**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

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FORM 10-KSB

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x                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGEACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2004.

**OR**

**o**                                 TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934.

**Forthe transition period from ____________ to _______________**

**Commissionfile number 0-12551**

**CREATIVE COMPUTER APPLICATIONS, INC.**

(Name of Small BusinessIssuer in its charter)

| **California**                                                   | **95-3353465**                        |
|------------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | (I.R.S. Employer  Identification No.) |
| **26115-A Mureau Road  Calabasas, California**                   | **91302**                             |
| (Address of principal  executive offices)                        | (Zip Code)                            |
| Issuer’s  telephone number:   **(818) 880-6700**  |

 

Securities registeredunder Section 12(b) of the Exchange Act:   None

Securities registeredunder Section 12(g) of the Exchange Act:

**Common Stock, no par value**

(Title of class)

Check whether the Issuer (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theIssuer was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x   No o

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained in this form, and no disclosure will be contained, to the best ofIssuer’s knowledge, in definitive proxy or information statements incorporatedby reference in Part III of this Form 10-KSB or any amendmentto this Form 10-KSB. o

Issuer’s revenues for itsmost recent fiscal year ended August 31, 2004 were *$7,655,972*

As of *November 19,2004*, the aggregate market value of the voting stock held bynon-affiliates of the Company was approximately *$3,178,000*.

As of *November 19,2004* the Company had *3,318,900*sharesof its common stock outstanding.

DOCUMENTS INCORPORATED BYREFERENCE

Items 10, 11 and 12 of Part IIIof this report are hereby incorporated by reference from the Company’s Fiscal2000 Definitive Proxy Statement, which will be filed within 120 days of the endof the Company’s fiscal year.

Transitional SmallBusiness Disclosure (check one):

Yes o              No x

 

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The following reportcontains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Such forward-looking statementsinvolve risks and uncertainties so that the actual results may vary materially

**PART I**

**Item 1.   Business.**

**Business Description**

Creative Computer Applications, Inc. (CCA or theCompany) is a healthcare information technology and service provider thatspecializes in Clinical Information Systems (CIS) software, services andbrowser-based solutions for hospitals and clinic-based laboratories, pharmaciesand radiology departments. Clinical information is data that is gatheredconcerning each individual patient’s health condition, diagnosis, and treatmentthat are used by doctors, nurses and other healthcare providers. Such data mayinclude laboratory tests results, transcribed reports of radiological orimaging procedures, medication administration records, and other clinical data.CCA’s products are deployed to provide automation of clinical information thatfacilitates the operation of clinical ancillary departments and allows therapid recording and processing of information that can be communicated,documented, and delivered to healthcare providers.

Currently, CCA markets aLaboratory Information System under the name CyberLAB®, a PharmacyInformation System under the name CyberMED®, a Radiology InformationSystem under the name CyberRAD®, an Anatomic Pathology System underthe name of CyberPATH®, a WebGatewayTM for physician access toits CIS applications, and other related clinical application modules. Thegeneral offices and operational headquarters are located at 26115-AMureau Road, Calabasas, CA 91302. The Company’s telephone number is 818/880-6700and its website address is www.ccainc.com. The Company’s business consists offour operational areas:  (1) ClinicalInformation Systems products, (2) service of its client’s installations, (3) implementationservices, and (4) data acquisition products. Product lines consist ofLaboratory Information Systems, Pharmacy Information Systems, RadiologyInformation Systems, Anatomic Pathology Systems, Mammography Reporting andTracking Systems, and Data Acquisition products. The Company sells its productsand systems directly through its own sales force in North America, throughjoint marketing programs with other companies, and has reseller agreements incertain international markets.

**History and Business Development**

Since its inception as a California corporation in1978, CCA has been primarily engaged in the development, marketing,installation, and service of Clinical Information Systems that automate thecollection and management of patient clinical data for healthcare providers. Asof August 31, 2004, the Company supported approximately 400 activeapplication installations that are used in over 500 client sites.

The percentage of the Company’s net sales attributableto the sale, licensing, and implementation of Clinical Information Systems,including data acquisition product sales, accounted for approximately 43% oftotal revenues in fiscal 2004, 43% in fiscal 2003, and 48% in fiscal 2002. Managementbelieves that the percentage of the Company’s net sales attributable to itssales of Clinical Information Systems activities will increase in fiscal 2005due to an anticipated increase in sales of its CyberLAB laboratory informationsystem product due in part to current market dynamics and the recentintroduction of a new version of this product. It also expects that its servicerevenues, which accounted for 57% of total revenues in the current fiscal year,will continue to grow as additional new installations are added to the Company’sinstalled base.

By automating thecollection and organization of patient clinical data, the Company’s ClinicalInformation Systems reduce operating costs, assist in meeting compliancerequirements, address patient care and safety issues, and increase theefficiency of healthcare providers. In addition to such factors, CCA 

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has beenable to document significant return on investment scenarios, which furtherconfirm the efficacy of its systems. The healthcare industry continues tooperate under increasing pressure from government regulatory agencies and thirdparty payers of medical expense, as well as from increased competition in thehealthcare industry, to control costs. Management believes that there will becontinuing demands to contain healthcare costs for the foreseeable future.

As part of its businessstrategy, the Company has consistently pursued the development of enhancementsand new modules to its existing products, as well as the development ofentirely new products and services to expand the Company’s business. TheCompany’s objective is to diversify its product portfolio beyond the areascurrently served. The Company has developed a clinician portal marketed as theCCA WebGatewayTM, which provides access to its CyberLAB and CyberRAD products sothat physicians and nurses can easily utilize them from virtually anywhere in theworld, and is continuing to build upon this technology platform in order todeploy other functionality. CCA’s WebGateway provides access to CyberLAB fororders, inquiry, results, and compliance. WebGateway also provides access toCyberRAD for orders, inquiry, electronic signature, compliance, and otherfunctions.

CCA’s results ofoperations for the current fiscal year ended August 31, 2004 were markedby an increase in sales of approximately 4% over the 2003 fiscal year and anincrease of approximately 73% in earnings. During fiscal 2004, CCA maintainedpositive operating cash flow while increasing spending for product development.The Company’s increase in revenues for the 2004 fiscal year was primarily dueto the introduction and transition to a new version of CyberLAB thatcontributed to new sales and upgrades of clients on the previous productversion. During fiscal 2003, the Company had experienced delays in the releaseof CyberLAB 7.0 due to timing issues and the need to complete Health InsurancePortability and Accountability Act (HIPAA) related upgrades to its existingproducts. However, by the end of fiscal 2003 CCA had substantially completedCyberLAB 7.0 and began to install the new software in its initial beta sitesfor testing and evaluation. As of November 19, 2004, CyberLAB 7.0 was livein eight sites and was being implemented in 6 additional sites. In addition,new sales and marketing activities were initiated resulting in CCA’s pipelineof potential new CyberLAB 7.0 related transactions increasing beyond historicallevels. CyberLAB 7.0 has generated significant interest among new buyers aswell as CCA’s installed client base.

In order to addresscompliance issues brought about by the HIPAA regulations, the Company completedthe development of enhancements to its products and upgraded hundreds of clientsites with the HIPAA related enhancements during the 2003 fiscal year. Thisposed considerable challenges to CCA’s organization. Provisions of HIPAA areintended to ensure patient confidentiality and security for all health carerelated information. The requirements of HIPAA apply to any entity storingand/or transmitting patient identifiable information on electronic media. Thisaffects virtually all health care organizations, from physicians and insurancecompanies to health care support organizations. Certain safeguards are requiredto accurately insure the security of patient data including more robust audittrails and tiered/structured password security when accessing patient data.

