge such duties as may be assigned from time to time by the President
or by the Board of Directors.

         Section 8. SECRETARY. The Secretary shall see that notices for all
meetings are given in accordance with the provisions of these Bylaws and as
required by law, shall keep minutes of all meetings, shall have charge of the
seal and the corporate books, and shall make such reports and perform such other
duties as are incident to such office, or as are properly required by the
President or by the Board of Directors.

                  The Assistant Secretary or the Assistant Secretaries, in the
order of their seniority, shall, in the absence or disability of the Secretary,
or in the event of such officer's refusal to act, perform the duties and
exercise the powers and discharge such duties as may be assigned from time to
time by the President or by the Board of Directors.


                                       12

<Page>


         Section 9. CHIEF FINANCIAL OFFICER. The Chief Financial Officer may
also be designated by the alternate title of "Treasurer." The Chief Financial
Officer shall have custody of all moneys and securities of the Corporation and
shall keep regular books of account. Such officer shall disburse the funds of
the Corporation in payment of the just demands against the Corporation, or as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Board of Directors from time to time as
may be required of such officer, an account of all transactions as Chief
Financial Officer and of the financial condition of the Corporation. Such
officer shall perform all duties incident to such office or which are properly
required by the President or by the Board of Directors.

         The Assistant Chief Financial Officer or the Assistant Chief Financial
Officers, in the order of their seniority, shall, in the absence or disability
of the Chief Financial Officer, or in the event of such officer's refusal to
act, perform the duties and exercise the powers of the Chief Financial Officer,
and shall have such powers and discharge such duties as may be assigned from
time to time by the President or by the Board of Directors.

         Section 10. SALARIES. The salaries of the officers shall be fixed from
time to time by the Board of Directors and no officer shall be prevented from
receiving such salary by reason of the fact that such officer is also a director
of the Corporation.

         Section 11. OFFICERS HOLDING MORE THAN ONE OFFICE. Any two or more
offices may be held by the same person.

                           ARTICLE V. - MISCELLANEOUS

         Section 1. RECORD DATE AND CLOSING OF STOCK BOOKS. The Board of
Directors may fix a time in the future as a record date for the determination of
the stockholders entitled to notice of and to vote at any meeting of
stockholders or entitled to receive payment of any dividend or 


                                       13

<Page>

distribution, or any allotment of rights, or to exercise rights in respect to 
any other lawful action. The record date so fixed shall not be more than 
sixty (60) nor less than ten (10) days prior to the date of the meeting or 
event for the purposes of which it is fixed. When a record date is so fixed, 
only stockholders of record at the close of business on that date are 
entitled to notice of and to vote at the meeting or to receive the dividend, 
distribution, or allotment of rights, or to exercise the rights, as the case 
may be, notwithstanding any transfer of any shares on the books of the 
Corporation after the record date.

         The Board of Directors may close the books of the Corporation against
transfers of shares during the whole or any part of a period of not more than
sixty (60) days prior to the date of a stockholders' meeting, the date when the
right to any dividend, distribution, or allotment of rights vests, or the
effective date of any change, conversion or exchange of shares.

         Section 2. CERTIFICATES. Certificates of stock shall be issued in
numerical order and each stockholder shall be entitled to a certificate signed
in the name of the Corporation by the Chairman of the Board or the President or
a Vice President, and the Chief Financial Officer, the Secretary or an Assistant
Secretary, certifying to the number of shares owned by such stockholder. Any or
all of the signatures on the certificate may be facsimile. Prior to the due
presentment for registration of transfer in the stock transfer book of the
Corporation, the registered owner shall be treated as the person exclusively
entitled to vote, to receive notifications and otherwise to exercise all the
rights and powers of an owner, except as expressly provided otherwise by the
laws of the State of Delaware.

         Section 3. REPRESENTATION OF SHARES IN OTHER CORPORATIONS. Shares of
other corporations standing in the name of the Corporation may be voted or
represented and all incidents thereto 


                                       14

<Page>

may be exercised on behalf of the Corporation by the Chairman of the Board, 
the President or any Vice President and the Chief Financial Officer or the 
Secretary or an Assistant Secretary.

         Section 4. FISCAL YEAR. The fiscal year of the Corporation shall be set
by the Board of Directors.

         Section 5. ANNUAL REPORTS. The Annual Report to stockholders, described
in the General Corporation Law of Delaware, is expressly waived and dispensed
with.

         Section 6. AMENDMENTS. Bylaws may be adopted, amended, or repealed by
the vote or the written consent of stockholders entitled to exercise a majority
of the voting power of the Corporation. Subject to the right of stockholders to
adopt, amend, or repeal bylaws, bylaws may be adopted, amended, or repealed by
the Board of Directors, except that a bylaw amendment thereof changing the
authorized number of directors may be adopted by the Board of Directors only if
these Bylaws permit an indefinite number of directors and the bylaw or amendment
thereof adopted by the Board of Directors changes the authorized number of
directors within the limits specified in these Bylaws.

                          ARTICLE VI. - INDEMNIFICATION

         Section 1. DELAWARE. The Corporation shall, to the fullest extent
authorized under the laws of the State of Delaware, as those laws may be amended
and supplemented from time to time, indemnify any director made, or threatened
to be made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
Corporation or a predecessor corporation or, at the Corporation's request, a
director or officer of another corporation, provided, however, that the
Corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the Corporation. The indemnification provided for in this Section 1
shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled 


                                       15

<Page>

under the Corporation's certificate of incorporation, any bylaw, agreement or 
vote of stockholders or disinterested directors or otherwise, both as to 
action in their official capacities and as to action in another capacity 
while holding such office, (ii) continue as to a person who has ceased to be 
a director and (iii) inure to the benefit of the heirs, executors and 
administrators of such a person. The Corporation's obligation to provide 
indemnification under this Section 1 shall be offset to the extent of any 
other source of indemnification or any otherwise applicable insurance 
coverage under a policy maintained by the Corporation or any other person.

                  Expenses incurred by a director of the Corporation in
defending a civil or criminal action, suit or proceeding by reason of the fact
that such director is or was a director of the Corporation (or was serving at
the Corporation's request as a director or officer of another corporation) shall
be paid by the Corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf of such
director to repay such amount if it shall ultimately be determined that such
director is not entitled to be indemnified by the Corporation as authorized by
relevant sections of the General Corporation Law of Delaware. Notwithstanding
the foregoing, the Corporation shall not be required to advance such expenses to
an agent who is a party to an action, suit or proceeding brought by the
Corporation and approved by a majority of the Board of Directors of the
Corporation which alleges willful misappropriation of corporate assets by such
agent, disclosure of confidential information in violation of such agent's
fiduciary or contractual obligations to the Corporation or any other willful and
deliberate breach in bad faith of such agent's duty to the Corporation or its
stockholders.

                  The foregoing provisions of this Section 1 shall be deemed to
be a contract between the Corporation and each director who serves in such
capacity at any time while this 


                                       16

<Page>


bylaw is in effect, and any repeal or modification thereof shall not affect 
any rights or obligations then existing with respect to any state of facts 
then or theretofore existing or any action, suit or proceeding theretofore or 
thereafter brought based in whole or in part upon any such state of facts.

                  The Board of Directors in its discretion shall have power on
behalf of the Corporation to indemnify any person, other than a director, made a
party to any action, suit or proceeding by reason of the fact that such person,
such person's testator or intestate, is or was an officer or employee of the
Corporation.

                  To assure indemnification under this Section 1 of all
directors, officers and employees who are determined by the Corporation or
otherwise to be or to have been "fiduciaries" of any employee benefit plan of
the Corporation which may exist from time to time, Section 145 of the General
Corporation Law of Delaware shall, for the purposes of this Section 1, be
interpreted as follows: an "other enterprise" shall be deemed to include such an
employee benefit plan, including without limitation, any plan of the Corporation
which is governed by the Act of Congress entitled "Employee Retirement Income
Security Act of 1974," as amended from time to time; the Corporation shall be
deemed to have requested a person to serve an employee benefit plan where the
performance by such person of his or her duties to the Corporation also imposes
duties on, or otherwise involves services by, such person to the plan or
participants or beneficiaries of the plan; excise taxes assessed on a person
with respect to an employee benefit plan pursuant to such Act of Congress shall
be deemed "fines."

         Section 2. CALIFORNIA. The Corporation shall indemnify its directors to
the fullest extent not prohibited by the California General Corporation Law;
provided, however, that the Corporation shall not be required to indemnify any
director in connection with any proceeding 


                                       17

<Page>

(or part thereof) initiated by such person or any proceeding by such person 
against the Corporation or its directors, officers, employees or other agents 
unless (i) such indemnification is expressly required to be made by law, (ii) 
the proceeding was authorized by the board of directors of the Corporation or 
(iii) such indemnification is provided by the Corporation, in its sole 
discretion, pursuant to the powers vested in the Corporation under the 
California General Corporation Law.

         The Corporation shall have power to indemnify its officers, employees
and other agents as set forth in the California General Corporation Law.

         Promptly after receipt of a request for indemnification hereunder (and
in any event within ninety (90) days thereof) a reasonable, good faith
determination as to whether indemnification of the director is proper under the
circumstances because each director has met the applicable standard of care
shall be made by: (i) a majority vote of a quorum consisting of directors who
are not parties to such proceeding; (ii) if such quorum is not obtainable, by
independent legal counsel in a written opinion; or (iii) approval or
ratification by the affirmative vote of a majority of the shares of the
Corporation represented and voting at a duly held meeting at which a quorum is
present (which shares voting affirmatively also constitute at least a majority
of the required quorum) or by written consent of a majority of the outstanding
shares entitled to vote; where in each case the shares owned by the person to be
indemnified shall not be considered entitled to vote thereon.

         For purposes of any determination under this bylaw, a director shall be
deemed to have acted in good faith and in a manner he or she reasonably believed
to be in the best interests of the Corporation and its stockholders, and, with
respect to any criminal action or proceeding, to have had no reasonable cause to
believe that his or her conduct was unlawful, if his or her action is 


                                       18

<Page>

based on information, opinions, reports and statements, including financial 
statements and other financial data, in each case prepared or presented by: 
(i) one or more officers or employees of the Corporation whom the director 
believed to be reliable and competent in the matters presented; (ii) counsel, 
independent accountants or other persons as to matters which the director 
believed to be within such person's professional competence; and (iii) a 
committee of the Board upon which such director does not serve, as to matters 
within such committee's designated authority, which committee the director 
believes to merit confidence; so long as, in each case, the director acts 
without knowledge that would cause such reliance to be unwarranted.

         The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he or she reasonably believed to be in the best interests of the
Corporation and its stockholders or that he or she had reasonable cause to
believe that his or her conduct was unlawful.

         The provisions of the preceding two paragraphs shall not be deemed to
be exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth by the
California General Corporation Law.

         The Corporation shall advance, prior to the final disposition of any
proceeding, promptly following request therefor, all expenses incurred by any
director in connection with such proceeding upon receipt of an undertaking by or
on behalf of such person to repay said amounts if it shall be determined
ultimately that such person is not entitled to be indemnified under this bylaw
or otherwise.

         Without the necessity of entering into an express contract, all rights
to indemnification and advances to directors under this bylaw shall be deemed to
be contractual rights and be 


                                       19

<Page>

effective to the same extent and as if provided for in a contract between the 
Corporation and the director. Any right to indemnification or advances 
granted by this bylaw to a director shall be enforceable by or on behalf of 
the person holding such right in the forum in which the proceeding is or was 
pending or, if such forum is not available or a determination is made that 
such forum is not convenient, in any court of competent jurisdiction if (i) 
the claim for indemnification or advances is denied, in whole or in part, or 
(ii) no disposition of such claim is made within ninety (90) days of request 
therefor. The claimant in such enforcement action, if successful in whole or 
in part, shall be entitled to be paid also the expense of prosecuting his or 
her claim. The Corporation shall be entitled to raise as a defense to any 
such action (other than an action brought to enforce a claim for expenses 
incurred in connection with any proceeding in advance of its final 
disposition when the required undertaking has been tendered to the 
Corporation) that the claimant has not met the standards of conduct that make 
it permissible under the California General Corporation Law for the 
Corporation to indemnify the claimant for the amount claimed. Neither the 
failure of the Corporation (including its board of directors, independent 
legal counsel or its stockholders) to have made a determination prior to the 
commencement of such action that indemnification of the claimant is proper in 
the circumstances because the claimant has met the applicable standard of 
conduct set forth in the California General Corporation Law, nor an actual 
determination by the Corporation (including its board of directors, 
independent legal counsel or its stockholders) that the claimant has not met 
such applicable standard of conduct, shall be a defense to the action or 
create a presumption that the claimant has not met the applicable standard of 
conduct.

         To the fullest extent permitted by the Corporation's Certificate of
Incorporation and the California General Corporation Law, the rights conferred
on any person by this bylaw shall not 


                                       20

<Page>

be exclusive of any other right which such person may have or hereafter 
acquire under any statute, provision of the Certificate of Incorporation, 
bylaws, agreement, vote of stockholders or disinterested directors or 
otherwise, both as to action in his or her official capacity and as to action 
in another capacity while holding office. The Corporation is specifically 
authorized to enter into individual contracts with any or all of its 
directors, officers, employees or agents respecting indemnification and 
advances, to the fullest extent permitted by the California General 
Corporation Law and the Corporation's Certificate of Incorporation.

         The rights conferred on any person by this bylaw shall continue as to a
person who has ceased to be a director and shall inure to the benefit of the
heirs, executors and administrators of such a person.

         The Corporation, upon approval by the board of directors, may purchase
insurance on behalf of any person required or permitted to be indemnified
pursuant to this bylaw. The Corporation's obligation to provide indemnification
under this Section 2 shall be offset to the extent of any other source of
indemnification or any otherwise applicable insurance coverage under a policy
maintained by the Corporation or any other person.

         Any repeal or modification of this bylaw shall only be prospective and
shall not affect the rights under this bylaw in effect at the time of the
alleged occurrence of any action or omission to act that is the cause of any
proceeding against any agent of the Corporation.

         The Corporation shall indemnify the directors and officers of the
Corporation who serve at the request of the Corporation as trustees, investment
managers or other fiduciaries of employee benefit plans to the fullest extent
permitted by the California General Corporation Law.


                                       21

<Page>


         If this bylaw or any portion hereof shall be invalidated on any ground
by any court of competent jurisdiction, then the Corporation shall nevertheless
indemnify each director to the fullest extent permitted by any applicable
portion of this bylaw that shall not have been invalidated, or by any other
applicable law.

         For the purposes of this bylaw, the following definitions shall apply:

                  (i) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement and appeal of any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, arbitrative or
investigative.

                  (ii) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding, including expenses of
establishing a right to indemnification under this bylaw or any applicable law.

                  (iii) The term the "Corporation" shall include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this bylaw with respect to the resulting or surviving
corporation 


                                       22

<Page>

as he or she would have with respect to such constituent corporation if its 
separate existence had continued.

                  (iv) References to a "director," "officer," "employee," or
"agent" of the Corporation shall include, without limitation, situations where
such person is serving at the request of the Corporation as a director, officer,
employee, trustee or agent of another corporation, partnership, joint venture,
trust or other enterprise.

         Section 3. INCONSISTENCY. In the event of any inconsistency between
Section 1 and Section 2 of this Article VI, the controlling Section as to any
particular issue with regard to any particular matter, shall be the one which
authorizes for the benefit of the agent or the other person in question the
provision of the fullest, promptest, most certain or otherwise most favorable
indemnification and/or advancement.

                      ARTICLE VII. - RIGHT OF FIRST REFUSAL

         Section 1. RIGHT OF FIRST REFUSAL. No stockholder shall sell, assign,
pledge, or in any manner transfer any of the shares of common stock of the
Corporation or any right or interest therein, whether voluntarily or by
operation of law, or by gift or otherwise, except by a transfer which meets the
requirements hereinafter set forth in this bylaw:

                  (a) If the stockholder desires to sell or otherwise transfer
any of his shares of common stock, then the stockholder shall first give written
notice thereof to the Corporation. The notice shall name the proposed transferee
and state the number of shares to be transferred, the proposed consideration,
and all other terms and conditions of the proposed transfer.

                  (b) For thirty (30) days following receipt of such notice, the
Corporation shall have the option to purchase all or any portion of the shares
specified in the notice at the price and upon the terms set forth in such
notice. In the event of a gift, property settlement or other 


                                       23

<Page>

transfer in which the proposed transferee is not paying the full price for 
the shares, and that is not otherwise exempted from the provisions of this 
bylaw, the price shall be deemed to be the fair market value of the common 
stock at such time as determined in good faith by the Board of Directors. In 
the event the Corporation elects to purchase all or any portion of the 
shares, it shall give written notice to the transferring stockholder of its 
election and settlement for said shares shall be made as provided below in 
paragraph (d).

                  (c)      The Corporation may assign its rights hereunder.

                  (d) In the event the Corporation and/or its assignee(s) elect
to acquire any of the shares of the transferring stockholder as specified in
said transferring stockholder's notice, the Secretary of the Corporation shall
so notify the transferring stockholder and settlement thereof shall be made in
cash within thirty (30) days after the Secretary of the Corporation receives
said transferring stockholder's notice; provided that if the terms of payment
set forth in said transferring stockholder's notice were other than cash against
delivery, the Corporation and/or its assignee(s) shall pay for said shares on
the same terms and conditions set forth in said transferring stockholder's
notice.

                  (e) In the event the Corporation and/or its assignees(s) do
not elect to acquire all of the shares specified in the transferring
stockholder's notice, said transferring stockholder may, within the sixty-day
period following the expiration of the option rights granted to the Corporation
and/or its assignee(s) herein, transfer the shares specified in said
transferring stockholder's notice which were not acquired by the Corporation
and/or its assignee(s) as specified in said transferring stockholder's notice.
All shares so sold by said transferring stockholder shall continue to be subject
to the provisions of this bylaw in the same manner as before said transfer.


                                       24

<Page>

                  (f) Anything to the contrary contained herein notwithstanding,
the following transactions shall be exempt from the provisions of this bylaw:

                           A stockholder's transfer of any or all shares of 
common stock held either during such stockholder's lifetime or on death by will
or intestacy to such stockholder's immediate family or to any custodian or
trustee for the account of such stockholder or such stockholder's immediate
family. "Immediate family" as used herein shall mean spouse, lineal descendant,
father, mother, brother or sister of the stockholder making such transfer.

                           In any such case, the transferee, assignee, or other 
recipient shall receive and hold such common stock subject to the provisions of
this bylaw, and there shall be no further transfer of such stock except in
accord with this bylaw.

                  (g) The provisions of this bylaw may be waived with respect to
any transfer either by the Corporation, upon duly authorized action of its Board
of Directors, or by the stockholders, upon the express written consent of the
owners of a majority of the voting power of the Corporation (excluding the votes
represented by those shares to be transferred by the transferring stockholder).
This bylaw may be amended or repealed either by a duly authorized action of the
Board of Directors or by the stockholders, upon the express written consent of
the owners of a majority of the voting power of the Corporation.

                  (h) Any sale or transfer, or purported sale or transfer, of
securities of the Corporation shall be null and void unless the terms,
conditions and provisions of this bylaw are strictly observed and followed.

                  (i) The foregoing right of first refusal shall terminate on
either of the following dates, whichever shall first occur:

                           (i)      On May 13, 2004; or


                                       25

<Page>

                           (ii)     Upon the date securities of the Corporation 
are first offered to the public pursuant to a registration statement filed with,
and declared effective by, the United States Securities and Exchange Commission
under the Securities Act of 1933, as amended.

                  (j) The certificates representing shares of common stock of
the Corporation shall bear on their face the following legend so long as the
foregoing right of first refusal remains in effect:

                           "The shares represented by this certificate are
         subject to a right of first refusal option in favor of the Corporation
         and/or its assignee(s), as provided in the bylaws of the Corporation."

                [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]


                                       26

<Page>




                            CERTIFICATE OF SECRETARY

         The undersigned, being the Secretary of Digirad Corporation, a Delaware
corporation, does hereby certify the foregoing to be the Bylaws of said
Corporation, as adopted by the directors of the Corporation and which remain in
full force and effect as of the date hereof.

         Executed at San Diego, California effective as of January 2, 1997.

                                                         /s/ Craig Andrews
                                                    ---------------------------
                                                     Craig Andrews, Secretary


<Page>


                                                                    EXHIBIT 10.1

                                   L-99-1261


                                LICENSE AGREEMENT

                                       FOR


                                    DETECTOR


                                     BETWEEN


                               DIGIRAD CORPORATION



                                       AND


                   THE REGENTS OF THE UNIVERSITY OF CALIFORNIA


                                   THROUGH THE


                             ERNEST ORLANDO LAWRENCE
                          BERKELEY NATIONAL LABORATORY



<Page>


                                   L-99-1261

                                TABLE OF CONTENTS

1.   BACKGROUND                                                           1

2.   DEFINITIONS                                                          1

3.   LICENSE GRANT                                                        3

4.   LICENSE ISSUE FEE                                                    4

5.   ROYALTIES AND PAYMENTS                                               4

6    PERFORMANCE REQUIREMENTS                                             6

7    PROGRESS AND ROYALTY REPORTS                                         7

8.   BOOKS AND RECORDS                                                    8

9.   LIFE OF THE AGREEMENT                                                8

10.  TERMINATION BY BERKELEY LAB                                          9

11.  TERMINATION BY DIGIRAD                                               9

12.  DISPOSITION OF LICENSED PRODUCTS                                     9

13.  USE OF NAMES AND TRADEMARKS AND NONDISCLOSURE OF AGREEMENT           9

14.  LIMITED WARRANTY                                                    10

15.  PATENT PROSECUTION AND MAINTENANCE                                  11

16.  PATENT INFRINGEMENT                                                 13

17   WAIVER                                                              13

18.  ASSIGNMENT                                                          13

19.  INDEMNIFICATION                                                     13

20.  LATE PAYMENTS                                                       15


<Page>


                                   L-99-1261


21.  NOTICES                                                             15

22.  U.S.  MANUFACTURE                                                   15

23.  PATENT MARKING                                                      16

24.  GOVERNMENT APPROVAL OR REGISTRATION                                 16

25.  EXPORT CONTROL LAWS                                                 16

26.  FORCE MAJEURE                                                       16

27   MISCELLANEOUS                                                       16


<Page>


                                                                       L-99-1261


                         LICENSE AGREEMENT FOR DETECTOR


This license agreement (the "Agreement") is entered into by The Regents of the
University of California ("The Regents"), Department of Energy
contract-operators of the Ernest Orlando Lawrence Berkeley National Laboratory,
1 Cyclotron
 Road, Berkeley, CA 94720, (jointly, "Berkeley Lab"), and Digirad
Corporation, ("Digirad") a Delaware corporation, having as its principle place
of business, 9350 Trade Place San Diego, California 92126-6330.

                                  1. BACKGROUND

1.1      A certain invention, *** 
                              *** 
         (the "Invention"), was made under U.S. Department of Energy contract
         *** 
         *** at the University of California, Ernest Orlando Lawrence Berkeley
         National Laboratory by Steven Edward Holland.

1.2      As DOE sponsored development of the Invention, this Agreement and the
         resulting license are subject to overriding obligations to the federal
         government pursuant to the provisions of the applicable law or
         regulations.

1.3      Berkeley Lab wants the Invention developed and used to the fullest
         extent so that the general public enjoys the benefits of the
         government-sponsored research.

1.4      Digirad wants to obtain certain rights from Berkeley Lab for the
         commercial development, manufacture, use, and sale of the Invention.

1.5      Digirad entered into an Option Agreement with Berkeley Lab to license
         the above referenced invention on June 3, 1998.

1.6      Digirad is a "small business firm" as defined at Section 2 of Public
         Law 85-536 (15 U.S.C. 632).

Therefore the parties agree as follows:

                                 2. DEFINITIONS

2.1      "Effective Date" means the date of execution by the last signing party.

2.2      "Field of Use" means the development, production and use ***
                                             ***
                                             ***

*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.


                                    1 of 17
<Page>


                                                                       L-99-1261


2.3      "Highly Inflationary Currency" means the currency of any economy with a
         cumulative inflation rate of *** or more over the most recent *** , as
         measured by consumer price indices published by the *** 
         ***

2.4      "Licensed Patents" means patent rights to any subject matter claimed in
         or covered by
                                                     ***
                                                     ***
         *** or any corresponding foreign patent application or patent, for
         which Digirad has met the requirements of Section 15.2 herein; any
         division, reexamination, continuation, continuation-in-part (excluding
         new matter contained and claimed in that continuation-in-part), or of
         which such application is a successor; any patents issuing on any of
         the foregoing, and all renewals, reissues and extensions thereof, or
         other equivalents of a renewal, reissues and extension thereof.

2.5      "Licensed Product" means any product, service or process that employs
         or is produced by the practice of any invention claimed in Licensed
         Patents and whose manufacture, use, practice, sale, or lease would
         constitute, but for the license Berkeley Lab grants to Digirad under
         this Agreement, an infringement of any claim in Licensed Patents.

2.6      "Selling Price" for the purpose of computing royalties means the price
         at which Digirad or its sublicensee sells the Licensed Product in an
         arms-length transaction, less the sum of the following deductions that
         are customary and actually taken: ***
                                                     ***
                                                     ***
                                                     ***
         When a Licensed Product is not sold, but is otherwise disposed of, the
         Selling Price of that Licensed Product for the purposes of computing
         royalties is ***
                                                     ***
         *** When such products are not currently being offered for sale by
         Digirad, the Selling Price of a Licensed Product otherwise disposed of,
         for the purpose of computing royalties, is ***
                                                     ***
         *** When such products are not currently sold or offered for sale by
         Digirad or others, then the Selling Price, for the purpose of computing
         royalties, shall be
                                            ***
         *** For sales of Licensed Products to a Joint Venture or Affiliate (as
         defined in Paragraphs 2.7 and 2.8 below) that are provided by Digirad
         to the Joint Venture or Affiliate (directly or indirectly for resale by
         said Joint Venture or Affiliate) at a reduced price from that
         customarily charged to an unrelated third party, then the royalty paid
         to Berkeley Lab will be based on ***
                                                     ***
         *** For sales of Licensed Products to a Joint 

*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

                                    2 of 17
<Page>


                                                                       L-99-1261


         Venture or Affiliate (as defined in Paragraphs 2.7 and 2.8 below) that
         are provided directly or indirectly by Digirad to the Joint Venture or
         Affiliate as an end user at a reduced price from that customarily
         charged to an unrelated third party, then the royalty paid to Berkeley
         Lab will be based on *** ***

2.7      "Affiliate(s)" of a party means                      ***
                                                     ***
                                                     ***
                                                     ***

2.8      "Joint Venture" means any separate entity established pursuant to an
         agreement between a third party and Digirad to constitute a vehicle for
         a joint venture, which separate entity purchases, sells or acquires
         Licensed Products from Digirad at prices substantially different from
         those at which Digirad would have charged other purchasers that deal at
         arms length with Digirad. If such separate entity is established, then
         Berkeley Lab shall collect from Digirad royalties on the Selling Price
         of Licensed Products by the entity and shall not collect royalties on
         the Selling Price of Licensed Products by Digirad.

                                3. LICENSE GRANT

3.1      Subject to the limitations set forth in this Agreement, Berkeley Lab
         grants to Digirad a nontransferable (subject to Section 18.1), limited
         (by the terms of Sections 3.2 and 3.7) worldwide exclusive,
         royalty-bearing license, under Licensed Patents, only in the Field of
         Use, to develop, make, have made, use, practice, sell, have sold, and
         lease the Licensed Products.

3.2      Any license under this Agreement is subject to the following: (a) DOE's
         royalty-free license for federal government practice only, and (b)
         DOE's option to grant licenses either if reasonable steps to
         commercialize the Invention are not carried out or in order to meet
         federal regulations. Digirad shall use best efforts to commercialize
         Licensed Patents.

3.3      Berkeley Lab also grants to Digirad the right to issue royalty-bearing
         sublicenses only in the Field of Use to make, use, practice and sell
         Licensed Products, so long as Digirad has current exclusive rights in
         the Field of Use.

3.4      Any sublicense Digirad grants must be consistent with all the rights
         and obligations due Berkeley Lab and the United States Government under
         this Agreement, including, without limitation, the obligations under
         Section 3.2 above.

3.5      Digirad shall provide Berkeley Lab with a copy of each sublicense
         issued under this Agreement; collect payment of all royalties due
         Berkeley Lab from sublicensees; and summarize and deliver all reports
         due Berkeley Lab from sublicensees under Article 7 (PROGRESS AND
         ROYALTY REPORTS).

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                                                                       L-99-1261


3.6      If this Agreement terminates for any reason,  ***
                                                     ***

3.7      Berkeley Lab expressly reserves the right to use the Invention and
         associated technology for educational and research purposes subject to
         the limitations of Section 13.2.

                              4. LICENSE ISSUE FEE

4.1      Digirad shall pay Berkeley Lab a license issue fee of ***
                                                     ***
                                                     ***
                                                     ***
                                                     ***
                           ***

4.2      This fee is                        ***

                            5. ROYALTIES AND PAYMENTS

5.1        Digirad shall pay to Berkeley Lab an earned royalty *** 
         *** of the Selling Price of each Licensed Product Digirad sells.

5.2      Under this Agreement a Licensed Product is considered to be sold when
         invoiced, or if not invoiced, when delivered to a third party. But when
         the last patent covering a Licensed Product expires or when the license
         terminates, any shipment made on or before the day of that expiration
         or termination that has not been billed out before is considered as
         sold (and therefore subject to royalty) unless returned to Digirad
         within *** . Berkeley Lab shall credit royalties that Digirad pays on a
         Licensed Product that the customer does not accept or returns.

5.3      For each sublicense, Digirad shall pay Berkeley Lab  ***
                                            ***
                                            ***
                                            ***
                                            ***
                           ***

5.4      Digirad shall pay to Berkeley Lab by *** of each year the difference
         between the earned royalties for that calendar year Digirad has already
         paid to Berkeley Lab and the minimum annual royalty set forth in the
         following schedule. Berkeley Lab shall credit that minimum annual
         royalty paid against the earned royalty due and owing for the calendar
         year in which Digirad made the minimum payment

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<Table>
<Caption>
              CALENDAR YEAR                            MINIMUM ANNUAL ROYALTY
              -------------                            ----------------------
              <S>                                      <C>
                  1999                                 $ ***
                  2000                                 $ ***
                  2001                                 $ ***
                  2002 and each year thereafter        $ ***
</Table>


5.5      Digirad shall send payment for royalties accruing to Berkeley Lab ***
         together with its royalty report under paragraph 7.4. Digirad shall be
         entitled to credit ***
                                                     ***
                                                     ***
                           ***

5.6      Digirad shall make checks payable to "The Regents of the University of
         California (Berkeley Lab/L-99-1261.)" Digirad shall pay Berkeley Lab
         only in United States dollars. If a Licensed Product is sold for moneys
         other than United States dollars (not including Highly Inflationary
         Currency), Digirad shall ***
                                                     ***
                                                     ***
                                                     ***
         If a Licensed Product is sold for a Highly Inflationary Currency,
         Digirad shall ***
                                                     ***
                                                     ***
                                                     ***
                  ***

5.7      Digirad may not reduce royalties payable by  ***
                                                     ***
                                                     ***
                  ***

5.8      If Digirad cannot promptly remit any royalties for sales in any country
         where a Licensed Product is sold because of legal restrictions, Digirad
         may deposit in United States funds royalties due Berkeley Lab to
         Berkeley Lab's account in a bank or other depository in that country.
         If Digirad is not permitted to deposit those payments in U.S. funds
         under the laws of that country, Digirad may deposit those payments in
         the local currency to Berkeley Lab's account in a bank or other
         depository in that country.

5.9      If a court of competent jurisdiction and last resort holds invalid any
         patent or any of the patent claims within Licensed Patent in a final
         decision from which no appeal has or can be taken, Digirad's obligation
         to pay royalties based on that patent or claim will cease as of the
         date of that final decision. Digirad, however, shall pay any royalties
         that accrued before that decision or that are based on another patent
         or claim not involved in that decision.

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5.10     Digirad has no duty to pay Berkeley Lab royalties under this Agreement
         on a Licensed Product Digirad sells to the United States Government
         including any United States Government agency. Digirad shall reduce the
         amount charged for a Licensed Product sold to the United States
         Government by an amount equal to the royalty otherwise due Berkeley
         Lab. Such royalty otherwise due Berkeley Lab will count towards the
         minimum annual royalty payments per Section 5.4.

                           6. PERFORMANCE REQUIREMENTS

6.1      Digirad shall proceed with the development, manufacture and sale of
         Licensed Products and shall use diligent commercial efforts to endeavor
         to market them within a reasonable time after the Effective Date in
         quantities sufficient to meet the market demand.

6.2      Digirad shall use diligent commercial efforts to obtain all necessary
         governmental approvals for the manufacture, use and sale of Licensed
         Products.

6.3      Digirad is entitled to exercise prudent and reasonable business
         judgment in meeting its performance requirements under this Agreement.

6.4      If Digirad is unable to perform any of the following, then Berkeley Lab
         may either terminate this Agreement or reduce this limited exclusive
         license to a nonexclusive license:

              6.4.1                  ***
                                     *** or


              6.4.2                  ***
                                     ***
                        ***

         It is the understanding of the parties hereto that any termination of
         the Agreement or reduction of this license to a nonexclusive license as
         a result of Digirad's failure to meet the specifications of Section
         6.4, shall be subject to the *** cure period set forth in Section 10.1
         below.

6.5      If Berkeley Lab grants a non-exclusive license to any other party upon
         royalty rates more favorable than those of this Agreement after
         reducing this license to a non-exclusive license, then ***
                                                     ***
                                                     ***
                           ***

6.6      Digirad and Berkeley Lab by mutual written consent may amend or extend
         the requirements of Sections 6.4.1-6.4.2 at the written request of
         Digirad in response to legitimate business reasons.

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                         7. PROGRESS AND ROYALTY REPORTS

7.1      Beginning June 1, 1999 and *** thereafter, Digirad shall submit to
         Berkeley Lab a progress report covering Digirad's activities related to
         the development and testing of all Licensed Products and the obtaining
         of the governmental approvals necessary for marketing. Digirad shall
         make these progress reports for each Licensed Product until the first
         commercial sale of that Licensed Product occurs anywhere in the world.

7.2      The progress reports Digirad submits under Section 7.1 must include,
         but not be limited to, the following topics:

         7.2.1    summary of work completed related to the requirements of
                  Section 6.4;

         7.2.2    key scientific discoveries;

         7.2.3    summary of work in progress;

         7.2.4    current schedule of anticipated milestones;

         7.2.5    market plans for introduction of Licensed Products; and

         7.2.6    number of full-time equivalent (FTEs) employees or agents
                  working on the development of Licensed Products.

7.3      Digirad shall also report to Berkeley Lab in its immediately subsequent
         royalty report on the date of first commercial sale of each Licensed
         Product in the U.S. and in each other country.

7.4      After the first commercial sale of a Licensed Product anywhere in the
         world, Digirad shall make *** royalty reports to Berkeley Lab on or ***
         *** Each royalty report must cover the most recently completed *** and
         must show:

         7.4.1    the Selling Price of each type of Licensed Product sold by
                  Digirad;

         7.4.2    the number of each type of Licensed Product sold;

         7.4.3    the royalties, in U.S. dollars, payable under this Agreement
                  on those sales;

         7.4.4    the exchange rates used in calculating the royalty due;

         7.4.5    the royalties on government sales that otherwise would have
                  been due under Section 5.10; and

         7.4.6    for each sublicense, if any:

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                  7.4.6.1    the sublicensee;

                  7.4.6.2  the number, description, and aggregate Selling Prices
                           of Licensed Products that the sublicensee sold or
                           otherwise disposed of;

                  7.4.6.3  the exchange rates used in calculating the royalties
                           due Berkeley Lab from the sublicensee's sales.

7.5      If no sales of Licensed Products have been made during any reporting
         period, Digirad shall make a statement to this effect.

                              8. BOOKS AND RECORDS

8.1      Digirad shall keep books and records accurately showing all Licensed
         Products manufactured, used, or sold under the terms of this Agreement.
         Digirad shall preserve those books and records for at least *** from
         the date of the royalty payment to which they pertain and shall open
         them to inspection by representatives or agents of Berkeley Lab ***
                                                     ***
           ***

8.2      Berkeley Lab shall bear the fees and expenses of Berkeley Lab's
         representatives performing the examination of the books and records.
         But if the representatives discover an error resulting in a deficiency
         in royalties of more than *** of the total royalties due for any year,
         then Digirad shall bear the fees and expenses of these representatives
         and the difference between the earned royalties and the reported
         royalties (which shall be subject to the provisions of Article 20 (LATE
         PAYMENTS)).

                            9. LIFE OF THE AGREEMENT

9.1      Unless otherwise terminated by operation of law or by acts of the
         parties in accordance with the terms of this Agreement, this Agreement
         is in force from the Effective Date and expires concurrently with the
         last-to-expire Licensed Patent.

9.2      Any termination of this Agreement shall not affect the rights and
         obligations set forth in the following Articles:

                  Article 8         Books and Records

                  Article 12        Disposition of Licensed Products on Hand 
                                    upon Termination

                  Article 13        Use of Names and Trademarks and 
                                    Nondisclosure of Agreement

                  Article 14        Limited Warranty

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                  Article 19        Indemnification

                  Article 25        Export Control Laws

9.3      Termination does not affect in any manner any rights of Berkeley Lab or
         Digirad arising under this Agreement before the termination.

                         10. TERMINATION BY BERKELEY LAB

10.1     If Digirad violates or fails to perform any material term of this
         Agreement, then Berkeley Lab may give written notice of such default
         ("Default Notice") to Digirad. If Digirad fails to cure that default
         and provide Berkeley Lab with reasonable evidence of the cure within
         *** of the Default Notice, Berkeley Lab may terminate this Agreement
         and the licenses granted by a second written notice ("Termination
         Notice") to Digirad. If Berkeley Lab sends a Termination Notice to
         Digirad, this Agreement automatically terminates on the effective date
         of the Termination Notice.

                           11. TERMINATION BY DIGIRAD

11.1     Digirad at any time may terminate this Agreement in whole or as to any
         portion of Licensed Patents by giving written notice to Berkeley Lab.
         Digirad's termination of this Agreement will be effective *** after its
         notice. If that termination is without cause within *** years of the
         Effective Date, Digirad shall ***
                                            ***
                  ***

          12. DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION

12.1     Within *** of termination of this Agreement for any reason, Digirad
         shall provide Berkeley Lab with a written inventory of all Licensed
         Products in process of manufacture or in stock. Digirad shall make
         diligent efforts to dispose of those Licensed Products within *** of
         termination. The sale of any Licensed Product within *** is subject to
         the terms of this Agreement. Digirad shall cease sales of *** 
         *** after termination.