**Clinical InformationSystems**

The Company’s Clinical Information Systems aredesigned to provide cost effective, robust application features to managecomprehensive clinical activities throughout most sectors of the health careprovider marketplace. The Company’s systems are highly user definable andscaleable, enabling a wide range of users and different types of healthcareproviders to employ them.

CCA’s Clinical Information System applications aredesigned around a common open systems architecture that is based on the UNIX orLINUX operating system platforms and employs thin-client technology at thepoint of user interface. CCA’s use of this technology allows easy integrationinto existing networks, as well as seamless integration with other systems. CCA’ssuite of Clinical Information System applications allows for unprecedentedscalability and flexibility ensuring that as the needs of a healthcare 

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provider change, thesystems can easily be adapted. The Company’s clinical applications are designedaround flexible parameterized software, which enables the end user to tailorthe software for its individual needs.

For clinical laboratories, the Company has integratedits software applications and data acquisition technology into LaboratoryInformation Systems, which are sold under its trade name CyberLAB. Extensiveapplications for a wide variety of laboratory testing, compliance, and qualitycontrol procedures, including hematology, immunology, chemistry, microbiology,drug testing, toxicology, urinalysis, and cytology testing, are available withthe Company’s systems. Validation and reimbursement, multi-site reporting andmanagement, database management, bedside specimen collections, point of caretesting, remote communications and flexible user defined reporting capabilitiesare also included. Additional modules are also available for completemicrobiology testing and CyberPATH, CCA’s Anatomic Pathology system, can befully integrated with CyberLAB. The Company’s Laboratory Information Systemsare highly flexible and scalable and are used by laboratories of varying sizeand complexity. During fiscal 2004, CCA expanded its point of care testingapplications and introduced a new version of its CyberMATE® handhelddevice.

The Company’s Pharmacy Information Systems, which aresold under the trade name CyberMED, integrate inpatient, outpatient, and longterm care applications into a highly integrated software product. CyberMEDintegrates unit dose, IVPB/TPN, controlled substances, floor stock, inventorycontrol, and kinetics functions. It performs labor-intensive operations such aspatient profiling, drug inventory control, drug interactions, and patientbilling. An optional purchasing module can electronically place orders withsuppliers and determine the fastest moving drugs, as well as track drug usageand costs. CyberMED supports several third party database services forintegrated drug interactions, pricing, and patient informational disclosuresthat are required by regulation. Extensive reporting capabilities are supportedincluding a user defined parameterized medication administration reportingmodule.

CyberRAD, the Company’s Radiology Information System,is also hybrid in its design, which allows for its deployment in inpatient,outpatient and multi-site settings. Applications include extensive scheduling,reporting, film tracking, transcription, and clinical functionality. Inaddition, Document Imaging for storage and retrieval of important patientinformation, such as signed HIPAA Privacy Notice, Medical Necessity ABN, andother patient information is included in CyberRAD. CyberRAD has also beendesigned with easy to deploy built-in communication interface capabilities fordiagnostic modalities and Picture Archive Communication Systems (PACS).

The Company’s Clinical Information Systems supportextensive communication capabilities to various healthcare information systemsincluding Hospital Information Systems, nursing and practice managementsystems, for which the Company has developed over one hundred system-to-system communicationinterfaces. The Company’s Clinical Information Systems are employed in manysettings that consist of multiple sites where testing or medical procedures areseamlessly integrated. In addition, different types of enterprises, such ashospital and affiliated outpatient clinics, can use the Company’s systems tointegrate their activities thus enabling the execution of their businessstrategies. The communication interfaces often support bi-directional datacommunications, whereby demographic and order requests are transmitted to theClinical Information Systems and, in turn, billing information and results arere-transmitted to the host system. The Company’s Clinical Information Systemssupport their own order communications and test subsystems that have beenemployed in other accounts that have relied on the Clinical Information System’scommunications capabilities. Management believes that communications to othersystems allowing connectivity between its CIS applications and patient care,electronic medical record systems, and other administrative informationsystems, are very important functional requirements in the marketability of itsproducts. The Company has focused considerable attention on the communication,networking, and connectivity capabilities of its products, and plans to furtherdevelop these capabilities as opportunities present themselves.

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The Company has developed standard seamlessintegration and network connectivity for all its products through user selectednetwork topologies, network protocols, and network operating systems. Althougheach application has been configured to operate as a stand-alone product, allcan be operated as an integrated package, residing on a shared platform ornetwork, thereby eliminating the need for multiple interfaces, duplicateinformation handling, and their associated costs. CCA continues the developmentof enhancements to CyberLINK®, a software integration andcommunications module that integrates all of its own clinical applications andprovides a single communications gateway to or from other vendors’ systems.

The Company has designed its products to incorporateopen systems architecture and to conform to computer industry standards, whichenable them to be more easily integrated with other vendors’ products. Healthcareindustry standards, including Health Level Seven (HL7) and ASTM, and DICOMstandards are employed throughout the Company’s software products and in itsCyberLINK connectivity application

The Company’s ClinicalInformation Systems operate under various versions of UNIX. As a result oftrends throughout the information technology marketplace, Microsoft Windows©is becoming more popular. The Company has considered migrating its ClinicalInformation Systems to operate under Windows©, but does not believeWindows© has reached the level of scalability that UNIX has achieved.The Company began migrating some of its systems to a client-server architectureand CyberRAD, and CyberPATH operate in that environment. However, as a resultof technological advancements the Company is evolving all of its clinicalapplications to the graphical browser-based architecture that CyberLAB 7.0 nowoperates under. Management believes that it is a superior architecture toclient-server and has cost benefit attributes associated with it since iteliminates the need for more costly client PC’s and substantially reduces desktop administration.

**Data Acquisition Products**

The Company’s data acquisition products, which consistof clinical instrument data interfaces, increase the efficiency and accuracy ofon-line data acquisition in biomedical laboratories by automating the collectionand organization of test data. Many of the Company’s data acquisition productsuse a microcomputer performing a specific discrete task. All of the Company’sdata acquisition products are “plug-in” compatible with each other, enabling anend user to easily expand its system. The Company’s data acquisition productsconserve central computer resources, lower hardware costs, and significantlyreduce costs of installation and system expansion, meeting the cost-containmentneeds of healthcare organizations. However, as a result of technologicalchanges and the improved communication capabilities of current generationclinical instruments, the Company is developing its new clinical instrumentinterfaces in a direct communications format and is de-emphasizing its dataacquisition product platform.

As of August 31,2004, the Company had sold more than 12,500 of its data acquisition products inthe United States and abroad, and supports over 600 different interfaceconfigurations for use with a wide variety of automated biomedical testingdevices.

**Service**

The Company provides comprehensive services to itsinstalled base of system clients through its own service organization, andprovides extensive training and implementation of its systems. The Companyoffers both software support services, through a twenty-four (24) hour “hotline,”and field service for hardware repair. In most instances, the Company relies onthird parties to service the hardware components that it sells. The Companyservices its own data acquisition products and related software, used as partof its CIS product offering, under service contracts offered to end users. TheCompany’s long-term inventory requirements for its service and repair businesshave historically been significant because it must retain a loaner pool ofcomponents used to service its client base. In recent years, the Company hasde-emphasized providing hardware in connection with the sale of its CISproducts and currently only 

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provides the servers and afew specialty components. Therefore, CCA’s long-term inventory requirements areexpected to decline in the future.

The Company’s service revenues for fiscal 2004increased by approximately 3% from the previous fiscal year, and they areexpected to continue to grow when and as the installed base of system clientsgrows. The majority of the Company’s clients are under service contracts. TheCompany believes that the ability to offer comprehensive services to itsclients is a very important facet of its business and solidifies a long-termrelationship with its client accounts. The recurring revenue stream associatedwith this activity is a significant part of the Company’s business. The abilityto offer long-term service often leads to add-on sales opportunities forperipheral components, data acquisition products, and upgrades to newercomputers and software applications. In addition, the quality of service is animportant aspect of the end users buying decision when making a systemselection; therefore the Company is constantly fine-tuning the services itprovides and its service organization as part of its marketing strategy.

The Company has deployed technology to automate acompany wide helpdesk system in order to more effectively service its clientsand employs a “virtual company” concept by linking outside personnel via theInternet directly into its own internal network. A number of Company employeeswho are engaged in technical and service related activities telecommute throughthis venue. During fiscal 2005, the Company plans to convert its currenthelpdesk system to a new customer relationship management system (CRM) andintegrate it with its current general accounting system.

The Company believes thatthe service of its clients is of utmost importance to its long-term success andbusiness strategy. Accordingly, a great deal of emphasis is placed oncontinuing to upgrade the service organization and on expanding the servicesthat the Company offers. As part of this effort, the Company routinely surveysits clients in an effort to obtain a “report card” on how the serviceorganization performs. With this mechanism the Company tunes its serviceorganization to better address its client’s requirements.  The Company anticipates adding additionalimplementation personnel during fiscal 2005.

**Significant Contracts and Programs**

The Company has pursued a strategy of seeking out newmarket opportunities to expand the distribution of its products in two specificways, first through joint ventures with other vendors of compatible productsand services that are synergistic with CCA’s products, and secondly by enteringnew markets.

During August 2002, the Company entered into ajoint marketing and product development agreement with eMed Technologies, Inc.a leading vendor of Picture Archive Communication Systems (PACS) and web-basedmedical image distribution solutions. The association is focused on theintegration of the CCA CyberRAD Radiology Information System (RIS) with theeMed Ideal Image Management Suite. Together, the companies have developed andjointly market a feature-rich RIS/PACS solution under the trade name of EnteraTM.The result of this collaboration is a complete solution that synchronizesmedical imaging and clinical information workflow. Specifically designed forthe imaging center or hospital enterprise, EnteraTM automates processes at everypoint of patient care—scheduling, image acquisition, diagnostic reading, andresults delivery. The joint venture between CCA and eMed will address the needsof imaging facilities seeking a single RIS/PACS solution. By tightly integratingthe CCA CyberRAD RIS with the eMed PACS, medical imaging facilities will beable to realize the benefits of workflow automation at a cost that was oncereserved for the large facility budget. Entera went live in a beta site duringCCA’s fourth fiscal quarter and is currently being marketed.

CCA is also seeking to expand its presence ininternational markets. Currently most of the Company’s installations are in theUnited States; however, the Company also has systems placed in Canada, theCaribbean, Malaysia, Thailand, and Singapore.

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As part of its overall marketing strategy, the Companyis also pursuing strategic relationships with organizations that operatemultiple entity enterprises where the Company may have the opportunity to offerits array of products and services to the group.

During the 2004 fiscalyear, there were no customers, contracts or programs that generated over 10% ofthe Company’s net sales.

**ProductDevelopment**

The market for the Company’s products is characterizedby rapid and significant technological change. The Company’s ability to competein the market, and to operate successfully, depends in part on its ability toreact to such change. During the Company’s 2004, 2003, and 2002 fiscal years,amounts (inclusive of capitalized software) equal to approximately 18%, 16%,and 20%, respectively, of the Company’s net sales were expended for researchand development. The Company continues to expend a significant amount ofresources for the development of new products, and for the development ofadditional enhancements to existing products and intends to continue to expendsuch resources in the future.

The Company’s development plans are focused onevolving it’s clinical application products to a common user interface based onindustry standard browser-based thin client technology. By utilizing thiscommon user interface architecture it allows for easier deployment in atraditional enterprise environment as well as projecting the applicationnatively over the Internet. Management believes that the total cost ofownership (TCO) inherent in thin client architecture will be very attractive toboth current and future users. As the product suite continues to migrate to acommon look and feel, CCA is also building standard open systems connectivityto ODBC compliant relational database technology. This architectural approachallows the product suite to take advantage of all current and any potentialfuture relational database technologies. Management’s goal is to drive theproduct suite to a total open systems environment, therefore allowing CCA totake advantage of new technologies as they appear.

In addition to the preceding, CCA has planned productdevelopment projects over the next three years that include additionalenhancements to all of its products and additional new modules will bedeveloped for CyberMATE.  The Companyalso continues to develop enhancements to its WebGateway that will provide forgreater functionality, and expanded use of its CIS products for physicians.

Research and developmentexpenditures, net of capitalized software, amounted to approximately $1,014,000in fiscal 2004, $902,000 in fiscal 2003, and $791,000 in fiscal 2002. Suchexpenditures were attributable to systems development, including thedevelopment of new Laboratory, Radiology, and Pharmacy Information Systemsapplications, and enhancements to those products. The Company’s business logicapplications are maintained in an object COBOL language that provides astandard code structure for the business applications while the graphicalpresentation is written in JAVA® and HTML. By employing run-timemodules for UNIX, the Company has been able to port to a variety of hardwareplatforms with ease. The Company currently supports its software applicationson Intel® based Hewlett Packard®/Compaq®servers and IBM® RISC 6000 servers, the two most popular computerproviders in healthcare. This capability has allowed the Company to become “platformindependent” in vending its software products where some customers may bepredisposed to certain hardware brands. The Company also provides some of itsapplications in Microsoft NT®, in order to take advantage of usingoff the shelf software such as Windows® for transcription anddocument production and delivery. All of the Company’s products are opendatabase compliant (ODBC), and the data structures support the use of standardquery language (SQL) report generators that allows a wide range of reportingcapabilities.

**Distribution and Marketing**

From its inception, the Company has sold its productsand systems directly to the healthcare industry through its own sales andmarketing personnel, as well as indirectly through original equipment 

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manufacturers (“OEM’s”),and through joint marketing relations with other companies. The Company has traditionallymarketed its products throughout the United States, Canada and the Caribbean. Earlyin fiscal 2000, the Company contracted to provide CyberLAB to a large referencelaboratory in Malaysia. As a result of the successful CyberLAB installation in Malaysia,new additional business opportunities have materialized in the region and theCompany now has new installations that are being implemented in Thailand andSingapore.

At present, the Company’s direct field sales forceconsists of four salespersons that are managed by the vice president of sales. Inaddition, the Company’s senior management and technical product consultantsassist in sales activities.