         13. USE OF NAMES AND TRADEMARKS AND NONDISCLOSURE OF AGREEMENT

13.1     In accordance with California Education Code Section 92000, Digirad
         shall not use in advertising, publicity or other promotional activities
         any name, trade name, trademark, or other designation of the University
         of California, nor shall Digirad so use "Berkeley Lab" (including any
         contraction, abbreviation, or simulation of any of the foregoing)
         without 

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         Berkeley Lab's prior written consent. As the sole exception to the
         above prohibition, Digirad shall give appropriate credit to the
         inventor(s) and Berkeley Lab at scientific symposia, and in technical
         publications in scientific journals where the licensed technology is
         referenced. Berkeley Lab shall not use in advertising, publicity or
         other promotional activities any name, trade name, or other designation
         of Digirad without its prior written consent except as set forth in
         Section 13.2 below.

13.2     Neither party may disclose the terms or existence of this Agreement to
         a third patty without express written permission of the other party,
         except when required under either the California Public Records Act or
         other applicable law or court order or by Berkeley Lab's contracts with
         the DOE or any other Federal or State entity. Notwithstanding the
         foregoing, Berkeley Lab may disclose the existence of this Agreement
         and the extent of the grant in Article 3, but shall not otherwise
         disclose the terms of this Agreement, except to the DOE.

13.3     The Proprietary Information Exchange Agreement between Digirad and the
         Regents of the University of California as Managers of the Lawrence
         Berkeley National Laboratory, as attached hereto as Exhibit A, shall
         remain in effect through the term outlined in the Proprietary
         Information Exchange Agreement.

                              14. LIMITED WARRANTY

14.1     Berkeley Lab warrants to Digirad that it has the lawful right to grant
         this license.

14.2     Except as set forth above, this license and the associated Invention(s)
         are provided WITHOUT WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
         PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED. BERKELEY
         LAB MAKES NO REPRESENTATION OR WARRANTY THAT LICENSED PRODUCTS WILL NOT
         INFRINGE ANY PATENT OR OTHER PROPRIETARY RIGHT.

14.3     IN NO EVENT WILL BERKELEY LAB OR DIGIRAD BE LIABLE FOR ANY INCIDENTAL,
         SPECIAL OR CONSEQUENTIAL DAMAGES INCURRED BY THE OTHER PARTY HERETO
         RESULTING FROM EXERCISE OF THIS LICENSE OR THE USE OF THE INVENTION(S)
         OR LICENSED PRODUCTS UNDER THIS AGREEMENT. THIS PROVISION, 14.3, DOES
         NOT APPLY TO INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES AWARDED IN A
         JUDGEMENT FOR A THIRD PARTY AGAINST A PARTY OR THE PARTIES HERETO.

14.4     Except as set forth above, nothing in this Agreement may be construed
         as:

         14.4.1   a warranty or representation by Berkeley Lab as to the
                  validity or scope of any of Berkeley Lab's rights in Licensed
                  Patents;


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                                                                       L-99-1261


         14.4.2   a warranty or representation that anything made, used, sold or
                  otherwise disposed of under any license granted in this
                  Agreement is or will be free from infringement of patents of
                  third parties;

         14.4.3   an obligation to bring or prosecute actions or suits against
                  third parties for patent infringement, except as specifically
                  provided for in Article 16 (Patent Infringement);

         14.4.4   a grant by implication, estoppel or otherwise of any license
                  or rights under any patents of Berkeley Lab other than
                  Licensed Patents, regardless of whether such patents are
                  dominant or subordinate to Licensed Patents; or

         14.4.5   an obligation to furnish any know-how not provided in Licensed
                  Patents.

                     15. PATENT PROSECUTION AND MAINTENANCE

15.1     Berkeley Lab shall diligently maintain the United States patents for
         Licensed Patents (including any future patent rights provided for in
         Section 2.4) using counsel of its choice that is reasonably acceptable
         to Digirad. Berkeley Lab shall bear the cost of pre-paring, filing,
         prosecuting and maintaining any United States patent covered by this
         Agreement.

15.2     Berkeley Lab has filed foreign patent applications corresponding to the
         PCT Application referred to in Section 2.4 (namely US 97/20173) as 
         follows:

(a)    European Patent Office (EPO), designating

(i)    ***

(ii)   ***

(iii)  ***

(iv)   ***

(v)    ***

(vi)   ***

(vii)  ***

(viii) ***

(ix)   ***

(x)    ***

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(xi)   ***

(xii)  ***

(b)    ***

Berkeley Lab has no obligation to take action to file or prosecute foreign
patent applications on behalf of Digirad until the following occurs:

         15.2.1   (With the exception of the three countries listed in 15.3
                  below) Digirad makes that request in writing to Berkeley Lab
                  within *** after the Effective Date. The absence of the
                  required notice from Digirad to Berkeley Lab acts as an
                  election not to proceed on protecting foreign rights.

         15.2.2   That notice also identifies the countries Digirad desires.

         15.2.3   Digirad pays Berkeley Lab the foreign license fee as set forth
                  in paragraph 15.4

15.3     Digirad agrees to pay Berkeley Lab *** , upon the day of execution of
         this Agreement, for the foreign patent counterparts to the U.S.
         application for the following countries: ***

15.4     The foreign license fee for each foreign counterpart in addition to
         those listed in Section 15.3 to a United States patent application
         shall be *** for each national filing or for each country designated in
         the PCT filing for entry into the national phase, European Patent
         Convention ("EPC") filing, or similar regional filing.

15.5     Berkeley Lab shall bear the expense of preparing, filing, prosecuting
         and securing all foreign patent applications that Berkeley Lab files at
         Digirad's request (pursuant to 15.2 above). Digirad shall bear the
         expense of ***
                                                     ***
                                                     ***

15.6     Berkeley Lab shall promptly provide Digirad with copies of all relevant
         documentation so that Digirad is informed of the continuing prosecution
         of Licensed Patents and any foreign patent applications Berkeley Lab
         files under Section 15.2. Additionally, Berkeley Lab shall provide
         Digirad a *** *** summarizing the status of the Licensed Patents and
         any foreign patent applications Berkeley Lab files under Section 15.2.
         Digirad shall keep this documentation confidential. Berkeley Lab shall
         use all reasonable efforts to amend any patent application to include
         claims reasonably requested by Digirad to protect the products
         contemplated to be sold under this Agreement.

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                             16. PATENT INFRINGEMENT

16.1     If either party learns of the substantial infringement of any of
         Licensed Patents, the party shall so inform the other party in writing
         and shall provide the other party with reasonable evidence of the
         infringement. During the period and in a jurisdiction where Digirad has
         exclusive rights under this Agreement, ***
                                                     ***
                                                     ***        Both parties 
         shall use their best efforts in cooperation with each other to
         terminate such infringement without litigation.

16.2                                                          ***
                                                              ***
                                                              ***

16.3                                                          ***
                                                              ***
                                                              ***

16.4                                                          ***
                                                              ***
                                                              ***

                                   17. WAIVER

17.1     The waiver of any breach of any term of this Agreement does not waive
         any other breach of that or any other term.

                                 18. ASSIGNMENT

18.1     This Agreement is binding upon and shall inure to the benefit of
         Berkeley Lab, its successors and assigns. Upon written notice to
         Berkeley Lab, Digirad may assign this Agreement to a Digirad wholly
         owned subsidiary or to a purchaser or acquirer of all or substantially
         all of the business or assets of Digirad. Any other attempt by Digirad
         to assign this Agreement is void unless Digirad obtains the prior
         written consent of Berkeley Lab. Berkeley Lab shall not unreasonably
         withhold or delay that consent.

                               19. INDEMNIFICATION

19.1     Digirad shall indemnify, hold harmless and defend Berkeley Lab and the
         U.S. Government and their officers, employees, and agents; the sponsors
         of the research that led to the Invention; and the inventors of the
         patents and patent applications in Licensed Patents against any and all
         claims, suits, losses, damage, costs, fees, and expenses resulting from
         or arising out of exercise of this license or any sublicense. Berkeley
         Lab shall promptly notify Digirad in writing of any claim or suit
         brought against Berkeley Lab in respect of which Berkeley Lab intends
         to invoke the provisions of this Article 19 

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         (INDEMNIFICATION).                          ***
                                                     ***
                                                     ***


19.2     Digirad, at its sole expense, shall insure its activities in connection
         with the work under this Agreement and obtain and keep in force
         Comprehensive or Commercial Form General Liability Insurance
         (contractual liability and products liability included) or equivalent
         program of self-insurance with limits as follows:

         19.2.1   Each Occurrence                                     $   ***
         19.2.2   Products/Completed Operations Aggregate             $   ***
         19.2.3   Personal and Advertising Injury                     $   ***
         19.2.4   General Aggregate (commercial form only)            $   ***

19.3     The coverages and limits referred to in this Article 19 do not in any
         way limit the liability of Digirad. Digirad shall furnish Berkeley Lab
         with certificates of insurance, including renewals, evidencing
         compliance with all requirements at least *** prior to the first
         commercial sale, use, practice or distribution of a Licensed Product.

         19.3.1   If such insurance is written on a claims-made form, coverage
                  shall provide for a retroactive date of placement on or before
                  the Effective Date.

         19.3.2   Digirad shall maintain the general liability insurance
                  specified during: (a) the period that the Licensed Product is
                  being commercially distributed or sold (other than for the
                  purpose of obtaining regulatory approvals) by Digirad or by a
                  sublicensee or agent of Digirad, and (b) a reasonable period
                  thereafter, but in no event less than five years.

19.4     The insurance coverage of Section 19.2 must:

         19.4.1   Provide for *** advance written notice to Berkeley Lab of any
                  modification of any such coverage and provide immediate notice
                  of cancellation of such coverage.

         19.4.2   Indicate that DOE and "The Regents of the University of
                  California" are endorsed as additional insureds, but only with
                  respect to the subject matter of this Agreement.

         19.4.3   Include a provision that the coverages are primary and do not
                  participate with, nor are excess over, any valid and
                  collectible insurance or program of self-insurance carried or
                  maintained by Berkeley Lab.

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                                20. LATE PAYMENTS

20.1     Excepting issues arising from Section 26.1, if Digirad does not make a
         payment to Berkeley Lab when due, Digirad shall pay to Berkeley Lab ***
                                                     ***
                                                     ***
                  ***

                                   21. NOTICES

21.1     Any payment, notice or other communication this Agreement requires or
         permits either party to give must be in writing to the appropriate
         address given below, or to such other address as one party designates
         by written notice to the other party. The parties deem payment, notice
         or other communication to have been properly given and to be effective
         (a) on the date of delivery if delivered in person; (b) on the fourth
         day after mailing if mailed by first-class mail, postage paid; (c) on
         the second day after delivery to an overnight courier service such as
         Federal Express, if sent by such a service; or (d) upon confirmed
         transmission by telecopier. The parties addresses are as follows:

         For payments to Berkeley Lab:       For all other notices to 
                                             Berkeley Lab:

         Ernest Orlando Lawrence             Ernest Orlando Lawrence
         Berkeley National Laboratory        Berkeley National Laboratory
         Accounting/Financial Management     Technology Transfer Department
         P.O. Box 528                        Mailstop 90-1070
         Berkeley, California 94701          One Cyclotron Road
         Attention: Licensing Accountant     Berkeley, California 94720
         Fax: 510/486-5995                   Attention: Licensing Manager
         Telephone: 510/486-7113             Fax: 510/486-6457
                                             Telephone: 510/486-6467

         In the case of Digirad:

         Digirad Corporation
         9350 Trade Place
         San Diego, California 92126-6334
         Attention:  President
         Fax:  619-549-7714
         Telephone:  619-578-5300

                              22. U.S. MANUFACTURE

22.1     Digirad shall have Licensed Products produced for sale in the United
         States manufactured substantially in the United States so long as
         Digirad has current exclusive rights in the Field of Use.

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                               23. PATENT MARKING

23.1     Digirad shall mark all Licensed Products made, used or sold under this
         Agreement, or their containers, in accordance with the applicable
         patent marking laws.

                     24. GOVERNMENT APPROVAL OR REGISTRATION

24.1     If the law of any nation requires that any governmental agency either
         approve or register this Agreement or any associated transaction,
         Digirad shall assume all legal obligations to do so. Digirad shall
         notify Berkeley Lab if it becomes aware that this Agreement is subject
         to a U.S. or foreign government reporting or approval requirement.
         Digirad shall make all necessary filings and pay all costs, including
         fees, penalties, and all other costs associated with such reporting or
         approval process. Berkeley Lab shall fully cooperate with Digirad, to
         the extent it is able to do so within the law and established Berkeley
         Lab policy, to provide documentation and testimony to obtain such
         approval or registration, at Digirad's sole expense.

                             25. EXPORT CONTROL LAWS

25.1     Digirad shall observe all applicable United States and foreign laws and
         regulations with respect to the transfer of Licensed Products and
         related technical data, including, with-out limitation, the
         International Traffic in Arms Regulations (ITAR) and the Export
         Administration Regulations.

                                26. FORCE MAJEURE

26.1     If a party's performance required under this Agreement is rendered
         impossible or unfeasible due to any catastrophes or other major events
         beyond its reasonable control, including, without limitation, the
         following, the parties are excused from performance, war, riot, and
         insurrection; laws, proclamations, edicts, ordinances or regulations;
         strikes, lockouts or other serious labor disputes; and floods, fires,
         explosions, or other natural disasters. When such events abate, the
         parties' respective obligations under this Agreement must resume.

                                27. MISCELLANEOUS

27.1     The headings of the several sections are inserted for convenience of
         reference only and are not intended to be a part of or to affect the
         meaning or interpretation of this Agreement.

27.2     This Agreement is not binding upon the parties until it is signed below
         on behalf of each party.

27.3     No amendment or modification hereof shall be valid or binding upon the
         parties unless made in writing and signed on behalf of each party.


                                    16 of 17
<Page>


                                                                       L-99-1261


27.4     This Agreement embodies the entire and final understanding of the
         parties on this subject. It supersedes any previous representations,
         agreements, or understandings, whether oral or written.

27.5     If a court of competent jurisdiction holds any provision of this
         Agreement invalid, illegal or unenforceable in any respect, this
         Agreement must be construed as if that invalid or illegal or
         unenforceable provision is severed from the Agreement, provided,
         however, that the parties shall negotiate in good faith substitute
         enforceable provisions that most nearly effect the parties' intent in
         entering into this Agreement.

27.6     This Agreement must be interpreted under California law without regard
         to principles of conflicts of laws.

Berkeley Lab and Digirad execute this Agreement in duplicate originals through
their duly authorized respective officers in one or more counterparts, that
taken together, are but one instrument.

THE REGENTS OF THE UNIVERSITY               DIGIRAD CORPORATION
OF CALIFORNIA, THROUGH THE
ERNEST ORLANDO LAWRENCE
BERKELEY NATIONAL LABORATORY

By    /S/ PIERMARIA T. ODDONE             By       /S/ SCOTT HUENNEKENS   
   -----------------------------             ---------------------------------
                  (signature)                          (signature)

By      PIERMARIA T.  ODDONE              By         SCOTT HUENNEKENS          
   ------------------------------            ---------------------------------
            (Please Print)                            (Please Print)

Title    DEPUTY DIRECTOR                  Title    PERS. & COO                 
      ---------------------------                -----------------------------

Date     MAY 16, 1999                     Date     5-19, 1999       
     ----------------------------              -------------------------------




Approved as to form


         /S/ GLENN R. WOODS                                   
----------------------------------------
GLENN R. WOODS
LAWRENCE BERKELEY NATIONAL LABORATORY


                                    17 of 17
<Page>

                         Exhibit A to License Agreement

                   PROPRIETARY INFORMATION EXCHANGE AGREEMENT

         This AGREEMENT made and entered into as of this 23rd day of April 1,
1999 by and between DIGIRAD, a Delaware corporation, whose address is 9350 Trade
Place, San Diego, California 92126-6334 and The Regents of the University of
California as Managers of the Lawrence Berkeley National Laboratory, whose
address is 1 Cyclotron Road, Berkeley, CA 94720.

         WHEREAS, the parties hereto are undertaking negotiations towards the
development of a license agreement between them, and

         WHEREAS, in furtherance of such license, each undersigned party (the
"Receiving Party") understands that the other party (the "Disclosing Party") has
disclosed or may disclose information relating to the Disclosing Party's
business and/or intellectual property (including, without limitation, chemical
formulas, computer programs, software, technical drawings, names and expertise
of employees and consultants, know-how, formulas processes, ideas, inventions
(whether patentable or not), schematics and other technical business, financial,
customer and product development plans, forecasts, strategies and information,
and any and all information, technical or otherwise related to describing
Digirad's ***
                                            ***
                                            ***
sub-assemblies and related assemblies for use in medical imaging systems and
other applications), information which to the extent previously, presently, or
subsequently disclosed to the Receiving Party is hereinafter referred to as
"Proprietary Information" of the Disclosing Party.

         NOW, THEREFORE, in consideration of the parties' discussions and any
access the Receiving Party may have to Proprietary Information of the Disclosing
Party, the parties agree that any information received by one party from the
other shall be governed by the following terms and conditions:

Definition:

         "Proprietary Information" shall not include information which:

         (a)      was rightfully in possession of or known to the Receiving
Party prior to receiving it from the Disclosing Party; or

         (b)      is or becomes part of the public knowledge or literature by
acts other than those of the Receiving Party and without fault of the receiving
Party; or

         (c)      was rightfully disclosed to the Receiving Party by a third
party provided the Receiving Party complies with restrictions imposed by the
third party; or

         (d)      is transmitted after the expiration of this Agreement; or

*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.


                                     1 of 4
<Page>

         (e)      is disclosed by the Receiving Party under a valid order
created by a court or government agency, provided that the Receiving Party
provides prior written notice to the Disclosing Party of such obligation and the
opportunity to oppose such disclosure.

         (f)      the Receiving Party develops independently, subsequent to
receipt of Proprietary Information and for which Receiving Party can demonstrate
by written records that independent development occurred without knowledge or
use of Proprietary Information. 

HANDLING OF PROPRIETARY INFORMATION:

         The Receiving Party agrees to (i) hold the Disclosing Party's
Proprietary Information in strict confidence as a fiduciary and to take
reasonable precautions to protect such Proprietary Information and (ii) handle
the Proprietary Information in the same manner that it handles its own
proprietary information of like importance, but with at least reasonable degree
of care, for a period of five (5) years after the date of disclosure.

LIMITATION ON DISCLOSURE:

         The Receiving Party shall not disclose, in whole or in part, such
Proprietary Information to any third party without the prior written consent of
the Disclosing Party for the period that such information is to be handled as
proprietary. The Receiving Party may disclose Proprietary Information only to
those of its employees who would require knowledge of such Proprietary
Information for the purposes contemplated by this Agreement and who is similarly
bound in writing.

LIMITATION OF USE:

         The Receiving Party shall make no use, in whole or in part, of any such
Proprietary Information other than in furtherance of the purpose of this
Agreement without the prior written consent of the Disclosing Party.

         If the purpose of the information exchange is the preparation of a
proposal to the United States Government, Proprietary Information of either
party may be incorporated into the proposal to the United States Government,
provided that the proposal document bears the restrictive legend contained in
Federal Acquisition Regulation 52.215-12 or a substantially similar successor
provision.

TERM:

         This Agreement shall expire one (1) year from the date recited in the
first paragraph of this Agreement. With the exception of information disclosed
in accordance with the provisions of the License Agreement for Detector between
Digirad Corporation and the Regents of the University of California through the
Ernest Orlando Lawrence Berkeley Laboratory, immediately upon a request by the
Disclosing Party at any time (which will be effective if actually received or
three days after mailed first class postage prepaid to the Receiving Party's
address herein), the Receiving Party will turn over to the Disclosing Party all
Proprietary Information of the Disclosing Party and all documents or media
containing any such Proprietary Information and any and all copies or extracts
thereof. The Receiving Party understands that 


                                     2 of 4
<Page>

nothing herein (i) requires the disclosure of any Proprietary Information of the
Disclosing Party, which shall be disclosed if at all solely at the option of the
Disclosing Party (in particular, but without limitation, any disclosure is
subject to compliance with expert control laws and regulations), or (ii)
requires the Disclosing Party to proceed with any proposed transaction or
relationship in connection with which Proprietary Information may be disclosed.
The party's obligations with respect to Proprietary Information disclosed to it
prior to expiration/termination shall survive expiration/termination.

RELATIONSHIP OF PARTIES:

         This Agreement is intended to provide only for the handling and
protection of Proprietary Information exchanged or disclosed hereunder, and
shall not be construed as a Teaming, Joint Venture, Partnership, or other
similar arrangement. Specifically, this Agreement shall not be construed in any
manner to be an obligation to enter into a contract, nor shall it result in any
claim whatsoever for reimbursement of costs.

NO LICENSE:

         Neither the execution of this agreement nor the furnishing of any
Proprietary Information hereunder shall be construed as granting either
expressly, by implication, estoppel or otherwise, any license other than as
expressly set forth herein under any invention, patent, copyright, trade secret,
mask work right, or any other intellectual property right, now or hereafter
owned or controlled by the party furnishing same.

U.S.  GOVERNMENT REGULATIONS:

         A party receiving Proprietary Information shall comply with all
relevant United States Government regulations, including the International
Traffic in Arms Regulations and the Export Administration Act.

MISCELLANEOUS:

         Each party shall perform its respective obligations hereunder without
charge to the other.

         Except to the extent permitted by the License Agreement for Detector
between Digirad Corporation and the Regents of the University of California
through the Ernest Orlando Lawrence Berkeley Laboratory, neither party will
refer to this Agreement or use the other party's name in any form of publicity
or advertising directly or indirectly, without the prior written consent of the
party whose name is proposed for use.

         Except as to a sale of the business to which this Agreement relates or
transfer of the management of the Ernest Orlando Lawrence Berkley Laboratory,
the rights and obligations of each party under this Agreement may not be
assigned or transferred to any person, firm or corporation, without the express
prior written consent of the other party, which consent will not be unreasonably
withheld.

         Neither party makes any representations regarding the accuracy,
completeness, or freedom from defects of the information disclosed, or with
respect to infringement of the rights of others.


                                     3 of 4
<Page>

         The Receiving Party acknowledges and agrees that due to the unique
nature of the Disclosing Party's Proprietary Information, there may be no
adequate remedy at law for any breach of its obligations hereunder, that any
such breach may allow the Receiving Party or third parties to unfairly compete
with the Disclosing Party resulting in irreparable harm to the Disclosing Party,
and therefore, that upon any such breach or any threat thereof, the Disclosing
Party may be entitled to appropriate equitable relief in addition to whatever
remedies it might have at law. The Receiving Party will notify the Disclosing
Party in writing immediately upon the occurrence of any such unauthorized
release or other breach of which it is aware. In the event that any of the
provisions of this Agreement shall be held by a court or other tribunal of
competent jurisdiction to be illegal, invalid or unenforceable, such provisions
shall be limited or eliminated to the minimum extent necessary so that this
Agreement shall otherwise remain in full force and effect.

ENTIRE AGREEMENT:

         This Agreement represents the entire agreement of the parties
pertaining to the subject matter of the Agreement, and supersedes any and all
prior oral discussions and/or written correspondence or agreements between the
parties with respect thereto.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate original copies by their respective duly authorized
representatives.

DIGIRAD                                  The Regents of the University of 
                                         California Acting as Manager of the 
                                         Lawrence Berkeley Laboratory


By:                                      By:                              
    ------------------------------           -----------------------------

Name:                                    Name:                            
      ----------------------------             ---------------------------

Title:                                   Title:                           
       ---------------------------              --------------------------

Date:                                    Date:                            
      ----------------------------             ---------------------------


                                     4 of 4
<Page>


                                  AMENDMENT #1
                                       TO
                         LICENSE AGREEMENT FOR DETECTOR

This Amendment (the "Amendment"), effective as of the signing date of the last
party to sign below, is entered into by The Regents of the University of
California ("The Regents"), Department of Energy contract-operators of the
Ernest Orlando Lawrence Berkeley National Laboratory ("LBNL"), 1 Cyclotron Road,
Berkeley, CA 94720, (jointly, "Berkeley Lab"), and Digirad Corporation
("Digirad"), a Delaware corporation having its principal place of business at
9350 Trade Place, San Diego, CA 92126-6330.

         THE PARTIES ENTERED INTO A LICENSE AGREEMENT FOR DETECTOR, REFERENCE
         NUMBER L-90-1261 (THE "AGREEMENT"), EFFECTIVE DATE OF MAY 19, 1999. THE
         PARTIES NOW DESIRE TO AMEND THE AGREEMENT BY EXPANDING THE LICENSE TO
         INCLUDE A NON-EXCLUSIVE FIELD OF USE (AS DEFINED BELOW) PURSUANT TO THE
         TERMS AND CONDITIONS HEREIN. CAPITALIZED TERMS HEREIN SHALL HAVE THE
         MEANING AS SET FORTH IN THE AGREEMENT EXCEPT AS OTHERWISE DEFINED IN
         THIS AMENDMENT.


The parties agree as follows:

1.       Section 2.2 of the Agreement is hereby deleted in its entirety and
         replaced with the following:

         2.2      "Field of Use" and "Non-Exclusive Field of Use":

                  2.2.1    "Field of Use" means the development, production and
                           use of ***
                                                              ***
                                                              ***

                  2.2.2    "Non-Exclusive Field of Use" means the development,
                           production and use of ***
                                                              ***
                                                              ***

2.       Section 2.4 of the Agreement is hereby deleted in its entirety and
         replaced with the following:

         2.4      "Licensed Patents" means patent rights to any subject matter
                  claimed in or covered by any of the following:

                  2.4.1    US Patent Number ***
                                                              ***
                                                              ***

                  2.4.2    Any resulting patent issued in Germany or France
                           arising from European Patent Convention Application
                           ***

*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.


                                                                            pg 1
<Page>

                                                              ***
                                                              ***

                  2.4.3    Japan Patent Application  ***
                                                              ***
                                                              ***

                  2.4.4    with respect to Sections 2.4.1 to 2.4.3, any
                           division, reexamination, continuation,
                           continuation-in-part (excluding new matter contained
                           and claimed in that continuation-in-part), or of
                           which such application is a successor; any patents
                           issuing on any of the foregoing, and all renewals,
                           reissues and extensions thereof, or other equivalents
                           of a renewal, reissues, and extensions thereof.

3.       Section 3.1 of the Agreement is hereby deleted in its entirety and
         replaced with the following:

         3.1      Subject to the limitations set forth in this Agreement,
                  Berkeley Lab grants to Digirad:

                  3.1.1    a nontransferable (subject to Section 18.1), limited
                           (by the terms of Sections 3.2 and 3.7) worldwide
                           exclusive, royalty-bearing license, under Licensed
                           Patents, only in the Field of Use, to develop, make,
                           have made, use, practice, sell, have sold, and lease
                           the Licensed Products.

                  3.1.2    a nontransferable (subject to Section 18.1),
                           nonexclusive worldwide, royalty-bearing license,
                           under Licensed Patents, only within the Non-Exclusive
                           Field of Use, to develop, make, have made, use,
                           practice, sell, and lease the Licensed Products.

4.       Section 4.1 of the Agreement is hereby deleted in its entirety and
         replaced with the following:

         4.1      As consideration for the licenses granted hereunder:

                  4.1.1    within the Field of Use, Digirad shall pay Berkeley
                           Lab a license issue fee of ***
                                                              ***
                                                              ***

                  4.1.2    within the Non-Exclusive Field of Use, Digirad shall
                           pay Berkeley Lab a license issue fee of ***
                                                              ***
                                                              ***
                                    ***

*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.


                                                                            pg 2
<Page>

5.       Section 5.1 of the Agreement is hereby deleted in its entirety and
         replaced with the following:

         5.1      Digirad shall pay to Berkeley Lab an earned royalty of:

                  5.1.1    *** of the Selling Price of each Licensed Product
                           Digirad sells within the Field of Use;

                  5.1.2    *** of the Selling Price of each Licensed
                           Product Digirad sells within the Non-Exclusive
                           Field of Use;

6.       Section 5.4 of the Agreement is hereby deleted in its entirety and
         replaced with the following:

         5.4      Digirad shall pay to Berkeley Lab by *** of each year the
                  difference between the earned royalties for that calendar year
                  Digirad has already paid to Berkeley Lab for the Field of Use
                  and Non-Exclusive Field of Use and the minimum annual royalty
                  set forth in the following schedules for the Field of Use and
                  Non-Exclusive Field of Use. Berkeley Lab shall credit that
                  minimum annual royalty paid against the earned royalty due and
                  owing for the calendar year in which Digirad made the minimum
                  payment; provided that the earned royalties and minimum annual
                  royalties for the Field of Use shall be treated separately
                  from and independent of the earned royalties and minimum
                  annual royalties for the Non-Exclusive Field of Use.


<Table>
<Caption>
      ------------------------------------ ----------------------------------- -------------------------------
                 CALENDAR YEAR             MINIMUM ANNUAL ROVALTY FOR FIELD     MINIMUM ANNUAL ROYALTY FOR
                                                         OF USE                  NON-EXCLUSIVE FIELD OF USE
      ------------------------------------ ----------------------------------- -------------------------------
      <S>                                  <C>                                  <C>
                     1999                                 ***                               N/A
      ------------------------------------ ----------------------------------- -------------------------------
                     2000                                 ***                               N/A
      ------------------------------------ ----------------------------------- -------------------------------
                     2001                                 ***                               ***
      ------------------------------------ ----------------------------------- -------------------------------
                     2002                                 ***                               ***
      ------------------------------------ ----------------------------------- -------------------------------
                     2003                                 ***                               ***
      ------------------------------------ ----------------------------------- -------------------------------
                     2004                                 ***                               ***
      ------------------------------------ ----------------------------------- -------------------------------
      2005 and each year thereafter                       ***                               ***
      ------------------------------------ ----------------------------------- -------------------------------
</Table>


7.       Sections 6.4 and 6.5 of the Agreement are hereby deleted in their
         entirety and replaced with the following:

         6.4      If Digirad is unable to perform any of the following, then
                  Berkeley Lab may either terminate this Agreement or reduce the
                  limited exclusive license within the Field of Use to a
                  non-exclusive license within the Field of Use:

                  6.4.1    With regard to the Field of Use:

*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.


                                                                            pg 3
<Page>

                           6.4.1.1          ***
                                            ***

                           6.4.1.2          ***
                                            ***

                  6.4.2    With regard to the Non-Exclusive Field of Use:

                           6.4.2.1                   ***

                           6.4.2.2                   ***

                           6.4.2.3                   ***

                           6.4.2.4                   ***

                           6.4.2.5                   ***

                           6.4.2.6                   ***
                                                     ***

                  It is the understanding of the parties hereto that any
                  termination of the Agreement or reduction of this license to a
                  non-exclusive license as a result of Digirad's failure to meet
                  the specifications of Section 6.4 shall be subject to the ***
                  day cure period set forth in Section 10.1 below.

         6.5      If Berkeley Lab grants a non-exclusive license to any other
                  party within the Field of Use upon royalty rates more
                  favorable than those of this Agreement after reducing the this
                  license within the Field of Use to a non-exclusive license
                  within the Field of Use, then ***
                                                                       ***
                                                                       ***
                                            ***

8.       The reporting obligations of Section 7 shall apply to both the Field of
         Use and Non-Exclusive Field of Use, separately and independently.
         Beginning *** thereafter, Digirad shall submit to Berkeley Lab a
         progress reports covering Digirad's activities related to the
         development and testing of all Licensed Products within the
         Non-Exclusive Field of Use and obtaining of the government approvals
         necessary for marketing as required pursuant to Section 7.1 ET. SEQ.

9.       Section 11.1 of the Agreement is hereby deleted in its entirety and
         replaced with the following:

         11.1     Digirad at any time may terminate this Agreement in whole or
                  as to any portion of Licensed Patents by giving written notice
                  to Berkeley Lab. Digirad's termination 

*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.


                                                                            pg 4
<Page>

                  of this Agreement will be effective *** days after its notice.
                  If that termination pertains to the Field of Use and is
                  without cause within *** years of the Effective Date, Digirad
                  shall *** 
                                            *** 

10.      Section 15.2 of the Agreement is hereby deleted in its entirety.

11.      Section 15.5 of the Agreement is hereby deleted in its entirety and
         replaced with the following:

         15.5                                    ***
                                                 ***
                                                 ***

12.      Section 15.6 of the Agreement is hereby deleted in its entirety and
         replaced with the following:

         15.6     Berkeley Lab shall promptly provide Digirad with copies of all
                  relevant documentation so that Digirad is informed of the
                  continuing prosecution of Licensed Patents. Additionally, upon
                  *** Berkeley Lab shall provide Digirad with a report
                  summarizing the status of the Licensed Patents. Digirad shall
                  keep this documentation confidential. Berkeley Lab shall use
                  all reasonable efforts to amend any patent application to
                  include claims reasonably requested by Digirad to protect the
                  products contemplated to be sold under this Agreement.

13.      Digirad acknowledges and agrees that Section 16 applies, other than the
         first sentence of Section 16.1, only to jurisdictions in which Digirad
         has exclusive rights under the Agreement. Thus, except for that first
         sentence of Section 16.1, the entirety of Section 16 will not apply to
         the Licensed Products insofar as they are within the Non-Exclusive
         Field of Use.

*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.


                                                                            pg 5
<Page>

14.      Except as specifically amended herein, the Agreement is hereby ratified
         and confirmed.

Berkeley Lab and Digirad execute this Agreement in duplicate originals through
their authorized respective officers in one or more counterparts that, taken
together, are but one instrument.


THE REGENTS OF THE UNIVERSITY                 DIGIRAD CORPORATION
OF CALIFORNIA, THROUGH THE     
ERNEST ORLANDO LAWRENCE 
BERKELEY NATIONAL LABORATORY

By   /S/ PIERMARIA ODDONE                     By    /S/ SCOTT HUENNEKENS
  -----------------------------------            ---------------------------
          (Signature)                                    (Signature)

By    PIERMARIA ODDONE                        By    SCOTT HUENNEKENS
  -----------------------------------             --------------------
Title    DEPUTY LABORATORY DIRECTOR           Title    PRESIDENT AND CEO
     --------------------------------                ---------------------
Date    5-24-01                               Date    5-11-01
    ---------------------------------               -----------


Approved as to form


/S/ GLENN R. WOODS                                   
-------------------------------------
GLENN R. WOODS
LAWRENCE BERKELEY NATIONAL LABORATORY


                                                                            pg 6


<Page>


                                                                    EXHIBIT 10.2


                           SOFTWARE LICENSE AGREEMENT

         This Software License Agreement ("Agreement") is entered into under
seal this 16th day of June, 1999 (the "Effective Date") by and between Segami
Corporation, a Maryland corporation having its principal offices at 12624 Golden
Oak Drive, Ellicott City MD 21042 ("Segami"), and Digirad Corporation
("Digirad"), a Delaware corporation having its principal offices at 9350 Trade
Place. San Diego CA 92126.

                             Statement of Intention

         A.       Segami is in the business of the development and sale of
                  software for gamma camera image acquisition, processing and
                  display. Segami's current software is called Mirage

         B.       Digirad desires to purchase software from Segami for the
                  purpose of gamma camera image acquisition, processing and
                  display which will interface with Digirad's solid state gamma
                  camera.


         C.       Digirad desires to package the Mirage software and Digirad's
                  hardware for resale as a single product, identifiable only as
                  a Digirad product.

         In consideration of the mutual promises and covenants herein contained,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
under seal as follows:

         1.       DEFINITIONS. For the purposes of this Agreement, the following
terms, when
 used herein, have the following meaning.

"Base Software"-The existing Mirage software described in EXHIBIT D hereto in
object and executable code forms, and all updates, enhancements, revisions,
modifications, modules and or sub-modules thereto and all permitted copies,
except that Base Software does not include the Interface Development.

"Interface Development"-The new code written and modifications made to the Base
Software which will allow use of the Base Software with Digirad's current
hardware, in object and executable code forms, and all updates, enhancements,
revisions, modifications, modules and or sub-modules thereto and all permitted
copies.

"Product" - Digirad's solid state gamma camera bundled together with the Base
Software and Interface Development.

         2.       LICENSE TO DIGIRAD. Subject to all the terms of this
Agreement, Segami grants to Digirad a nonexclusive worldwide, fully paid-up
license:

         (a)      to sublicense the Base Software to end-users only in
connection with the sale and use of the Products; any such sublicense shall be
pursuant to a sublicense agreement for Segami's


                                  Page 1 of 10

<Page>


benefit that contains applicable similar restrictions and obligations imposed on
Digirad hereunder.

         (b)      to use, adopt, reproduce, display, perform, test, demonstrate
and distribute the Base Software as necessary to market, sale and distribute the
Products.

         (c)      sublicense to third parties the distribution rights for the
Products and Base Software; any such sublicense shall be pursuant to a
sublicense agreement for Segami 's benefit that contains applicable similar
restrictions and obligations imposed on Digirad hereunder.

The balance of this Section 2 notwithstanding, the license granted to Digirad
shall not include the right to sublicense, sell or distribute the Base Software
independently and separate from the Product, with the understanding that Digirad
may demonstrate the Base Software or distribute demonstration models of the Base
Software, limited in function, for use on systems independent from the Product.

         3.       USE/LICENSE FEES.

                  3.1      USE. Segami hereby grants Digirad the right to
package and bundle the Base Software with the Product, the Interface Development
and Digirad hardware for sale to end-users by Digirad or its subdistributors.

                  3.2      LICENSE FEES. Digirad shall pay a License Fee (the
"License Fee") to Segami, in accordance with the attached Exhibit A, for each
copy of the Base Software distributed to any end-user, unless otherwise agreed
upon in writing by Segami. Payment of the License Fee shall be made by Digirad
and tendered to Segami at the sooner of *** days after customer payment or ***
days after customer installation. Digirad will receive a reasonable number of
demonstration versions of the Base Software including the dongle keys ("Keys")
for using such versions ("Demo Versions") to be used for customer demonstrations
and/or Digirad roadshows (not for sale to customers). Segami shall deliver the
Demo Versions within *** days upon written request from Digirad.