During fiscal 2004, the Company commenced newpromotional activities and is compiling a significant database of accountsthroughout the healthcare marketplace that is helping to position the Company’ssales activities. In addition to direct marketing, the Company promotes itsproducts by attending national industry trade meetings, through media advertising,publishing articles in industry publications and through its web site. Becauseof the opportunity to meet larger audiences at national industry meetings, theCompany has upgraded its attendance at such meetings for fiscal 2005 with newlarger exhibits and other promotional programs. The Company has also formedjoint marketing arrangements with other companies that have compatible productsand services, which has increased sales penetration in the marketplace.

The Company has established and supports an annualuser symposium in order to encourage users of its Clinical Information Systemsto participate in helping the Company to better serve its clients. The focus ofthe symposium is to encourage open group communications with the Company abouta range of subjects, including service and support and new product enhancements.Since the Company has experienced success in vending multiple products to itsclients, the national symposium proves to be a good forum to discuss generaltopics, such as the Company’s strategy and product direction, and provides anopportunity to focus on specific application issues in breakout sessions. TheCompany also schedules advanced training courses as part of the symposiumagenda that have had considerable attendance by its clients.

The Company also publishesnewsletters and articles, which are intended to expand communications withexisting and potential clients. During fiscal 2005, the Company expects tosubstantially increase expenditures associated with its marketing plan whichinclude new web site enhancements, collateral materials, including new productmarketing literature, and intends to expand its trade show attendance.

**Competition**

The Company has several significant competitors in theClinical Information Systems business, many of which are much larger companiesthat may offer a wider array of products in addition to competitive clinicalapplications.   Management believes,however, that few competing CIS products offer the Company’s hybrid multi-sitecapabilities, variety of data interfaces, add-on capability, and flexibilitythat allows the systems to be user definable, so that they can be employed indifferent types of settings. The multi-site and multi-disciplinary or hybridnature of the Company’s products are a strong selling point. The Company hasalso received very good references about its service organization and theability to respond to clients needs on a timely and cost effective basis.

The principal competitivefactors in the Company’s business are technological competence, diversity ofproduct line, price and performance characteristics, product quality,capability and reliability, marketing and distribution networks, service andsupport, ability to attract and retain trained technical employees and businessreputation. The Company believes that it has competitive advantages in many ofthese areas. CCA has also positioned itself to focus on a niche in the marketthat is not the focus of larger companies. CCA seeks to secure business fromlarge multi-specialty clinics and rural hospitals. Such entities typically have

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diverseoutpatient populations and operate in a number of locations that requirespecial features designed in the Company’s products that assist them inmaximizing their operating potential.

**Manufacturing and Suppliers**

The Company has utilizedcomputers manufactured by several suppliers for its Clinical InformationSystems in the past, and primarily uses computers manufactured by HewlettPackard/Compaq®, and IBM®. Management believes that othercomputers, which can be used in the Company’s systems, are readily availablefrom several suppliers. As part of a strategy to limit the amount of hardwarethat the company vends, it has migrated to a “just in time” inventory programwhereby it has relied on purchasing inventory when it has received an orderfrom a customer rather than stocking inventory on a routine basis. The Companystill maintains an inventory supply of certain items including spare parts andcomponents for both its CIS product line and for its data acquisition productline. In addition, the Company maintains a long-term inventory pool ofcomponents and parts to service customer’s hardware pursuant to its long termextended service agreements. The Company’s data acquisition products areassembled by its employees and subcontractors from prefabricated subassemblies,which are built by independent electronics assembly companies. Managementbelieves there are many competent subassembly companies within the immediatevicinity of the Company’s business location. The Company obtains the componentsof its data acquisition products from a variety of suppliers and is notdependent on any one supplier for such components.

**Warranties and Product Liability**

The Company warrants that its products conform to theirrespective functional specifications. The Company’s data acquisition productsand components are warranted against faulty materials and workmanship for 90days. The Company also warrants its application software incorporated in itsLaboratory, Radiology, and Pharmacy Information Systems for 90 days. However,clients may elect to enter into extended service agreements with the Companythat further extends such warranties. The computers that the Company currentlysells as part of its Clinical Information Systems are subject to the warrantiesof their manufacturers. The manufacturers generally warrant their productsagainst faulty material and workmanship for one to three years. The Companypasses through the manufacturers warranties to the end users and in most casescontracts with the manufacturers are to provide onsite warranty servicesthrough the manufacturers service network.

The Company currentlycarries an aggregate of $4,000,000 in product liability insurance. Managementbelieves that this amount of insurance is adequate to cover its risks. Tofurther mitigate its risks, the Company’s standard hardware sales/softwarelicense agreement as well as its service agreement expressly limits itsliabilities and the warranties of its products and services in accordance withaccepted provisions of the Uniform Commercial code as adopted in most states.

**Copyrights, Patentsand Trade Secrets**

The Company does not holdany patents protecting its proprietary technology. The Company has relied ondesign copyrights for its hardware, and has copyrighted the designs of itsproprietary components and software. Patent or copyright protection may not beavailable for many of the Company’s products. A portion of the Company’sproprietary technology is in the form of software. The Company has reliedprimarily on copyright and trade secret protection of its software. Managementbelieves that its business is more dependent upon marketing, service, andknowledge than on patent or copyright protection. The Company has registered trademarksfor CyberLAB CyberMED, CyberRAD, CyberPATH, CyberTERM®, CyberLINKand CyberMATE, and has appliedto register its trademarks on its other trade names. The Company has retainedspecial intellectual property counsel to advise management on the appropriatecourse to pursue with respect to these issues.

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**Governmental Regulation**

The Federal Food, Drug and Cosmetic Act, more commonlyknown for its regulation of drugs in interstate commerce, was amended by the “MedicalDevice Amendments of 1976” (the “Amendments”) to cover devices used in medicalpractice. These include instruments and reagents used in biomedical laboratorytesting. In 1987, the Federal Drug Administration (FDA) first classified anumber of clinical software products as medical devices, but exempted most ofthem from routine regulations. Subsequently, the FDA amended the policy andmade the exemptions inapplicable to manufacturers of devices intended for usein blood banks.

The Company is informed that the FDA intends torequire all Class I devices, which includes the Company’s ClinicalInformation System products, to comply with its Quality System Requirements(QSRs). The Company is in the process of completing the modification of itsinternal policies to comply with this directive. Management believes that theQSRs procedures have an impact on its business to the extent that there arelengthened development cycles of new software and additional costs are incurred.However, all of its competitors are faced with the same requirements.

To the Company’s knowledge, the FDA from time to timereevaluates its rules relevant to computer products used in connectionwith medical devices and software used in clinical applications. No assurancecan be given that the Company’s current or new products developed will not besubject to the provisions of the Amendments and implementing rules. The Companyhas retained special counsel to advise it in such matters. The likelihood ofsuch changes and their effect on the business of the Company cannot beascertained. If the FDA were to determine that additional provisions shouldapply to all or some of the Company’s products, it is uncertain whethercompliance with such interpretation would have a material adverse effect on theCompany or its products or operations.

In general, the Companyand its products are subject to direct governmental regulations applicable tomanufacturers, including those regulations promulgated under the OccupationalSafety and Health Act, and by the Environmental Protection Agency. The Company’scustomers, however, are subject to significant regulation by the FDA, theCenters for Medicare and Medicaid Services, the Health and Human ServicesAdministration, the Centers for Disease Control, and by state and localgovernmental authorities. Such regulations require the Company to comply withcertain requirements in order to sell its systems, and are a major focus of itsdevelopment efforts in order to maintain the regulatory compliance of itsproducts. In addition, the new HIPAA regulations indirectly and directly areapplicable to the Company and have been a focus of its new product developmentefforts during the last two fiscal years.