                  3.3      AUDIT. Segami shall have the right to audit the
books, financial accounts and documents of Digirad *** in each calendar year for
which this contract is in force, to verify the number of copies of the Base
Software disseminated by Digirad. Segami shall employ an independent Certified
Public Accountant at its own cost and expense for such audit. Segami shall give
Digirad a minimum of *** days prior written notification of the audit. Digirad
shall not unreasonably withhold its cooperation in the audit.

         4.       INTERFACE DEVELOPMENT.

                  4.1      DEVELOPMENT. Segami agrees to undertake and complete
the code design, programming and testing of the Interface Development. Interface
Development shall be in accordance with the specifications on the attached
Exhibit B (the "Specifications") and the delivery schedule attached hereto as
Exhibit C (the "Delivery Schedule"). Segami shall be


*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

                                  Page 2 of 10
<Page>


responsible for obtaining and maintaining operational status and approvals of
the Base Software and Interface Development (and any new versions or
improvements thereto) under FDA, CE and other regulatory authorities or
agencies. Segami agrees that its conduct in performing its obligations under
this Agreement shall conform in all material respects to all applicable laws and
regulations of the U.S. and foreign governments (and political subdivisions
thereof).

                  4.2      ACCEPTANCE. Digirad will, by written notice, accept
or reject any portion of the Interface Development delivered (individually, the
"Deliverable(s)") within *** days after receipt. Failure to give notice of
acceptance or rejection within that period will constitute acceptance. Digirad
may reject any Deliverable only if the Deliverable fails to meet the
Specifications or, at the fault or failing of that Deliverable alone, the
Product cannot operate in a commercially reasonable manner. If Digirad properly
rejects the Deliverable, Segami will correct the failures properly specified in
the rejection notice within *** days of the rejection notice. When it believes
that it has made the necessary corrections, Segami will again deliver the
Deliverable to Digirad and the acceptance/rejection/correction provisions above
shall be reapplied until the Deliverable is accepted; provided, however, that
upon the *** or any subsequent rejection or if the corrections are not made
within *** days of the initial rejection, Digirad may at its option terminate
this Agreement by immediate written notice unless the Deliverable is accepted
during the notice period.

         5.       COMPENSATION FOR INTERFACE DEVELOPMENT. Digirad shall make
payments to Segami in accordance with the Delivery Schedule. Each payment will
be in U.S. dollars from the United States and will be made no later than ***
days from the occurrence of the event specified in the Delivery Schedule for
which payment is due.

         6.       OWNERSHIP RIGHTS. As between the parties Segami shall retain
all right title and interest, including all patent, copyright, trade secret,
trademark, mask work or other rights, in the Base Software, or any other idea or
product conceived or reduced to form by Segami, its agents or assigns as of the
Effective Date. Digirad shall have all right, title and interest, in the
Interface Development. The parties hereby make any assignments necessary to
accomplish the foregoing ownership provisions.

         7.       SUPPORT/MAINTENANCE.

                  7.1      SUPPORT.  During the term of this Agreement:

                           (1)      Segami shall use its best efforts to respond
within *** days after receipt of written notice of verifiable defects, and
propose a plan for prompt and effective remedy, and shall provide general
guidance concerning the Base Software or Interface Development. Defects shall be
reported in writing via electronic mail or facsimile to Segami at the
telephone/email numbers provided by Segami to Digirad from time to time.

                           (2)      Segami shall inform Digirad promptly of any
changes in the Base Software or delivery schedules.


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                                  Page 3 of 10
<Page>


                           (3)      Subject to the other terms and conditions of
this Agreement, Segami shall use its reasonable best efforts to promptly fill
Digirad's orders for Keys. Promptly following the execution of this Agreement,
Segami shall place *** Keys in escrow. If Segami materially fails to provide a
sufficient number of Keys to Digirad for delivery of Products to end-users,
after *** days written notice to Segami, Digirad shall be entitled to receive
from escrow any or all of the Keys. If Segami fails to provide a sufficient
number of Keys to Digirad for delivery of Products to end-users, after *** days
written notice to Segami, Digirad shall be entitled to a fully executed purchase
order from Segami to the Key manufacturer ("Escrow Materials") authorizing the
Key manufacturer to provide directly to Digirad those Keys reasonably necessary,
in Digirad's sole discretion, for Digirad to sell and install Product. In
support of the foregoing and promptly after execution of this Agreement, Segami
will place in escrow (pursuant to the terms of an escrow agreement in form
mutually acceptable to the parties hereto) the Escrow Materials as they exist at
the date of the Agreement. Segami will update the escrow with any new or
modified Escrow Materials and Keys promptly as it becomes necessary and will
notify Digirad when it does so. *** ***

                           (4)      Segami agrees to provide *** standard
training *** for Digirad personnel. *** shall be given at Digirad's main office
on a schedule reasonably acceptable to Segami but commencing no later than ***
days after Digirad's written request. *** 
                                      ***
***

                           (5)      Segami shall provide free technical support
to Digirad personnel up to *** during the first year, and *** per year after
that. This does not include time spent on developments set forth in Section 4 or
Section 7.1(1). Segami shall provide Digirad with all the user's documentation
in its possession.

                  7.2      MAINTENANCE RELEASES. In the exercise of its sole
discretion and from time to time, Segami may develop and make available
maintenance release for the Base Software at no cost to Digirad. Such
maintenance release shall be patches for the purpose of correcting any
deficiencies in the Base Software which may become apparent to Digirad and
Segami after successful delivery of the Interface Development.

                  7.3      ENHANCEMENTS/UPGRADES. In the exercise of its sole
discretion and from time to time, Segami may develop and make available for sale
through Digirad to end-users, and at an additional license fee to Segami, to be
negotiated in good faith by the Parties, substantially upgraded versions of the
Base Software which incorporate significant functional changes or additions, or
substantially improved performance.

         8.       CONFIDENTIALITY. Each party agrees that all code, inventions
algorithms, know-how and ideas and all other business, technical and financial
information they obtain from the other are confidential information and property
of the disclosing party ("Confidential Information"). Each party shall use
Confidential Information of the other party which is disclosed to it only for
the purposes of this Agreement and shall not disclose such Confidential


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                                  Page 4 of 10
<Page>


Information to-any third party, without the other party's prior written consent,
other than to Segami's subcontractors, subdistributors and employees on a
need-to-know basis. Each party agrees to take measures to protect the
confidentiality of the other party's Confidential Information that, in the
aggregate, are no less protective than those measures it uses to protect the
confidentiality of its own Confidential Information, but at a minimum, each
party shall take reasonable steps to advise their employees, subcontractors and
subdistributors of the confidential nature of the Confidential Information and
of the prohibitions on copying or revealing such Confidential Information
contained herein. The parties each agree to require that the other party's
Confidential Information be kept in a reasonably secure location.
Notwithstanding anything to the contrary contained in this Agreement neither
party shall be obligated to treat as confidential, or otherwise be subject to
the restrictions on use, disclosure or treatment contained in this Agreement for
any information disclosed by the other party (the "Disclosing party") which: (1)
is rightfully known to the recipient prior to its disclosure by the Disclosing
Party; (2) is generally known or easily ascertainable by non-parties of ordinary
skill in computer process design or programming or in the business of the
client; (3) is released by the Disclosing Party to any other person, firm or
entity (including governmental agencies or bureaus) without restrictions; (4) is
independently developed by the recipient without any reliance on Confidential
Information; or (5) is or later becomes publicly available without violation of
this Agreement or may be lawfully obtained by a party from a non-party. Neither
party will be liable to the other for inadvertent or accidental -disclosure of
Confidential Information if the disclosure occurs notwithstanding the party's
exercise of the same level of protection and care that such party customarily
uses in safeguarding its own confidential information.

         Notwithstanding the foregoing, all Confidential Information developed
by Segami, including but not limited to the Interface Development, in connection
with this Agreement shall be deemed Confidential Information of Digirad
disclosed by Digirad to Segami and exceptions (1) and (4) above will not be
applicable thereto.


         9.       EXPORT CONTROL. Each party hereby agrees to comply with all
export laws and restrictions and regulations of the Department of Commerce or
other United States or foreign agency or authority, and not to export, or allow
the export or re-export of any proprietary information or software or any copy
or direct product thereof in violation of any such restrictions, laws or
regulations.

         10.      TERMINATION

                  10.1     TERMINATION BY DIGIRAD. Digirad may terminate this
Agreement if Segami is in material breach of, or default under, this Agreement
and such breach or default is not cured within *** days after Digirad delivers
written notice of such breach or default to Segami.

                  10.2     TERMINATION BY SEGAMI. Segami may terminate this
Agreement if Digirad is in material breach of or default under, this Agreement
and such breach or default is not cured within *** days after written notice to
Digirad. A material breach of and default


*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

                                  Page 5 of 10
<Page>


under, this Agreement by Digirad shall include, without limitation, the
occurrence of the failure of Digirad to pay any License Fee when due.

                  10.3     SURVIVAL. Sections 5-15 of this Agreement, any
accrued rights to payment, any licenses granted in this Agreement that are
expressly perpetual and any remedies for breach of this Agreement shall survive
termination.

         11.      LIMITATION OF LIABILITY.

                  (a)      Except under Section 8 and the indemnity provisions
of Section 12, neither party nor its affiliates shall, under any circumstances,
be liable to the other party or its affiliates for any claim based upon any
third party claim or for consequential, incidental, indirect, punitive,
exemplary or special damages of any nature whatsoever, or for any damages
arising out of or in connection with any malfunctions, delays, loss of data,
loss of profit, interruption of service or loss of business or anticipatory
profits, even if a party or its affiliates have been apprised of the likelihood
of such damages occurring. 

                  (b)      ***
                           *** 
                           ***

         12.      INDEMNIFICATION

                  (a)      The parties each agree to indemnify, defend and hold
harmless the other from and against any and all amounts, including legal fees
and other out-of-pocket expenses, payable under any judgment, verdict, court
order or settlement for death or bodily injury or the damage to or loss or
destruction of any real or tangible personal property to the extent arising out
of the indemnitor's negligence, gross negligence, or willful misconduct in the
performance of this Agreement.

                  (b)      Segami agrees to indemnify, defend and hold harmless
Digirad, its distributors and end-users from and against any and all amounts,
including legal fees and other out-of-pocket expenses, payable under any
judgment, verdict, court order or settlement to the extent resulting from any
third party allegation that the Base Software or the work performed by Segami
under this Agreement infringes such third party's intellectual property rights,
including, without limitation, patent, copyright or trade secret. Should
Digirad's use of work performed by Segami be determined to have infringed, or if
in Segami's and Digirad's reasonable judgment such use is likely to be
infringing, *** *** ***

                  (c)      Digirad agrees to indemnify, defend and hold harmless
Segami from and against any and all amounts payable under any judgment, verdict,
court order or settlement to the extent resulting from any affiliated third
party allegation that the work performed by Segami under this Agreement
infringes such third party's intellectual property rights to the extent
attributable to software, hardware, data, knowledge or services provided by
Digirad.


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    Confidential Treatment and filed separately with the Commission.

                                  Page 6 of 10
<Page>


                  (d)      The indemnities in this paragraph are contingent
upon: (1) the indemnified party promptly notifying the indemnifying party in
writing of any claim which may give rise to a claim for indemnification
hereunder; (2) the indemnifying party being allowed to control the defense and
settlement of such claim; and (3) the indemnified party cooperating with all
reasonable requests of the indemnifying party (at the indemnifying party'
expense) in defending or settling such claim. The indemnified party shall have
the right, at its option and expense, to participate in the defense of any
action, suitor proceeding relating to such a claim through a counsel of its own
choosing.

         13.      WARRANTIES. Segami warrants that it has and will obtain
agreements with its employees and contractors sufficient to allow it to provide
Digirad with the assignments and licenses to intellectual property rights
contemplated in this Agreement. Segami also warrants that the Base Software and
Interface Development and any part thereof shall meet the Specifications, and
perform in a commercially reasonable manner until the later of (i) *** years
from the final date of delivery on the Delivery Schedule and (ii) with respect
to each product containing the Base Software and/or Interface Development, ***
year from the date of installation of such product by Digirad or its distributor
to an end-user. If Digirad finds that the Products, or part thereof fail to meet
the above warranty, Segami shall, at its option, immediately repair or replace
the Base Software and/or Interface Development or part thereof at its costs and
expenses without prejudice to any other rights and remedies of Digirad under
this Agreement or applicable law. If a Deliverable is rejected, the warranty
will extend accordingly from any adjusted final delivery date. Except for
Section 14, notwithstanding anything to the contrary contained in this
Agreement, Segami makes no other warranties, express or implied, or whether
arising by operation of law, course of performance or dealing, custom, usage in
the trade or profession or otherwise including without limitation implied
warranties of merchantability and fitness for a particular purpose.

         14.      MILLENNIUM WARRANTY.

                  14.1     GENERAL, Other sections of this Agreement
notwithstanding, Segami represents and warrants that for a period of four (4)
years after the Effective Date, the Base Software and the Interface Development
will be able to accurately: (a) process any date-roll event with no adverse
impact on the functionality of the software including without limitation, the
producing of error(s) or abnormal interruption; (b) process date-data
calculations including, without limitation, computation, comparisons,
sequencing, sorts and extracts and return and display date-data in a consistent
manner regardless of the dates used in such date-data whether before, on,
during, or after January 1, 2000; (c) process any date-data computations that
can be expected from the software if used for its intended purpose, regardless
of the date in time on which the processes are actually performed and regardless
of the date-data input, whether before, on, during or after January 1, 2000; (d)
exchange date-data related information with other hardware, firmware or software
with which it interacts, provided that the interacting hardware, firmware or
software is itself capable of exchanging accurate date-data; (e) accept and
respond to four-digit year-date input in a manner that resolves any ambiguities
as to the century in a defined predetermined and appropriate manner; and (f)
store and display date-data in ways that are unambiguous as to the determination
of the century. No date-data shall cause such software to


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    Confidential Treatment and filed separately with the Commission.

                                  Page 7 of 10
<Page>


perform an abnormally ending routine or function within the processes or
generate incorrect values or invalid results. For purposes of the foregoing, a
date-rollover event is defined as any transaction between one calendar year and
the following calendar year including, without limitation, any time, date and
day-of-the-week progressions and any regularly scheduled leap events. Date-data
is defined as any data, formula, algorithm, process, input or output, which
includes, calculates or represents a date, day or time, a reference to a date,
day or time, or a representation of a date, day or time.

                  14.2     SPECIAL REMEDIES. In the event of any breach of the
warranties and covenants contained in this section, provided that such breach is
not cured by Segami within *** days following receipt of written notice of such
breach, in addition to other rights and remedies that may be available to
Digirad under this Agreement, Segami shall be responsible for: (a) any costs of
repairing, replacing and/or correcting the affected software; and (b) cover and
other similar damages that are incurred by Digirad as a result of Segami's
breach of this warranty.

         15.      MISCELLANEOUS

                  15.1     BINDING NATURE. This Agreement shall be binding upon
and shall inure to the benefit of the parties to this Agreement and their
respective successors and permitted assigns. Segami shall not have any right or
ability to assign, transfer, or sublicense any obligations or benefit under this
Agreement without the written consent of Digirad, except that Segami may assign
and transfer this Agreement and its rights and obligations hereunder to any
third party who succeeds to substantially all its business or assets.

                  15.2     ENTIRE AGREEMENT. This Agreement constitutes the
entire agreement between the parties and there are no representations,
warranties, covenants, or obligations except as set forth in this Agreement.
This Agreement supersedes all prior or contemporaneous agreements
understandings, negotiations and discussions, written or oral, of the parties to
this Agreement, relating to any transaction contemplated by this Agreement.

                  15.3     SEVERABILITY. Each provision of this Agreement shall
be considered separable and if for any reason any provision or provisions in
this Agreement are determined to be invalid arid contrary to any existing or
future law, that invalidity shall not impair the operation of this Agreement or
affect those portions of this Agreement which are valid.

                  15.4     ARBITRATION. If any dispute or controversy arises
among the parties to this Agreement concerning any provision of this Agreement,
that dispute or controversy shall be submitted for resolution to a board of
arbitration in *** *** *** Such arbitration shall be conducted pursuant to the
rules of the American Arbitration Association (the "AAA") or other governing
rules and *** *** ***


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                                  Page 8 of 10
<Page>


                  15.5     NO AGENCY. This Agreement shall not be deemed to
constitute the parties hereto as partners, joint venturers, nor shall either
patty hereto be deemed to be an agent of any nature, kind and description
whatsoever of the other.

                  15.6     JURISDICTION AND VENUE. This Agreement shall be
governed, enforced, performed and construed in accordance with the laws of the
State of *** *** Subject to the provisions of Section 15.4 hereof each of the
parties hereto hereby submits to the exclusive jurisdiction of the state and/or
federal courts located within the State of *** for any suit, hearing or other
legal proceeding of every nature, kind and description whatsoever in the event
of any dispute or controversy arising hereunder or relating hereto, or in the
event any ruling, finding or other legal determination is required or desired
hereunder.

                  15.7     ATTORNEYS FEES. In the event that legal proceedings
are commenced in connection with this Agreement or the transactions contemplated
hereby, the party or parties *** *** ***

                  15.8     AMBIGUITY. The parties acknowledge that each party
and its respective counsel have reviewed and revised this Agreement and that the
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of this Agreement or any amendments or exhibits, or schedules hereto.

                  15.9     EXHIBITS. The exhibits attached hereto and each
certificate, schedule, list summary or other document provided or delivered
pursuant to this Agreement or in connection with the transactions contemplated
hereby are incorporated herein by this reference and made a part hereof.

                  15.10    COUNTERPARTS. Provided that all parties hereto
execute a copy of this Agreement, this Agreement may be executed in
counterparts, each of which shall he deemed an original and all of which
together shall constitute one and the same instrument. Executed copies of this
Agreement may be delivered by facsimile transmission or other comparable
electronic means.

                  15.11    VOLUNTARY AGREEMENT. The parties hereto represent
that they have carefully read the foregoing Agreement, understood its terms,
consulted with an attorney of their choice, and voluntarily signed the same as
their own free act with the intent to be legally bound thereby. The terms of
this Agreement are contractual and not a mere recital.

                  15.12    FORCE MAJEURE. Neither party shall be liable to the
other for its failure to perform any of its obligations under this Agreement
during any period in which such performance is delayed due to circumstances
beyond its control, including acts of God or public authorities, was and war
measures, civil unrest, natural disasters or delays in transportation, delivery
or supply.


*** Portions of this page have been omitted pursuant to a request for
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                                  Page 9 of 10
<Page>


                  15.13    NOTICE. All notices under this Agreement shall be in
writing and shall be deemed given when personally delivered or three days after
being sent prepaid certified or registered United States mail to the address of
the party to be noticed as set forth below or such other addresses as such party
last provided to the other by notice:


                           Digirad:         Digirad Corporation
                                            9350 Trade Place
                                            San Diego CA 92126
                                            Attn: President and COO

                           Segami:          Segami Corporation
                                            12624 Golden Oak Drive
                                            Ellicott City MD 21042
                                            Attn: Philippe Briandet Ph.D.

                           Copy to:         Christopher S. Young, Esq.
                                            3440 Ellicott Center Drive
                                            Ste. 203
                                            Ellicott City MD 21043

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
under seal as of the date first above written.

ATTEST:                                        Digirad Corporation


By:      /s/ ILLEGIBLE                       By:     /s/ Scott Huennekens
   -------------------------------              --------------------------------
Title:        Controller           (SEAL)    Title:    President & COO
      ----------------------------                 -----------------------------


                                             Segami Corporation


By:         /s/ ILLEGIBLE       (Secretary)  By:        /s/ ILLEGIBLE
   -------------------------------                ------------------------------
Title:                             (SEAL)    Title:      President
      ----------------------------                 -----------------------------


                                  Page 10 of 10
<Page>


                                    EXHIBIT A
                                PRICING SCHEDULE



                                       ***
                                       ***
                                       ***














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                                      A-1
<Page>


                                    EXHIBIT B



                                       ***
                                       ***
                                       ***
















*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

--------------------------------------------------------------------------------
Information contained in this document is proprietary to DIGIRAD Corporation and
should not be released outside of the company without written permission of the
company.
--------------------------------------------------------------------------------

                                      B-1
<Page>


                                       ***
                                       ***
                                       ***
















*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

--------------------------------------------------------------------------------
Information contained in this document is proprietary to DIGIRAD Corporation and
should not be released outside of the company without written permission of the
company.
--------------------------------------------------------------------------------

                                      B-2
<Page>


                                       ***
                                       ***
                                       ***
















*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

--------------------------------------------------------------------------------
Information contained in this document is proprietary to DIGIRAD Corporation and
should not be released outside of the company without written permission of the
company.
--------------------------------------------------------------------------------

                                      B-3
<Page>


                                       ***
                                       ***
                                       ***
















*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

--------------------------------------------------------------------------------
Information contained in this document is proprietary to DIGIRAD Corporation and
should not be released outside of the company without written permission of the
company.
--------------------------------------------------------------------------------

                                      B-4
<Page>


                                       ***
                                       ***
                                       ***
















*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

--------------------------------------------------------------------------------
Information contained in this document is proprietary to DIGIRAD Corporation and
should not be released outside of the company without written permission of the
company.
--------------------------------------------------------------------------------

                                      B-5
<Page>


                                       ***
                                       ***
                                       ***
















*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

--------------------------------------------------------------------------------
Information contained in this document is proprietary to DIGIRAD Corporation and
should not be released outside of the company without written permission of the
company.
--------------------------------------------------------------------------------

                                      B-6
<Page>


                                       ***
                                       ***
                                       ***
















*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

--------------------------------------------------------------------------------
Information contained in this document is proprietary to DIGIRAD Corporation and
should not be released outside of the company without written permission of the
company.
--------------------------------------------------------------------------------

                                      B-7
<Page>


                                       ***
                                       ***
                                       ***
















*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

--------------------------------------------------------------------------------
Information contained in this document is proprietary to DIGIRAD Corporation and
should not be released outside of the company without written permission of the
company.
--------------------------------------------------------------------------------

                                      B-8
<Page>


                                       ***
                                       ***
                                       ***
















*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

--------------------------------------------------------------------------------
Information contained in this document is proprietary to DIGIRAD Corporation and
should not be released outside of the company without written permission of the
company.
--------------------------------------------------------------------------------

                                      B-9
<Page>


                                       ***
                                       ***
                                       ***
















*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

--------------------------------------------------------------------------------
Information contained in this document is proprietary to DIGIRAD Corporation and
should not be released outside of the company without written permission of the
company.
--------------------------------------------------------------------------------

                                      B-10
<Page>


                                       ***
                                       ***
                                       ***
















*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

--------------------------------------------------------------------------------
Information contained in this document is proprietary to DIGIRAD Corporation and
should not be released outside of the company without written permission of the
company.
--------------------------------------------------------------------------------

                                      B-11
<Page>


                                    EXHIBIT C
                                DELIVERY SCHEDULE



















*** Portions of this page have been omitted pursuant to a request for
    Confidential Treatment and filed separately with the Commission.

                                      C-1
<Page>


                                    EXHIBIT D
                             SEGAMI'S BASE SOFTWARE



















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    Confidential Treatment and filed separately with the Commission.

                                      D-1


<Page>

                                                                    EXHIBIT 10.3


                           LOAN AND SECURITY AGREEMENT



Agreement No.  __________                           Dated as of October 27, 1999

                                     between
                           MMC/GATX PARTNERSHIP NO. 1

                                    as Lender

                                       and
                               DIGIRAD CORPORATION
                             a Delaware corporation
                                9350 Trade Place
                               San Diego, CA 92121
                                   as Borrower

                            CREDIT AMOUNT: $3,000,000

Repayment Period:                                36 months

Treasury Note Maturity:                          36 months

Loan Margin:                                     750 basis points

Commitment Termination Dates:                    November 1, 1999 (First Loan)
                                                 June 30, 2000 (Second Loan)

         The defined terms and information set forth on this cover page are a
part of the LOAN AND SECURITY AGREEMENT, dated as of the date first written
above (this "Agreement"), entered into by and between MMC/GATX PARTNERSHIP NO. I
("Lender") and the borrower ("Borrower") set forth above. The terms and
conditions of this Agreement agreed to between Lender and Borrower are as
follows:


<Page>


                                    ARTICLE I
                                 INTERPRETATION

         1.01     CERTAIN DEFINITIONS. Unless otherwise indicated in this
Agreement or any other Operative Document, the following terms, when used in
this Agreement or any other Operative Document, shall have the following
respective meanings:

         "APPLICABLE PREMIUM" shall mean an amount equal to: (i) 4% of the
amount being prepaid or accelerated more than twelve (12) months after, but on
or before twenty-four (24) months
 after the first Payment Date, or (ii) 3% of
the amount being prepaid or accelerated more than twenty-four (24) months after
the first Payment Date; PROVIDED THAT if an Event of Default occurs within
twelve (12) months of the first Payment Date (other than an Event of Default
specified in Section 9.01 h, i, j, k or l), the Applicable Premium shall be 4%
of the amount being prepaid or accelerated.

         "BORROWER'S HOME STATE" shall mean California, the state in which
Borrower's principal place of business is located.

         "BROKER" shall mean Priority Capital.

         "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or
public holiday under the laws of California or Borrower's Home State or other
day on which banking institutions are authorized or obligated to close in
California or Borrower's Home State.

         "CLAIM" has the meaning given to that term in SECTION 10.03.

         "COLLATERAL" has the meaning given to that term in SECTION 5.01.

         "COMMITMENT FEE" has the meaning given to that term in SECTION 2.04.

         "COMMITMENT TERMINATION DATES" shall mean (a) with respect to the First
Loan, November 1, 1999, and (b) with respect to the Second Loan, June 30, 2000,
which are the dates specified on the cover page of this Agreement.

         "CREDIT AMOUNT" shall mean the maximum aggregate amount of the Loans
under this Agreement (if the conditions specified in Schedule 3 are satisfied),
which amount is set forth following such term on the cover page of this
Agreement.

         "DEFAULT" shall mean any event which with the passing of time or the
giving of notice or both would become an Event of Default hereunder.

         "DEFAULT RATE" shall mean the per annum rate of interest equal to the
higher of (i) 18% or (ii) the Prime Rate plus 6%, but such rate shall in no
event be more than the highest rate permitted by applicable law.


                                      -2-
<Page>


         "DISCLOSURE SCHEDULE" has the meaning set forth in the definition of
the term "Permitted Liens."

         "ENVIRONMENTAL LAW" shall mean the Resource Conservation and Recovery
Act of 1987, the Comprehensive Environmental Response, Compensation and
Liability Act, and any other federal, state or local statute, law, ordinance,
code, rule, regulation, order or decree (in each case having the force of law)
regulating or imposing liability or standards of conduct concerning any
Hazardous Material, as now or at any time hereafter in effect.

         "EQUIPMENT" has the meaning given to that term in SECTION 5.01.

         "EQUIPMENT COLLATERAL" has the meaning given to that term in SECTION
5.01.

         "EQUIPMENT LIST" has the meaning given to that term in SECTION 5.04.

         "EQUIPMENT LOANS" has the meaning given to that term in SECTION 2.02.

         "EQUITY SECURITIES" of any Person shall mean (a) all common stock,
preferred stock, participations, shares, partnership interests or other equity
interests in and of such Person (regardless of how designated and whether or not
voting or non-voting) and (b) all warrants, options and other rights to acquire
any of the foregoing.

         "EVENT OF DEFAULT" has the meaning given to that term in SECTION 9.01.

         "FUNDING DATE" shall mean a date on which a Loan is made to or on
account of Borrower under this Agreement; provided that the Funding Date for the
Second Loan shall be on or after March 31, 2000.

         "GAAP" shall mean generally accepted accounting principles and
practices as in effect in the United States of America from time to time,
consistently applied.

         "HAZARDOUS MATERIAL" means any hazardous, dangerous or toxic
constituent material, pollutant, waste or other substance, whether solid, liquid
or gaseous, which is regulated by any federal, state or local governmental
authority.

         "INDEBTEDNESS" shall mean, with respect to Borrower or any Subsidiary,
the aggregate amount of, without duplication, (a) all obligations of such Person
for borrowed money, (b) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (c) all obligations of such
Person to pay the deferred purchase price of property or services (excluding
trade payables aged less than 180 days), (d) all capital lease obligations of
such Person, (e) all obligations or liabilities of others secured by a lien on
any asset of such Person, whether or not such obligation or liability is
assumed, (f) all obligations or liabilities of others guaranteed by such Person;
and (g) any other obligations or liabilities which are required by GAAP to be
shown as debt on the balance sheet of such Person. Unless otherwise indicated,
the term "INDEBTEDNESS" shall include all Indebtedness of Borrower and the
Subsidiaries.


                                      -3-
<Page>


         "INTELLECTUAL PROPERTY" shall mean all of Borrower's right, title and
interest in and to patents, patent rights (and applications and registrations
therefor), trademarks and service marks (and applications and registrations
therefor), inventions, copyrights, mask works (and applications and
registrations therefor), trade names, trade styles, software and computer
programs, trade secrets, methods, processes, know how, drawings, specifications,
descriptions, and all memoranda, notes, and records with respect to any research
and development, all whether now owned or subsequently acquired or developed by
Borrower and whether in tangible or intangible form or contained on magnetic
media readable by machine together with all such magnetic media.

         "INVESTMENT" shall mean the purchase or acquisition of any capital
stock, equity interest, or any obligations or other securities of, or any
interest in, any Person, or the extension of any advance, loan, extension of
credit or capital contribution to, or any other investment in, any Person.

         "LIEN" shall mean any pledge, bailment, lease, mortgage, hypothecation,
conditional sales and title retention agreements, charge, claim, encumbrance or
other lien in favor of any Person.

         "LOAN" means a loan advanced by Lender to Borrower under this
Agreement.

         "LOAN MARGIN" shall mean the number of basis points set forth following
such term on the cover page of this Agreement.

         "LOAN RATE" shall mean, with respect to each Loan, the per annum rate
of interest (based on a year of twelve 30-day months) equal to the sum of (a)
the U.S. Treasury note rate of a term equal to the Treasury Note Maturity as
quoted in THE WALL STREET JOURNAL on the date the Note with respect to each Loan
is prepared, plus (b) the Loan Margin.

         "NOTE" shall mean one of the secured promissory notes of Borrower
substantially in the form of EXHIBIT A.

         "OBLIGATIONS" has the meaning given to that term in SECTION 5.01.

         "OPERATIVE DOCUMENTS" shall mean this Agreement, the Notes and the
Warrants and all other documents, instruments and agreements executed and
delivered in connection herewith or therewith or in respect of the closing of
the transactions contemplated hereby or thereby.

         "PAYMENT DATE" has the meaning given to that term in the applicable
Note.

         "PERMITTED INDEBTEDNESS" shall mean and include:

                  (a)      Indebtedness of Borrower to Lender;

                  (b)      Indebtedness of Borrower secured by Liens permitted
                           under clause (e) of the definition of Permitted
                           Liens;


                                      -4-
<Page>


                  (c)      Indebtedness arising from the endorsement of
                           instruments in the ordinary course of business;

                  (d)      Indebtedness existing on the date hereof and set
                           forth on the Disclosure Schedule;

                  (e)      Indebtedness consisting of a revolving credit
                           facility in an aggregate principal amount not
                           exceeding the lesser of: (1) $2,500,000, or (2) a
                           borrowing base calculated as a percentage (not
                           exceeding 100%) of qualified accounts receivable plus
                           eligible inventory; and

                  (f)      Subordinated Indebtedness.

         "PERMITTED INVESTMENTS" shall mean and include:

                  (a)      Deposits with commercial banks organized under the
                           laws of the United States or a state thereof to the
                           extent such deposits are fully insured by the Federal
                           Deposit Insurance Corporation;

                  (b)      Investments in marketable obligations issued or fully
                           guaranteed by the United States and maturing not more
                           than one (1) year from the date of issuance; and

                  (c)      Investments in open market commercial paper rated at
                           least "Al" or "P1" or higher by a national credit
                           rating agency and maturing not more than one (1) year
                           from the creation thereof.

                  (d)      Investments pursuant to or arising under currency
                           agreements or interest rate agreements entered into
                           in the ordinary course of business;

                  (e)      Investments consisting of deposit accounts of
                           Borrower in which Lender has a perfected security
                           interest; and

                  (f)      Other Investments aggregating not in excess of Two
                           Hundred Fifty Thousand Dollars ($250,000) at any
                           time.

         "PERMITTED LIENS" shall mean (a) the Lien created by this Agreement,
(b) Liens for fees, taxes, levies, imposts, duties or other governmental charges
of any kind which are not yet delinquent or which are being contested in good
faith by appropriate proceedings which suspend the collection thereof (PROVIDED,
HOWEVER, that such proceedings do not involve any substantial danger of the
sale, forfeiture or loss of any item of equipment and that Borrower has
adequately bonded such Lien or reserves sufficient to discharge such Lien have
been provided on the books of Borrower), (c) Liens identified on the disclosure
schedule attached hereto as SCHEDULE 2 ("DISCLOSURE SCHEDULE"), (d) Liens to
secure payment of worker's compensation, employment insurance, old age pensions
or other social security obligations of Borrower in the ordinary 


                                      -5-
<Page>



course of business of Borrower, (e) Liens upon any equipment or other personal
property acquired by Borrower more than eighteen (18) months after the date
hereof to secure (i) the purchase price of such equipment or other personal
property or (ii) lease obligations or indebtedness incurred solely for the
purpose of financing the acquisition of such equipment or other personal
property; PROVIDED that (A) such Liens are confined solely to the equipment or
other personal property so acquired and the amount secured does not exceed the
acquisition price thereof, and (B) no such Lien shall be created, incurred,
assumed or suffered to exist in favor of Borrower's officers, directors or
shareholders holding five percent (5%) or more of Borrower's Equity Securities,
(f) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other similar Liens arising in the ordinary course of business
which are not delinquent or remain payable without penalty or which are being
contested in good faith and by appropriate proceedings; and (g) non-exclusive
licenses of Intellectual Property entered into in the ordinary course of
business and non-exclusive licenses or similar arrangements entered into in
connection with joint ventures and corporate collaborations; and (h) Liens
securing Indebtedness permitted under clause (e) of the definition of Permitted
Indebtedness.

         "PERSON" shall mean and include an individual, a partnership, a
corporation, a business trust, a joint stock company, a limited liability
company, an unincorporated association or other entity and any domestic or
foreign national, state or local government, any political subdivision thereof,
and any department, agency, authority or bureau of any of the foregoing.

         "PRIME RATE" shall mean the interest rate per annum specified in the
"Money Rates" column of THE WALL STREET JOURNAL, but such rate shall in no event
be more than the highest interest rate permitted by applicable law.

         "SUBORDINATED INDEBTEDNESS" shall mean Indebtedness subordinated to the
Obligations on terms and conditions acceptable to Lender in its sole discretion.

         "SUBSIDIARY" shall mean any corporation of which a majority of the
outstanding capital stock entitled to vote for the election of directors
(otherwise than as the result of a default) is owned by Borrower directly or
indirectly through Subsidiaries.

         "TERM" shall mean the period from and after the date hereof until the
payment or satisfaction in full of all Obligations under this Agreement and the
other Operative Documents.

         "THIRD PARTY EQUIPMENT" has the meaning given that term in SECTION
5.05.

         "TREASURY NOTE MATURITY" shall mean the period of months set forth
following such term on the cover page of this Agreement.

         "WARRANTS" shall mean separate warrants to be issued at the direction
of Lender to purchase securities of Borrower substantially in the form of
EXHIBIT B.

         1.02.    HEADINGS. Headings in this Agreement and each of the other
Operative Documents are for convenience of reference only and are not part of
the substance hereof or thereof.


                                      -6-
<Page>


         1.03.    PLURAL TERMS. All terms defined in this Agreement or any other
Operative Document in the singular form shall have comparable meanings when used
in the plural form and VICE VERSA.

         1.04.    CONSTRUCTION. This Agreement is the result of negotiations
among, and has been reviewed by, Borrower and Lender and their respective
counsel. Accordingly, this Agreement shall be deemed to be the product of all
parties hereto, and no ambiguity shall be construed in favor of or against
Borrower or Lender.

         1.05.    ENTIRE AGREEMENT. This Agreement, together with the terms set
forth in each of the other Operative Documents, taken together, constitute and,
contain the entire agreement of Borrower and Lender and, with regard to their
respective subject matters, supersede any and all prior agreements, term sheets,
negotiations, correspondence, understandings and communications among the
parties, whether written or oral, with respect to their respective subject
matters. Borrower acknowledges that it is not relying on any representation or
agreement made by Lender or any employee, agent or attorney of Lender, other
than the specific agreements set forth in this Agreement and the Operative
Documents.

         1.06.    OTHER INTERPRETIVE PROVISIONS. References in this Agreement to
"Articles," "Sections," "Exhibits," "Schedules" and "Annexes" are to articles,
sections, exhibits, schedules and annexes herein and hereto unless otherwise
indicated. References in this Agreement and each of the other Operative
Documents to any document, instrument or agreement shall include (a) all
exhibits, schedules, annexes and other attachments thereto, (b) all documents,
instruments or agreements issued or executed in replacement thereof, and (c)
such document, instrument or agreement, or replacement or predecessor thereto,
as amended, modified and supplemented from time to time and in effect at any
given time. The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement or any other Operative Document shall refer
to this Agreement or such other Operative Document, as the case may be, as a
whole and not to any particular provision of this Agreement or such other
Operative Document, as the case may be. The words "include" and "including" and
words of similar import when used in this Agreement or any other Operative
Document shall not be construed to be limiting or exclusive. Unless otherwise
indicated in this Agreement or any other Operative Document, all accounting
terms used in this Agreement or any other Operative Document shall be construed,
and all accounting and financial computations hereunder or thereunder shall be
computed, in accordance with GAAP.

                                   ARTICLE II
                                   THE CREDIT

         2.01.    Credit Facility.

                  (a)      THE CREDIT AMOUNT. Subject to the terms and
conditions of this Agreement and relying upon the representations and warranties
herein set forth as and when made or deemed to be made, Lender agrees to lend to
Borrower a maximum of two Loans (respectively, the "First Loan" and the "Second
Loan") in an aggregate amount not to exceed the


                                      -7-
<Page>


Credit Amount. The First Loan shall be in the amount of Two Million Dollars
($2,000,000) and the Second Loan shall be in the amount of One Million Dollars
($1,000,000). The Loans may be prepaid only as set forth in SECTION 2.01(d).

                  (b)      INTEREST RATES. Borrower shall pay interest on the
unpaid principal amount of each Loan from the date of such Loan until such Loan
is paid in full, at a per annum rate of interest equal to the Loan Rate for such
Loan determined in accordance with the definition of Loan Rate. The Loan Rate
applicable to a Loan shall not be subject to change in the absence of manifest
error. All computations of interest on a Loan shall be based on a year of twelve
30-day months. If Borrower pays interest on a Loan which is determined to be in
excess of the then legal maximum rate, then that portion of each interest
payment representing an amount in excess of the then legal maximum rate shall be
deemed a payment of principal and applied against the principal of such Loan.

                  (c)      PAYMENTS OF PRINCIPAL AND INTEREST. If a Funding Date
is not the first day of the month, Borrower shall make an interest only payment
on the first Payment Date specified in Lender's Note and thirty-six (36) equal
monthly payments of principal plus accrued interest on the outstanding principal
amount of such Loan commencing on the first Payment Date as set forth in
Lender's Note.

                  (d)      OPTIONAL PREPAYMENT WITH PREMIUM. Borrower may not
prepay any Loan within twelve (12) months of its first Payment Date; thereafter,
upon ten (10) Business Days' prior written notice to Lender, Borrower may, at
its option, at any time, prepay all, and not less than all, of a Loan in full at
a prepayment price equal to the principal amount of the Loan, plus interest
accrued on the Loan through and including the date of such prepayment, plus a
premium on the Loan equal to the Applicable Premium. If an Event of Default
occurs and is continuing (other than an Event of Default specified in Section
9.01 h, i, j, k or 1, in which case no Applicable Premium is due and payable),
and Lender exercises its right under Section 9.02 to accelerate the Loans or the
Loans are automatically accelerated, Borrower expressly agrees that the amount
then due and payable shall include the Applicable Premium as of the date of such
acceleration.

         2.02.    USE OF PROCEEDS; THE LOAN AND THE NOTES; DISBURSEMENT.

                  (a)      USE OF PROCEEDS. The proceeds of the Loans shall be
used solely for: (1) working capital, or (2) general corporate purposes of
Borrower, or (3) purchase of, or reimbursement to Borrower of the acquisition
costs of Equipment ("EQUIPMENT LOANS"), or (4) any combination of the foregoing.

                  (b)      THE LOANS AND THE NOTES. The obligation of Borrower
to repay the unpaid principal amount of and interest on each Loan shall be
evidenced by a Note issued to Lender and Lender is authorized to endorse on a
grid annexed to its Note appropriate notations regarding payments made on the
Note; PROVIDED, HOWEVER, that the failure to make, or an error in making, any
such notation shall not limit or otherwise affect the obligations of Borrower
hereunder or thereunder.


                                      -8-
<Page>


                  (c)      DISBURSEMENT. Lender shall disburse its Loans by wire
transfer to Borrower unless otherwise directed in writing by Borrower.

                  (d)      TERMINATION OF COMMITMENT TO LEND. Notwithstanding
anything to the contrary in the Operative Documents, Lender's obligations to
advance the Loans hereunder shall terminate on the earliest of (i) the
occurrence of any Event of Default hereunder and (ii) the respective Commitment
Termination Dates.

         2.03.    OTHER PAYMENT TERMS.

                  (a)      PLACE AND MANNER. Borrower shall make all payments
due to Lender in lawful money of the United States, in immediately available
funds, at the address for payments and in the manner specified in SECTION
10.05(B).

                  (b)      DATE. Whenever any payment due hereunder shall fall
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day.

                  (c)      DEFAULT RATE. If either (i) any amounts required to
be paid by Borrower under this Agreement or the other Operative Documents
(including principal or interest payable on the Loan, any fees or other amounts)
remain unpaid after such amounts are due, or (ii) an Event of Default has
occurred and is continuing, Borrower shall pay interest on the outstanding
principal balance hereunder from the date due or from the date of the Event of
Default, as applicable, until such past due amounts are paid in full or until
all Events of Defaults are cured, as applicable, at a per annum rate equal to
the Default Rate, such rate to change from time to time as the Prime Rate shall
change. All computations of such interest at the Default Rate shall be based on
a year of 360 days and twelve 30-day months.

                  (d)      FACILITY FEE; COMMITMENT FEE. Upon the execution and
delivery of this Agreement, Borrower agrees to pay to Lender a facility fee
("FACILITY FEE") of $25,000 as follows: (i) Borrower has paid a commitment fee
in the aggregate amount of $20,000 (the "COMMITMENT FEE"); Twenty Thousand
Dollars ($20,000) of the Commitment Fee shall be applied towards the Facility
Fee, and (ii) Borrower shall pay to Lender Five Thousand Dollars ($5,000)
concurrently with Borrower's execution and delivery of this Agreement. Borrower
agrees to pay to Lender within thirty (30) days of invoice Lender's expenses in
connection with due diligence or the negotiation, documentation (including
without limitation, filing fees related thereto) and funding of the Loans, up to
a maximum of Five Thousand Dollars ($5,000); provided that if the First Loan is
funded after invoice but before payment, Lender may deduct the invoiced amount
from the First Loan proceeds.

                                   ARTICLE III
                         REPRESENTATIONS AND WARRANTIES

         3.01.    REPRESENTATIONS AND WARRANTIES. Except as set forth in the
Disclosure Schedule, Borrower makes the following representations and warranties
to Lender as of the date hereof and again on the Funding Date:


                                      -9-
<Page>


                  (a)      ORGANIZATION AND QUALIFICATION. Borrower is a
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation and is duly qualified to do business in Borrower's
Home State. Borrower has no Subsidiaries.

                  (b)      AUTHORITY. Borrower has all necessary corporate
power, authority and legal right and has obtained all approvals and consents and
has given all notices necessary to execute and deliver this Agreement and the
other Operative Documents and to perform the terms hereof and thereof. Borrower
has all requisite corporate power and authority to own and operate its
properties and to carry on its businesses as now conducted.

                  (c)      CONFLICT WITH OTHER INSTRUMENTS ETC. Neither the
execution and delivery of any Operative Document to which Borrower is a panty
nor the consummation of the transactions therein contemplated nor compliance
with the terms, conditions and provisions thereof will conflict with or result
in a breach of any of the terms, conditions or provisions of the charter or the
bylaws of Borrower or, to its knowledge, any law or any regulation, order, writ,
injunction or decree of any court or governmental instrumentality or any
material agreement or instrument to which Borrower is a party or by which it or
any of its properties is bound or to which it or any of its properties is
subject, or constitute a default thereunder or result in the creation or
imposition of any Lien, other than Permitted Liens.

                  (d)      PROPERTIES. Borrower has good and marketable title to
the Collateral, free and clear of all Liens, other than Permitted Liens.
Borrower has good title and ownership of, or is licensed under, all of Borrower
5 current Intellectual Property, with no known infringement of the rights of
others. Borrower has not received any communications alleging that Borrower has
violated, or by conducting its business as proposed, would violate any
proprietary rights of any other Person. Borrower has no knowledge of any
infringement or violation by it of the intellectual property rights of any third
party and has no knowledge of any violation or infringement by a third party of
any of its Intellectual Property. The Collateral and the Intellectual Property
constitute substantially all of the assets and property of Borrower.

                  (e)      AUTHORIZATION, GOVERNMENTAL APPROVALS, ETC. The
execution and delivery by Borrower of each Operative Document, the granting of
the security interest in the Collateral, the issuance of the Warrants, the
issuance of the securities into which the Warrants are exercisable, the issuance
of any securities into which the securities issuable upon exercise of the
Warrants are convertible, and the performance of the obligations herein and
therein contemplated have each been duly authorized by all necessary action on
the part of Borrower. No authorization, consent, approval, license or exemption
of, and no registration, qualification, designation, declaration or filing with,
or notice to, any Person is, was or will be necessary to (i) the valid execution
and delivery of any Operative Document to which Borrower is a party, (ii) the
performance of Borrower's obligations under any Operative Document, or (iii) the
granting of the security interest in the Collateral, except for filings in
connection with the perfection of the security interest in any of the Collateral
or the issuance of the Warrants. The Operative Documents have been or will be
duly executed and delivered and constitute or will constitute legal, valid and
binding obligations of Borrower, enforceable in accordance with their respective
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency


                                      -10-
<Page>


or other similar laws of general application relating to or affecting the
enforcement of creditors' rights or by general principles of equity.

                  (f)      LITIGATION. There are no actions, suits, proceedings
or investigations pending or, to the knowledge of Borrower, threatened against
or affecting Borrower, or the business or any property or asset owned by it,
before any court or governmental department, agency or instrumentality which, if
adversely determined, could reasonably be expected to have a material adverse
effect on the financial condition, business or operations of Borrower.

                  (g)      SECURITY INTEREST. Assuming the proper filing of one
or more financing statement(s) identifying the Collateral with the proper state
and/or local authorities, the security interests in the Collateral granted to
Lender pursuant to this Agreement (i) constitute and will continue to constitute
first priority security interests (except to the extent any other Permitted Lien
may create any priority to Lender's Lien under this Agreement) and (ii) are and
will continue to be superior and prior to the rights in the Collateral of all
other creditors of Borrower (except to the extent of such Permitted Liens).
Except as set forth in the Disclosure Schedule, Borrower does not own any right,
title or interest in or to any real property (other than leasehold interests),
motor vehicles, promissory notes or other property (excluding Intellectual
Property) with respect to which a security interest must be perfected by a
method other than the filing of a UCC-1 financing statement.

                  (h)      EXECUTIVE OFFICES. The principal place of business
and chief executive office of Borrower, and the office where Borrower will keep
all records and files regarding the Collateral, is set forth on the cover page
of this Agreement.

                  (i)      SOLVENCY, ETC. Borrower is Solvent (as defined below)
and, after the execution and delivery of the Operative Documents and the
consummation of the transactions contemplated thereby, Borrower will be Solvent.
"SOLVENT" shall mean, with respect to any Person on any date, that on such date
(a) the fair value of the property of such Person is greater than the fair value
of the liabilities (including, without limitation, contingent liabilities) of
such Person, (b) the present fair saleable value of the assets of such Person is
not less than the amount that will be required to pay the probable liability of
such Person on its debts as they become absolute and matured, (c) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature and (d) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
property would constitute an unreasonably small capital.

                  (j)      CATASTROPHIC EVENTS; LABOR DISPUTES. None of Borrower
or its properties is or has been affected by any fire, explosion, accident,
strike, lockout or other labor dispute, drought, storm, hail, earthquake,
embargo, act of God or other casualty that could reasonably be expected to have
a material adverse effect on the financial condition, business or operations of
Borrower. There are no disputes presently subject to grievance procedure,
arbitration or litigation under any of the collective bargaining agreements,
employment contracts or employee welfare or incentive plans to which Borrower is
a party, and there are no strikes, lockouts, work stoppages or slowdowns, or, to
the acknowledge of Borrower, jurisdictional disputes or organizing activity


                                      -11-
<Page>


occurring or threatened which could reasonably be expected to have a material
adverse effect on the financial condition, business or operations of Borrower.

                  (k)      NO MATERIAL ADVERSE EFFECT. No event has occurred and
no condition exists which could reasonably be expected to have a material
adverse effect on the financial condition, business or operations of Borrower
since December 31, 1998, the date of Borrower's last audited financial
statements.

                  (1)      ACCURACY OF INFORMATION FURNISHED. None of the
Operative Documents and none of the other certificates, statements or
information furnished to Lender by or on behalf of Borrower in connection with
the Operative Documents or the transactions contemplated thereby contains or
will contain any untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Lender recognizes that
all financial projections furnished to Lender by or on behalf of Borrower in
connection with the Operative Documents or the transactions contemplated thereby
are not to be viewed as facts and that actual results during the period or
periods covered by such projections may differ from the projected or forecasted
results.

                  (m)      CERTAIN AGREEMENTS OF OFFICERS, EMPLOYEES AND
                           CONSULTANTS.

                           (i)      To the  knowledge of Borrower,  no officer, 
employee or consultant of Borrower is, or is now expected to be, in violation of
any term of any employment contract, proprietary information agreement,
nondisclosure agreement, noncompetition agreement, or any other material
contract or agreement or any restrictive covenant relating to the right of any
such officer, employee or consultant to be employed by Borrower because of the
nature of the business conducted or to be conducted by Borrower or relating to
the use of trade secrets or proprietary information of others, and to Borrower's
knowledge, the continued employment of Borrower's officers, employees and
consultants does not subject Borrower to any material liability for any claim or
claims arising out of or in connection with any such contract, agreement, or
covenant.

                           (ii)     To the knowledge of Borrower, no officers of
Borrower, and no employee or consultant of Borrower whose termination, either
individually or in the aggregate, could reasonably be expected to have a
material adverse effect on the financial condition, business or operations of
Borrower, has any present intention of terminating his or her employment or
consulting relationship with Borrower.

                                   ARTICLE IV
                             REPORTING REQUIREMENTS

         4.01.    FURNISHING REPORTS.  Borrower shall furnish to Lender:

                  (a)      FINANCIAL STATEMENTS. So long as Borrower is not
subject to the reporting requirements of Section 12 or Section 15 of the
Securities and Exchange Act of 1934, as amended, promptly as they are available,
unaudited monthly and audited annual financial


                                      -12-
<Page>



statements of Borrower and such other financial information as Lender may
reasonably request from time to time. From and after such time as Borrower
becomes a publicly reporting company, promptly as they are available and in any
event: (i) at the time of filing of Borrower's Form 10-K with the Securities and
Exchange Commission after the end of each fiscal year of Borrower, the financial
statements of Borrower filed with such Form 10-K; and (ii) at the time of filing
of Borrower's Form 10-Q with the Securities and Exchange Commission after the
end of each of the first three fiscal quarters of Borrower, the financial
statements of Borrower filed with such Form 10-Q.

                  (b)      NOTICE OF DEFAULTS. As soon as possible, and in any
event within five (5) Business Days after the discovery of a Default or Event of
Default provide Lender with an officer's certificate of Borrower setting forth
the facts relating to or giving rise to such Default or Event of Default and the
action which Borrower proposes to take with respect thereto.

                  (c)      MISCELLANEOUS. Such other information as Lender may
reasonably request from time to time.

                                    ARTICLE V
                           GRANT OF SECURITY INTEREST
                     GENERAL PROVISIONS CONCERNING SECURITY

         5.01.    GRANT OF SECURITY INTEREST. Borrower, in order to secure the
payment of the principal and interest with respect to the Loans made pursuant to
this Agreement, all other sums due under and in respect hereof and of the other
Operative Documents, including fees, charges, expenses and attorneys' fees and
costs and the performance and observance by Borrower of all other terms,
conditions, covenants and agreements herein and in the other Operative Documents
(all such amounts and obligations being herein sometimes called the
"OBLIGATIONS"), does hereby grant to Lender and its successors and assigns, a
security interest in and to the following property (collectively, the
"COLLATERAL"): All right, title, interest, claims and demands of Borrower in and
to:

                  (a)      All goods and equipment now owned or hereafter
acquired, including, without limitation, all laboratory equipment, computer
equipment, office equipment, machinery, fixtures, vehicles (including motor
vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;

                  (b)      All inventory now owned or hereafter acquired,
including, without limitation, all merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products including
such inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's books relating to any of the foregoing;



                                      -13-
<Page>


                  (c)      All contract rights and general intangibles (except
to the extent included within the definition of Intellectual Property), now
owned or hereafter acquired, including, without limitation, goodwill, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
disks, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;

                  (d)      All now existing and hereafter arising accounts,
contract rights, royalties, license rights and all other forms of obligations
owing to Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower (subject, in each case, to
the contractual rights of third parties to require funds received by Borrower to
be expended in a particular manner), whether or not earned by performance, and
any and all credit insurance, guaranties, and other security therefor, as well
as all merchandise returned to or reclaimed by Borrower and Borrower's books
relating to any of the foregoing;

                  (e)      All documents, cash, deposit accounts, letters of
credit, certificates of deposit, instruments, chattel paper and investment
property, including, without limitation, all securities, whether certificated or
uncertificated, security entitlements, securities accounts, commodity contracts
and commodity accounts, and all financial assets held in any securities account
or otherwise, wherever located, now owned or hereafter acquired and Borrowers
books relating to the foregoing; and

                  (f)      Any and all claims, rights and interests in any of
the above and all substitutions for, additions and accessions to and proceeds
thereof, including, without limitation, insurance, condemnation, requisition or
similar payments and proceeds of the sale or licensing of Intellectual Property
to the extent such proceeds no longer constitute Intellectual Property; but

                  (g)      EXCLUDING, all Intellectual Property; and

                  (h)      Any and all of the following equipment collateral
(collectively, "EQUIPMENT COLLATERAL"):

                           All right, title, interest, claims and demands of
                  Borrower in and to each and every item of equipment, fixtures
                  or personal property, whether now owned or hereafter acquired,
                  together with all substitutions, renewals or replacements of
                  and additions, improvements, accessions, replacement parts and
                  accumulations to any and all of such equipment, fixtures or
                  personal property (collectively, the "EQUIPMENT"), together
                  with all proceeds thereof, including, without limitation,
                  insurance, condemnation, requisition or similar payments, and
                  all proceeds from sales, renewals, releases or other
                  dispositions thereof, which is financed with or is designated
                  as collateral for the Obligations on and after the date of
                  this Agreement by designating such equipment, fixtures and
                  personal property on a UCC financing statement listing
                  Borrower as "debtor" and Lender as "secured party."


                                      -14-
<Page>


         5.02.    DURATION OF SECURITY INTEREST. Lender's security interest in
the Collateral shall continue until the payment in full and the satisfaction of
all Obligations, whereupon such security interest shall terminate. Lender, upon
payment in full and the satisfaction of the Obligations, shall execute such
further documents and take such further actions as may be necessary to effect
the release and/or termination contemplated by this SECTION 5.02, including duly
executing and delivering termination statements for filing in all relevant
jurisdictions.

         5.03.    POSSESSION AND LOCATION OF COLLATERAL. The Collateral is and
shall remain in the possession of Borrower at Borrower's address stated on the
cover page of this Agreement. So long as no Event of Default has occurred and is
continuing, Borrower shall remain in full possession, enjoyment and control of
the Collateral (except only as may be otherwise required by Lender for
perfection of its security interest therein) and to manage, operate and use the
same and each part thereof with the rights and franchises appertaining thereto;
PROVIDED, HOWEVER, that the possession, enjoyment, control and use of the
Collateral shall at all times be subject to the observance and performance of
the terms of this Agreement.

         5.04.    EQUIPMENT COLLATERAL. On or prior to its execution and
delivery of this Agreement, Borrower shall provide Lender with a listing, in
detail to Lender's satisfaction, of all of Borrower's equipment, fixtures and
personal property (collectively, an "Equipment List"), which, at Lender's
option, shall be attached as an exhibit to a UCC financing statement filed by
Lender naming Borrower as "debtor" and Lender as "secured party." Within thirty
days after the end of every quarter after the date hereof, Borrower shall
provide Lender with an Equipment List of equipment, fixtures and personal
property acquired by Borrower during such quarter (which may exclude Third Party
Equipment), and such Equipment List shall, at Lender's option, be attached as an
exhibit to a UCC financing statement filed by Lender naming Borrower as "debtor"
and Lender as "secured party." Borrower agrees to execute and deliver to Lender
any and all such financing statements to Lender.

         5.05.    LIEN SUBORDINATION. Lender agrees that the Liens granted to it
hereunder (except for Liens in Equipment Collateral) shall be subordinate to the
Liens granted in connection with Indebtedness permitted by clause (e) of the
definition of Permitted Indebtedness. Lender agrees to enter into a
subordination agreement with the lender of the Indebtedness permitted by clause
(e) of the definition of Permitted Indebtedness substantially in the form of
EXHIBIT D and to negotiate in good faith any changes thereto as long as they are
acceptable to Lender. Lender agrees that the Liens granted to it hereunder in
Third Party Equipment shall be subordinate to the Liens of future lenders
providing equipment financing and equipment lessors for equipment and other
personal property acquired by Borrower more than eighteen (18) months after the
date hereof ("THIRD PARTY EQUIPMENT"); PROVIDED, that, in the case of equipment
financings and leasing such Liens are confined solely to the equipment so
financed and the proceeds thereof. Notwithstanding the foregoing, the
Obligations hereunder shall not be subordinate in right of payment to any
obligations to other lenders, equipment lenders or equipment lessors and
Lender's rights and remedies hereunder shall not in any way be subordinate to
the rights and remedies of any such lender or equipment lessors. Lender agrees
to execute and deliver such agreements and documents as may be reasonably
requested by Borrower from time to time which set forth the lien subordination
described in this SECTION 5.05 and are reasonably acceptable to Lender. Lender
shall have no obligation to execute any agreement or document


                                      -15-
<Page>


which would impose obligations, restrictions or lien priority on Lender which
are less favorable to Lender than those described in this SECTION 5.05.

                                   ARTICLE VI
                              AFFIRMATIVE COVENANTS

         6.01.    AFFIRMATIVE COVENANTS.

                  (a)      PAYMENT OF TAXES ETC. Borrower shall pay and
discharge all taxes, assessments and governmental charges or levies imposed upon
it or upon its income or profits, or upon any properties belonging to it, prior
to the date on which penalties attach thereto, and all lawful claims which, if
unpaid, might become a Lien upon any of its properties; PROVIDED that there
shall be no requirement to pay any such tax, assessment, charge, levy or claim
(i) which is being contested in good faith and by appropriate proceedings or
which presents no risk of seizure, forfeiture, levy or other event which could
jeopardize any Collateral or (ii) for which payment in full is bonded or
reserved in Borrower's financial statements.

                  (b)      INSPECTION RIGHTS. Borrower shall, at any reasonable
time and from time to time, permit Lender or any of its agents or
representatives to inspect the Collateral, to examine and make copies of and
abstracts from the records and books of account of, and visit the properties of,
Borrower and to discuss the affairs, finances and accounts of Borrower with any
of its officers or directors relating in each case to Lender's capacity as
lender and secured party hereunder and with respect to the Collateral.

                  (c)      MAINTENANCE OF EQUIPMENT AND SIMILAR ASSETS. Borrower
shall keep and maintain all items of equipment and other similar types of
personal property that form any significant portion or portions of the
Collateral in good operating condition and repair and shall make all necessary
replacements thereof and renewals thereto so that the value and operating
efficiency thereof shall at all times be maintained and preserved. Borrower
shall not permit any such material item of Collateral to become a fixture to
real estate or an accession to other personal property, without the prior
written consent of Lender. Borrower shall not permit any such material item of
Collateral to be operated or maintained in violation of any applicable law,
statute, rule or regulation. With respect to items of leased equipment (to the
extent Lender has any security interest in any residual Borrower's interest in
such equipment under the lease), Borrower shall keep, maintain, repair, replace
and operate such leased equipment in accordance with the terms of the applicable
lease.

                  (d)      INSURANCE. Borrower shall, obtain and maintain, at
its own expense, insurance of a type and with such limits as are carried by
similarly situated companies, including at a minimum:

                           (i)      "All risk" insurance against loss or damage
to the Collateral. The coverage limit shall be determined to Lender's reasonable
satisfaction. The deductible shall not exceed $25,000. The policy shall name
Lender as loss payee with respect to the Equipment, shall not be invalidated by
any action of or breach of warranty by Borrower of any provision thereof and
waive subrogation against Lender.


                                      -16-
<Page>


                           (ii)     Commercial general liability insurance
(including contractual liability, products liability and completed operations
coverages) reasonably satisfactory to Lender. The limit of liability shall be at
least $5,000,000 per occurrence. The policy shall be without deductible, except
for products liability coverage which may have a deductible up to $25,000. The
policy(ies) shall name Lender as an additional insured in the full amount of
Borrower's liability coverage limits (or the coverage limits of any successor to
Borrower or such successor's parent which is providing coverage), be primary and
without contribution as respects any insurance carried by Lender, and contain
cross liability and severability of interest clauses.

                           (iii)    Such other insurance against risks of loss
and with terms as shall be reasonably required by Lender.

         All policies of insurance shall be placed with financially sound,
commercial insurers reasonably satisfactory to Lender. All policies of insurance
shall provide that Lender shall be given 30 days notice of cancellation of
coverage. This notice provision shall be without qualification. On or prior to
the first Funding Date and prior to each policy renewal, Borrower shall furnish
to Lender certificates of insurance or other evidence satisfactory to Lender
that insurance complying with all of the above requirements is in effect.

                                   ARTICLE VII
                               NEGATIVE COVENANTS

         7.01.    NEGATIVE COVENANTS. So long as the Obligations remain
outstanding, Borrower shall not:

                  (a)      NAME; LOCATION OF CHIEF EXECUTIVE OFFICE AND
COLLATERAL. Without thirty (30) days prior written notice to Lender, change its
chief executive office or principal place of business or remove or cause to be
removed from the location set forth on the cover page hereof or move any
Collateral to a location other than that set forth on the cover page hereof.

                  (b)      LIENS ON COLLATERAL. Create, incur, assume or suffer
to exist any Lien of any kind upon any Collateral, whether now owned or
hereafter acquired, except Permitted Liens.

                  (c)      NEGATIVE PLEDGE REGARDING INTELLECTUAL PROPERTY.
Create, incur, assume or suffer to exist any Lien of any kind upon any
Intellectual Property, whether now owned or hereafter acquired, except Permitted
Liens.

                  (d)      DISPOSITIONS OF COLLATERAL OR INTELLECTUAL PROPERTY.
Convey, sell, offer to sell, lease, transfer, exchange or otherwise dispose of
(collectively, a "Transfer") all or any part of the Collateral or Intellectual
Property to any Person, other than: (i) Transfers of inventory in the ordinary
course of business; (ii) Transfers which would constitute Permitted Liens under
clause (g) of the definition of Permitted Liens; or (iii) Transfers of worn-out
or obsolete equipment.


                                      -17-
<Page>


                  (e)      DISTRIBUTIONS. (i) Pay any dividends or make any
distributions on its Equity Securities; (ii) purchase, redeem, retire, defease
or otherwise acquire for value any of its Equity Securities (other than
repurchases by cancellation of indebtedness pursuant to the terms of employee
stock purchase plans, employee restricted stock agreements or similar
arrangements in an aggregate amount not to exceed $100,000); (iii) return any
capital to any holder of its Equity Securities as such; (iv) make any
distribution of assets, Equity Securities, obligations or securities to any
holder of its Equity Securities as such; or (v) set apart any sum for any such
purpose; provided, however, that Borrower may pay dividends payable solely in
common stock.

                  (f)      MERGERS OR ACQUISITIONS. Merge or consolidate with or
into any other Person or acquire all or substantially all of the capital stock
or assets of another Person; provided that in the event Borrower requests
Lender's consent to such a transaction and Lender does not consent (Lender's
decision whether to consent is at Lender's sole discretion), Borrower may prepay
the Obligations without any Applicable Premium; provided further, if Lender does
consent, the provisions of Section 2.01(d) apply.

                  (g)      TRANSACTIONS WITH AFFILIATES. Enter into any
contractual obligation with any affiliate or engage in any other transaction
with any affiliate except upon terms at least as favorable to Borrower as an
arms-length transaction with unaffiliated Persons.

                  (h)      MAINTENANCE OF ACCOUNTS. Maintain any deposit
accounts or accounts holding securities owned by Borrower except (i) accounts
located at Silicon Valley Bank, Bank of America and State Street Bank & Trust
(Merrill Lynch Premier Institutional Fund), and (ii) other accounts with respect
to which Lender takes such action as it deems necessary to obtain a perfected
security interest in such account.

                  (i)      INDEBTEDNESS PAYMENTS. (i) Prepay, redeem, purchase,
defease or otherwise satisfy in any manner prior to the scheduled repayment
thereof any Indebtedness for borrowed money (other than amounts due or permitted
to be prepaid under this Loan Agreement or the Notes or under any revolving
credit agreement constituting Permitted Indebtedness under clause (e) of the
definition of Permitted Indebtedness) or lease obligations, (ii) amend, modify
or otherwise change the terms of any Indebtedness for borrowed money or lease
obligations so as to accelerate the scheduled repayment thereof or (iii) repay
any notes to officers, directors or shareholders. Borrower shall provide a
subordination agreement, in the form provided by Lender, between Lender and the
following shareholders: Gerald G. Loehr Trust, Jack F. Butler, and Clinton L.
Lingren, duly executed by such shareholders within forty-five (45) days after
the date of this Agreement.

                  (j)      INDEBTEDNESS. Create, incur, assume or permit to
exist any Indebtedness except Permitted Indebtedness.

                  (k)      INVESTMENTS. Make any Investment except for Permitted
Investments.


                                      -18-
<Page>



                                  ARTICLE VIII
                              CONDITIONS PRECEDENT

         8.01.    CLOSING. At the time of execution and delivery of this
Agreement, Borrower shall have duly executed and/or delivered to Lender the
items set forth in PART I OF SCHEDULE 3.

         8.02.    OTHER CONDITIONS. The obligation of the Lender to make the
Loans shall be subject to the execution and/or delivery to such Lender of each
of the items set forth in PART I OF SCHEDULE 3 and the satisfaction by Borrower
of each condition set forth in PART II OF SCHEDULE 3.

         8.03.    COVENANT TO DELIVER. Borrower agrees (not as a condition but
as a covenant) to deliver to Lender each item required to be delivered to Lender
as a condition to a Loan, if the Loan is advanced. Borrower expressly agrees
that the extension of any Loan prior to the receipt by Lender of any such item
shall not constitute a waiver by Lender of Borrower's obligation to deliver such
item.

                                   ARTICLE IX
                              DEFAULT AND REMEDIES

         9.01.    EVENTS OF DEFAULT. An "Event of Default" shall mean the
occurrence of one or more of the following described events:

                  (a)      Borrower shall (i) default in the payment of
principal of or interest on any Loan when the same is due, or (ii) default in
the payment of any expense or other amount payable hereunder or thereunder for
five (5) days after receipt of written notice from a Lender that the same is
due; or

                  (b)      Borrower shall breach any provision of SECTION
6.01(d) or SECTION 7.01; or

                  (c)      Borrower shall default in the performance of any
covenant, agreement or obligation (other than a covenant, agreement or
obligation referred to in, SECTION 9.01 (a) or SECTION 9.01 (b)) contained in
any Operative Document (other than the Warrants) and Borrower shall fail to cure
within thirty (30) days after receipt of written notice from Lender any default
in the performance of any such covenant, agreement or obligation contained
therein; or

                  (d)      Borrower shall have breached the terms of any of the
Warrants; or

                  (e)      Any representation or warranty made herein or on the
Funding Date by Borrower in any Operative Document, or any certificate or
financial statement furnished pursuant to the provisions of any Operative
Document, shall prove to have been false or misleading in any material respect
as of the time made or furnished; or

                  (f)      Any Operative Document shall in any material respect
cease to be, or Borrower shall assert that any Operative Document is not, a
legal, valid and binding obligation of Borrower enforceable in accordance with
its terms; or


                                      -19-
<Page>


                  (g)      Defaults shall exist under any agreements of Borrower
which consist of the failure to pay any Indebtedness at maturity or which result
in a right by such third party or parties, whether or not exercised, to
accelerate the maturity of Indebtedness of Borrower in an aggregate amount in
excess of One Hundred Thousand Dollars ($100,000) or a material default shall
exist under any financing agreement with Lender or any of Lender's affiliates or
Lender shall have received a "Blockage Notice" under a subordination agreement
with the lender of the Indebtedness permitted under clause (e) of the definition
of Permitted Indebtedness; or

                  (h)      A proceeding shall have been instituted in a court of
competent jurisdiction seeking a decree or order for relief in respect of
Borrower in an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, or for the appointment of a
receiver, liquidator, assignee, custodian, trustee (or similar official) of
Borrower or for any substantial part of its property, or for the winding-up or
liquidation of its affairs, and such proceeding shall remain undismissed or
unstayed and in effect for a period of thirty (30) consecutive days or such
court shall enter a decree or order granting the relief sought in such
proceeding; or

                  (i)      Borrower shall commence a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, shall consent to the entry of an order for relief in an involuntary case
under any such law, or shall consent to the appointment of or taking possession
by a receiver, liquidator, assignee, trustee, custodian (or other similar
official) of Borrower or for any substantial part of its property, or shall make
a general assignment for the benefit of creditors, or shall fail generally to
pay its debts as they become due, or shall take any corporate action in
furtherance of any of the foregoing; or

                  (j)      A final judgment or order for the payment of money in
excess of One Hundred Thousand Dollars ($100,000) (exclusive of amounts covered
by insurance issued by an insurer not an affiliate of Borrower) shall be
rendered against Borrower and the same shall remain undischarged for a period of
thirty (30) days during which execution shall not be effectively stayed, or any
judgment, writ, assessment, warrant of attachment, or execution or similar
process shall be issued or levied against a substantial part of the property of
Borrower and such judgment, writ, or similar process shall not be released,
stayed, vacated or otherwise dismissed within thirty (30) days after issue or
levy; or

                  (k)      If there occurs a material adverse change in
Borrower's business, or if there is a material impairment of the prospect of
repayment of any portion of the Obligations owing to Lender or a material
impairment of the value or priority of Lender's security interests in the
Collateral; or

                  (1)      If any material portion of Borrower's assets is
attached, seized, subjected to writ or distress warrant, or is levied upon, or
comes into possession of any trustee, receiver or Person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of


                                      -20-
<Page>


record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contesting by Borrower.

         9.02.    CONSEQUENCES OF EVENT OF DEFAULT.

                  (a)      If an Event of Default specified under any of CLAUSES
(a) THROUGH (g) OR (j) THROUGH (l) OF SECTION 9.01 shall occur and be
continuing, Lender may (i) declare all of the Loans, together with interest
thereon, plus the Applicable Premium and all other liabilities of Borrower
hereunder and under the other Operative Documents to be immediately due and
payable, without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived, and (ii) terminate any commitment to make
the Loans and terminate any commitment to advance money or extend credit to or
for the benefit of Borrower pursuant to any other agreement or commitment
extended by a Lender to Borrower.

                  (b)      If an Event of Default specified under CLAUSE (h) OR
(i) OF SECTION 9.01 shall occur, then immediately and without notice (i) the
Loans, together with interest thereon, plus the Applicable Premium and all other
liabilities of Borrower hereunder and under the other Operative Documents shall
automatically become due and payable, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived, and (ii) Lender's
commitments hereunder to make the Loans and any other commitment of Lender to
Borrower to advance money or extend credit pursuant to any other agreement or
commitment shall be terminated.

                  (c)      Borrower expressly agrees that the amount due and
payable upon any such acceleration or prepayment of the Loans contrary to the
terms hereof shall include a Applicable Premium as of the date of such
acceleration or prepayment (except for an Event of Default specified in Section
9.01 h, i, j, k or l).

         9.03.    RIGHTS REGARDING COLLATERAL. Borrower agrees that when any
Event of Default has occurred and is continuing, Lender shall have the rights,
options, duties and remedies of a secured party as permitted by law and, in
addition to and without limiting the foregoing, Lender may exercise any one or
more or all, and in any order, of the remedies herein set forth, including the
following:

                  (a)      Lender, personally or by agents or attorneys, shall
have the right (subject to compliance with any applicable mandatory legal
requirements) to require Borrower to assemble the Collateral and make it
available to Lender at a place to be designated by Lender or to take immediate
possession of the Collateral, or any portion thereof, and for that purpose may
pursue the same wherever it may be found, and may enter any of premises of
Borrower, with or without notice, demand, process of law or legal procedure, to
the extent permitted by applicable law, and search for, take possession of,
remove, keep and store the same, or use and operate or lease the same until
sold. In furtherance of Lender's rights hereunder, Borrower hereby grants to


                                      -21-
<Page>


Lender an irrevocable, non-exclusive license (exercisable without royalty or
other payment by Lender) to use, license or sublicense any patent, trademark,
trade name, copyright or other Intellectual Property in which Borrower now or
hereafter has any right, title or interest together with the right of access to
all media in which any of the foregoing may be recorded or stored; provided,
however, that such license shall only be exercisable in connection with the
disposition of Collateral upon Lender's exercise of its remedies hereunder.

                  (b)      Lender may, if at the time such action may be lawful
and always subject to compliance with any mandatory legal requirements, either
with or without taking possession and either before or after taking possession,
without instituting any legal proceedings whatsoever, having first given notice
of such sale by registered or certified mail to Borrower once at least ten (10)
days prior to the date of such sale, and having first given any other notice
which may be required by law, sell and dispose of the Collateral, or any part
thereof, at a private sale or at public auction, to the highest bidder, in one
lot as an entirety or in separate lots, and either for cash or on credit and on
such terms as Lender may determine, and at any place (whether or not it be the
location of the Collateral or any part thereof) designated in the notice
referred to above. To the extent permitted by applicable law, any such sale or
sales may be adjourned from time to time by announcement at the time and place
appointed for such sale or sales, or for any such adjourned sale or sales,
without further published notice, and Borrower, Lender or the holder or holders
of the Notes, or of any interest therein, may bid and become the purchaser at
any such sale.

                  (c)      Lender may proceed to protect and enforce this
Agreement and the other Operative Documents by suit or suits or proceedings in
equity, at law or in bankruptcy, and whether for the specific performance of any
covenant or agreement herein contained or in execution or aid of any power
herein granted; or for foreclosure hereunder, or for the appointment of a
receiver or receivers for any real property security or any part thereof, or for
the recovery of judgment for the Obligations or for the enforcement of any other
proper, legal or equitable remedy available under applicable law.

         9.04.    WAIVER BY BORROWER. Upon the occurrence of an Event of
Default, to the extent permitted by law, Borrower covenants that it will not at
any time insist upon or plead, or in any manner whatsoever claim or take any
benefit or advantage of, any stay or extension law now or at any time hereafter
in force, nor claim, take nor insist upon any benefit or advantage of or from
any law now or hereafter in force providing for the valuation or appraisement of
the Collateral or any part thereof prior to any sale or sales thereof to be made
pursuant to any provision herein contained, or to the decree, judgment or order
of any court of competent jurisdiction; nor, after such sale or sales, claim or
exercise any right under any statute now or hereafter made or enacted by any
state or otherwise to redeem the property so sold or any part thereof, and, to
the full extent legally permitted, except as to rights expressly provided
herein, hereby expressly waives for itself and on behalf of each and every
Person, except decree or judgment creditors of Borrower, acquiring any interest
in or title to the Collateral or any part thereof subsequent to the date of this
Agreement, all benefit and advantage of any such law or laws, and covenants that
it will not invoke or utilize any such law or laws or otherwise hinder, delay or
impede the execution of any power herein granted and delegated to Lender, but
will suffer and permit the execution of every such power as though no such
power, law or laws had been made or enacted.