**Backlog**

The Company’s backlog at August 31,2004 was approximately $700,000 for software, hardware and interface products,and approximately $1,200,000 for deferred services, compared to approximately$800,000 for software, hardware and interface products, and $1,100,000 fordeferred services, at August 31, 2003. The Company also has annuallyrenewable extended service agreements under contracts aggregating in excess of$4,400,000.

**Employees**

At November 19, 2004,the Company employed 66 full-time and 2 part-time employees of whom 18 areinvolved in product development, 11 in sales and marketing, 2 in production, 30in technical services, training, and support, and 7 in administration. TheCompany is not subject to any collective bargaining agreements. The Companyconsiders its employee relations to be good.

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**Item 2.   Properties.**

The Company’s headquarters are located in a leasedfacility in Calabasas, California. The facility was constructed in 1991 andcomprises approximately 16,850 square feet with an effective base rental ofapproximately $23,192 per month, plus common area maintenance costs andproperty taxes. During fiscal 2002 a new five year lease term was negotiatedthat began in November 2002 and ends in October 2007. The base rentalin the first year was approximately $21,847 per month and there are minor costof living adjustments in each of the next four years. All other provisions ofthe original lease substantially remained the same.

The Calabasas facility isused as general offices and operations headquarters that includes warehousing,service and support, training, development, and assembly. The Company considersthe facility to be adequate for its intended purposes. The Company carriesadequate general liability insurance, as required by the respective leases, tocover any risks concerning the facility.

**Item 3.   Legal Proceedings.**

There are no materialactive, pending, or threatened legal proceedings to which the Company is aparty.

**Item 4.   Submission of Matters to a Vote ofSecurity Holders.**

The Company did not submit any matter to a vote of itssecurity holders during the fourth quarter of its fiscal year ended August 31,2004.

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**PART II**

**Item 5.   Market for Company’s Common Equity andRelated Stockholder Matters.**

The Company’s common shares trade on the AmericanStock Exchange under the symbol CAP.

Thefollowing table sets forth the high and low bid quotations for the CommonShares for the periods indicated.
| ** **                                | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------------------------|------------|----------|------------|---------|------------|
| Fiscal Year Ended  August 31, 2003   |       |     |       |    |       |
| 1st Quarter, Ended November 30, 2002 |       | 1.50     |       | .80     |       |
| 2nd Quarter, Ended February 28, 2003 |       | 2.05     |       | 1.15    |       |
| 3rd Quarter, Ended May 31, 2003      |       | 1.95     |       | 1.15    |       |
| 4th Quarter, Ended August 31, 2003   |       | 2.40     |       | 1.50    |       |
| Fiscal Year Ended  August 31, 2004   |       |     |       |    |       |
| 1st Quarter, Ended November 30, 2003 |       | 2.23     |       | 1.70    |       |
| 2nd Quarter, Ended February 29, 2004 |       | 1.96     |       | 1.35    |       |
| 3rd Quarter, Ended May 31, 2004      |       | 1.85     |       | 1.25    |       |
| 4th Quarter,  Ended August 31, 2004  |       | 1.50     |       | 1.06    |       |

 

The number of shareholders of record of Common Sharesof the Company as of November 19, 2004 was approximately 280. The Companyalso has over 1000 beneficial holders of record whose shares are held in streetname.

Holdersof Common Shares are entitled to receive such dividends as may be declared bythe Company’s Board of Directors. The Company has never paid a cash dividend onits Common Shares and the Board of Directors currently intends to retain anyearnings for use in the Company’s business. From time to time the Company hasissued restricted common shares to its employees as compensation for vacationpay. However, there were no issuances of common shares during the 2004 or 2003fiscal years.

**Item 6.   Management’s Discussion and Analysis ofResults of Operations and Financial Condition.**

**Forward-Looking Statements**

This Annual Reporton Form 10-KSB contains forward-looking statements, which reflectmanagement’s current views about future events and financial results. Managementmakes these statements in reliance on the safe harbor created by the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statements includeviews on future financial results, financing sources, product development,capital requirements, market growth and the like, and are generally identifiedby phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,”“plans” and similar words. Forward-looking statements are merely predictionsand therefore inherently subject to uncertainties and other factors which couldcause the actual results to differ materially from the forward-lookingstatement. These uncertainties and other factors include, among other things:

·       Unexpectedtechnical and marketing difficulties inherent in major product development effortssuch as those described about CyberLAB 7.0.

·       Thepotential need for changes in our long-term strategy in response to futuredevelopments.

·       Futureadvances in clinical information technology and procedures, as well aspotential changes in government regulations and healthcare policies, both ofwhich could adversely affect the economics of the products offered by CCA.

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·       Rapidtechnological change in the microelectronics and software industries, and

·       Increasingcompetition from current as well as future competitors

Set forth below are othersignificant uncertainties and factors affecting forward-looking statements. Thereaders should understand that uncertainties and other factors identified inthis Annual Report on Form 10-KSB are not a comprehensive list of all theuncertainties and other factors that may affect forward-looking statements. Wedo not undertake any obligation to update or revise any forward-lookingstatements or the list of uncertainties and other factors that could affectthose statements.

**Introduction**

CCA operates in one business segment and generatesrevenues primarily from the sale of its Clinical Information Systems, whichincludes the licensure of proprietary application software, and may include thesale of servers upon which the application software operates. In connectionwith its sales of CIS products, the Company provides implementation servicesfor the installation, integration, and training of end users’ personnel. TheCompany generates sales of ancillary software and hardware, including its dataacquisition products, to its CIS clients and to third parties. The Company alsogenerates recurring revenues from the provision of comprehensive postimplementation services to its CIS clients, pursuant to extended serviceagreements.

Because of the nature of its business, CCA makessignificant investments in research and development for new products andenhancements to existing products.   Historically, CCA has funded its research anddevelopment programs through cash flow primarily generated from operations. Managementanticipates that future expenditures in research and development will eithercontinue at current levels or may increase for the foreseeable future, and willbe funded primarily out of the Company’s cash flow.

CCA’s results of operations for the current fiscalyear ended August 31, 2004 were marked by an increase in sales ofapproximately 4% over the 2003 fiscal year and an increase of approximately 73%in earnings. During fiscal 2004, CCA maintained positive operating cash flowwhile increasing spending for product development. The Company’s increase inrevenues for the 2004 fiscal year was primarily due to its introduction andtransition to a new version of CyberLAB that attributed to new sales andupgrades of clients on the previous product version. During fiscal 2003, theCompany had experienced delays in the release of CyberLAB 7.0 due to timingissues and the need to complete HIPAA related upgrades to its existing products.However, by the end of its fiscal 2003, CCA had substantially completedCyberLAB 7.0 and began to install the new software in its initial beta sitesfor testing and evaluation. As of November 19, 2004, CyberLAB 7.0 was livein nine sites and six new sites were in the process of being implemented. In addition,new sales and marketing activities were initiated resulting in CCA’s pipelineof potential new CyberLAB 7.0 related transactions increasing beyond historicallevels. CyberLAB 7.0 has generated significant interest among new buyers aswell as CCA’s installed client base. Management expects that approximately 100of its existing CyberLAB 6.0 clients will upgrade to CyberLAB 7.0 during thecourse of the next three to four years. In accordance with the terms of CCA’sextended service agreement, clients are entitled to upgrade to the new productversion. However, most clients will require server and infrastructure upgrades,as well as professional services to implement CyberLAB 7.0. As a result,management anticipates hiring additional personnel to implement CyberLAB 7.0 inits existing clients accounts.

During fiscal 2004, CCA also made significant progressin developing further enhancements to its other CIS products. CCA is currentlycompleting several new functional modules to CyberRAD and released a newversion of CyberMATE to a beta site. The CyberMATE application can be used on avariety of handheld computers and is designed for bedside or point of caretesting and communicates back to CyberLAB data that has been captured remotelyby CyberMATE. CCA plans additional functional modules for CyberMATE to expandits use beyond the point of care testing area. CCA has also undertaken certainenhancements to CyberMED to assist its clients with tools for compliance and 

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accreditation of theirpharmacy operations.  Management believesthat these investments in product development will ensure that the productsremain competitive and will continue to satisfy the dynamic requirements of itsclients.

In order to addresscompliance issues brought about by the HIPAA regulations, the Company completedthe development of enhancements to its products and upgraded hundreds of clientsites with the HIPAA related enhancements during the 2003 fiscal year. Thisposed considerable challenges to CCA’s organization and caused delays in thedevelopment and eventual release of CyberLAB 7.0.

**Results of Operations**
| ** **                               | ** ** | **Fiscal Year Ended  August 31, 2004** | ** ** | **Fiscal Year Ended  August 31, 2003** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Revenues:                                |       |                                                       |       | ** **                                                 |       |   |   | ** ** |   |
| System sales                             |       |                                                       | 43.1       | %                                                          |       |   | 42.6 | % |   |
| Service revenues                         |       |                                                       | 56.9       | ** **                                                 |       |   | 57.4 | ** ** |   |
| Total revenues                           |       |                                                       | 100.0      | ** **                                                 |       |   | 100.0 | ** ** |   |
| Cost of products and services sold:      | ** ** |                                                       |       | ** **                                                 |       |   |   | ** ** |   |
| System sales                             | ** ** |                                                       | 25.0       | ** **                                                 |       |   | 28.5 | ** ** |   |
| Service revenues                         | ** ** |                                                       | 20.8       | ** **                                                 |       |   | 19.9 | ** ** |   |
| Total cost of products and services      | ** ** |                                                       | 45.8       | ** **                                                 |       |   | 48.4 | ** ** |   |
| Gross profit                             | ** ** |                                                       | 54.2       | ** **                                                 |       |   | 51.6 | ** ** |   |
| Operating expenses:                      | ** ** |                                                       |       | ** **                                                 |       |   |   | ** ** |   |
| Selling, general and administrative      | ** ** |                                                       | 37.3       | ** **                                                 |       |   | 37.7 | ** ** |   |
| Research and development                 | ** ** |                                                       | 13.2       | ** **                                                 |       |   | 12.2 | ** ** |   |
| Total operating expenses                 | ** ** |                                                       | 50.5       | ** **                                                 |       |   | 49.9 | ** ** |   |
| Operating income                         | ** ** |                                                       | 3.7        | ** **                                                 |       |   | 1.7 | ** ** |   |
| Income before provision for income taxes | ** ** |                                                       | 3.7        | ** **                                                 |       |   | 1.9 | ** ** |   |
| Provision for income taxes               |       |                                                       | 1.6        | ** **                                                 |       |   | 0.6 | ** ** |   |
| Net income                               |       |                                                       | 2.1        | ** **                                                 |       |   | 1.3 | ** ** |   |

 

Sales for the fiscal year ending August 31, 2004increased to $7,655,972, as compared to $7,381,121 for the fiscal year ending August 31,2003, an overall increase of approximately $274,851 or 3.7%. When analyzed byproduct category, sales of Clinical Information Systems (CIS) increased by$262,695 or 9.7%, and service revenues increased by $123,436 or 2.9%. Suchincreases were partially offset by sales of data acquisition products, whichdecreased $110,173 or 26.4%, and other revenues, which decreased $1,107 or 6.3%over the previous fiscal year.  Theincrease in sales of CIS products was primarily attributable to theintroduction of a new version of CyberLAB that has been met with favorableacceptance in the marketplace although CyberLAB 7.0 was not generally releaseduntil the second half of the 2004 fiscal year.  The increase in service revenues isattributable to a greater number of client accounts under contract and anincrease in the average fees charged for such contracts. As a result of theCompany closing larger CIS transactions, the annual service costs associatedwith such transactions are proportionately greater. The Company experienced anoverall decrease in sales of data acquisition products, which was primarilyattributable to a decrease in the volume of units sold to OEM customers and agreater number of software only interfaces being deployed. The decrease in OEMbusiness is expected to continue, as fewer OEM customers remain active in themarketplace or are no longer reliant on CCA’s data acquisition products. Managementdoes not believe the OEM business is a material part of CCA’s business todayand will not be 

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in the future as theCompany’s emphasis is being placed on its CIS products and related services. Servicerevenues are expected to continue to increase as the Company’s installed baseof CIS installations increases.

The Company continues to expand its sales andmarketing activities, directing its focus towards larger clients and multi-productsales as well as selling new products into its installed client base. TheCompany has also initiated strategic joint marketing partnerships with othercompanies, which has improved the Company’s market penetration and hasinitiated more marketing activities internationally. CCA’s “pipeline” ofworking CIS transactions continues to improve, and management views the nearterm outlook for the continued sale of CIS products as cautiously optimisticduring the first half of the 2005 fiscal year. The Company’s future operatingresults will continue to be subject to annual and quarterly variations basedupon a wide variety of factors, including the volume mix and timing of ordersreceived during any quarter or annual period, and the temporary delays in the closingof new CIS sales. In addition, the Company’s revenues associated with CIStransactions may be delayed due to client related issues such as availabilityof funding, staff availability, IT infrastructure readiness, and theperformance of third party contractors, all of which are issues outside of thecontrol of CCA.

Cost of sales overall decreased by $64,053 or 1.8% forthe 2004 fiscal year as compared to the previous fiscal year. The overalldecrease in cost of sales was primarily attributable to a decrease in materialcosts of $51,020 or 9.3% and a decrease in other costs of sales of $172,177 or12.2% which was partially offset by an increase in labor costs of $159,144 or9.9%.  The decrease in material costs wasattributable to a lesser amount of hardware that was provided in connectionwith sales of CIS products. Many new clients prefer providing their ownhardware and as a result a higher percentage of CCA’s CIS sales do not includehardware. The decrease in other cost of sales was primarily attributable to areduction in depreciation and amortization expense of approximately $53,000,workman’s compensation insurance expense of about $17,000, travel and lodgingof about $50,000 and telephone expense of about $25,000. The increase in laborcosts was attributable to the addition of additional persons to the support andimplementation departments. Cost of sales as a percentage of sales decreased to46% for the 2004 fiscal year, as compared to 48% for the 2003 fiscal year. Theoverall percentage decrease in cost of sales, as a percentage of sales, wasprimarily attributable to the overall increase in revenues. Management believesthe gross profit margin of 54% attained in the current fiscal year will remainat that level in fiscal 2005; however, the Company could experience quarterlyvariations in gross margin as a result of the factors discussed above.