                                      -22-
<Page>


         9.05.    EFFECT OF SALE. Any sale, whether under any power of sale
available to Lender or by virtue of judicial proceedings, shall operate to
divest all right, title, interest, claim and demand whatsoever, either at law or
in equity, of Borrower in and to the property sold, and shall be a perpetual
bar, both at law and in equity, against Borrower, its successors and assigns,
and against any and all persons claiming the property sold or any part thereof
under, by or through Borrower, its successors or assigns.

         9.06.    APPLICATION OF COLLATERAL PROCEEDS. The proceeds and/or avails
of the Collateral, or any part thereof, and the proceeds and the avails of any
remedy hereunder (as well as any other amounts of any kind held by Lender at the
time of, or received by Lender after, the occurrence of an Event of Default
hereunder) shall be paid to and applied as follows:

                  (a)      FIRST, to the payment of reasonable costs and
expenses, including all amounts expended to preserve the value of the
Collateral, of foreclosure or suit, if any, and of such sale and the exercise of
any other rights or remedies, and of all proper fees, expenses, liability and
advances, including reasonable legal expenses and attorneys' fees, incurred or
made hereunder by Lender;

                  (b)      SECOND, to the payment to Lender of the amount then
owing or unpaid on the Notes, and in case such proceeds shall be insufficient to
pay in full the whole amount so due, owing or unpaid upon the Notes, then FIRST,
to the unpaid interest thereon, SECOND, to unpaid principal thereof and third to
the remaining balance of the Obligations under the Notes; such application to be
made upon presentation of the Notes, and the notation thereon of the payment, if
partially paid, or the surrender and cancellation thereof, if fully paid;

                  (c)      THIRD, to the payment of other amounts then payable
to Lender under any of the Operative Documents; and

                  (d)      FOURTH, to the payment of the surplus, if any, to
Borrower, its successors and assigns, or to whomsoever may be lawfully entitled
to receive the same.

         9.07.    REINSTATEMENT OF RIGHTS. If Lender shall have proceeded to
enforce any right under this Agreement or any other Operative Document by
foreclosure, sale, entry or otherwise, and such proceedings shall have been
discontinued or abandoned for any reason or shall have been determined
adversely, then and in every such case (unless otherwise ordered by a court of
competent jurisdiction), Lender shall be restored to its former position and
rights hereunder with respect to the property subject to the security interest
created under this Agreement.

                                    ARTICLE X
                                  MISCELLANEOUS

         10.01.   MODIFICATIONS, AMENDMENTS OR WAIVERS. The provisions of any
Operative Document may be modified, amended or waived only by a written
instrument signed by the parties thereto.


                                      -23-
<Page>


         10.02.   NO IMPLIED WAIVERS; CUMULATIVE REMEDIES; WRITING REQUIRED. No
delay or failure of Lender in exercising any right, power or remedy hereunder
shall affect or operate as a waiver thereof; nor shall any single or partial
exercise thereof or any abandonment or discontinuance of steps to enforce such a
right, power or remedy preclude any further exercise thereof or of any other
right, power or remedy. The rights and remedies hereunder of Lender are
cumulative and not exclusive of any rights or remedies which it would otherwise
have. Any waiver, permit, consent or approval of any kind or character on the
part of Lender of any breach or default under this Agreement or any such waiver
of any provision or condition of this Agreement must be in writing and shall be
effective only in the specified instance and to the extent specifically set
forth in such writing.

         10.03.   EXPENSES; INDEMNIFICATION. Borrower agrees upon demand to pay
or reimburse Lender for all liabilities, obligations and out-of-pocket expenses,
including reasonable fees and expenses of counsel for Lender, from time to time
arising in connection with the enforcement or collection of sums due under the
Operative Documents, and in connection with any amendment or modification of the
Operative Documents or any "work-out" in connection with the Operative
Documents. Borrower shall indemnify, reimburse and hold Lender, each of Lender's
partners, and each of their respective successors, assigns, agents, officers,
directors, shareholders, servants, agents and employees harmless from and
against all liabilities, losses, damages, actions, suits, demands, claims of any
kind and nature (including claims relating to environmental discharge, cleanup
or compliance), all costs and expenses whatsoever to the extent they may be
incurred or suffered by such indemnified party in connection therewith
(including reasonable attorneys' fees and expenses), fines, penalties (and other
charges of applicable governmental authorities), licensing fees relating to any
item of Collateral, damage to or loss of use of property (including
consequential or special damages to third parties or damages to Borrower's
property), or bodily injury to or death of any person (including any agent or
employee of Borrower) (each, a "CLAIM"), directly or indirectly relating to or
arising out of the use of the proceeds of the Loans or otherwise, the falsity of
any representation or warranty of Borrower or Borrower's failure to comply with
the terms of this Agreement or any other Operative Document during the Term. The
foregoing indemnity shall cover, without limitation, (i) any Claim in connection
with a design or other defect (latent or patent) in any item of equipment
included in the Collateral, (ii) any Claim for infringement of any patent,
copyright, trademark or other Intellectual Property right, (iii) any Claim
resulting from the presence on or under or the escape, seepage, leakage,
spillage, discharge, emission or release of any Hazardous Materials on the
premises of Borrower, including any Claims asserted or arising under any
Environmental Law, or (iv) any Claim for negligence or strict or absolute
liability in tort; PROVIDED, HOWEVER, that Borrower shall not indemnify Lender
for any liability incurred by Lender as a direct and sole result of Lender's
gross negligence or willful misconduct. Such indemnities shall continue in full
force and effect, notwithstanding the expiration or termination of this
Agreement. Upon Lender's written demand, Borrower shall assume and diligently
conduct, at its sole cost and expense, the entire defense of Lender, each of its
partners, and each of its respective, agents, employees, directors, officers,
shareholders, successors and assigns against any indemnified Claim described in
this SECTION 10.03. Borrower shall not settle or compromise any Claim against or
involving Lender without first obtaining Lender's written consent thereto, which
consent shall not be unreasonably withheld.


                                      -24-
<Page>


         10.04.   WAIVERS. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN
THIS AGREEMENT OR ANYWHERE ELSE, BORROWER AGREES THAT IT SHALL NOT SEEK FROM
LENDER UNDER ANY THEORY OF LIABILITY (INCLUDING ANY THEORY IN TORTS), ANY
SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES.

         10.05.   NOTICES; PAYMENTS.

                  (a)      All notices and other communications given to or made
upon any party hereto in connection with this Agreement shall be in writing
(including telexed, telecopied or telegraphic communication) and mailed (by
certified or registered mail), telexed, telegraphed, telecopied or delivered to
the respective parties, as follows:

         Borrower: At the address set forth on the cover page of this Agreement.

         Lender:   MMC/GATX PARTNERSHIP NO.  I
                   c/o MEIER MITCHELL & COMPANY
                   4 Orinda Way, Suite 200B
                   Orinda, California 94563

or in accordance with any subsequent written direction from either party to the
other. All such notices and other communications shall, except as otherwise
expressly herein provided, be effective when received; or in the case of
delivery by messenger or overnight delivery service, when left at the
appropriate address.

                  (b)      Unless Lender specify otherwise in writing, all
payments shall be made by wire transfer to:

                   GATX Capital Corporation

                   Bank Name:                Bank of America
                   Bank Address:             Dallas, Texas 75202
                   Account No.:              3750878673
                   ABA Routing No.:          111-000012
                   Reference:                Digirad Invoice #____________

         10.06.   TERMINATION. This Agreement shall terminate at the end of the
Term; PROVIDED, HOWEVER, that the termination of this Agreement shall not affect
any of the rights and remedies of Lender hereunder, it being understood and
agreed that all such rights and remedies shall continue in full force and effect
until payment of all amounts owed to Lender under or in connection with the
Operative Documents, whether on account of principal, interest, fees or
otherwise.

         10.07.   SEVERABILITY. If any provision of any Operative Document is
held invalid or unenforceable to any extent or in any application, the remainder
of such Operative Document and all other Operative Documents, or the application
of such provision to different Persons or circumstances or in different
jurisdictions, shall not be affected thereby.


                                      -25-
<Page>


         10.08.   SURVIVAL. All representations, warranties, covenants and
agreements of Borrower contained herein or made in writing in connection
herewith shall survive the execution and delivery of the Operative Documents,
the making of the Loans hereunder, the granting of security and the issuance of
the Notes.

         10.09.   RELATIONSHIP OF PARTIES. Borrower and Lender acknowledge,
understand and agree that:

                  (a)      The relationship between the Borrower, on the one
hand, and Lender, on the other, is, and at all time shall remain solely that of
a borrower and lender. Lender shall not under any circumstances be construed to
be partners or joint venturers of Borrower or any of its Affiliates; nor shall
Lender under any circumstances be deemed to be in a relationship of confidence
or trust or a fiduciary relationship with Borrower or any of its Affiliates, or
to owe any fiduciary duty to Borrower or any of its Affiliates. Lender does not
undertake or assume any responsibility or duty to Borrower or any of its
Affiliates to select, review, inspect, supervise, pass judgment upon or
otherwise inform the Borrower or any of its Affiliates of any matter in
connection with its or their Property, any Collateral held by Lender or the
operations of Borrower or any of its Affiliates. Borrower and each of its
Affiliates shall rely entirely on their own judgment with respect to such
matters, and any review, inspection, supervision, exercise of judgment or supply
of information undertaken or assumed by Lender in connection with such matters
is solely for the protection of Lender and neither Borrower nor any Affiliate is
entitled to rely thereon.

         10.10.   GOVERNING LAW. This Agreement, the other Operative Documents
and the rights and obligations of the parties hereto and thereto shall be
governed by and construed and enforced in accordance with the laws of the State
of California. Any action to enforce this Agreement against Borrower may be
brought in California or, with regard to Collateral, may also be brought
wherever such Collateral is located.

         10.11.   SUCCESSORS AND ASSIGNS. This Agreement and the other Operative
Documents shall be binding upon and inure to the benefit of Lender, all future
holders of the Notes, Borrower and their respective successors and permitted
assigns, except that Borrower may not assign or transfer its rights hereunder or
any interest herein without the prior written consent of Lender. Lender may sell
to any other financial entity (a "PARTICIPANT") participation interests in
Lender's rights under this Agreement and the other Operative Documents; provided
that notwithstanding the sale of participations, Lender shall remain solely
responsible for the performance of its obligations under this Agreement, Lender
shall remain the holder of its Note for all purposes under this Agreement and
Borrower shall continue to deal solely and directly with Lender in connection
with this Agreement and the other Operative Documents. Lender may disclose the
Operative Documents and any other financial or other information relating to
Borrower or any Subsidiary to any potential Participant, provided that such
Participant agrees to protect the confidentiality of such documents and
information using the same measures that it uses to protect its own confidential
information.


                                      -26-
<Page>


         10.12.   COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which, when so executed and delivered, shall be an original, but all such
counterparts shall together constitute one and the same instrument.

         10.13.   FURTHER ASSURANCES. Borrower will, at its own expense, from
time to time do, execute, acknowledge and deliver all further acts, deeds,
conveyances, transfers and assurances, and all financing and continuation
statements and similar notices, reasonably necessary or proper for the
perfection of the security interest being herein provided for in the Collateral,
whether now owned or hereafter acquired.

         10.14.   POWER OF ATTORNEY IN RESPECT OF THE COLLATERAL. Borrower does
hereby irrevocably appoint Lender (which appointment is coupled with an
interest), the true and lawful attorney-in-fact of Borrower with full power of
substitution, for it and in its name (a) to perform (but Lender shall not be
obligated to and shall incur no liability to Borrower or any third party for
failure to perform) any act which Borrower is obligated by this Agreement to
perform but fails to perform, (b) to ask, demand, collect, receive, receipt for,
sue for, compound and give acquittance for any and all rents, issues, profits,
avails, distributions, income, payment draws and other sums in which a security
interest is granted under SECTION 5.01 with full power to settle, adjust or
compromise any claim thereunder as fully as if Lender were Borrower itself, (c)
to receive payment of and to endorse the name of Borrower to any items of
Collateral (including checks, drafts and other orders for the payment of money)
that come into Lender's possession or under Lender's control, (d) to make all
demands, consents and waivers, or take any other action with respect to, the
Collateral, (e) in Lender's discretion, to file any claim or take any other
action or institute proceedings, either in its own name or in the name of
Borrower or otherwise, which Lender may reasonably deem necessary or appropriate
to protect and preserve the right, title and interest of Lender in and to the
Collateral, and (f) to otherwise act with respect thereto as though Lender were
the outright owner of the Collateral; PROVIDED, HOWEVER, that the power of
attorney herein granted shall be exercisable only upon the occurrence and during
the continuation of an Event of Default unless in Lender's reasonable opinion
immediate action is necessary to preserve or protect the Collateral. Borrower
agrees to reimburse Lender upon demand for all reasonable costs and expenses,
including attorneys' fees and expenses, which Lender may incur while acting as
Borrower's attorney in fact hereunder, all of which costs and expenses are
included within the Obligations.

         10.15.   CONFIDENTIALITY. All information (other than periodic reports
filed by Borrower with the Securities and Exchange Commission) disclosed by
Borrower to Lender in writing or through inspection pursuant to this Agreement
shall be considered confidential. Lender agrees to use the same degree of care
to safeguard and prevent disclosure of such confidential information as Lender
uses with its own confidential information, but in any event no less than a
reasonable degree of care. Lender shall not disclose such information to any
third party (other than Lender's or Lender's partner's attorneys and auditors
subject to the same confidentiality obligation set forth herein) and shall use
such information only for purposes of evaluation of its investment in Borrower
and the exercise of Lender's rights and the enforcement of its remedies under
this Agreement and the other Operative Agreements. The obligations of
confidentiality shall not apply to any information that (a) was known to the
public prior to disclosure by


                                      -27-
<Page>


Borrower under this Agreement, (b) becomes known to the public through no fault
of Lender, (c) is disclosed to Lender by a third party having a legal right to
make such disclosure, or (d) is independently developed by Lender.


                                      -28-
<Page>


         IN WITNESS WHEREOF, the parties hereto, by their officers thereunto
duly authorized, have executed this Agreement as of the day and year first above
written.

                                       DIGIRAD CORPORATION


                                       By:    /s/ Scott Huennekens              
                                          --------------------------------------

                                       Name:  Scott Huennekens                  
                                            ------------------------------------

                                       Title: President & CEO                   
                                             -----------------------------------



                                       MMC/GATX PARTNERSHIP NO. 1

                                       By:   GATX Capital Corporation, as 
                                             general partner

                                       By:   /s/ Patricia W. Leicher            
                                          --------------------------------------

                                       Name: Patricia W. Leicher                
                                            ------------------------------------

                                       Title: V.P.                              
                                             -----------------------------------


<Page>


                  SCHEDULES

                           1        Funding Certificate
                           2        Disclosure Schedule
                           3        Conditions Precedent

                  EXHIBITS

                           A        Form of Secured Promissory Note
                           B        Form of Warrant
                           C        Form of Opinion of Counsel
                           D        Form of Subordination Agreement


<Page>


                                   SCHEDULE 1

                               FUNDING CERTIFICATE


         The undersigned, being the duly elected and acting ____________________
of DIGIRAD CORPORATION, a Delaware corporation ("Borrower"), does hereby certify
to the Lender (as defined in the Loan Agreement defined below) in connection
with that certain Loan and Security Agreement dated as of October __, 1999,
among Borrower and Lender (the "Loan Agreement"; with other capitalized terms
used below having the meanings ascribed thereto in the Loan Agreement) that:

         1.       The representations and warranties made by Borrower in ARTICLE
                  III of the Loan Agreement and in the other Operative Documents
                  are true and correct as of the date hereof.

         2.       No event or condition has occurred and is continuing that
                  would constitute a Default or an Event of Default under the
                  Loan Agreement or any other Operative Document.

         3.       Borrower is in compliance with the covenants and requirements
                  contained in ARTICLES IV, V, VI AND VII of the Loan Agreement.

         4.       All conditions referred to in ARTICLE VIII of the Loan
                  Agreement to the making of the Loan to be made on or about the
                  date hereof have been satisfied.

         5.       No material adverse change in the general affairs, management,
                  results of operations, condition (financial or otherwise) or
                  prospects of Borrower, whether or not arising from
                  transactions in the ordinary course of business, has occurred.

Dated: _________, 199__

                                       DIGIRAD CORPORATION

                                       By:                                      
                                          --------------------------------------

                                       Name:                                    
                                            ------------------------------------

                                       Title:                                   
                                             -----------------------------------


<Page>


                                   SCHEDULE 2
                               DISCLOSURE SCHEDULE


N/A



<Page>


                                   SCHEDULE 3
                              CONDITIONS PRECEDENT
         PART I:

         At the time of execution and delivery of this Agreement, there shall
also have been duly executed and delivered to Lender:

         (a)      The Warrants executed in favor of Lender and Persons specified
                  by Lender which are exercisable for 197,628 shares of
                  Borrower's preferred stock;

         (b)      A favorable opinion of counsel for Borrower, dated as of the
                  closing date, in the form attached hereto as EXHIBIT C or such
                  other form or forms as Lender may accept;

         (c)      Copies, certified by the Secretary, Assistant Secretary or
                  Chief Financial Officer of Borrower as of the closing date, of
                  Borrower's charter documents and bylaws and of all documents
                  evidencing corporate action taken by Borrower authorizing the
                  execution, delivery and performance of the Operative Documents
                  to which Borrower is a party, in form and substance
                  satisfactory to Lender and its counsel;

         (d)      Good standing certificate from Borrower's state of
                  incorporation and the state in which Borrower's principal
                  place of business is located, together with certificates of
                  the applicable governmental authorities that Borrower is in
                  compliance with the franchise tax laws of each such state,
                  each dated as of a recent date;

         (e)      Evidence of the insurance coverage required by SECTION 6.01(d)
                  of this Agreement;

         (f)      All necessary consents of shareholders and other third parties
                  with respect to the execution, delivery and performance of
                  this Agreement, the Warrants, the Notes and the other
                  Operative Documents;

         (g)      Form UCC-1 Financing Statements, duly executed by Borrower, or
                  other documents, and Borrower shall have taken such actions,
                  if any, as Lender shall reasonably determine are necessary or
                  desirable to perfect and protect its security interest in the
                  Collateral;

         (h)      Notices of Security Interest to Depository Banks in the forms
                  provided by Lender;

         (i)      A pledged collateral account control agreement, in the form
                  provided by Lender; and

         (j)      All other documents as Lender shall have reasonably requested.


<Page>



         PART II

         On or prior to the Funding Date of the Loans, each of the items set
forth in PART I OF THIS SCHEDULE 3 shall have been delivered to such Lender and
the following conditions shall have been satisfied or waived by such Lender:

         (a)      Borrower shall have provided to Lender such documents,
                  instruments and agreements as Lender shall reasonably request
                  to evidence the perfection and priority of the security
                  interests granted to Lender pursuant to ARTICLE V;

         (b)      No Event of Default or Default shall have occurred and be
                  continuing;

         (c)      Borrower shall have duly executed and delivered to each Lender
                  a Note in the amount of such Lender's Loan;

         (d)      In Lender's sole discretion, there shall not have occurred any
                  material adverse change in the general affairs, management,
                  results of operations, condition (financial or otherwise) or
                  prospects of Borrower, whether or not arising from
                  transactions in the ordinary course of business, and there
                  shall not have occurred since the date first written on the
                  cover page of this Agreement any material adverse deviation by
                  Borrower from the business plan of Borrower presented to and
                  not disapproved by Lender;

         (e)      The representations and warranties contained in this Agreement
                  and the other Operative Documents to which Borrower is a party
                  shall be true and correct in all material respects as if made
                  on such Funding Date;

         (f)      Each of the Operative Documents remains in full force and
                  effect;

         (g)      Prior to the funding of the Second Loan, Borrower shall have
                  provided evidence to Lender, satisfactory to Lender, that
                  Borrower has successfully consummated an equity financing or
                  bridge loan or such other financing as Lender deems acceptable
                  with the net proceeds received by Borrower of such financing
                  equaling or exceeding Four Million Dollars ($4,000,000); and

         (h)      The Funding Date of the Loans shall not be later than the
                  respective Commitment Termination Dates; and the Funding Date
                  of the Second Loan shall not be prior to March 31, 2000.


                                      -2-
<Page>


                                    EXHIBIT A

                             SECURED PROMISSORY NOTE

$___________                                                      Dated: [Date]


         FOR VALUE RECEIVED, the undersigned, DIGIRAD CORPORATION, a Delaware
corporation ("BORROWER"), HEREBY PROMISES TO PAY to the order of MMC/GATX
PARTNERSHIP NO. I ("LENDER") the principal amount of _____ Million Dollars
($___000,000) or such lesser amount as shall equal the outstanding principal
balance of the Loan made to Borrower by Lender pursuant to the Loan and Security
Agreement referred to below (the "LOAN AGREEMENT"), and to pay all other amounts
due with respect to the Loan on the dates and in the amounts set forth in the
Loan Agreement.

         Interest on the principal amount of this Note from the date of this
Note shall accrue at the Loan Rate or, if applicable, the Default Rate. The Loan
Rate for this Note is ______% per annum based on a year of twelve 30-day months.
If the Funding Date of this Loan is not the first day of the month, Borrower
shall make a payment of accrued interest on the outstanding principal amount of
the Loan on [insert first Payment Date]. Commencing on ________, 199__, and
continuing on the first day of each subsequent month (each, a "PAYMENT DATE"),
Borrower shall make to Lender thirty-six (36) equal payments of principal plus
accrued interest on the then outstanding principal amount in the amount of
$_______.

         Principal, interest and all other amounts due with respect to the Loan,
are payable in lawful money of the United States of America to Lender by wire
transfer according to the wire transfer instructions set forth in the Loan
Agreement. The principal amount of this Note and the interest rate applicable
thereto, and all payments made with respect thereto, shall be recorded by Lender
and, prior to any transfer hereof, endorsed on the grid attached hereto which is
part of this Note.

         This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Loan and Security Agreement, dated as of October __, 1999, to
which Borrower and Lender are parties. The Loan Agreement, among other things,
(a) provides for the making of a secured Loan to Borrower, and (b) contains
provisions for acceleration of the maturity hereof upon the happening of certain
stated events.

         This Note may be not be prepaid except as set forth in Section 2.01(d)
of the Loan Agreement.

         This Note and the obligation of Borrower to repay the unpaid principal
amount of the Loan, plus the Applicable Premium, interest on the Loan and all
other amounts due Lender under the Loan Agreement is secured under the Loan
Agreement.


                                    - A-1 -
<Page>


         Presentment for payment, demand, notice of protest and all other
demands and notices of any kind in connection with the execution, delivery,
performance and enforcement of this Note are hereby waived.

         Borrower shall pay all reasonable fees and expenses, including, without
limitation, reasonable attorneys' fees and costs, incurred by Lender in the
enforcement or attempt to enforce any of Borrower's obligations hereunder not
performed when due. This Note shall be governed by, and construed and
interpreted in accordance with, the laws of the State of California.

         IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed
by one of its officers thereunto duly authorized on the date hereof.


                                       DIGIRAD CORPORATION

                                       By:                                      
                                          --------------------------------------

                                       Name:                                    
                                            ------------------------------------

                                       Title:                                   
                                             -----------------------------------


                                    - A-2 -
<Page>


                  LOAN INTEREST RATE AND PAYMENTS OF PRINCIPAL


<Table>
<Caption>

                           PRINCIPAL                              SCHEDULED 
           DATE             AMOUNT         INTEREST RATE        PAYMENT AMOUNT        NOTATION BY
           ----             ------         -------------        --------------        -----------
           <S>              <C>            <C>                  <C>                   <C>





</Table>




<Page>


                                    EXHIBIT B
                                 FORM OF WARRANT













                                    - B-1 -

<Page>


THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION
OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE
APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THIS WARRANT.

                               DIGIRAD CORPORATION

                           WARRANT TO PURCHASE SHARES
                           OF SERIES E PREFERRED STOCK

         THIS CERTIFIES THAT, for value received, [MEIER MITCHELL &
COMPANY/PRIORITY CAPITAL] and its assignees are entitled to subscribe for and
purchase [172,925/24,703] shares of the fully paid and nonassessable Series E
Preferred Stock (as adjusted pursuant to Section 4 hereof, the "Shares") of
DIGIRAD CORPORATION, a Delaware corporation (the "Company"), at the price of
$3.036 per share (such price and such other price as shall result, from time to
time, from the adjustments specified in Section 4 hereof is herein referred to
as the "Warrant Price"), subject to the provisions and upon the terms and
conditions hereinafter set forth. As used herein, (a) the term "Series
Preferred" shall mean the Company's presently authorized Series E Preferred
Stock, and any stock into or for which such Series E Preferred Stock may
hereafter be converted or exchanged, and after the automatic conversion of the
Series E Preferred Stock to Common Stock shall mean the Company's Common Stock,
(b) the term "Date of Grant" shall mean October __, 1999, and (c) the term
"Other Warrants" shall mean any other warrants issued by the Company in
connection with the transaction with respect to which this Warrant was issued,
the Loan and Security Agreement dated as of October __ 1999 (the "Loan
Agreement") between the Company and the lender named therein, and any warrant
issued upon transfer or partial exercise of or in lieu of this Warrant. The term
"Warrant" as used herein shall be deemed to include Other Warrants unless the
context clearly requires otherwise.

         If the Company is eligible under the Loan Agreement and requests Lender
to fund the Second Loan pursuant to the terms of the Loan Agreement, but Lender
elects not to fund the Second Loan, the number of shares of the fully paid and
nonassessable Series E Preferred Stock the holder is entitled to subscribe for
and purchase as set forth above shall be reduced from [172,925/24,703] to
[115,283/16,469). The terms "Lender" and "Second Loan" shall have the meaning
given these capitalized terms in the Loan Agreement.

         1.       TERM. The purchase right represented by this Warrant is
exercisable, in whole or in part, at any time and from time to time from the
Date of Grant through the later of (i) seven (7) years after the Date of Grant
or (ii) five (5) years after the closing of the Company's initial public
offering of its Common Stock ("IPO") effected pursuant to a Registration
Statement on Form S-1 (or its successor) filed under the Securities Act of 1933,
as amended (the "Act").


<Page>


         2.       METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT. Subject
to Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, at
the election of the holder hereof, by (a) the surrender of this Warrant (with
the notice of exercise substantially in the form attached hereto as Exhibit A-1
duly completed and executed) at the principal office of the Company and by the
payment to the Company, by certified or bank check, or by wire transfer to an
account designated by the Company (a "Wire Transfer") of an amount equal to the
then applicable Warrant Price multiplied by the number of Shares then being
purchased; (b) if in connection with a registered public offering of the
Company's securities, the surrender of this Warrant (with the notice of exercise
form attached hereto as Exhibit A-2 duly completed and executed) at the
principal office of the Company together with notice of arrangements reasonably
satisfactory to the Company for payment to the Company either by certified or
bank check or by Wire Transfer from the proceeds of the sale of shares to be
sold by the holder in such public offering of an amount equal to the then
applicable Warrant Price per share multiplied by the number of Shares then being
purchased; or (c) exercise of the "net issuance" right provided for in Section
10.2 hereof. The person or persons in whose name(s) any certificate(s)
representing shares of Series Preferred shall be issuable upon exercise of this
Warrant shall be deemed to have become the holder(s) of record of, and shall be
treated for all purposes as the record holder(s) of, the shares represented
thereby (and such shares shall be deemed to have been issued) immediately prior
to the close of business on the date or dates upon which this Warrant is
exercised. In the event of any exercise of the rights represented by this
Warrant, certificates for the shares of stock so purchased shall be delivered to
the holder hereof as soon as possible and in any event within thirty (30) days
after such exercise and, unless this Warrant has been fully exercised or
expired, a new Warrant representing the portion of the Shares, if any, with
respect to which this Warrant shall not then have been exercised shall also be
issued to the holder hereof as soon as possible and in any event within such
thirty-day period; provided, however, at such time as the Company is subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended,
if requested by the holder of this Warrant, the Company shall cause its transfer
agent to deliver the certificate representing Shares issued upon exercise of
this Warrant to a broker or other person (as directed by the holder exercising
this Warrant) within the time period required to settle any trade made by the
holder after exercise of this Warrant.

         3.       STOCK FULLY PAID; RESERVATION OF SHARES. All Shares that may
be issued upon the exercise of the rights represented by this Warrant will, upon
issuance pursuant to the terms and conditions herein, be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized, and
reserved for the purpose of the issue upon exercise of the purchase rights
evidenced by this Warrant, a sufficient number of shares of its Series Preferred
to provide for the exercise of the rights represented by this Warrant and a
sufficient number of shares of its Common Stock to provide for the conversion of
the Series Preferred into Common Stock.

         4.       ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number
and kind of securities purchasable upon the exercise of this Warrant and the
Warrant Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:


                                      -2-
<Page>


                  (a)      RECLASSIFICATION OR MERGER. In case of any
reclassification or change of securities of the class issuable upon exercise of
this Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination), or in case of any merger of the Company with or into another
corporation (other than a merger with another corporation in which the Company
is the acquiring and the surviving corporation and which does not result in any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant), or in case of any sale of all or substantially all of the assets
of the Company, the Company, or such successor or purchasing corporation, as the
case maybe, shall duly execute and deliver to the holder of this Warrant a new
Warrant (in form and substance satisfactory to the holder of this Warrant), or
the Company shall make appropriate provision without the issuance of a new
Warrant, so that the holder of this Warrant shall have the right to receive, at
a total purchase price not to exceed that payable upon the exercise of the
unexercised portion of this Warrant, and in lieu of the shares of Series
Preferred theretofore issuable upon exercise of this Warrant, (i) the kind and
amount of shares of stock, other securities, money and property receivable upon
such reclassification, change, merger or sale by a holder of the number of
shares of Series Preferred then purchasable under this Warrant, or (ii) in the
case of such a merger or sale in which the consideration paid consists all or in
part of assets other than securities of the successor or purchasing corporation,
at the option of the Holder of this Warrant, the securities of the successor or
purchasing corporation having a value at the time of the transaction equivalent
to the valuation of the Series Preferred at the time of the transaction. Any new
Warrant shall provide for adjustments that shall be as nearly equivalent as may
be practicable to the adjustments provided for in this Section 4. The provisions
of this subparagraph (a) shall similarly apply to successive reclassifications,
changes, mergers and transfers.

                  (b)      SUBDIVISION OR COMBINATION OF SHARES. If the Company
at any time while this Warrant remains outstanding and unexpired shall subdivide
or combine its outstanding shares of Series Preferred, the Warrant Price shall
be proportionately decreased and the number of Shares issuable hereunder shall
be proportionately increased in the case of a subdivision and the Warrant Price
shall be proportionately increased and the number of Shares issuable hereunder
shall be proportionately decreased in the case of a combination.

                  (c)      STOCK DIVIDENDS AND OTHER DISTRIBUTIONS. If the
Company at any time while this Warrant is outstanding and unexpired shall (i)
pay a dividend with respect to Series Preferred payable in Series Preferred,
then the Warrant Price shall be adjusted, from and after the date of
determination of shareholders entitled to receive such dividend or distribution,
to that price determined by multiplying the Warrant Price in effect immediately
prior to such date of determination by a fraction (A) the numerator of which
shall be the total number of shares of Series Preferred outstanding immediately
prior to such dividend or distribution, and (B) the denominator of which shall
be the total number of shares of Series Preferred outstanding immediately after
such dividend or distribution; or (ii) make any other distribution with respect
to Series Preferred (except any distribution specifically provided for in
Sections 4(a) and 4(b)), then, in each such case, provision shall be made by the
Company such that the holder of this Warrant shall receive upon exercise of this
Warrant a proportionate share of any such dividend or distribution as though it
were the holder of the Series Preferred (or Common Stock issuable upon
conversion thereof) as of the record date fixed for the determination of the
shareholders of the Company entitled to receive such dividend or distribution.


                                      -3-
<Page>


                  (d)      ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment
in the Warrant Price, the number of Shares of Series Preferred purchasable
hereunder shall be adjusted, to the nearest whole share, to the product obtained
by multiplying the number of Shares purchasable immediately prior to such
adjustment in the Warrant Price by a fraction, the numerator of which shall be
the Warrant Price immediately prior to such adjustment and the denominator of
which shall be the Warrant Price immediately thereafter.

                  (e)      ANTIDILUTION RIGHTS. The other antidilution rights
applicable to the Shares of Series Preferred purchasable hereunder are set forth
in the Company's Certificate of Incorporation, as amended through the Date of
Grant, a true and complete copy of which is attached hereto as Exhibit B (the
"Charter"). Such antidilution rights shall not be restated, amended, modified or
waived in any manner that is adverse to the holder hereof without such holder's
prior written consent. The Company shall promptly provide the holder hereof with
any restatement, amendment, modification or waiver of the Charter promptly after
the same has been made.

         5.       NOTICE OF ADJUSTMENTS. Whenever the Warrant Price or the
number of Shares purchasable hereunder shall be adjusted pursuant to Section 4
hereof, the Company shall make a certificate signed by its chief financial
officer setting forth, in reasonable detail, the event requiring the adjustment,
the amount of the adjustment, the method by which such adjustment was
calculated, and the Warrant Price and the number of Shares purchasable hereunder
after giving effect to such adjustment, and shall cause copies of such
certificate to be mailed (without regard to Section 13 hereof, by first class
mail, postage prepaid) to the holder of this Warrant. In addition, whenever the
conversion price or conversion ratio of the Series Preferred shall be adjusted,
the Company shall make a certificate signed by its chief financial officer
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated,
and the conversion price or ratio of the Series Preferred after giving effect to
such adjustment, and shall cause copies of such certificate to be mailed
(without regard to Section 13 hereof, by first class mail, postage prepaid) to
the holder of this Warrant.

         6.       FRACTIONAL SHARES. No fractional shares of Series Preferred
will be issued in connection with any exercise hereunder, but in lieu of such
fractional shares the Company shall make a cash payment therefor based on the
fair market value of the Series Preferred on the date of exercise as reasonably
determined in good faith by the Company's Board of Directors.

         7.       COMPLIANCE WITH ACT; DISPOSITION OF WARRANT OR SHARES OF
                  SERIES PREFERRED.

                  (a)      COMPLIANCE WITH ACT. The holder of this Warrant, by
acceptance hereof, agrees that this Warrant, and the shares of Series Preferred
to be issued upon exercise hereof and any Common Stock issued upon conversion
thereof are being acquired for investment and that such holder will not offer,
sell or otherwise dispose of this Warrant, or any shares of Series Preferred to
be issued upon exercise hereof or any Common Stock issued upon conversion
thereof except under circumstances which will not result in a violation of the
Act or any applicable state securities laws.


                                      -4-
<Page>


Upon exercise of this Warrant, unless the Shares being acquired are registered
under the Act and any applicable state securities laws or an exemption from such
registration is available, the holder hereof shall confirm in writing that the
shares of Series Preferred so purchased (and any shares of Common Stock issued
upon conversion thereof) are being acquired for investment and not with a view
toward distribution or resale in violation of the Act and shall confirm such
other matters related thereto as may be reasonably requested by the Company.
This Warrant and all shares of Series Preferred issued upon exercise of this
Warrant and all shares of Common Stock issued upon conversion thereof (unless
registered under the Act and any applicable state securities laws) shall be
stamped or imprinted with a legend in substantially the following form:

"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION
MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO,
(ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION
LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE
COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE
SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY."

         Said legend shall be removed by the Company, upon the request of a
holder, at such time as the restrictions on the transfer of the applicable
security shall have terminated. In addition, in connection with the issuance of
this Warrant, the holder specifically represents to the Company by acceptance of
this Warrant as follows:

                           (1)      The holder is aware of the Company's
business affairs and financial condition, and has acquired information about the
Company sufficient to reach an informed and knowledgeable decision to acquire
this Warrant. The holder is acquiring this Warrant for its own account for
investment purposes only and not with a view to, or for the resale in connection
with, any "distribution" thereof in violation of the Act. By executing this
Warrant, the holder further represents as of the Date of Grant that the holder
does not have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participation to such person or to any third
person, with respect to any of the Shares or this Warrant.

                           (2)      The holder is a holder in securities of
companies in the development stage and acknowledges that it is able to fend for
itself, can bear the economic risk of its holding and has such knowledge ad
experience in financial and business matters that it is capable of evaluating
the merits and risks of the acquisition of this Warrant and the Shares.

                           (3)      The holder understands that this Warrant has
not been registered under the Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of the holder's investment intent as expressed herein.


                                      -5-
<Page>


                           (4)      The holder further understands that this
Warrant must be held indefinitely unless subsequently registered under the Act
and qualified under any applicable state securities laws, or unless exemptions
from registration and qualification are otherwise available. The holder is aware
of the provisions of Rule 144, promulgated under the Act.

                           (5)      The holder is an "accredited investor" as
such term is defined in Rule 501 of Regulation D promulgated under the Act.

                  (b)      DISPOSITION OF WARRANT OR SHARES. With respect to any
offer, sale or other disposition of this Warrant or any shares of Series
Preferred acquired pursuant to the exercise of this Warrant prior to
registration of such Warrant or shares, the holder hereof agrees to give written
notice to the Company prior thereto, describing briefly the manner thereof,
together with a written opinion of such holder's counsel, or other evidence, if
reasonably satisfactory to the Company, to the effect that such offer, sale or
other disposition may be effected without registration or qualification (under
the Act as then in effect or any federal or state securities law then in effect)
of this Warrant or such shares of Series Preferred or Common Stock and
indicating whether or not under the Act certificates for this Warrant or such
shares of Series Preferred to be sold or otherwise disposed of require any
restrictive legend as to applicable restrictions on transferability in order to
ensure compliance with such law. Upon receiving such written notice and
reasonably satisfactory opinion or other evidence, the Company, as promptly as
practicable but no later than fifteen (15) days after receipt of the written
notice, shall notify such holder that such holder may sell or otherwise dispose
of this Warrant or such shares of Series Preferred or Common Stock, all in
accordance with the terms of the notice delivered to the Company. If a
determination has been made pursuant to this Section 7(b) that the opinion of
counsel for the holder or other evidence is not reasonably satisfactory to the
Company, the Company shall so notify the holder promptly with details thereof
after such determination has been made. Notwithstanding the foregoing, this
Warrant or such shares of Series Preferred or Common Stock may, as to such
federal laws, be offered, sold or otherwise disposed of in accordance with Rule
144 or 144A under the Act, provided that the Company shall have been furnished
with such information as the Company may reasonably request to provide a
reasonable assurance that the provisions of Rule 144 or 144A have been
satisfied. Each certificate representing this Warrant or the shares of Series
Preferred thus transferred (except a transfer pursuant to Rule 144 or 144A)
shall bear a legend as to the applicable restrictions on transferability in
order to ensure compliance with such laws, unless in the aforesaid opinion of
counsel for the holder, such legend is not required in order to ensure
compliance with such laws. The Company may issue stop transfer instructions to
its transfer agent in connection with such restrictions.