Selling, general, and administrative expensesincreased by $75,489 or 2.7% for the current 2004 fiscal year as compared tothe 2003 fiscal year. The increases in selling, general, and administrativeexpenses were primarily attributable to additional expenditures in legal andauditing, marketing, and user symposium. The Company plans to continue to makeinvestments in sales and marketing programs in fiscal 2005 associated withincreased activities related to the launch of CyberLAB 7.0. Management alsoanticipates that it will incur increases in auditing and consultant expenses infiscal 2005 that are related to Sarbanes-Oxley Act Section 404 compliancerequirements. During fiscal 2005, the Company will also acquire and implement anew customer relationship management system to replace its aged help deskapplication, a portion of the costs of which will be expensed.

Research and development expenses increased $112,671or 12.5% during fiscal 2004, as compared to fiscal 2003. The increase isattributable to increases in salaries, other personnel related expenses, andthe addition of new personnel in product engineering. For its 2004 and 2003fiscal years, the Company capitalized software costs of $564,803 and $461,690,respectively, which are generally amortized over the estimated useful life notto exceed five years. Such costs were attributable to enhancements and newmodules for the Company’s CIS products, new applications under development, andmodifications associated with HIPAA compliance to all of CCA’s products. Managementanticipates its overall research and development activities will increase infiscal 2005 due to planned personnel additions in product engineering.

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Interest and other income was $4,603 for fiscal 2004as compared to $19,776 for fiscal 2003 due to a reduction in finance chargeslevied.

Interest and other expense was $3,704 for fiscal 2004as compared to $8,863 for fiscal 2003 due to the reduced level of reducedborrowings on the Company’s line of credit with its bank.

As a result of the factors discussed above, theCompany had net income of $162,624 in fiscal 2004, compared to earnings of$94,101 for fiscal 2003. The Company’s basic and diluted earnings per share was$.05 for fiscal 2004 as compared to basic and diluted earnings per share of$.03 in fiscal 2003.

The Company is currently in a loss carry-forwardposition for federal income taxes, primarily due to the operating lossesincurred prior to August 31, 2002. The federal net operating losscarry-forward balance as of the August 31, 2004 was approximately$1,555,000, compared to $2,110,000 in the prior year. The net operating losscarry-forward is available to offset future taxable income through 2022. TheCompany also has federal investment and research and experimentation tax creditcarry-forwards to offset future income tax payable of approximately $566,000that expire at various dates through 2023.

The major temporary tax differences that are expectedto reverse next year are deferred revenue, allowance for doubtful accounts,accrued vacation, Section 263A Unicap inventory, and component inventoryreserve. However, the Company expects new temporary differences to beestablished in these years, which will either reduce or exceed the reversingtemporary differences.

The Company annuallyevaluates the realization of the net deferred tax asset, taking intoconsideration prior earnings history, projected operating results, and thereversal of temporary tax differences. At August 31, 2004, the Companyevaluated the net deferred tax asset, taking into consideration operatingresults, and determined that a valuation allowance of $479,200 should bemaintained. The Company believes it is more likely than not that the netdeferred tax asset of approximately $793,900 will be realized.

**Capital Resources and Liquidity**

The Company’s primary need for capital has been toinvest in software development, and in computers and related equipment for itsinternal use. The Company invested $564,803 and $461,690 respectively duringfiscal 2004 and 2003 in software development. These expenditures related toHIPAA related enhancements to all its products, and the new browser version ofthe Company’s LIS product, CyberLAB, and other product enhancements. TheCompany anticipates expending additional sums during fiscal 2005 on productenhancements to all its products and the further development of the new browserversion of the Company’s LIS product, CyberLAB. During fiscal 2004, the Companyinvested an aggregate of $80,660 in fixed assets primarily consisting ofcomputers and software, as compared to an investment of $120,281 in fiscal2003.

As of August 31, 2004, the Company’s workingcapital amounted to $2,038,629, compared to $1,621,807 as of August 31,2003. The Company’s current ratio was 1.9 at August 31, 2004 as comparedto 1.7 at August 31, 2003. At August 31, 2004, the Company’s creditfacilities with its bank consisted of a revolving line of credit of $500,000, ofwhich there were no amounts outstanding. The bank credit agreement is through February 1,2005.

Cash flows from operating activities were $1,144,878for the 2004 fiscal year, compared to $603,584 for the 2003 fiscal year. Theincrease in cash flows from operating activities was primarily attributable tothe net change in accrued liabilities, inventory, and deferred tax provision.

Net cash used in investing activities totaled $645,463for the 2004 fiscal year, compared to $581,971 used in investing activitiesduring the 2003 fiscal year. The change was primarily the result of an increasein software capitalization costs compared to the prior fiscal year.

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Cash used in financing activities amounted to $361during the 2004 fiscal year compared to net cash flows from financingactivities of $25,900 in fiscal 2003. The change in fiscal 2004 resultedprimarily from the payoff of all outstanding amounts under a capital leaseobligation and no exercises of stock options during the 2004 fiscal year.

The Company’s primarysource of working capital has been generated from earnings. The Company’sresults of operations for the current fiscal year ended August 31, 2004produced operating cash flow of approximately $1,145,000, which was sufficientto fund its product development activities, and to invest in new marketingprograms. Furthermore, the Company was able to generate an overall increase inits cash balance from the prior fiscal year end as well as maintain a cashbalance of over $1,500,000 at fiscal year end. Management believes that itssales pipeline is adequate to produce comparable operating cash flow in the2005 fiscal year, and that its projected cash flow from operations, togetherwith its bank credit facilities, should be sufficient to fund its working capitalrequirements for its 2005 fiscal year. However, an unanticipated decline insales, delays in implementations where payments are tied to delivery and/orperformance of services, or cancellations of contracts could have a negativeeffect on cash flow from operations and could in turn create short-termliquidity problems. If such events were to occur the Company may have to seekalternative financing.

**Contractual Obligations**

Thefollowing summarizes our contractual obligations at August 31, 2004 andthe effects such obligations are expected to have on liquidity and cash flow infuture periods:
| **Contractual Obligations** | ** ** | ** ** | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
|----------------------------------|------------|------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|
| Operating leases                 |       | $          | 904,164    |      | $          | 276,963                         |       | $                  | 578,127    |               | $          | 49,074                      |       |   | $ | — |   |   |
| Note payable (1)                 |       | $          | —     |      | $          | —                          |       | $                  | —     |               | $          | —                      |       |   | $ | — |   |   |

 

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(1)          AtAugust 31, 2004, the Company did not have an outstanding balance under thenote payable.

**Seasonality,Inflation and Industry Trends**

The Company’s sales aregenerally higher in the winter and spring. Inflation has not had a materialeffect on the Company’s business since the Company has been able to adjust theprices of its products and services in response to inflationary pressures. Managementbelieves that most phases of the healthcare segment of the computer industrywill continue to be highly competitive, and that potential healthcare reformsincluding those promulgated by HIPAA may have a long-term positive impact onits business. With respect to the compliance issues brought about by HIPAA, theCompany has invested heavily in new application modules to assist its clientsin meeting their regulatory goals. Management believes that the new moduleswill be key selling points and will provide a competitive advantage. In addition,management believes that the healthcare information technology industry will bemarked with more significant technological advances, which will improve thequality of service and reduce costs. The Company is poised to meet thesechallenges by continuing to employ new technologies, when they becomeavailable, diversifying its product offerings, improving and expanding itsservices, and by constantly enhancing its software applications.