                  (c)      APPLICABILITY OF RESTRICTIONS. Neither any
restrictions of any legend described in this Warrant nor the requirements of
Section 7(b) above shall apply to any transfer of, or grant of a security
interest in, this Warrant (or the Series Preferred or Common Stock obtainable
upon exercise thereof) or any part hereof (i) to a partner of the holder if the
holder is a partnership or to a member of the holder if the holder is a limited
liability company, (ii) to a partnership of which the holder is a partner or to
a limited liability company of which the holder is a member, or (iii) to any
affiliate of the holder if the holder is a corporation; PROVIDED,


                                      -6-
<Page>


HOWEVER, in any such transfer, if applicable, the transferee shall on the
Company's request agree in writing to be bound by the terms of this Warrant as
if an original holder hereof.

         8.       RIGHTS AS SHAREHOLDERS; INFORMATION. No holder of this
Warrant, as such, shall be entitled to vote or receive dividends or be deemed
the holder of Series Preferred or any other securities of the Company which may
at any time be issuable on the exercise hereof for any purpose, nor shall
anything contained herein be construed to confer upon the holder of this
Warrant, as such, any of the rights of a shareholder of the Company or any right
to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to receive notice of meetings, or to
receive dividends or subscription rights or otherwise until this Warrant shall
have been exercised and the Shares purchasable upon the exercise hereof shall
have become deliverable, as provided herein. Notwithstanding the foregoing, the
Company will transmit to the holder of this Warrant such information, documents
and reports as are generally distributed to the holders of any class or series
of the securities of the Company concurrently with the distribution thereof to
the shareholders.

         9.       MARKET STAND-OFF AGREEMENT. During the time period not to
exceed 180 days specified by the Company and an underwriter of securities of the
Company, following the effective date of a registration statement of the Company
filed under the Act (the "Lock-up"), the holder shall not, to the extent
requested by the Company and such underwriter, directly or indirectly sell,
offer to sell, contract to sell (including, without limitation, any short sale),
grant any option to purchase or otherwise transfer or dispose of (other than to
transferees or donees who agree to be similarly bound) any securities of the
Company held by it at any time during such period except Common Stock included
in such registration; PROVIDED, HOWEVER, that this Section 9 shall be applicable
(a) only to the first such registration statement of the Company pursuant to
which Common Stock (or other securities) of the Company are to be sold on its
behalf to the public in an underwritten offering, and (b) only if all officers
and directors of the Company enter into similar agreements, and (c) such
underwriters certify to the holder of this Warrant in writing that (1) they have
determined that the holder must be so bound during the Lock-up or it would have
a material negative impact on the offering, and (2) all other holders of
warrants of the Company have agreed to be similarly restricted. In order to
enforce the foregoing covenant, the Company may impose stop-transfer
restrictions with respect to the Shares of the holder (and the shares or
securities of every person subject to the foregoing restriction) until the end
of such period

         10.      ADDITIONAL RIGHTS.

                  10.1     ACQUISITION TRANSACTIONS. The Company shall provide
the holder of this Warrant with at least twenty (20) days' written notice prior
to closing thereof of the terms and conditions of any of the following
transactions (to the extent the Company has notice thereof): (i) the sale,
lease, exchange, conveyance or other disposition of all or substantially all of
the Company's property or business, or (ii) its merger into or consolidation
with any other corporation (other than a wholly-owned subsidiary of the
Company), or any transaction (including a merger or other reorganization) or
series of related transactions, in which more than 50% of the voting power of
the Company is disposed of.


                                      -7-
<Page>


                  10.2     RIGHT TO CONVERT WARRANT INTO STOCK: NET ISSUANCE.

                           (a)      RIGHT TO CONVERT. In addition to and without
limiting the rights of the holder under the terms of this Warrant, the holder
shall have the right to convert this Warrant or any portion thereof (the
"Conversion Right") into shares of Series Preferred (or Common Stock if the
Series Preferred has been automatically converted into Common Stock) as provided
in this Section 10.2 at any time or from time to time during the term of this
Warrant. Upon exercise of the Conversion Right with respect to a particular
number of shares subject to this Warrant (the "Converted Warrant Shares"), the
Company shall deliver to the holder (without payment by the holder of any
exercise price or any cash or other consideration) that number of shares of
fully paid and nonassessable Series Preferred (or Common Stock if the Series
Preferred has been automatically converted into Common Stock) as is determined
according to the following formula:

         X=   B - A
              -----
                Y

         Where:     X =    the number of shares of Series Preferred (or Common 
                           Stock if the Series Preferred has been automatically 
                           converted to Common Stock) that shall be issued to
                           holder

                    Y =    the fair market value of one share of Series
                           Preferred (or Common Stock if the Series Preferred
                           has been automatically converted to Common Stock)

                    A =    the aggregate Warrant Price of the specified number
                           of Converted Warrant Shares immediately prior to the
                           exercise of the Conversion Right (i.e., the number of
                           Converted Warrant Shares multiplied by the Warrant
                           Price)

                    B =    the aggregate fair market value of the specified
                           number of Converted Warrant Shares (i.e., the number
                           of Converted Warrant Shares MULTIPLIED BY the fair
                           market value of one Converted Warrant Share)

         No fractional shares shall be issuable upon exercise of the Conversion
Right, and, if the number of shares to be issued determined in accordance with
the foregoing formula is other than a whole number, the Company shall pay to the
holder an amount in cash equal to the fair market value of the resulting
fractional share on the Conversion Date (as hereinafter defined). For purposes
of Section 9 of this Warrant, shares issued pursuant to the Conversion Right
shall be treated as if they were issued upon the exercise of this Warrant.

                  (b)      METHOD OF EXERCISE. The Conversion Right may be
exercised by the holder by the surrender of this Warrant at the principal office
of the Company together with a written statement (which may be in the form of
Exhibit A-1 or Exhibit A-2 hereto) specifying that the holder thereby intends to
exercise the Conversion Right and indicating the number of shares subject to
this Warrant which are being surrendered (referred to in Section 10.2(a) hereof
as the Converted Warrant Shares) in exercise of the Conversion Right. Such
conversion shall be effective upon receipt by the Company of this Warrant
together with the aforesaid written


                                      -8-
<Page>


statement, or on such later date as is specified therein (the "Conversion
Date"), and, at the election of the holder hereof, may be made contingent upon
the closing of the sale of the Company's Common Stock to the public in a public
offering pursuant to a Registration Statement under the Act (a "Public
Offering"). Certificates for the shares issuable upon exercise of the Conversion
Right and, if applicable, a new warrant evidencing the balance of the shares
remaining subject to this Warrant, shall be issued as of the Conversion Date and
shall be delivered to the holder within thirty (30) days following the
Conversion Date.

                  (c)      DETERMINATION OF FAIR MARKET VALUE. For purposes of
this Section 10.2, "fair market value" of a share of Series Preferred (or Common
Stock if the Series Preferred has been automatically converted into Common
Stock) as of a particular date (the "Determination Date") shall mean:

                           (i)      If the Conversion Right is exercised in
connection with and contingent upon a Public Offering, and if the Company's
Registration Statement relating to such Public Offering ("Registration
Statement") has been declared effective by the Securities and Exchange
Commission, then the initial "Price to Public" specified in the final prospectus
with respect to such offering.

                           (ii)     If the Conversion Right is not exercised in
connection with and contingent upon a Public Offering, then as follows:

                  (A)      If traded on a securities exchange, the fair market
value of the Common Stock shall be deemed to be the average of the closing
prices of the Common Stock on such exchange over the 30-day period ending five
business days prior to the Determination Date, and the fair market value of the
Series Preferred shall be deemed to be such fair market value of the Common
Stock multiplied by the number of shares of Common Stock into which each share
of Series Preferred is then convertible;

                  (B)      If traded on the Nasdaq Stock Market or other
over-the-counter system, the fair market value of the Common Stock shall be
deemed to be the average of the closing bid prices of the Common Stock over the
30-day period ending five business days prior to the Determination Date, and the
fair market value of the Series Preferred shall be deemed to be such fair market
value of the Common Stock multiplied by the number of shares of Common Stock
into which each share of Series Preferred is then convertible; and

                  (C)      If there is no public market for the Common Stock,
then fair market value shall be determined by the Board of Directors of the
Company acting in good faith.

         10.3     EXERCISE PRIOR TO EXPIRATION. To the extent this Warrant is
not previously exercised as to all of the Shares subject hereto, and if the fair
market value of one share of the Series Preferred is greater than the Warrant
Price then in effect, this Warrant shall be deemed automatically exercised
pursuant to Section 10.2 above (even if not surrendered) immediately before its
expiration. For purposes of such automatic exercise, the fair market value of
one share of the Series Preferred upon such expiration shall be determined
pursuant to Section 10.2(c). To the extent this Warrant or any portion thereof
is deemed automatically exercised pursuant to this


                                      -9-
<Page>


Section 10.3, the Company agrees to promptly notify the holder hereof of the
number of Shares, if any, the holder hereof is to receive by reason of such
automatic exercise.

         11.      REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to the holder of this Warrant as follows:

                  (a)      This Warrant has been duly authorized and executed by
the Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and the rules of law or
principles at equity governing specific performance, injunctive relief and other
equitable remedies;

                  (b)      The Shares have been duly authorized and reserved for
issuance by the Company and, when issued in accordance with the terms hereof,
will be validly issued, fully paid and non-assessable;

                  (c)      The rights, preferences, privileges and restrictions
granted to or imposed upon the Series Preferred and the holders thereof are as
set forth in the Charter, and on the Date of Grant, each share of the Series
Preferred represented by this Warrant is convertible into one share of Common
Stock;

                  (d)      The shares of Common Stock issuable upon conversion
of the Shares have been duly authorized and reserved for issuance by the Company
and, when issued in accordance with the terms of the Charter will be validly
issued, hilly paid and nonassessable;

                  (e)      The execution and delivery of this Warrant are not,
and the issuance of the Shares upon exercise of this Warrant in accordance with
the terms hereof will not be, inconsistent with the Company's Charter or
by-laws, do not and will not contravene any law, governmental rule or
regulation, judgment or order applicable to the Company, and do not and will not
conflict with or contravene any provision of, or constitute a default under, any
indenture, mortgage, contract or other instrument of which the Company is a
party or by which it is bound or require the consent or approval of, the giving
of notice to, the registration or filing with or the taking of any action in
respect of or by, any Federal, state or local government authority or agency or
other person, except for the filing of notices pursuant to federal and state
securities laws, which filings will be effected by the time required thereby;
and

                  (f)      There are no actions, suits, audits, investigations
or proceedings pending or, to the knowledge of the Company, threatened against
the Company in any court or before any governmental commission, board or
authority which, if adversely determined, will have a material adverse effect on
the ability of the Company to perform its obligations under this Warrant.

                  (g)      The number of shares of Common Stock of the Company
outstanding on the date hereof, on a fully diluted basis (assuming the
conversion of all outstanding convertible securities and the exercise of all
outstanding options and warrants), does not exceed [________] shares.


                                      -10-
<Page>


         12.      MODIFICATION AND WAIVER. This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.

         13.      NOTICES. Any notice, request, communication or other document
required or permitted to be given or delivered to the holder hereof or the
Company shall be delivered, or shall be sent by certified or registered mail,
postage prepaid, to each such holder at its address as shown on the books of the
Company or to the Company at the address indicated therefor on the signature
page of this Warrant.

         14.      BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding
upon any corporation succeeding the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets, and all of the
obligations of the Company relating to the Series Preferred issuable upon the
exercise or conversion of this Warrant shall survive the exercise, conversion
and termination of this Warrant and all of the covenants and agreements of the
Company shall inure to the benefit of the successors and assigns of the holder
hereof.

         15.      LOST WARRANTS OR STOCK CERTIFICATES. The Company covenants to
the holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company will make and deliver a new Warrant or stock
certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant or stock certificate.

         16.      DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The language in this Warrant shall be
construed as to its fair meaning without regard to which parry drafted this
Warrant.

         17.      GOVERNING LAW. This Warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of California (without giving effect to principles of conflicts of
laws).

         18.      SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations and warranties of the Company and the holder hereof contained
herein shall survive the Date of Grant, the exercise or conversion of this
Warrant (or any part hereof) or the termination or expiration of rights
hereunder. All agreements of the Company and the holder hereof contained herein
shall survive indefinitely until, by their respective terms, they are no longer
operative.

         19.      REMEDIES. In case any one or more of the covenants and
agreements contained in this Warrant shall have been breached, the holders
hereof (in the case of a breach by the Company), or the Company (in the case of
a breach by a holder), may proceed to protect and enforce their or its rights
either by suit in equity and/or by action at law, including, but not


                                      -11-
<Page>


limited to, an action for damages as a result of any such breach and/or an
action for specific performance of any such covenant or agreement contained in
this Warrant.

         20.      NO IMPAIRMENT OF RIGHTS. The Company will not, by amendment of
its Charter or through any other means, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holder of this Warrant against impairment.

         21.      SEVERABILITY. The invalidity or unenforceability of any
provision of this Warrant in any jurisdiction shall not affect the validity or
enforceability of such provision in any other jurisdiction, or affect any other
provision of this Warrant, which shall remain in full force and effect.

         22.      RECOVERY OF LITIGATION COSTS. If any legal action or other
proceeding is brought for the enforcement of this Warrant, or because of an
alleged dispute, breach, default, or misrepresentation in connection with any of
the provisions of this Warrant, the successful or prevailing party or parties
shall be entitled to recover reasonable attorneys' fees and other costs incurred
in that action or proceeding, in addition to any other relief to which it or
they may be entitled.

         23.      ENTIRE AGREEMENT; MODIFICATION. This Warrant constitutes the
entire agreement between the parties pertaining to the subject matter contained
in it and supersedes all prior and contemporaneous agreements, representations,
and undertakings of the parties, whether oral or written, with respect to such
subject matter.



                                      -12-
<Page>


         The Company has caused this Warrant to be duly executed and delivered
as of the Date of Grant specified above.

                                       DIGIRAD CORPORATION



                                       By                                       
                                         ---------------------------------------

                                       Title                                    
                                            ------------------------------------

                                       Address:  9350 Trade Place
                                       San Diego, CA 92121



                                       MEIER MITCHELL & COMPANY




                                       By                                       
                                         ---------------------------------------

                                       Title                                    
                                            ------------------------------------

                                       Address:  4 Orinday Way, Suite 200B
                                       Orinda, CA  94563




                                      -13-
<Page>


                                   EXHIBIT A-1

                               NOTICE OF EXERCISE

To:      DIGIRAD CORPORATION (the "Company")

         1.       The undersigned hereby:

                  / /      elects to purchase_________ shares of [Series
                           Preferred Stock] [Common Stock] of the Company
                           pursuant to the terms of the attached Warrant, and
                           tenders herewith payment of the purchase price of
                           such shares in full, or

                  / /      elects to exercise its net issuance rights pursuant
                           to Section 10.2 of the attached Warrant with respect
                           to __________ Shares of [Series Preferred Stock]
                           [Common Stock].

         2.       Please issue a certificate or certificates representing
_________ shares in the name of the undersigned or in such other name or names
as are specified below:

                      ------------------------------------
                                     (Name)

                      ------------------------------------

                      ------------------------------------
                                    (Address)

         3.       The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares,
all except as in compliance with applicable securities laws.


                                          --------------------------------------
                                          (Signature)

---------------------------
          (Date)


<Page>


                                   EXHIBIT A-2

                               NOTICE OF EXERCISE


To:      DIGIRAD CORPORATION (the "Company")

         1.       Contingent upon and effective immediately prior to the closing
(the "Closing") of the Company's public offering contemplated by the
Registration Statement on Form S___, filed ________, 19___, the undersigned
hereby:

         / /      elects to purchase __________ shares of [Series Preferred
Stock] [Common Stock] of the Company (or such lesser number of shares as may be
sold on behalf of the undersigned at the Closing) pursuant to the terms of the
attached Warrant, or

         / /      elects to exercise its net issuance rights pursuant to Section
10.2 of the attached Warrant with respect to _______ Shares of [Series Preferred
Stock] [Common Stock].

         2.       Please deliver to the custodian for the selling shareholders a
stock certificate representing such _________ shares.

         3.       The undersigned has instructed the custodian for the selling
shareholders to deliver to the Company $_______or, if less, the net proceeds due
the undersigned from the sale of shares in the aforesaid public offering. If
such net proceeds are less than the purchase price for such shares, the
undersigned agrees to deliver the difference to the Company prior to the
Closing.


                                           -------------------------------------
                                           (Signature)


-----------------
     (Date)


<Page>


                                    EXHIBIT B
                                     CHARTER




<Page>


                           CERTIFICATE OF AMENDMENT TO
                              AMENDED AND RESTATED
                          CERTIFICATE OF INCORPORATION
                             OF DIGIRAD CORPORATION,
                             a Delaware Corporation


         Digirad Corporation, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),

     DOES HEREBY CERTIFY:

         FIRST:   That resolutions were duly adopted by the Board of Directors
of the Corporation setting forth a proposed amendment to the existing Amended
and Restated Certificate of Incorporation of the Corporation, and declaring said
amendment to be advisable and recommended for approval by the stockholders of
the Corporation. The resolutions setting forth the proposed amendment are as
follows:

         RESOLVED, FURTHER, that Paragraph A and Paragraph B, Section 1 of
         ARTICLE IV of the Amended and Restated Certificate of Incorporation of
         this Corporation is hereby amended to read in its entirety as follows:

                           A.       CLASSES OF STOCK. This Corporation is
                  authorized to issue two (2) classes of shares, to be
                  designated "Common" and "Preferred" and referred to herein as
                  the "Common Stock" or the "Preferred Stock" respectively. The
                  total number of shares of Common Stock the Corporation is
                  authorized to issue is Twenty-Seven Million (27,000,000). The
                  par value is $0.001 per share. The total number of shares of
                  Preferred Stock the Corporation is authorized to issue is
                  Eighteen Million Six Hundred Ninety Thousand Eight Hundred
                  Thirty-Nine (18,690,839). The par value is $0.001 per share.

                                    The Board of Directors of the Corporation
                  may divide the Preferred Stock into any number of series. The
                  Board of Directors shall fix the designation and number of
                  shares of each such series. The Board of Directors may
                  determine and alter the rights, preferences, privileges and
                  restrictions granted to and imposed upon any wholly unissued
                  series of the Preferred Stock. The Board of Directors (within
                  the limits and restrictions of any resolution adopted by it,
                  originally fixing the number of shares of any series) may
                  increase or decrease the number of shares of any such series
                  after the issue of shares of that series, but not below the
                  number of then outstanding shares of such series.


<Page>


                           B.       Rights, Preferences, Privileges and
                  Restrictions of the Series A Preferred Stock, Series B
                  Preferred Stock, Series C Preferred Stock, Series D Preferred
                  Stock and Series E Preferred Stock.

                                    1.       Designation of Series A Preferred
                  Stock, Series B Preferred Stock, Series C Preferred Stock,
                  Series D Preferred Stock and Series E Preferred Stock.

                                             Two Million Two Hundred Fifty
                  Thousand (2,250,000) shares of Preferred Stock are designated
                  Series A Preferred Stock (the "Series A Preferred Stock") with
                  the rights, preferences and privileges specified herein. Two
                  Million Two Hundred Eighty-One Thousand (2,281,000) shares of
                  Preferred Stock are designated Series B Preferred Stock (the
                  "Series B Preferred Stock") with the rights, preferences and
                  privileges specified herein. Four Million Eight Hundred
                  Thousand (4,800,000) shares of Preferred Stock are designated
                  Series C Preferred Stock (the "Series C Preferred Stock") with
                  the rights, preferences and privileges specified herein. Eight
                  Million Six Hundred Sixty-Eight Thousand One Hundred Forty
                  (8,668,140) shares of Preferred Stock are designated Series D
                  Preferred Stock (the "Series D Preferred Stock"). Six Hundred
                  Ninety-One Thousand Six Hundred Ninety-Nine (691,699) shares
                  of Preferred Stock are designated Series E Preferred Stock
                  (the "Series E Preferred Stock"). As used in this Article IV,
                  Division B, the term "Preferred Stock" shall refer to the
                  Series A Preferred Stock, the Series B Preferred Stock, the
                  Series C Preferred Stock, Series D Preferred Stock and Series
                  E Preferred Stock."

         SECOND:  That, thereafter, the stockholders of said Corporation
approved the amended by written consent in accordance with Section 228 of the
Delaware General Corporation Law.


         THIRD:   That said amendment was duly approved in accordance with the
provisions of Section 242 of the Delaware General Corporation Law.


         FOURTH:  That the capital of said Corporation shall not be reduced
under or by reason of said amendment.


                                      -2-
<Page>


         IN WITNESS WHEREOF, Digirad Corporation, has caused this certificate to
be signed by Scott Huennekens, its President, on this 27th day of October, 1999.




                                       /s/ Scott Huennekens
                                       -----------------------------------------
                                       Scott Huennekens, President





                                      -3-

<Page>


                AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
                                       OF
                               DIGIRAD CORPORATION


         Digirad Corporation, a corporation organized and existing under the
laws of the state of Delaware, hereby certifies as follows:

         1.       The name of the corporation is Digirad Corporation. The date
the Corporation filed its original Certificate of Incorporation with the
Secretary of State was January 2, 1997.

         2.       This Amended and Restated Certificate of Incorporation
restates and amends the provisions of the original Certificate of Incorporation
of this Corporation as heretofore in effect and was duly adopted by the
Corporation's Board of Directors in accordance with Sections 241 and 245 of the
General Corporation Law of the State of Delaware.

         3.       The text of the Certificate of Incorporation is hereby amended
and restated to read as herein set forth in full:

                                    ARTICLE I

         The name of the Corporation (hereinafter called "Corporation") is
Digirad Corporation.

                                   ARTICLE II

         The address of the registered office of the Corporation in the State of
Delaware is 30 Old Rudnick Lane, City of Dover, County of Kent 19901, and the
name of the registered agent of the Corporation in the State of Delaware at such
address is CorpAmerica, Inc.

                                   ARTICLE III

         The purpose of this Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.

                                   ARTICLE IV

         A.       CLASSES OF STOCK. This Corporation is authorized to issue two
(2) classes of shares, to be designated "Common" and "Preferred" and referred to
herein as the "Common Stock" or the "Preferred Stock" respectively. The total
number of shares of Common Stock the Corporation is authorized to issue is
twenty-five million four hundred ninety-four thousand seventy-one (25,494,071).
The par value is $0.001 per share. The total number of shares of Preferred Stock
the Corporation is authorized to issue is eighteen million four hundred
ninety-three thousand two hundred eleven (18,493,211). The par value is $0.001
per share.


<Page>

                  The Board of Directors of the Corporation may divide the
Preferred Stock into any number of series. The Board of Directors shall fix the
designation and number of shares of each such series. The Board of Directors may
determine and alter the rights, preferences, privileges and restrictions granted
to and imposed upon any wholly unissued series of the Preferred Stock. The Board
of Directors (within the limits and restrictions of any resolution adopted by
it, originally fixing the number of shares of any series) may increase or
decrease the number of shares of any such series after the issue of shares of
that series, but not below the number of then outstanding shares of such series.

         B.       Rights, Preferences, Privileges and Restrictions of the Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock.

                  1.       Designation of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock.

                           Two Million Two Hundred Fifty Thousand (2,250,000)
shares of Preferred Stock are designated Series A Preferred Stock (the "Series A
Preferred Stock") with the rights, preferences and privileges specified herein.
Two Million Two Hundred Eighty-One Thousand (2,281,000) shares of Preferred
Stock are designated Series B Preferred Stock (the "Series B Preferred Stock")
with the rights, preferences and privileges specified herein. Four Million Eight
Hundred Thousand (4,800,000) shares of Preferred Stock are designated Series C
Preferred Stock (the "Series C Preferred Stock") with the rights, preferences
and privileges specified herein. Eight million six hundred sixty-eight thousand
one hundred forty (8,668,140) shares of Preferred Stock are designated Series D
Preferred Stock (the "Series D Preferred Stock"). Four hundred ninety-four
thousand seventy-one (494,071) shares of Preferred Stock are designated Series E
Preferred Stock (the "Series E Preferred Stock"). As used in this Article IV,
Division B, the term "Preferred Stock" shall refer to the Series A Preferred
Stock, the Series B Preferred Stock, the Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock.

                  2.       DIVIDEND PROVISIONS.

                           The holders of shares of Preferred Stock shall be 
entitled to receive non-cumulative dividends, out of any assets legally
available therefor, prior and in preference to any declaration or payment of any
dividend (payable other than in Common Stock of this Corporation) on the Common
Stock or any other junior equity security of this Corporation, at the rate of
$.10 per share of Series A Preferred Stock, $.11 per share of Series B Preferred
Stock, $.125 per share of Series C Preferred Stock, $.23073 per share of Series
D Preferred Stock and $.3036 per share of Series E Preferred Stock per annum
plus an amount equal to that paid on outstanding shares of Common Stock of this
Corporation, whenever funds are legally available therefor, payable quarterly
when, as and if declared by the Board of Directors and shall be non-cumulative.
Dividends, if declared, must be declared and paid with respect to all series of
Preferred Stock contemporaneously, and if less than full dividends are declared,
the same percentage of the dividend rate will be payable to each series of
Preferred Stock.


                                      -2-
<Page>


                  3.       LIQUIDATION PREFERENCE.

                           (a)      In the event of any liquidation, dissolution
or winding up of this Corporation, either voluntary or involuntary, the holders
of Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets of this Corporation to the holders of Common
Stock or any other junior equity security by reason of their ownership thereof
an amount for each share of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock,
respectively, held by such holder equal to the sum of (i) $1.00 for each such
outstanding share of Series A Preferred Stock (the "Original Series A Issue
Price"), (ii) $1.10 for each such outstanding share of Series B Preferred Stock
(the "Original Series B Issue Price"), (iii) $1.25 for each such outstanding
share of Series C Preferred Stock (the "Original Series C Issue Price"), (iv)
$2.3073 for each outstanding share of Series D Preferred Stock (the "Original
Series D Issue Price"), (v) $3.036 for each outstanding share of Series E
Preferred Stock (the "Original Series E Issue Price") and (vi) in each case, an
amount equal to all declared but unpaid dividends on each such share. If upon
the occurrence of such an event the assets and funds thus distributed among the
holders of the Preferred Stock shall be insufficient to permit the payment to
such holders of the full aforesaid preferential amounts, then the entire assets
and funds of this Corporation legally available for distribution shall be
distributed, ratably among the holders of the Preferred Stock in proportion to
the product of the liquidation preference of each such share and the number of
such shares owned by each such holder.

                           (b)      Upon the completion of the distribution 
required by subsection 3(a) above, if assets remain in the Corporation, the
holders of the Common Stock shall receive an amount equal to $.21 per share
(adjusted to reflect any subsequent stock splits, stock dividends, or other
recapitalizations) for each share of Common Stock held by them. If, upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Common Stock shall be insufficient to permit payment to such
holders of the full aforesaid preferential amounts, then the entire assets and
funds of this Corporation legally available for distribution (after giving
effect to the distribution referred to in Section 3(a) hereof) shall be
distributed ratably among the holders of the Common Stock in proportion to the
amount of such stock owned by each such holder.

                           (c)      After the distributions described in
subsections 3(a) and (b) have been paid, the remaining assets of this
Corporation available for distribution to stockholders shall be distributed
among the holders of Preferred Stock and Common Stock pro rata based on the
number of shares of Common Stock held by each (assuming conversion of all such
Preferred Stock).

                  4.       REDEMPTION.

                           (a)      The outstanding Preferred Stock shall be 
redeemable as provided in this Section 4. The Series A Redemption Price shall be
the total amount equal to $1.00 per share of Series A Preferred Stock to be
redeemed together with any declared but unpaid dividends on such shares to the
Redemption Date (as such term is hereinafter defined). The Series B Redemption
Price shall be the total amount equal to $1.10 per share of Series B Preferred
Stock to be redeemed together with any declared but unpaid dividends on such
shares 


                                      -3-
<Page>


to the Redemption Date. The Series C Redemption Price shall be the total amount
equal to $1.25 per share of Series C Preferred Stock to be redeemed together
with any declared but unpaid dividends on such shares to the Redemption Date.
The Series D Redemption Price shall be the total amount equal to $2.3073 per
share of Series D Preferred Stock to be redeemed together with any declared but
unpaid dividends on such shares to the Redemption Date. The Series E Redemption
Price shall be the total amount equal to $3.036 per share of Series E Preferred
Stock to be redeemed together with any declared but unpaid dividends on such
shares to the Redemption Date.

                           (b)      On or at any time after July 31, 2004, upon
the receipt by this Corporation from the holders of at least 66-2/3% of the then
outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock, voting
as a single class, of a written request for redemption hereunder of their
respective shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock (the
"Redemption Request"), this Corporation shall, from any source of funds legally
available therefor, redeem all of the shares of Preferred Stock by paying in
cash therefor a sum equal to the Series A Redemption Price, the Series B
Redemption Price, the Series C Redemption Price, the Series D Redemption Price
and the Series E Redemption Price, respectively.

                           (c)      (i)     At least 15, but no more than 30, 
days prior to the date fixed for any redemption of the Preferred Stock (the
"Redemption Date"), which Redemption Date shall be no later than 45 days
following the Corporation's receipt of the Redemption Request, written notice
shall be mailed, first class postage prepaid, to each holder of record (at the
close of business on the business day next preceding the day on which notice is
given) of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock to be
redeemed at the address last shown on the records of this Corporation for such
holder or given by the holder to this Corporation for the purpose of notice or
if no such address appears or is given, at the place where the principal
executive office of this Corporation is located, notifying such holder of the
redemption to be effected, specifying the number of shares to be redeemed from
such holder, the Redemption Date, the Series A Redemption Price, the Series B
Redemption Price, the Series C Redemption Price, the Series D Redemption Price
or the Series E Redemption Price as the case may be, the place at which payment
may be obtained and the date on which such holder's Conversion Rights (as
hereinafter defined) as to such shares, terminating and calling upon such holder
to surrender to this Corporation, in the manner and at the place designated,
such holder's certificate or certificates representing the shares to be redeemed
(the "Redemption Notice"). Except as provided in subsection 4(c)(iii), on or
after the Redemption Date, each holder of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock to be redeemed shall surrender to this Corporation the
certificate or certificates representing such shares, in the manner and at the
place designated in the Redemption Notice, and thereupon the Series A Redemption
Price, Series B Redemption Price, Series C Redemption Price, the Series D
Redemption Price or the Series E Redemption Price, as the case may be, of such
shares shall be payable, to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. In the event less than all the shares represented
by any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.


                                      -4-
<Page>


                                    (ii)    If the funds of the Corporation
legally available for redemption of outstanding shares of Preferred Stock on any
Redemption Date are insufficient to redeem the total number of shares of
Preferred Stock to be redeemed on such date, those funds which are legally
available will be used to redeem the maximum possible number of such shares
ratably among the holders of (A) first, such shares of Series B, Series C,
Series D and Series E Preferred Stock to be redeemed, and (B) second, such
shares of Series A Preferred Stock to be redeemed. The shares of Preferred Stock
not redeemed shall remain outstanding and entitled to all the rights and
preferences provided herein. At any time thereafter when additional funds of
this Corporation are legally available for the redemption of shares of Preferred
Stock, such funds shall immediately be used to redeem the balance of the shares
which this Corporation has become obligated to redeem on any Redemption Date but
which it has not redeemed.

                                    (iii)   From and after the Redemption Date, 
unless there shall have been a default in payment of the applicable Series A
Redemption Price, Series B Redemption Price, Series C Redemption Price, Series D
Redemption Price or the Series E Redemption Price, all rights of the holders of
such shares as holders of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
(except the right to receive the Series A Redemption Price, Series B Redemption
Price, Series C Redemption Price, Series D Redemption Price or the Series E
Redemption Price, without interest, upon surrender of their certificate or
certificates) shall cease with respect to such shares, and such shares shall not
thereafter be transferred on the books of this Corporation or be deemed to be
outstanding for any purpose whatsoever.

                                    (iv)    At least three days prior to the 
Redemption Date, this Corporation shall deposit the Series A Redemption Price,
Series B Redemption Price, Series C Redemption Price, Series D Redemption Price
and Series E Redemption Price of all outstanding shares of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock, designated for redemption in the
Redemption Notice, and not yet redeemed or converted, with a bank or trust
company having aggregate capital and surplus in excess of $50,000,000, as a
trust fund for the benefit of the holders of the shares designated for
redemption and not yet redeemed. Simultaneously, this Corporation shall deposit
irrevocable instructions and authority to such bank or trust company to pay, on
and after the Redemption Date or prior thereto, the Series A Redemption Price,
Series B Redemption Price, Series C Redemption Price, Series D Redemption Price
and Series E Redemption Price, as the case may be, to the holders thereof upon
surrender of their certificates. Any monies deposited by this Corporation
pursuant to this subsection 4(c)(iv) for the redemption of shares which are
thereafter converted into shares of Common Stock pursuant to Section 5 hereof no
later than the close of business on the Redemption Date shall be returned to
this Corporation forthwith upon such conversion. The balance of any monies
deposited by this Corporation pursuant to this subsection 4(c)(iv) remaining
unclaimed at the expiration of two years following the Redemption Date shall
thereafter be returned to this Corporation, provided that the stockholder to
which such monies would be payable hereunder shall be entitled, upon proof of
its ownership of the Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, as the
case may be, and payment of any bond requested by this Corporation, to receive
such monies but without interest from the Redemption Date.


                                      -5-
<Page>


                  5.       CONVERSION. The holders of Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):

                           (a)      RIGHT TO CONVERT.

                                    (i)     Subject to subsection 5(c), each 
outstanding share of Preferred Stock shall be convertible, at the option of the
holder thereof at any time after the date of issuance of such share (and on or
prior to the fifth day prior to the Redemption Date, if any, as may have been
fixed in any Redemption Notice), at the office of this Corporation or any
transfer agent for such series of Preferred Stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing the
Original Series A Issue Price, the Original Series B Issue Price, the Original
Series C Issue Price, the Original Series D Issue Price and the Original Series
E Issue Price, respectively, by the Conversion Price at the time in effect for
such series or shares of such series. The initial Conversion Price per share for
shares of Preferred Stock shall be the Original Series A Issue Price, the
Original Series B Issue Price, the Original Series C Issue Price, the Original
Series D Issue Price and the Original Series E Issue Price, respectively,
provided, however, that the Conversion Prices for the Series A Preferred Stock,
the Series B Preferred Stock, the Series C Preferred Stock, the Series D
Preferred Stock and the Series E Preferred Stock shall be subject to adjustment
as set forth in subsection 5(c).

                                    (ii)    Each outstanding share of Preferred 
Stock shall automatically be converted into shares of Common Stock at the
Conversion Price at the time in effect for such shares immediately upon:

                                            (A)      the closing of this 
Corporation's sale of its Common Stock in a bona fide, firm commitment
underwritten public offering registered under the Securities Act of 1933, as
amended (the "Securities Act"), which results in aggregate gross offering
proceeds to this Corporation of at least $15,000,000, at a public offering price
of not less than $7.50 per share (adjusted to reflect subsequent stock
dividends, stock splits or recapitalizations) (a "Qualifying Public Offering");
or

                                            (B)      the approval of (i) 
holders of at least 75% of the then outstanding shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock, voting together as a single class and (ii)
holders of not less than 60% of the Series D Preferred Stock voting as a class.

                           (b)      MECHANICS OF CONVERSION.  Before any holder 
of Preferred Stock shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of this Corporation or of any transfer agent for
such stock, and shall be given written notice by mail postage prepaid, to this
Corporation at its principal corporate office, of the election to convert the
same and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. This Corporation
shall, as soon as practicable thereafter, issue and deliver at such office to
such holder of Preferred Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of such series of Preferred 


                                      -6-
<Page>


Stock to be converted, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock as of such date.
If the conversion is in connection with an underwritten offer of securities
registered pursuant to the Securities Act, the conversion may, at the option of
any holder tendering shares of such series of Preferred Stock for conversion, be
conditioned upon the closing with the underwriter of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive the
Common Stock issuable upon such conversion of shares of such series of Preferred
Stock shall not be deemed to have converted such shares of such series of
Preferred Stock until immediately prior to the closing of such sale of
securities.

                           (c)      CONVERSION PRICE ADJUSTMENTS OF THE 
PREFERRED STOCK. The Conversion Prices of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall be subject to adjustment from time to time as follows:

                                    (i)     (A)      If this Corporation shall 
issue any Additional Stock (as defined below) without consideration or for a
consideration per share less than the Conversion Price for shares of the Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock in effect immediately prior to the
issuance of such Additional Stock, the new Conversion Price for such shares of
such series of Preferred Stock shall be determined by multiplying the Conversion
Price for such series of Preferred Stock in effect immediately prior to the
issuance of Additional Stock by a fraction:

                                                     (x)      the numerator of 
         which shall be the number of shares of Common Stock outstanding
         immediately prior to such issuance (for purposes of this calculation
         only, including the number of shares of Common Stock then issuable upon
         the conversion of all outstanding shares of Preferred Stock at the
         Conversion Price for such shares in effect immediately prior to such
         issuance of Additional Stock) plus the number of shares of Common Stock
         equivalents which the aggregate consideration received by this
         Corporation for the shares of such Additional Stock so issued would
         purchase at the Conversion Price in effect at the time for the shares
         of the series of Preferred Stock with respect to which the adjustment
         is being made; and

                                                     (y)      the denominator of
         which shall be the number of shares of Common Stock outstanding
         immediately prior to such issuance (for purposes of this calculation
         only, including the number of shares of Common Stock then issuable upon
         the conversion of all outstanding shares of Preferred Stock at the
         Conversion Price for such shares in effect immediately prior to such
         issuance of Additional Stock) plus the number of such shares of
         Additional Stock so issued.

                           Any series of issuances of Additional Stock
                  consisting of Common Stock or the same series of Preferred
                  Stock, issued at the same price and within a six-month period,
                  shall be treated as one issuance of Additional Stock for the
                  purposes of this calculation.


                                      -7-
<Page>


                                            (B)      No adjustment of the 
Conversion Price for such series of Preferred Stock shall be made in an amount
less than one cent per share, provided that any adjustments which are not
required to be made by reason of this sentence shall be carried forward and
shall be either taken into account in any subsequent adjustment made prior to
three years from the date of the event giving rise to the adjustment being
carried forward, or shall be made at the end of three years from the date of the
event giving rise to the adjustment being carried forward. Except to the limited
extent provided for in subsections 5(c)(i)(E)(3) and (c)(i)(E)(4), no adjustment
of such Conversion Price for such series of Preferred Stock pursuant to this
subsection 5(c)(i) shall have the effect of increasing the Conversion Price for
such series of Preferred Stock above the Conversion Price for such series in
effect immediately prior to such adjustment.

                                            (C)      In the case of the issuance
of Common Stock for cash, the consideration shall be deemed to be the amount of
cash paid therefor before deducting any reasonable discounts, commissions or
other expenses allowed, paid or incurred by this Corporation for any
underwriting or otherwise in connection with the issuance and sale thereof.

                                            (D)      In the case of the issuance
of the Common Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair value thereof as
determined by the Board of Directors irrespective of any accounting treatment.

                                            (E)      In the case of the issuance
of options to purchase or rights to subscribe for Common Stock, securities by
their terms convertible into or exchangeable for Common Stock or options to
purchase or rights to subscribe for such convertible or exchangeable securities
(which are not excluded from the definition of Additional Stock), the following
provisions shall apply:

                                                     (1)      The aggregate 
maximum number of shares of Common Stock deliverable upon exercise of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
subsections 5(c)(i)(C) and (c)(i)(D)), if any, received by the Corporation upon
the issuance of such options or rights plus the minimum purchase price provided
in such options or rights for the Common Stock covered thereby.

                                                     (2)      The aggregate 
maximum number of shares of Common Stock deliverable upon conversion of or in
exchange for any such convertible or exchangeable securities or upon the
exercise of options to purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange thereof shall be
deemed to have been issued at the time such securities were issued or such
options or rights were issued and for a consideration equal to the
consideration, if any, received by this Corporation for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the additional consideration, if any, to be
received by this Corporation upon the conversion or exchange of such securities
or the exercise of any related options or rights (the consideration in each case
to be determined in the manner provided in subsections 5(c)(i)(C) and
(c)(i)(D)).


                                      -8-
<Page>


                                                     (3)      In the event of 
any change in the number of shares of Common Stock deliverable or any increase
in the consideration payable to this Corporation upon exercise of such options
or rights or upon conversion of or in exchange for such convertible or
exchangeable securities, including, but not limited to, a change resulting from
the anti-dilution provisions thereof, the Conversion Price of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock, as the case may be, obtained with
respect to the adjustment which was made upon the issuance of such options,
rights or securities, and any subsequent adjustments based thereon shall be
recomputed to reflect such change, but no further adjustment shall be made for
the actual issuance of Common Stock or any payment of such consideration upon
the exercise of any such options or rights or the conversion or exchange of such
securities; provided, however, that this section shall not have any effect on
any conversion of such series of Preferred Stock prior to such change or
increase.

                                                     (4)      Upon the 
expiration of any such options or rights, the termination of any such rights to
convert or exchange or the expiration of any options or rights related to such
convertible or exchangeable securities, the Conversion Price of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock, as the case may be, obtained with
respect to the adjustment which was made upon the issuance of such options,
rights or securities or options or rights related to such securities, and any
subsequent adjustments based thereon, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock actually issued upon the
exercise of such options or rights upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such
securities; provided, however, that this section shall not have any effect on
any conversion of such series of Preferred Stock prior to such expiration or
termination.

                                    (ii)    "Additional Stock" shall mean any 
shares of Common Stock issued (or deemed to have been issued pursuant to
subsection 5(c)(i)(e)) by this Corporation after June 22, 1998, other than:

                                            (A)      Common Stock issued 
pursuant to a transaction described in subsection 5(c)(iii) hereof, or

                                            (B)      3,454,860 shares of Common 
Stock, net of repurchases and the cancellation or expiration of options, issued
or issuable to employees, directors, consultants or advisors of this Corporation
under stock option and restricted stock purchase agreements approved by the
Board of Directors commencing as of May 1994, and such other number of shares of
Common Stock as may be fixed from time to time by the Board of Directors and
approved by a majority of then outstanding Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock, voting as a single class, issued or issuable to employees,
directors, consultants or advisors of this Corporation under stock option and
restricted stock purchase agreements approved by the Board of Directors, or


                                      -9-
<Page>


                                            (C)      Common Stock issued or 
issuable upon conversion of the Series A Preferred Stock, Series B Preferred 
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E 
Preferred Stock.

                                    (iii)   In the event this Corporation 
should at any time or from time to time after the effective date hereof fix a 
record date for the effectuation of a split or subdivision of the outstanding 
shares of Common Stock or the determination of holders of Common Stock 
entitled to receive a dividend or other distribution payable in additional 
shares of Common Stock or other securities or rights convertible into, or 
entitling the holder thereof to receive directly or indirectly, additional 
shares of Common Stock (hereinafter referred to as "Common Stock 
Equivalents") without payment of any consideration by such holder for the 
additional shares of Common Stock or the Common Stock Equivalents (including 
the additional shares of Common Stock issuable upon conversion or exercise 
thereof), then as of such record date (or the date of such dividend 
distribution, split or subdivision if no record date is fixed), the 
Conversion Price for the Series A Preferred Stock, Series B Preferred Stock, 
Series C Preferred Stock, Series D Preferred Stock or Series E Preferred 
Stock, as the case may be, shall be appropriately decreased so that the 
number of shares of Common Stock issuable on conversion of each share of such 
series shall be increased in proportion to such increase of outstanding 
shares determined in accordance with subsection 5(c)(i)(E).

                                    (iv)    If the number of shares of Common 
Stock outstanding at any time after the effective date hereof is decreased by 
a combination of the outstanding shares of Common Stock, then, following the 
record date of such combination, the Conversion Price for the Series A 
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D 
Preferred Stock or Series E Preferred Stock, as the case may be, shall be 
appropriately increased so that the number of shares of Common Stock issuable 
on conversion of each share of such series shall be decreased in proportion 
to such decrease in outstanding shares.

                           (d)      OTHER DISTRIBUTIONS.  In the event this 
Corporation shall declare a distribution payable in securities of other 
persons, evidences of indebtedness issued by this Corporation or other 
persons, assets (excluding cash dividends) or options or rights not referred 
to in subsection 5(c)(iii), then, in each such case for the purpose of this 
subsection 5(d), the holders of Series A Preferred Stock, Series B Preferred 
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E 
Preferred Stock, shall be entitled to a proportionate share of any such 
distribution as though they were the holders of the number of shares of 
Common Stock of this Corporation into which their shares of Series A 
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D 
Preferred Stock or Series E Preferred Stock, as the case may be, are 
convertible as of the record date fixed for the determination of the holders 
of Common Stock of this Corporation entitled to receive such distribution.

                           (e)      RECAPITALIZATIONS.  If at any time or 
from time to time there shall be a recapitalization of the Common Stock 
(other than a subdivision, combination or merger or sale of assets 
transaction provided for elsewhere in this Section 5 or Section 6) provision 
shall be made so that the holders of Series A Preferred Stock, Series B 
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and 
Series E Preferred Stock, shall thereafter be entitled to receive upon 
conversion of such series of Preferred Stock the number of shares of stock or 
other securities or property of this Corporation or otherwise, to which a 
holder of 

                                      -10-
<Page>


Common Stock deliverable upon conversion would have been entitled on such 
recapitalization. In any such case, appropriate adjustment shall be made in 
the application of the provisions of this Section 5 with respect to the 
rights of the holders of Series A Preferred Stock, Series B Preferred Stock, 
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred 
Stock, after the recapitalization to the end that the provisions of this 
Section 5 (including adjustment of the Conversion Price then in effect and 
the number of shares purchasable upon conversion of such series of Preferred 
Stock) shall be applicable after that event as nearly equivalent as may be 
practicable.

                           (f)      NO IMPAIRMENT.  This Corporation will 
not, by amendment of its Certificate of Incorporation or through any 
reorganization, revitalization, transfer of assets, consolidation, merger, 
dissolution, issue or sale of securities or any other voluntary action, avoid 
or seek to avoid the observance or performance of any of the terms to be 
observed or performed hereunder by this Corporation, but will at all times in 
good faith assist in the carrying out of all the provisions of this Section 5 
and in the taking of all such action as may be necessary or appropriate in 
order to protect the Conversion Rights of the holders of the Series A 
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D 
Preferred Stock and Series E Preferred Stock against impairment.

                           (g)      FRACTIONAL SHARES AND CERTIFICATE AS TO 
ADJUSTMENTS.

                                    (i)     No fractional shares shall be 
issued upon conversion of the Series A Preferred Stock, Series B Preferred 
Stock, Series C Preferred Stock, Series D Preferred Stock or Series E 
Preferred Stock, and the number of shares of Common Stock to be issued shall 
be rounded to the nearest whole share. Whether or not fractional shares are 
issuable upon such conversion shall be determined on the basis of the total 
number of shares of such series of Preferred Stock the holder is at the time 
converting into Common Stock and the number of shares of Common Stock 
issuable upon such aggregate conversion.

                                    (ii)    Upon the occurrence of each 
adjustment or, readjustment of the Conversion Price of Series A Preferred 
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred 
Stock or Series E Preferred Stock, as the case may be, pursuant to this 
Section 5, this Corporation, at its expense, shall promptly compute such 
adjustment or readjustment in accordance with the terms hereof and prepare 
and furnish to each holder of Series A Preferred Stock, Series B Preferred 
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E 
Preferred Stock, or instrument convertible into shares of any such series of 
Preferred Stock, as the case may be, a certificate setting forth such 
adjustment or readjustment and showing in detail the facts upon which such 
adjustment or readjustment is based. This Corporation shall, upon the written 
request furnish or cause to be furnished to such holder a like certificate 
setting forth (A) such adjustment and readjustment, (B) the Conversion Price 
at the time in effect, and (C) the number of shares of Common Stock and the 
amount, if any, of other property which at the time would be received upon 
the conversion of a share of such series of Preferred Stock.

                           (h)      NOTICES OF RECORD DATE.  In the event of 
any taking by this Corporation of a record of the holders of any class of 
securities for the purpose of determining the holders thereof who are 
entitled to receive any dividend (other than a cash dividend) or other 

                                      -11-
<Page>


distribution, any right to subscribe for, purchase or otherwise acquire any 
shares of stock of any class or any other securities or property, or to 
receive any other right, this Corporation shall mail to each holder of Series 
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series 
D Preferred Stock or Series E Preferred Stock at least 20 days prior to the 
date specified therein, a notice specifying the date on which by such record 
is to be taken for the purpose of such dividend, distribution or right and 
the amount and character of such dividend, distribution or right.

                           (i)      RESERVATION OF COMMON STOCK ISSUABLE UPON 
CONVERSION.  This Corporation shall at all times reserve and keep available 
out of its authorized but unissued shares of Common Stock solely for the 
purpose of effecting the conversion of the shares of Series A Preferred 
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred 
Stock and Series E Preferred Stock, such number of its shares of Common Stock 
as shall from time to time be sufficient to effect the conversion of all 
authorized shares of such series of Preferred Stock, and if at any time the 
number of authorized but unissued shares of Common Stock shall not be 
sufficient to effect the conversion of all then authorized shares of such 
series of Preferred Stock, in addition to such other remedies as shall be 
available to the holders of such series of Preferred Stock, this Corporation 
will take such corporate action as may, in the opinion of its counsel be 
necessary to increase its authorized but unissued shares of Common Stock to 
such number of shares as shall be sufficient for such purposes.

                           (j)      NOTICES.  Any notice required by the 
provisions of this Section 5 to be given to the holders of shares of Series A 
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D 
Preferred Stock and Series E Preferred Stock shall be deemed given if 
deposited in the United States postage prepaid, and addressed to each holder 
of record at such holder's address appearing on the books of this Corporation.

                  6.       MERGER; CONSOLIDATION.

                           (a)      If at any time after the effective date 
hereof there is a merger, consolidation or other corporate reorganization in 
which stockholders of this Corporation immediately prior to such transaction 
own less than 50% of the voting securities of the surviving or controlling 
entity immediately after the transaction, or sale of all or substantially all 
of the assets of this Corporation (hereinafter, an "Acquisition"), then, as a 
part of such Acquisition, provision shall be made so that the holders of the 
Series A Preferred Stock, the Series B Preferred Stock, the Series C 
Preferred Stock, the Series D Preferred Stock and Series E Preferred Stock 
shall be entitled to receive, prior to any distribution to holders of Common 
Stock or other junior equity security of the Corporation, the number of 
shares of stock or other securities or property to be issued to this 
Corporation or its stockholders resulting from such Acquisition in an amount 
per share equal to the Original Series A Issue Price, Original Series B Issue 
Price, Original Series C Issue Price, Original Series D Issue Price and 
Original Series E Issue Price, as applicable, plus a further amount equal to 
any dividends declared but unpaid on such shares. Subject to the following 
sentence, the holders of Common Stock shall thereafter be entitled to 
receive, pro rata, the remainder of the number of shares of stock or other 
securities or property to be issued to this Corporation or its stockholders 
resulting from such Acquisition. Notwithstanding anything to the contrary in 
this Section 6, in the event the aggregate value of stock, securities and 
other property to be distributed to this Corporation or its stockholders with 

                                      -12-
<Page>


respect to an Acquisition is less than $5.25 per share (such dollar amount to 
be appropriately adjusted to reflect any subsequent stock splits, stock 
dividends or other recapitalizations) of Common Stock outstanding (for 
purpose of this calculation only, including in the number of shares of Common 
Stock outstanding the number of shares of Common Stock then issuable upon 
conversion of all outstanding Preferred Stock), then the stock, securities or 
other property shall be distributed among the holders of Series A Preferred 
Stock, Series B Preferred Stock, Series C Preferred Stock, the Series D 
Preferred Stock, Series E Preferred Stock and the Common Stock according to 
the provisions of Section 3 hereof as if such Acquisition were deemed a 
liquidation.

                           (b)      Any securities to be delivered to the 
holders of Series A Preferred Stock, Series B Preferred Stock, Series C 
Preferred Stock, the Series D Preferred Stock, Series E Preferred Stock and 
Common Stock pursuant to subsection 6(a) above shall be valued as follows:

                                    (i)     Securities not subject to 
investment letter or other similar restrictions on free marketability;

                                            (A)      If traded on a 
securities exchange, the value shall be deemed to be the average of the 
closing prices of the securities on such exchange over the 30-day period 
ending three days prior to the closing;

                                            (B)      If actively traded 
over-the-counter, the value shall be deemed to be the average of the closing 
bid or sale prices (whichever are applicable) over the 30-day period ending 
three days prior to the closing; and

                                            (C)      If there is no active 
public market, the value shall be the fair market value thereof, as mutually 
determined by the Corporation and the holders of not less than a majority of 
the then outstanding shares of Series A Preferred Stock, Series B Preferred 
Stock, Series C Preferred Stock, the Series D Preferred Stock and Series E 
Preferred Stock.

                                    (ii)    The method of valuation of 
securities subject to investment letter or other restrictions on free 
marketability shall be to make an appropriate discount from the market value 
determined as above in subsections 6(b)(i)(A), (B) or (C) to reflect the 
approximate fair market value thereof, as mutually determined by this 
Corporation and the holders of a majority of the then outstanding shares of 
Series A Preferred Stock, Series B Preferred, Series C Preferred Stock, 
Series D Preferred Stock and Series E Preferred Stock, voting as a single 
class.

                           (c)      In the event the requirements of 
subsection 6(a) are not complied with, this Corporation shall forthwith 
either:

                                    (i)     cause such closing to be 
postponed until such time as the requirements of this Section 6 have been 
complied with, or

                                    (ii)    cancel such transaction, in which 
event the rights, preferences and privileges of the holders of the Series A 
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D 
Preferred Stock and Series E Preferred Stock shall revert to and be the same 
as such rights, preferences and privileges existing immediately prior to the 
date of the first notice referred to in subsection 6(d) hereof.

                                      -13-
<Page>


                           (d)      This Corporation shall give each holder 
of record of Series A Preferred Stock, Series B Preferred Stock, Series C 
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock written 
notice of such impending transaction not later than 20 days prior to the 
stockholders' meeting called to approve such action, or 20 days prior to the 
closing of such transaction, whichever is earlier, and shall also notify such 
holders in writing of the final approval of such transaction. The first of 
such notices shall describe the material terms and conditions of the 
impending transaction and the provisions of this Section 6, and this 
Corporation shall thereafter give such holders prompt notice of any material 
changes. The transaction shall in no event take place earlier than 20 days 
after the Corporation has given the first notice provided for herein or 
earlier than 10 days after the Corporation has given notice of any material 
changes provided for herein; provided, however, that such periods may be 
shortened upon the written consent of the holders of a majority of the then 
outstanding Series A Preferred Stock, Series B Preferred Stock, Series C 
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock voting 
as a class.

                           (e)      The provisions of this Section 6 are in 
addition to the protective provisions of Section 8 hereof.

                  7.       VOTING RIGHTS; DIRECTORS.

                           (a)      The holder of each outstanding share of 
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, 
Series D Preferred Stock and Series E Preferred Stock shall have the right to 
one vote for each share of Common Stock into which such outstanding Series A 
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D 
Preferred Stock or Series E Preferred Stock could be converted on the record 
date for the vote or written consent of stockholders. In all cases any 
fractional share, determined on an aggregate conversion basis, shall be 
rounded to the nearest whole share. With respect to such vote, such holder 
shall have full voting rights and powers equal to the voting rights and 
powers of the holders of Common Stock, and shall be entitled, notwithstanding 
any provision hereof to notice of any stockholders' meeting in accordance 
with the bylaws of this Corporation, and shall be entitled to vote, together 
with holders of Common Stock, with respect to any question upon which holders 
of Common Stock have the right to vote.

                           (b)      Notwithstanding subsection 7(a), (i) so 
long as at least fifty percent (50%) of the shares of Series A Preferred 
Stock and Series B Preferred Stock originally issued remain issued and 
outstanding, the holders of Series A Preferred Stock and Series B Preferred 
Stock, voting together as a separate class, shall be entitled to elect one 
member of the Board of Directors, (ii) so long as at least fifty percent 
(50%) of the shares of Series C Preferred Stock originally issued remain 
issued and outstanding, the holders of Series C Preferred Stock, voting as a 
separate class, shall be entitled to elect one member of the Board of 
Directors, and (iii) so long as at least fifty percent (50%) of the shares of 
Series D Preferred Stock originally issued remain issued and outstanding, the 
holders of Series D Preferred Stock, voting as a separate class, shall be 
entitled to elect either one or two members of the Board of Directors, as set 
forth in that certain Amended and Restated Voting Agreement between the 
Corporation and its stockholders dated on or about August 8, 1997. Any 
additional directors shall be elected by the holders of Preferred Stock and 
Common Stock, voting together as one class. In the case of any vacancy in the 
office of a director elected by the holders of the Series A Preferred Stock 
and

                                      -14-
<Page>


Series B Preferred Stock, the Series C Preferred Stock or the Series D 
Preferred Stock pursuant to this subsection 7(b), the holders of a majority 
of the then voting power of the Series A Preferred Stock and Series B 
Preferred Stock, the Series C Preferred Stock or the Series D Preferred 
Stock, as applicable, shall, within sixty (60) days of such vacancy, elect a 
successor to hold office for the unexpired term of the director whose place 
shall be vacant. In the case of a vacancy in the office of any other 
director, the successor of that director shall be elected within sixty (60) 
days of such vacancy to hold office for the unexpired term of the director 
whose place shall be vacant, and such successor director shall be elected by 
the holders of Preferred Stock and Common Stock, voting together as one 
class. Any director who shall have been so elected may be removed during the 
aforesaid term of office, whether with or without cause, only by the 
affirmative vote of the holders of a majority of the voting power of the 
Series of Preferred Stock which first elected him. This subsection 7(b) shall 
be void and of no further effect thereafter upon the occurrence of either of 
the following events:

                                    (i)     the closing of a Qualifying 
Public Offering;

                                    (ii)    upon the distribution to the 
stockholders pursuant to Section 3 or Section 6 hereof of the net proceeds of 
the sale of all or substantially all the assets of the Corporation.

                  8.       PROTECTIVE PROVISIONS.

                           (a)      In addition to any approvals required by 
law, so long as shares of Series A Preferred Stock, Series B Preferred Stock, 
Series C Preferred Stock, Series D Preferred Stock or Series E Preferred 
Stock are outstanding, this Corporation shall not without first obtaining the 
approval (by vote or written consent, as provided by law) of the holders of 
at least a majority of the then outstanding voting power of Series A 
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D 
Preferred Stock and Series E Preferred Stock (voting, as one class, in 
accordance with Section 7):

                                    (i)     sell, convey, or otherwise 
dispose of all or substantially all of its property or business or merge into 
or consolidate with any other corporation (other than a wholly-owned 
subsidiary corporation) in which this Corporation is not the surviving 
corporation or effect any transaction or series of related transactions in 
which more than fifty percent (50%) of the voting power of this Corporation 
is disposed of, provided, however, that this restriction shall not apply to 
any mortgage, deed of trust, pledge or other encumbrance or hypothecation of 
the Corporation's or any of its subsidiaries' assets for the purpose of 
securing any contract or obligation; or

                                    (ii)    alter or change the rights, 
preferences, privileges or restrictions of the shares of Series A Preferred 
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred 
Stock or Series E Preferred Stock; or

                                    (iii)   increase the authorized number of 
shares of Common Stock or Preferred Stock; or

                                    (iv)    create (by reclassification or 
otherwise) any new class or series of stock having a preference over, or 
being on a parity with, the Series A Preferred Stock, 

                                      -15-
<Page>


Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock 
or Series E Preferred Stock with respect to voting, dividends, redemption or 
conversion or upon liquidation; or

                                    (v)     pay or declare any dividend on 
its Common Stock or any other junior equity security other than a dividend in 
Common Stock of this Corporation; or

                                    (vi)    change the authorized number of 
directors; or

                                    (vii)   do any act or thing which would 
result in taxation of the holders of shares of Preferred Stock under section 
305(b) of the Internal Revenue Code of 1986, as amended (or any comparable 
provision of the Internal Revenue Code as hereafter from time to time 
amended).

                           (b)      In addition to any approvals required by 
law, so long as shares of Series C Preferred Stock are outstanding, this 
Corporation shall not without first obtaining the approval (by vote or 
written consent, as provided by law) of the holders of at least a majority of 
the then outstanding voting power of and Series C Preferred Stock voting as a 
single class:

                                    (i)     alter or change the rights, 
preferences, privileges or restrictions of the shares of Series C Preferred 
Stock; or

                                    (ii)    create (by reclassification or 
otherwise) any new class or series of stock having a preference over, or 
being on a parity with, the Series C Preferred Stock with respect to voting, 
dividends, redemption or conversion or upon liquidation.

                           (c)      In addition to any approvals required by 
law, so long as shares of Series D Preferred Stock are outstanding, this 
Corporation shall not without first obtaining the approval (by vote or 
written consent, as provided by law) of the holders of at least a majority of 
the then outstanding voting power of and Series D Preferred Stock voting as a 
single class:

                                    (i)     sell, convey, or otherwise 
dispose of all or substantially all of its property or business or merge into 
or consolidate with any other corporation (other than a wholly-owned 
subsidiary corporation) in which this Corporation is not the surviving 
corporation or effect any transaction or series of related transactions in 
which more than fifty percent (50%) of the voting power of this Corporation 
is disposed of, provided, however, that this restriction shall not apply to 
any mortgage, deed of trust, pledge or other encumbrance or hypothecation of 
the Corporation's or any of its subsidiaries' assets for the purpose of 
securing any contract or obligation; or

                                    (ii)    alter or change the rights, 
preferences, privileges or restrictions of the shares of Series D Preferred 
Stock; or

                                    (iii)   increase the authorized number of 
shares of Series D Preferred Stock; or

                                    (iv)    increase the authorized number of 
directors; or

                                      -16-
<Page>


                                    (v)     create (by reclassification or 
otherwise) any new class or series of stock having a preference over, or 
being on a parity with, the Series D Preferred Stock with respect to voting, 
dividends, redemption or conversion or upon liquidation.

                           (d)      In addition to any approvals required by 
law, so long as shares of Series E Preferred Stock are outstanding, this 
Corporation shall not without first obtaining the approval (by vote or 
written consent, as provided by law) of the holders of at least a majority of 
the then outstanding voting power of and Series E Preferred Stock voting as a 
single class:

                                    (i)  materially or adversely alter or 
change the rights, preferences or privileges of the shares of Series E 
Preferred Stock as a separate series in a manner that is dissimilar and 
disproportionate relative to the manner in which the rights, preferences or 
privileges of the other series of Preferred Stock are altered, or

                                    (ii)  increase the authorized number of 
shares of Series E Preferred Stock.

                  9.       STATUS OF REDEEMED OR CONVERTED STOCK. In the event
any shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock shall be
redeemed or converted pursuant to Section 4 or 5 hereof the shares so redeemed
or converted shall be cancelled and shall not be issuable by this Corporation,
and the Certificate of Incorporation of this Corporation shall be appropriately
amended to effect the corresponding reduction in this Corporation's authorized
capital stock.

                  10.      REPURCHASE OF SHARES. In connection with repurchases
by this Corporation of its Common Stock pursuant to agreements with certain of
the holders thereof approved by this Corporation's Board of Directors, each
holder of Preferred Stock shall be deemed to have waived the application, in
whole or in part, of any provisions of the Delaware General Corporation Law or
any applicable law of any other state which might limit or prevent or prohibit
such repurchases.

         C.       COMMON STOCK.

                  1.       RELATIVE RIGHTS OF PREFERRED STOCK AND COMMON STOCK.
All rights preferences, voting powers, relative, participating optional or other
special rights and privileges, and qualifications, limitations, or restrictions
of the Common Stock are expressly made subject and subordinate to those that may
be fixed with respect to any shares of the Preferred Stock.

                  2.       VOTING RIGHTS. Except as otherwise required by law or
this Certificate of Incorporation, each holder of Common Stock shall have one
vote in respect of each share of stock held by such holder of record on the
books of the Corporation for the election of directors and on all matters
submitted to a vote of stockholders of the Corporation.

                  3.       DIVIDENDS. Subject to the preferential rights of the
Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when, as and if declared by the Board of Directors, out of the assets
of the Corporation which are by law available therefor, dividends payable either
in cash, in property or in shares of capital stock.

                                      -17-
<Page>


                  4.       DISSOLUTION, LIQUIDATION OR WINDING UP. In the event
of any dissolution, liquidation or winding up of the affairs of the Corporation,
after distribution in full of the preferential amounts, if any, to be
distributed to the holders of shares of the Preferred Stock, holders of Common
Stock shall be entitled to participate in any distribution of the assets of the
Corporation in accordance with Section 3 of Article IV, Division B hereof.

                  5.       NO PREEMPTIVE RIGHTS. The holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Common Stock shall not have any
preemptive rights. The foregoing shall not, however, prohibit the Corporation
from granting contractual rights of first refusal to purchase securities to
holders of Preferred Stock.

                                    ARTICLE V

         In furtherance and not in limitation of the powers conferred by the 
laws of the State of Delaware:

         A.       The Board of Directors of the Corporation is expressly
authorized to adopt, amend or repeal the bylaws of the Corporation; provided,
however, that the bylaws may only be amended in accordance with the provisions
thereof and, provided further that, the authorized number of directors may be
changed only with the approval of the holders of at least a majority of the then
outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock (voting
as one class) in accordance with Section 7 of Article IV Division B.

         B.       Elections of directors need not be by written ballot unless 
the bylaws of the Corporation shall so provide.

         C.       The books of the Corporation may be kept at such place within
or without the State of Delaware as the bylaws of the Corporation may provide or
as may be designated from time to time by the Board of Directors of the
Corporation.

                                   ARTICLE VI

         A.       EXCULPATION.

                  1.       CALIFORNIA. The liability of each and every director
of this Corporation for monetary damages shall be eliminated to the fullest
extent permissible under California law.

                  2.       DELAWARE. A director of the Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law or (iv) for any transaction from which the
director derived any improper personal benefit. If the Delaware General
Corporation Law is hereafter amended to further


                                      -18-
<Page>


reduce or to authorize, with the approval of the Corporation's stockholders, 
further reductions in the liability of the Corporation's directors for breach 
of fiduciary duty, then a director of the Corporation shall not be liable for 
any such breach to the fullest extent permitted by the Delaware General 
Corporation Law as so amended.

                  3.       CONSISTENCY.  In the event of any inconsistency 
between Sections 1 and 2 of this Division A, the controlling Section, as to 
any particular issue with regard to any particular matter, shall be the one 
which provides to the director in question the greatest protection from 
liability.

         B.       INDEMNIFICATION.

                  1.       CALIFORNIA. This Corporation is authorized to
indemnify the directors and officers of this Corporation to the fullest extent
permissible under California law. Moreover, this Corporation is authorized to
provide indemnification of (and advancement of expenses to) agents (as defined
in Section 317 of the California Corporations Code) through bylaw provisions,
agreements with agents, vote of stockholders or disinterested directors or
otherwise, in excess of the indemnification and advancement otherwise permitted
by Section 317 of the California Corporations Code, subject only to applicable
limits set forth in Section 204 of the California Corporations Code, with
respect to actions for breach of duty to the Corporation and its stockholders.

                  2.       DELAWARE. To the extent permitted by applicable law,
this Corporation is also authorized to provide indemnification of (and
advancement of expenses to) such agents (and any other persons to which Delaware
law permits this Corporation to provide indemnification) through bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware General
Corporation Law, subject only to limits created by applicable Delaware law
(statutory or non-statutory), with respect to actions for breach of duty to the
Corporation, its stockholders and others.

                  3.       CONSISTENCY. In the event of any inconsistency
between Sections 1 and 2 of this Division B, the controlling Section, as to any
particular issue with regard to any particular matter, shall be the one which
authorizes for the benefit of the agent or other person in question the
provision of the fullest, promptest, most certain or otherwise most favorable
indemnification and/or advancement.

         C.       EFFECT OF REPEAL OR MODIFICATION. Any repeal or modification
of any of the foregoing provisions of this Article VI shall not adversely affect
any right or protection of a director, officer, agent or other person existing
at the time of, or increase the liability of any director of the Corporation
with respect to any acts or omissions of such director occurring prior to, such
repeal or modification.

                                   ARTICLE VII

         The Corporation shall have perpetual existence.


                                      -19-
<Page>


                                  ARTICLE VIII

                  The Corporation reserves the right to amend, alter, change 
or repeal any provision contained in this Certificate of Incorporation, in 
the manner now or hereafter prescribed by statute, and all rights conferred 
upon stockholders herein are granted subject to this reservation.

                [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]


                                      -20-
<Page>


         IN WITNESS WHEREOF, this Amended and Restated Certificate of 
Incorporation has been executed as of this 22nd day of June 1998.

                                       DIGIRAD CORPORATION




                                       By:      /s/ Karen A. Klause
                                           -------------------------------------
                                              Karen A. Klause, President












                               [SIGNATURE PAGE TO

                     RESTATED CERTIFICATE OF INCORPORATION]
<Page>


                                    EXHIBIT C

                           FORM OF OPINION OF COUNSEL



                                     [Date]



MMC/GATX PARTNERSHIP NO.  I
c/o GATX Capital Corporation, Agent
Four Embarcadero Center
Suite 2200
San Francisco, California 94111

Ladies and Gentlemen:

         We have acted as counsel for Digirad Corporation (the "Borrower") in 
connection with (i) the execution of the Loan and Security Agreement of even 
date herewith (the "Loan Agreement") between Borrower and MMC/GATX 
PARTNERSHIP NO. I ("Lender"), (ii) the issuance of warrants to purchase 
Borrower's Series E Preferred Stock (the "Warrants") and (iii) the 
transactions contemplated thereby. This opinion is being rendered to you 
pursuant to Section 8.01 of the Loan Agreement. Capitalized terms not 
otherwise defined in this opinion have the meaning given them in the Loan 
Agreement.

         In connection with this opinion and our representation, we have 
examined originals, or copies certified or otherwise identified to our 
satisfaction, of the following:

         (i)      The Loan Agreement;

         (ii)     The Warrants;

         (iii)    The Note dated as of [Date];

         (iv)     The Restated Articles of Incorporation and the Bylaws of
                  Borrower, each as in effect on the date hereof;

         (v)      The certificate of an officer of Borrower as to certain
                  factual matters ("Officer Certificate");

         (vi)     Certificates issued by the Secretary of State of the State of
                  [state of incorporation] dated ____________________ 199__,
                  certifying the good standing of Borrower;

         (vii)    Such other documents, records, and certificates as we have
                  deemed necessary or appropriate as a basis for the opinions
                  hereafter expressed.


<Page>


         The Loan Agreement, the Note and the Warrants are hereinafter 
referred to as the "Transaction Documents."

         In such examinations we have assumed the genuineness of all 
signatures, the authenticity of all documents submitted to us as originals 
and the conformity to originals of all documents submitted to us as 
certified, facsimile, telecopied or photostatic copies thereof. As to certain 
matters of fact material to our opinion, we have relied upon the Officer 
Certificate and upon your representations in the Transaction Documents.

         As used in this opinion, the expression "to the best of our 
knowledge," means the actual present knowledge or belief of those attorneys 
in our firm who have or who are currently representing Borrower. We have not 
undertaken any independent investigation to determine the existence or 
nonexistence of other facts, and no inference as to our knowledge of the 
existence or nonexistence of other facts should be drawn from the fact of 
this firm's representation of Borrower in connection with the Transaction 
Documents.

         Based upon and subject to the foregoing and subject to the 
qualifications contained herein, we are of the opinion that:

         (a)      Borrower is a corporation duly organized, validly existing and
in good standing under the laws of the State of [state of incorporation].

         (b)      Borrower has the requisite corporate power and authority to
execute, deliver and perform the Transaction Documents and to issue the
Warrants. All action on the part of Borrower, its directors and its shareholders
necessary for the authorization, execution, delivery and performance of the
Transaction Documents, has been taken. The Transaction Documents have been duly
executed and delivered by an authorized officer of Borrower.

         (c)      The execution, delivery and performance of the Transaction
Documents do not conflict with or violate any provision of Borrower's Restated
Articles of Incorporation or Bylaws or of applicable law.

         (d)      The Transaction Documents constitute legal, valid and binding
obligations of Borrower, enforceable in accordance with their respective terms.
To our knowledge, no filing need be made with any governmental authority with
respect to the Transaction Documents in connection with an exemption from state
usury laws or in connection with any other matter. [usury may be excepted]

         (e)      The shares of Series E Preferred Stock issuable upon exercise
of the Warrants have been duly authorized and reserved for issuance upon such
exercise, and when issued in accordance with the terms of the Warrants, will be
duly authorized, validly issued, fully paid and non-assessable.

         (f)      The shares of Common Stock issuable upon conversion of the
Series E Preferred Stock into which the Warrants are convertible, have been duly
authorized and reserved for


<Page>


issuance, when so issued in accordance with the terms of Borrower's Restated
Articles of Incorporation, will be duly authorized, validly issued, fully paid
and non-assessable.

         The opinions set forth above are subject to the following additional
qualifications, assumptions, limitations and exceptions:

         (A)      The effect of bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium and other similar laws relating to or
affecting the rights and remedies of creditors generally.

         (B)      Limitations imposed by general equitable principles upon the
specific enforceability of any of the provisions of the Transaction Documents
and upon the availability of injunctive relief or other equitable remedies.

         (C)      We express no opinion as to the enforceability of any choice
of law provision in the documents.

         (D)      We express no opinion as to the compliance or noncompliance
with applicable antifraud statutes under the rules and regulations of state and
federal securities laws concerning the issuance of the Warrant.

         (E)      We express no opinion herein concerning any law other than the
law of the State of California, [the General Corporation Law of the State of
Delaware] and the federal laws of the United States of America.

         This opinion is furnished to you solely for your benefit and may not 
be relied upon by any other person (other than assignees of any of your 
rights) without our prior written consent, which consent shall not be 
unreasonably withheld or delayed.

                                            Very truly yours,



<Page>



                                    EXHIBIT D

                         FORM OF SUBORDINATION AGREEMENT

         This Subordination Agreement (this "AGREEMENT") is made as of this 
_____ day of _______ 1999, by and between _________ Bank ("SENIOR CREDITOR") 
having its principal place of business at 
________________________________________________, and MMC/GATX Partnership 
No. I, a California general partnership, having its principal place of 
business at Four Embarcadero Center, Suite 2200, San Francisco, California 
94111 ("CREDITOR").

                                    RECITALS

         A.       Digirad Corporation ("BORROWER") has a _______________________
Dollars ($___________) revolving line of credit from Senior Creditor which is or
may be from time to time secured by assets and property of Borrower, pursuant to
the [Loan and Security Agreement, dated as of _________ 1999], between Borrower
and Senior Creditor (as the same may from time to time be amended, modified,
supplemented, restated or replaced, the "SENIOR LOAN AGREEMENT") and the other
documents executed in connection therewith (together with the Senior Loan
Agreement, the "SENIOR CREDIT DOCUMENTS").

         B.       Creditor has extended or will extend loans in the aggregate
original principal amount of Three Million and 00/100 Dollars ($3,000,000.00) as
evidenced by one or more Secured Promissory Notes (and as the same may from time
to time be amended, modified, supplemented, extended, renewed, restated or
replaced, the "SUBORDINATED NOTES") made by Borrower in favor of Creditor.
Borrower's obligations to Creditor evidenced by the Subordinated Notes are
secured by the personal property collateral granted by the Borrower to Creditor
pursuant to a Loan and Security Agreement dated as of October __ 1999 (as the
same may from time to time be amended, modified, supplemented or restated, the
"SUBORDINATED SECURITY AGREEMENT").

                  (a)      Pursuant to the terms and conditions of this
Agreement, Creditor is willing to subordinate: (i) all of Borrower's
indebtedness and obligations to Creditor, whether presently existing or arising
in the future under or relating to the Subordinated Security Agreement and
Subordinated Notes (collectively, the "SUBORDINATED DEBT") to Borrower's
indebtedness and obligations to Senior Creditor in a principal amount not to
exceed the lesser of: (1) a borrowing base calculated as a percentage (not
exceeding 100%) of qualified accounts receivable plus eligible inventory, or (2)
$2,500,000.00 (the "SENIOR PRINCIPAL AMOUNT"), plus interest thereon at the
standard rate (and not the default rate) set forth in the Senior Credit
Documents (including all interest accruing after the commencement by or against
Borrower of a bankruptcy, reorganization or similar proceeding), plus, without
limitation, the cost of collecting such obligations (including attorneys' fees)
(collectively, the "SENIOR DEBT"); and (ii) all of Creditor's security interests
in Borrower's property (other than Financed Equipment) (the "COLLATERAL") to all
of Senior Creditor's security interests in Borrower's property. Notwithstanding
anything to the contrary contained in the definition of "Subordinated Debt",
there shall be expressly excluded from such definition any warrant(s) to
purchase securities of Borrower executed by Borrower in favor of Creditor or its
assignee ("WARRANTS") and all rights of the holder thereunder.


<Page>


For purposes of this Agreement, the term "Financed Equipment" shall mean all 
right, title, interest, claims and demands of Borrower in and to each and 
every item of equipment, fixtures or personal property, whether now owned or 
hereafter acquired, together with all substitutions, renewals or replacements 
of and additions, improvements, accessions, replacement parts and 
accumulations to any and all of such equipment, fixtures or personal 
property, together with all proceeds thereof, including, without limitation, 
insurance, condemnation, requisition or similar payments, and all proceeds 
from sales, renewals, releases or other dispositions thereof, which is 
financed with or is designated as collateral for Borrower's obligations to 
Creditor under, and on and after the date of, the Subordinated Security 
Agreement by the designation of such equipment, fixtures and personal 
property on a UCC financing statement listing Borrower as "debtor" and 
Creditor as "secured party."

         NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:

                  1.       Notwithstanding the respective dates of attachment or
perfection of the security interest of Creditor and the security interest of
Senior Creditor: (i) the security interest of Creditor in the property of
Borrower (other than Financed Equipment), shall at all times be subordinate to
the security interest of Senior Creditor; provided, that if the security
interest of Senior Creditor in certain assets or property of Borrower is not
valid or perfected then the lien subordination set forth in this Section 1 shall
not be effective with respect to such assets or property of Borrower, and (ii)
all security interests now or hereafter acquired by Creditor in Financed
Equipment shall at all times be prior and superior to any security interests now
held or hereafter acquired by Senior Creditor in the Financed Equipment.
Creditor shall turn over to Senior Creditor any payments received from the sale,
liquidation, other disposition or exercise of remedies with respect to any
property of Borrower (other than Financed Equipment). Senior Creditor shall turn
over to Creditor any payments or proceeds received from the sale, liquidation,
other disposition or exercise of remedies with respect to the Financed
Equipment.

                  2.       Nothing herein shall be deemed to subordinate, waive
or restrict the performance of the obligations arising under the Warrants or
subordinate any interest in stock issuable upon exercise of the Warrants or
subordinate any interest in the Financed Equipment. Nothing herein shall be
deemed to restrict or prevent Borrower from making any payment to Creditor under
the Subordinated Debt.

                  3.       If the Senior Creditor delivers to Creditor a written
notice (a "BLOCKAGE NOTICE") which states a specific default has occurred under
the Senior Credit Documents and continues to exist after the giving of any
required notice and the expiration of any applicable grace or cure period, then
during any Blockage Period (as defined below), Creditor shall not exercise any
remedy with respect to the Collateral, or commence, or cause to be commenced or
prosecuted, or participate in any administrative, legal or equitable action
against Borrower. As used herein, "Blockage Period" means a period of time
beginning on the date a Blockage Notice is delivered to Creditor and terminating
on the earlier of: (1) 60 days thereafter, or (2) Senior Creditor's written
consent to such termination, or (3) when Senior Creditor has commenced a
judicial proceeding or non-judicial actions to collect or enforce the Senior
Debt or a case or proceeding by or against Borrower is commenced under the
federal Bankruptcy Code or any other insolvency law. After the termination of
any Blockage Period pursuant to the terms hereof


<Page>


and until Creditor's receipt of a subsequent Blockage Notice from Senior
Creditor, Creditor may exercise any remedy with respect to the Collateral and
the Subordinated Debt, or commence, or cause to be commenced or prosecuted, or
participate in any administrative, legal or equitable action against Borrower.
Senior Creditor shall not collect, take possession of, foreclose upon, or
exercise any rights or remedies with respect to the Financed Equipment,
judicially or nonjudicially, or attempt to do any of the foregoing, without the
prior written consent of Creditor, which shall be a matter of Creditor's sole
discretion.

                  4.       (a)     Upon an event of default under the
Subordinated Security Agreement, a sale or disposition of any of the Financed
Equipment whether or not approved by Creditor, the bankruptcy or insolvency of
Borrower, or Creditor's exercise of remedies against Borrower (a "Release
Event"), Senior Creditor's security interests in the Financed Equipment shall be
automatically terminated without further deed or act. The proceeds of any
Financed Equipment so sold or disposed of shall be applied, after the deduction
of any and all costs relating to such sale or disposition (including attorneys'
fees, advertising costs and auctioneer's fees) to any and all indebtedness
evidenced by the Subordinated Security Agreement in such order as Creditor may,
in its discretion, determine, and only if all obligations owed to Creditor by
Borrower under the Subordinated Security Agreement have been paid in full, then
to all or any part of the present or future indebtedness, liabilities,
guaranties or other obligations of Borrower to Senior Creditor in such order as
Senior Creditor may, in its discretion, determine.

                           (b)      Senior  Creditor  agrees to execute  and  
deliver to  Creditor,  promptly  upon Creditor's request, appropriate UCC 
termination statements or partial releases with respect to any Financed 
Equipment on or after a Release Event; although Senior Creditor acknowledges 
that its security interests in the Financed Equipment would be released in 
any event pursuant to Section (a).

                           (c)      Senior  Creditor  hereby  irrevocably  
appoints  Creditor as Senior  Creditor's attorney-in-fact, and grants to 
Creditor a power of attorney with full power of substitution, in the name of 
Senior Creditor, for the use and benefit of Creditor, without notice to 
Senior Creditor, on or after a Release Event to execute and file UCC 
termination statements or partial releases with respect to any Financed 
Equipment; although Senior Creditor acknowledges that its security interests 
in the Financed Equipment would be released in any event pursuant to Section 
(a).

                           (d)      Senior Creditor acknowledges and agrees 
that Creditor has no fiduciary,  agent, bailee or duty to Senior Creditor 
with regard to the Financed Equipment. Senior Creditor acknowledges and 
agrees that Creditor has no obligations to Senior Creditor as a junior 
lienholder except only those obligations specifically assumed by Creditor 
under this Agreement and Senior Creditor waives any other junior lienholder 
rights, claims and defenses. Senior Creditor shall not resist or take any 
action to prevent Creditor from exercising any remedies with respect to the 
Financed Equipment and Senior Creditor shall turn over to Creditor any 
Financed Equipment coming into Senior Creditor's possession or custody. 
Except as provided in this Agreement, at any time and from time to time, 
without notice to Senior Creditor, Creditor may take such actions with 
respect to the Subordinated Security Agreement and the Financed Equipment as 
Creditor, in its sole discretion, may deem appropriate, including, without 


<Page>


limitation, terminating advances to Borrower, increasing the principal amount 
of the Subordinated Notes, extending the time of payment, increasing 
applicable interest rates, renewing, compromising or otherwise amending the 
terms of any documents affecting the Subordinated Notes, the Subordinated 
Security Agreement, and the Financed Equipment, and enforcing or failing to 
enforce any rights against Borrower or any other person. Senior Creditor 
waives the benefits, if any, of any statutory or common law rule that may 
permit a subordinating creditor to assert any defenses of a surety, guarantor 
or junior lienholder, or that may give the subordinating creditor the right 
to require a senior creditor to marshal assets, give notice or maximize 
value, and Senior Creditor agrees that it shall not assert any such defenses, 
claims or rights.

                  4.       At any time and from time to time, without notice to
Creditor, Senior Creditor may take such actions with respect to the Senior Debt
as Senior Creditor, in its sole discretion, may deem appropriate, including,
without limitation, terminating advances to Borrower, increasing the principal
amount in an amount not to exceed the Senior Principal Amount, extending the
time of payment, increasing applicable interest rates, renewing, compromising or
otherwise amending the terms of any documents affecting the Senior Debt and any
collateral securing the Senior Debt, and enforcing or failing to enforce any
rights against Borrower or any other person, but in no event shall the principal
amount be increased in an amount exceeding the Senior Principal Amount. Creditor
waives the benefits, if any, of any statutory or common law rule that may permit
a subordinating creditor to assert any defenses of a surety or guarantor, or
that may give the subordinating creditor the right to require a senior creditor
to marshal assets, and Creditor agrees that it shall not assert any such
defenses or rights inconsistent with the provisions of this Agreement.

                  5.       In the event of Borrower's insolvency, reorganization
or any case or proceeding under any bankruptcy or insolvency law or laws
relating to the relief of debtors, these provisions shall remain in full force
and effect. This Agreement shall remain effective until the earlier of: (i)
Borrower no longer owes any amounts under the Senior Credit Documents, or (ii)
Creditor has received payment of all amounts owed Creditor under the
Subordinated Notes and the Subordinated Security Agreements.

                  6.       This  Agreement  shall bind any  successors or 
assignees of the parties.  This Agreement is solely for the benefit of 
Creditor and Senior Creditor and not for the benefit of Borrower or any other 
party.

                  7.       This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument. This Agreement shall become effective
only when it shall have been executed by Creditor and Senior Creditor (provided,
however, in no event shall this Agreement become effective until signed by an
officer of Senior Creditor in California).

                  8.       This Agreement shall be governed by and construed in
accordance with the laws of the State of California without giving effect to
conflicts of law principles. Creditor and Senior Creditor submit to the
exclusive jurisdiction of the state and federal courts located in the Northern
District of California. CREDITOR AND SENIOR CREDITOR WAIVE THEIR


<Page>


RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON 
OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED 
HEREIN.

                  9.       This Agreement represents the entire agreement with
respect to the subject matter hereof, and supersedes all prior negotiations,
agreements and commitments. Creditor is not relying on any representations by
Senior Creditor or Borrower in entering into this Agreement, and Creditor has
kept and will continue to keep itself fully apprised of the financial and other
condition of Borrower. Senior Creditor is not relying on any representations by
Creditor or Borrower in entering into this Agreement or the Senior Credit
Documents, and Senior Creditor has kept and will continue to keep itself fully
apprised of the financial and other condition of Borrower. This Agreement may be
amended only by written instrument signed by Creditor and Senior Creditor.

                  10.      In the event of any legal action to enforce the
rights of a party under this Agreement, the party prevailing in such action
shall be entitled, in addition to such other relief as may be granted, all
reasonable costs and expenses, including reasonable attorneys' fees, incurred in
such action.

                  11.      Promptly upon an event of default under the
Subordinated Security Agreement and the Subordinated Notes, Creditor shall
endeavor to provide Senior Creditor with written notice of such default, but
Creditor's failure to do so shall not result in any breach of this Agreement or
affect the rights of the parties hereto.


<Page>


                  IN WITNESS WHEREOF, the undersigned have executed this 
Agreement as of the date first above written.

"SENIOR CREDITOR"                          "CREDITOR"

_____________ BANK                         MMC/GATX PARTNERSHIP NO.  1,

                                           BY:  GATX CAPITAL CORPORATION,
                                                ITS GENERAL PARTNER

By:                                        By:
    --------------------------------          ---------------------------------

Title:                                     Title:
      ------------------------------             ------------------------------



THE UNDERSIGNED APPROVES OF THE TERMS OF THIS AGREEMENT.

"BORROWER"

DIGIRAD CORPORATION


By:
    --------------------------

Title:
       -----------------------


<Page>


                                 FIRST AMENDMENT
                                       TO
                           LOAN AND SECURITY AGREEMENT


         This FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT ("First 
Amendment"), dated as of August 14, 2000, is entered into by and between 
DIGIRAD CORPORATION, a Delaware corporation ("Borrower"), and MMC/GATX 
PARTNERSHIP NO. 1, a California general partnership ("Lender").

                                    RECITALS

         A.       Borrower and Lender are parties to a Loan and Security 
Agreement, dated as of October 27, 1999 (the "Loan Agreement") pursuant to 
which Lender has financed certain equipment.

         B.       Borrower has now requested that the amount of funding 
available under the Loan Agreement be increased by $1,000,000.  Lender is 
willing to amend the Loan Agreement upon the terms and conditions set forth 
herein.

                                    AGREEMENT

                  NOW, THEREFORE, in consideration of the above recitals and 
for other good and valuable consideration, the receipt and adequacy of which 
are hereby acknowledged, Borrower and Lender hereby agree as follows:

                  1.       DEFINITIONS; INTERPRETATION. Unless otherwise defined
herein, all capitalized terms used herein and defined in the Loan Agreement
shall have the respective meanings given to those terms in the Loan Agreement.
Other rules of construction set forth in the Loan Agreement, to the extent not
inconsistent with this First Amendment, apply to this First Amendment and are
hereby incorporated by reference.

                  2.       AMENDMENTS TO LOAN AGREEMENT.

                           (a)      The cover page of the Loan Agreement 
shall be amended to read in its entirety as set forth in Exhibit A to this 
First Amendment.

                           (b)      Section 1.01 of the Loan Agreement shall 
be amended to add the following defined terms in appropriate alphabetical 
order:

                           "CREDIT AMOUNT" shall mean, as it applies to the
                  Facility A Loans or the Facility B Loan, respectively, the
                  maximum aggregate amount of the Loans under this Agreement (if
                  the conditions specified in Schedule 3 are satisfied), which
                  amount is set forth following such term on the cover page of
                  this Agreement.


                                      -1-
<Page>


                           "FACILITY A LOANS" shall mean Loans made on the terms
                  set forth under the heading Facility A on the cover page of
                  this Agreement.

                           "FACILITY B LOAN" shall mean the Loan made on the
                  terms set forth under the heading Facility B on the cover page
                  of this Agreement.

                           "LOAN" means each advance of credit by Lender to
                  Borrower under this Agreement. Each reference to a Loan shall
                  be deemed to refer to a Facility A Loan or a Facility B Loan
                  and the respective terms thereof as is specified on the cover
                  page of this Agreement.

                           (c)      The definition of Applicable Premium in 
Section 1.01 of the Loan Agreement shall be changed to read as follows:

                                    "APPLICABLE PREMIUM" shall mean

                           for Facility A Loans, an amount equal to: (i) 4% of
                           the amount being prepaid or accelerated more than
                           twelve (12) months after, but on or before
                           twenty-four (24) months after the first Payment Date,
                           or (ii) 3% of the amount being prepaid or accelerated
                           more than twenty-four (24) months after the first
                           Payment Date; PROVIDED THAT if an Event of Default
                           occurs within twelve (12) months of the first Payment
                           Date (other than an Event of Default specified in
                           Section 9.01 h, i, j, k or 1), the Applicable Premium
                           shall be 4% of the amount being prepaid or
                           accelerated.

                           for the Facility B Loan, an amount equal to: (i) 2%
                           of the amount being prepaid or accelerated more than
                           twelve (l2) months after, but on or before
                           twenty-four (24) months after the first Payment Date,
                           or (ii) 1.5% of the amount being prepaid or
                           accelerated more than twenty-four (24) months after
                           the first Payment Date; PROVIDED THAT if an Event of
                           Default occurs within twelve (12) months of the first
                           Payment Date (other than an Event of Default
                           specified in Section 9.01 h, i, j, k or 1), the
                           Applicable Premium shall be 2% of the amount being
                           prepaid or accelerated.

                           (d)      Section 2.01(a) of the Agreement will be 
changed to read as follows:

                                    (a)     THE CREDIT AMOUNT.  Subject to 
the terms and conditions of this Agreement and relying upon the 
representations and warranties herein set forth as and when made or deemed to 
be made, Lender agrees to lend to Borrower a maximum of two Facility A Loans 
(respectively, the "First Loan" and the "Second Loan") in an aggregate amount 
not to exceed the Credit Amount and one Facility B Loan in the amount of One 
Million Dollars ($1,000,000). The First Loan shall be in the amount of Two 
Million Dollars ($2,000,000) and the Second Loan shall be in the amount of 
One Million Dollars ($1,000,000). The Loans may be prepaid only as set forth 
in SECTION 2.01(d).

                                      -2-
<Page>


                           (e)      Section 2.01(d) of the Agreement will be 
changed to read as follows:

                                    (d)     OPTIONAL PREPAYMENT WITH PREMIUM. 
Borrower may not prepay any Loan within twelve (12) months of its first 
Payment Date; thereafter, upon ten (10) Business Days' prior written notice 
to Lender, Borrower may, at its option, at any time, prepay all, and not less 
than all, of a Loan in full at a prepayment price equal to the principal 
amount of the Loan, plus interest accrued on the Loan through and including 
the date of such prepayment, plus a premium on the Loan equal to the 
Applicable Premium. If an Event of Default occurs and is continuing (other 
than an Event of Default specified in Section 9.01 h, i, j, k or 1, in which 
case no Applicable Premium is due and payable), and Lender exercises its 
right under Section 9.02 to accelerate the Loans or the Loans are 
automatically accelerated, Borrower expressly agrees that the amount then due 
and payable shall include the Applicable Premium as of the date of such 
acceleration. In the event that Borrower and the lender of the Indebtedness 
permitted by clause (e) of the definition of Permitted Indebtedness request 
Lender's agreement that there be an increase in the amount of such 
Indebtedness and Lender does not consent (which consent shall be at Lender's 
sole discretion), Borrower shall be permitted to prepay all Indebtedness 
hereunder without payment of any Applicable Premium.

                                    (f)     The following representation and 
warranty of Borrower is added to Section 3.01 as Section 3.01(n):

                                            (n)      INTELLECTUAL PROPERTY.  
Any registrations or application of Borrower's Intellectual Property with the 
US Patent and Trademark Office or the US Copyright Office are listed in the 
Exhibit C to this Agreement.

                                    (g)     Section 5.01 of the Agreement 
will be changed to read as follows:

                                            5.01     GRANT OF SECURITY 
INTEREST.  Borrower, in order to secure the payment of the principal and 
interest with respect to the Loans made pursuant to this Agreement, all other 
sums due under and in respect hereof and of the other Operative Documents, 
including fees, charges, expenses and attorneys' fees and costs and the 
performance and observance by Borrower of all other terms, conditions, 
covenants and agreements herein and in the other Operative Documents (all 
such amounts and obligations being herein sometimes called the 
"OBLIGATIONS"), does hereby grant to Lender and its successors and assigns, a 
security interest in and to the following property (collectively, the 
"COLLATERAL"): All right, title, interest, claims and demands of Borrower in 
and to:

                                                     (a)      All goods and 
equipment now owned or hereafter acquired, including, without limitation, all 
laboratory equipment, computer equipment, office equipment, machinery, 
fixtures, vehicles (including motor vehicles and trailers), and any interest 
in any of the foregoing, and all attachments, accessories, accessions, 
replacements, substitutions, additions, and improvements to any of the 
foregoing, wherever located;

                                      -3-
<Page>


                                                     (b)      All inventory 
now owned or hereafter acquired, including, without limitation, all 
merchandise, raw materials, parts, supplies, packing and shipping materials, 
work in process and finished products including such inventory as is 
temporarily out of Borrower's custody or possession or in transit and 
including any returns upon any accounts or other proceeds, including 
insurance proceeds, resulting from the sale or disposition of any of the 
foregoing and any documents of title representing any of the above, and 
Borrower's books relating to any of the foregoing;

                                                     (c)      All contract 
rights and general intangibles (including Intellectual Property), now owned 
or hereafter acquired, including, without limitation, goodwill, license 
agreements, franchise agreements, blueprints, drawings, purchase orders, 
customer lists, route lists, infringements, claims, computer programs, 
computer disks, computer tapes, literature, reports, catalogs, design rights, 
income tax refunds, payments of insurance and rights to payment of any kind;

                                                     (d)      All now 
existing and hereafter arising accounts, contract rights, royalties, license 
rights and all other forms of obligations owing to Borrower arising out of 
the sale or lease of goods, the licensing of technology or the rendering of 
services by Borrower (subject, in each case, to the contractual rights of 
third parties to require funds received by Borrower to be expended in a 
particular manner), whether or not earned by performance, and any and all 
credit insurance, guaranties, and other security therefor, as well as all 
merchandise returned to or reclaimed by Borrower and Borrower's books 
relating to any of the foregoing;

                                                     (e)      All documents, 
cash, deposit accounts, letters of credit, certificates of deposit, 
instruments, chattel paper and investment property, including, without 
limitation, all securities, whether certificated or uncertificated, security 
entitlements, securities accounts, commodity contracts and commodity 
accounts, and all financial assets held in any securities account or 
otherwise, wherever located, now owned or hereafter acquired and Borrower's 
books relating to the foregoing; and

                                                     (f)      Any and all 
claims, rights and interests in any of the above and all substitutions for, 
additions and accessions to and proceeds thereof, including, without 
limitation, insurance, condemnation, requisition or similar payments and 
proceeds of the sale or licensing of Intellectual Property.

                                                     (g)      Any and all of 
the following equipment collateral (collectively, "EQUIPMENT COLLATERAL"):

                                    All right, title, interest, claims and
                                    demands of Borrower in and to each and every
                                    item of equipment, fixtures or personal
                                    property, whether now owned or hereafter
                                    acquired, together with all substitutions,
                                    renewals or replacements of and additions,
                                    improvements, accessions, replacement parts
                                    and accumulations to any and all of such
                                    equipment, fixtures or personal property
                                    (collectively, the "EQUIPMENT"), together
                                    with all proceeds thereof, 


                                      -4-
<Page>


                                    including, without limitation, insurance,
                                    condemnation, requisition or similar
                                    payments, and all proceeds from sales,
                                    renewals, releases or other dispositions
                                    thereof, which is financed with or is
                                    designated as collateral for the Obligations
                                    on and after the date of this Agreement by
                                    designating such equipment, fixtures and
                                    personal property on a UCC financing
                                    statement listing Borrower as "debtor" and
                                    Lender as "secured party."

                                                     (h)   Sections 5.04 and 
5.05 of the Agreement shall be changed to read as follows:

                                            5.04     EQUIPMENT COLLATERAL.  
On or prior to its execution and delivery of this Agreement, Borrower shall 
provide Lender with a listing, in detail to Lender's satisfaction, of all of 
Borrower's equipment, fixtures and personal property (collectively, an 
"Equipment List"), which, at Lender's option, shall be attached as an exhibit 
to a UCC financing statement filed by Lender naming Borrower as "debtor" and 
Lender as "secured party." Within thirty days after the end of every quarter 
after the date hereof, Borrower shall provide Lender with an Equipment List 
of equipment, fixtures and personal property acquired by Borrower during such 
quarter through and including April 27, 2001, and such Equipment List shall, 
at Lender's option, be attached as an exhibit to a UCC financing statement 
filed by Lender naming Borrower as "debtor" and Lender as "secured party." 
Borrower agrees to execute and deliver to Lender any and all such financing 
statements to Lender. Borrower's equipment, fixtures and personal property 
acquired after April 27, 2001 may become Third Party Equipment.

                                            5.05     LIEN SUBORDINATION.  
Lender agrees that the Liens granted to it hereunder (except for Liens in 
Equipment Collateral) shall be subordinate to the Liens granted in connection 
with Indebtedness permitted by clause (e) of the definition of Permitted 
Indebtedness. Lender agrees to enter into a subordination agreement with the 
lender of the Indebtedness permitted by clause (e) of the definition of 
Permitted Indebtedness substantially in the form of EXHIBIT D and to 
negotiate in good faith any changes thereto as long as they are acceptable to 
Lender. Lender agrees that the Liens granted to it hereunder in Third Party 
Equipment shall be subordinate to the Liens of future lenders providing 
equipment financing and equipment lessors for equipment and other personal 
property acquired by Borrower after April 27, 2001 ("THIRD PARTY EQUIPMENT"); 
PROVIDED, that, in the case of equipment financings and leasing such Liens 
are confined solely to the equipment so financed and the proceeds thereof. 
Notwithstanding the foregoing, the Obligations hereunder shall not be 
subordinate in right of payment to any obligations to other lenders, 
equipment lenders or equipment lessors and Lender's rights and remedies 
hereunder shall not in any way be subordinate to the rights and remedies of 
any such lender or equipment lessors. Lender agrees to execute and deliver 
such agreements and documents as may be reasonably requested by Borrower from 
time to time which set forth the lien subordination described in this SECTION 
5.05 and are reasonably acceptable to Lender. Lender shall have no obligation 
to execute any agreement or document which would impose obligations, 
restrictions or lien priority on Lender which are less favorable to Lender 
than those described in this SECTION 5.05.

                                      -5-
<Page>


                                            (i)      New Section 5.06 and 
5.07 shall be added to the Agreement, which read as follows:

                                            5.06     INTELLECTUAL PROPERTY.  
(a) Within 30 days of the date of this Agreement, Borrower shall register or 
cause to be registered with the United States Copyright Office any software 
(material to the business of Borrower) developed or acquired by Borrower in 
connection with any product developed or acquired for sale or licensing. (b) 
While any Obligations remain outstanding, Borrower shall register or cause to 
be registered with the United States Copyright Office (i) any software 
(material to the business of Borrower) developed or acquired by Borrower 
hereafter from time to time in connection with any product developed or 
acquired for sale or licensing and (ii) any major revisions or upgrades to 
any software that has previously been registered with the United States 
Copyright Office. Borrower shall file for registration within 30 days from 
the development or acquisition of such software, major revision or upgrade. 
(c) If Borrower has or will federally register any Intellectual Property with 
the United States Copyright Office or the United States Patent and Trademark 
Office, then Borrower shall execute and deliver to Lender, for filing with 
the United States Copyright Office or the United States Patent and Trademark 
Office, as the case may be, a grant of security interest in such Intellectual 
Property, in form acceptable to Lender, within 30 days of the date Borrower 
registers such Intellectual Property. (d) If, on or before December 31, 2000, 
Borrower raises at least Fifteen Million Dollars ($15,000,000) in the next 
equity round, and no Default or Event of Default shall exist at such time, 
then Lender agrees to release its security interest in Intellectual Property.

                                            5.07     NIS AND FLORIDA 
ACQUISITIONS; COPELCO EQUIPMENT FINANCING. Notwithstanding anything to the 
contrary herein, Lender consents to Borrower entering into a $3,250,000 
credit facility with Copelco or another lender to finance 10 cameras and 
associated chairs and vehicle, and such equipment may be Third Party 
Equipment hereunder. In addition, Lender consents to Borrower's acquisition 
of (i) the mobile business of Nuclear Imaging Systems ("NIS") for the payment 
to NIS of $750,000 and up to 200,000 shares of Borrower's common stock, (ii) 
the fixed business of NIS on substantially the same terms as set forth in 
Exhibit D to this First Amendment, and (iii) the mobile business of Florida 
Cardiology and Nuclear Medicine Group ("FCNM") for the payment to FCNM of 
$1,000,000 and up to 400,000 shares of Borrower's common stock; provided, 
however, prior to Borrower forming any new Subsidiary to hold such assets, 
Borrower shall provide to Lender documentation to Lender's satisfaction, 
including without limitation, subsidiary guaranties, to ensure Lender's 
perfected security interest in such assets, subject only to Permitted Liens.

                                            (j)      A new Section 6.01(e) 
shall be added to the Agreement which reads as follows:

                                            (e)      EQUITY INVESTMENT.  
Borrower shall permit Lender, at Lender's option, to purchase in Borrower's 
next round of equity financing up to $500,000 of the securities sold in such 
financing at the same price and on the same terms as paid and received by the 
lead investor of the equity financing. Borrower agrees that it shall notify 
each Lender promptly upon the execution by Borrower of a term sheet or letter 
of intent setting forth the 

                                      -6-
<Page>


terms and conditions of such financing and in any event within five (5) days 
of such execution. This right of purchase may be assigned by a Lender to its 
Affiliates.

                  3.       AMENDMENT FACILITY FEE; DEPOSIT. Upon the funding of
the Facility B Loan, Borrower agrees to pay to Lender a facility fee ("AMENDMENT
FACILITY FEE") of $8,333. Borrower has paid Lender a good faith deposit of
$10,000 (the "Deposit"). The Deposit, less Lender's costs and expenses
(including in-house counsel fees of $2,500) in an aggregate amount not to exceed
$5,000, shall be applied towards the Amendment Facility Fee.

                  4.       CONDITION TO EFFECTIVENESS.  The effectiveness of 
this Amendment is conditioned upon the delivery by Borrower to Lender of the 
following:

                           (a)      A certificate of the Secretary or the 
Assistant Secretary of Borrower, in form and substance satisfactory to 
Lender, certifying the adoption of resolutions of the Board of Directors of 
Borrower approving this First Amendment and the transactions contemplated 
hereby (including the issuance of the Warrants described in Section 4(b) and 
4(c) below).

                           (b)      A Warrant in the form of Exhibit B hereto.

                           (c)      A Warrant in the form of Exhibit B 
hereto, except for a total of 8,235 shares executed and delivered to Priority 
Capital.

                           (d)      This First Amendment duly executed by 
Borrower.

                  5.       EFFECT OF FIRST AMENDMENT. On and after the date
hereof, each reference to the Loan Agreement in the Loan Agreement or in any
other document shall mean the Loan Agreement as amended by this First Amendment.
The execution, delivery and effectiveness of this First Amendment shall not
operate as a waiver of any right, power, or remedy of Lender, nor constitute a
waiver of any provision of the Loan Agreement.

                  6.       REPRESENTATIONS AND WARRANTIES.  Borrower hereby 
represents and warrants to Lender that:

                           (a)      (i) Borrower is a corporation duly 
organized, validly existing and in good standing under the laws of California 
and is duly qualified and authorized to do business in the state(s) where 
Collateral is or will be located; (ii) Borrower has the full corporate power, 
authority and legal right and has obtained all necessary approvals, consents 
and given all notices to execute and deliver this First Amendment and perform 
the terms thereof; (iii) there is no action, proceeding or claim pending or, 
insofar as Borrower knows, threatened against Borrower or any of its 
subsidiaries before any court or administrative agency which might have a 
materially adverse effect on the business, condition or operations of 
Borrower or such subsidiary; and (iv) this First Amendment has been duly 
executed and delivered by Borrower and constitutes the valid, binding and 
enforceable obligation of Borrower.

                                      -7-

<Page>


                           (b)      No Default or Event of Default under the 
Loan Agreement has occurred and is continuing.

                           (c)      As of the date hereof, the number of 
"common equivalent" shares (assuming exercise of all outstanding options or 
warrants to purchase securities and conversion of all convertible securities) 
of Borrower outstanding is not more than 31,000,000.

                  7.       FULL FORCE AND EFFECT.  Except as amended above, 
the Loan Agreement remains in full force and effect.

                  8.       HEADINGS.  Headings in this First Amendment are 
for convenience of reference only and are not part of the substance hereof.

                  9.       GOVERNING LAW.  This First Amendment shall be 
governed by and construed in accordance with the laws of the State of 
California without reference to conflicts of law rules.

                  10.      COUNTERPARTS.  This First Amendment may be 
executed in any number of identical counterparts, any set of which signed by 
all of the parties hereto shall be deemed to constitute a complete, executed 
original for all purposes.

                  [Remainder of Page Left Blank Intentionally.]


                                      -8-
<Page>


                  IN WITNESS WHEREOF, Borrower and Lender have caused this 
First Amendment to be executed as of the day and year first above written.

                                       DIGIRAD CORPORATION


                                       By:      /s/ Scott Huennekens
                                              --------------------------
                                       Name:    Scott Huennekens
                                              --------------------------
                                       Title:   President & CEO
                                              --------------------------


                                       MMC/GATX PARTNERSHIP NO.  I


                                       By:      /s/ Patricia W. Leicher
                                              --------------------------

                                       Name:    Patricia W. Leicher
                                              --------------------------

                                       Title:   VP
                                              --------------------------


                                      -9-
<Page>


                                    EXHIBIT A

                           LOAN AND SECURITY AGREEMENT

                          Dated as of October 27, 1999

                                     between

                           MMC/GATX PARTNERSHIP NO. 1

                                    as Lender

                                       and

                               DIGIRAD CORPORATION
                             a Delaware corporation
                                9350 Trade Place
                               San Diego, CA 92121

                                   as Borrower


<Table>
<Caption>

FACILITY A                                                         FACILITY B

<S>                                       <C>                      <C>                               <C>       
Credit Amount:                            $3,000,000               Credit Amount:                    $1,000,000
Repayment Period:                         36 months                Repayment Period:                 36 months
Treasury Note Maturity:                   36 Months                Treasury Note Maturity:           36 Months
Loan Margin:                              750 basis points         Loan Margin:                      750 basis points
Commitment Termination Date:                                       Commitment Termination Date:      August 25,2000
     (First Loan)                         November 1, 1999
     (Second Loan)                        June 30, 2000

</Table>



The terms and information set forth on this cover page are a part of the
attached Equipment Loan and Security Agreement, dated as of the date first
written above (this "AGREEMENT"), entered into by and among MMC/GATX PARTNERSHIP
NO. I ("LENDER") and DIGIRAD CORPORATION ("BORROWER") set forth above. The terms
an conditions of this Agreement agreed to between Lender and Borrower are as
follows:


                                      -10-
<Page>


                                    EXHIBIT B

                                     WARRANT






                                      -11-
<Page>


THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION
OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE
APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THIS WARRANT.

                               DIGIRAD CORPORATION

                           WARRANT TO PURCHASE SHARES
                           OF SERIES E PREFERRED STOCK

         THIS CERTIFIES THAT, for value received, GATX VENTURES, INC. and its
assignees are entitled to subscribe for and purchase 57,642 shares of the fully
paid and nonassessable Series E Preferred Stock (as adjusted pursuant to Section
4 hereof, the "Shares") of DIGIRAD CORPORATION, a Delaware corporation (the
"Company"), at the price of $3.036 per share (such price and such other price as
shall result, from time to time, from the adjustments specified in Section 4
hereof is herein referred to as the "Warrant Price"), subject to the provisions
and upon the terms and conditions hereinafter set forth. As used herein, (a) the
term "Series Preferred" shall mean the Company's presently authorized Series E
Preferred Stock, and any stock into or for which such Series E Preferred Stock
may hereafter be converted or exchanged, and after the automatic conversion of
the Series E Preferred Stock to Common Stock shall mean the Company's Common
Stock, (b) the term "Date of Grant" shall mean August 14, 2000, and (c) the term
"Other Warrants" shall mean any other warrants issued by the Company in
connection with the transaction with respect to which this Warrant was issued,
the Loan and Security Agreement dated as of October 27, 1999 (the "Loan
Agreement") between the Company and the lender named therein, and any warrant
issued upon transfer or partial exercise of or in lieu of this Warrant. The term
"Warrant" as used herein shall be deemed to include Other Warrants unless the
context clearly requires otherwise.

         If the Company is eligible under the Loan Agreement and requests Lender
to fund the Second Loan pursuant to the terms of the Loan Agreement, but Lender
elects not to fund the Second Loan, the number of shares of the fully paid and
nonassessable Series E Preferred Stock the holder is entitled to subscribe for
and purchase as set forth above shall be reduced from 172,925 to 115,283. The
terms "Lender" and "Second Loan" shall have the meaning given these capitalized
terms in the Loan Agreement.

         1.       TERM. The purchase right represented by this Warrant is
exercisable, in whole or in part, at any time and from time to time from the
Date of Grant through the later of (i) seven (7) years after the Date of Grant
or (ii) five (5) years after the closing of the Company's initial public
offering of its Common Stock ("IPO") effected pursuant to a Registration
Statement on Form S-l (or its successor) filed under the Securities Act of 1933,
as amended (the "Act").


<Page>


         2.       METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT. Subject
to Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, at
the election of the holder hereof, by (a) the surrender of this Warrant (with
the notice of exercise substantially in the form attached hereto as Exhibit A-1
duly completed and executed) at the principal office of the Company and by the
payment to the Company, by certified or bank check, or by wire transfer to an
account designated by the Company "Wire Transfer") of an amount equal to the
then applicable Warrant Price multiplied by the number of Shares then being
purchased; (b) if in connection with a registered public offering of the
Company's securities, the surrender of this Warrant (with the notice of exercise
form attached hereto as Exhibit A-2 duly completed and executed) at the
principal office of the Company together with notice of arrangements reasonably
satisfactory to the Company for payment to the Company either by certified or
bank check or by Wire Transfer from the proceeds of the sale of shares to be
sold by the holder in such public offering of an amount equal to the then
applicable Warrant Price per share multiplied by the number of Shares then being
purchased; or (c) exercise of the "net issuance" right provided for in Section
10.2 hereof. The person or persons in whose name(s) any certificate(s)
representing shares of Series Preferred shall be issuable upon exercise of this
Warrant shall be deemed to have become the holder(s) of record of, and shall be
treated for all purposes as the record holder(s) of, the shares represented
thereby (and such shares shall be deemed to have been issued) immediately prior
to the close of business on the date or dates upon which this Warrant is
exercised. In the event of any exercise of the rights represented by this
Warrant, certificates for the shares of stock so purchased shall be delivered to
the holder hereof as soon as possible and in any event within thirty (30) days
after such exercise and, unless this Warrant has been fully exercised or
expired, a new Warrant representing the portion of the Shares, if any, with
respect to which this Warrant shall not then have been exercised shall also be
issued to the holder hereof as soon as possible and in any event within such
thirty-day period; provided, however, at such time as the Company is subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended,
if requested by the holder of this Warrant, the Company shall cause its transfer
agent to deliver the certificate representing Shares issued upon exercise of
this Warrant to a broker or other person (as directed by the holder exercising
this Warrant) within the time period required to settle any trade made by the
holder after exercise of this Warrant.

         3.       STOCK FULLY PAID; RESERVATION OF SHARES. All Shares that may
be issued upon the exercise of the rights represented by this Warrant will, upon
issuance pursuant to the terms and conditions herein, be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized, and
reserved for the purpose of the issue upon exercise of the purchase rights
evidenced by this Warrant, a sufficient number of shares of its Series Preferred
to provide for the exercise of the rights represented by this Warrant and a
sufficient number of shares of its Common Stock to provide for the conversion of
the Series Preferred into Common Stock.

         4.       ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number
and kind of securities purchasable upon the exercise of this Warrant and the
Warrant Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:


                                      -2-
<Page>


                  (a)      RECLASSIFICATION OR MERGER. In case of any
reclassification or change of securities of the class issuable upon exercise of
this Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination), or in case of any merger of the Company with or into another
corporation (other than a merger with another corporation in which the Company
is the acquiring and the surviving corporation and which does not result in any
reclassification or change of outstanding securit