**Critical Accounting Policies and Estimates**

Management’s discussion and analysis of CCA’sfinancial condition and results of operations are based upon the consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires management to make estimates and judgments thataffect the reported amounts of 

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assets, liabilities,revenues and expenses, and related disclosures of contingent assets andliabilities. On an on-going basis, management evaluates estimates, includingthose related to the valuation of inventory and the allowance for uncollectibleaccounts receivable. We base our estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. We believe the following criticalaccounting policies affect our more significant judgments and estimates used inthe preparation of our consolidated financial statements:

Inventory

The Company’s inventory is comprised of a currentinventory account that consists of items that are held for resale and along-term inventory account that consists of items that are held for repairsand replacement of hardware components that are serviced by the Company underlong-term Extended Service Agreements with its clients. Current inventory isvalued at the lower of cost to purchase or the current estimated market valueof the inventory items. Inventory is evaluated on a continual basis and reserveadjustments are made based on management’s estimate of future sales value, orin the case of the long-term component inventory, on managements estimation ofthe usage of specific inventory items and net realizable value. Managementreviews inventory quantities on hand and makes determination of the excess orobsolete items in the inventory, which are specifically reserved. In addition,reserve adjustments are made for the difference between the cost of theinventory and the estimated market value and charged to operations in theperiod in which the facts that give rise to the adjustments become known. At August 31,2004 and 2003 the inventory reserve was $136,273 and $76,273 respectively.

Accounts Receivable

Accounts receivable balances are evaluated on acontinual basis and allowances are provided for potentially uncollectible accountsbased on management’s estimate of the collectability of customer accounts. Ifthe financial condition of a customer were to deteriorate, resulting in animpairment of their ability to make payments, an additional allowance may berequired. Allowance adjustments are charged to operations in the period inwhich the facts that give rise to the adjustments become known. The accountsreceivable balance at August 31, 2004 was $1,722,340, net of allowance fordoubtful accounts of $87,362.

**Revenue Recognition**

Revenues are derived primarily from the sale ofclinical information systems and the provision of services. The components ofthe system sales revenues are the licensing of computer software, installation,and the sale of computer hardware and sublicensed software. The components ofservice revenues are software support and hardware maintenance, training, andimplementation services. The Company recognizes revenue in accordance with theprovisions of Statement of Position (SOP) No. 97-2, “SoftwareRevenue Recognition,” as amended by SOP No. 98-4, SOP 98-9 andclarified by Staff Accounting Bulletin (SAB) 104 “Revenue Recognition inFinancial Statements”. SOP No 97-2, as amended, generally requiresrevenue earned on software arrangements involving multiple-elements to beallocated to each element based on the relative fair values of those elements. TheCompany allocates revenue to each element in a multiple-element arrangementbased on the element’s respective fair value, with the fair value determined bythe price charged when that element is sold and specifically defined in aquotation or contract. The Company determines the fair value of the maintenanceportion of the arrangement based on the renewal price of the maintenancecharged to clients, professional services portion of the arrangement, otherthan installation services, based on hourly rates which the Company charges forthese services when sold apart from a software license, and the hardware andsublicense of software based on the prices for these elements when they aresold separately from the software. At August 31, 2004 and 2003 deferredrevenue was $244,882 and $501,507 respectively.

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Post Implementation software and hardware maintenanceservices are marketed under monthly and annual arrangements and are recognizedas revenue ratably over the contracted maintenance term as services areprovided. Deferred revenue related to CIS sales is comprised of deferrals forlicense fees, hardware, and other services for which the implementation has notyet been completed and revenues have not been recognized. At August 31,2004 and 2003 deferred service contract income was $1,175,509 and $1,115,366 respectively.

**Software Development Costs**

Costs incurred internallyin creating computer software products are expensed until technologicalfeasibility has been established upon completion of a program design.Thereafter, applicable software development costs are capitalized andsubsequently reported at the lower of amortized cost or net realizable value.Capitalized costs are amortized based on current and expected future revenuefor each product with minimum annual amortization equal to the straight-line amortizationover the estimated economic life of the product not to exceed five years. Forthe years 2004 and 2003, the Company capitalized $564,803 and $461,690,respectively. For 2004 and 2003, the balance of capitalized software costs were$1,492,661 and $1,360,374 net of accumulated amortization of $1,103,009 and$1,114,645, respectively.

**RiskFactors**

In evaluating the Company, various risk factors andother information should be carefully considered. The risks and uncertaintiesdescribed below are not the only ones that impact the Company. Additional risksand uncertainties not presently known to us or that we currently deemimmaterial may also have an adverse impact on us. Among other things, thisdiscussion contains forward-looking statements that are based on certainassumptions about future risks and uncertainties. We believe that ourassumptions are reasonable. Nonetheless, it is likely that at least some ofthese assumptions will not come true.

*CCA faces intense competition from both establishedentities and new entries in the market that may adversely affect our revenuesand profitability.*

There are many companies with active research anddevelopment programs both in and outside of the healthcare informationtechnology industry. Many of these companies have considerable experience inareas of competing interest to us. Additionally, we cannot determine if otherfirms are conducting potentially competitive research, which could result inthe development and introduction of products that are either comparable orsuperior to the products we sell. Further, new product introductions, productenhancements and the use of other technologies by our competitors could lead toa loss of market acceptance and cause a decline in sales or gross margins.

*CCA’s success depends on its ability to attract,retain and motivate management and other skilled employees.*

CCA’s success depends upon the continued services ofkey management and skilled personnel. Competition for qualified personnel isintense and there are a limited number of people with knowledge of, andexperience in, our industry. We do not have employment agreements with most ofour key employees. However, we generally enter into agreements with ouremployees regarding patents, confidentiality and related matters. We do notmaintain life insurance polices on our employees. Our loss of key personnel,especially without advance notice, or our inability to hire or retain qualifiedpersonnel, could have a material adverse effect on sales and our ability tomaintain our technological edge. We cannot guarantee that we will continue toretain our key management and skilled personnel, or that we will be able toattract, assimilate and retain other highly qualified personnel in the future.

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*Anyfailure to successfully introduce future products into the market couldadversely affect our business.*

The commercial success of future products depends upontheir acceptance by the medical community. Our future product plans includecapital-intensive clinical information systems. We believe that these productscan significantly reduce labor costs, improve patient care and offer otherdistinctive benefits to the medical community. However, there is often marketresistance to products that require significant capital expenditures or whicheliminate jobs through automation. We can make no assurance that the marketwill accept our future products and systems, or that sales of our futureproducts and systems will grow at the rates expected by our management.

*If CCA fails to meet changing demands of technology,we may not continue to be able to compete successfully with competitors.*

The market for CCA’s products and systems ischaracterized by rapid technological advances, changes in customer requirementsand frequent new product introductions and enhancements. Our future successdepends upon our ability to introduce new products that keep pace withtechnological developments, enhance current product lines and respond toevolving client requirements. Our failure to meet these demands could result ina loss of our market share and competitiveness and could harm our revenues andresults of operations.

*Any failure or inability to protect our technology andconfidential information could adversely affect our business.*

***Trade Secrets.******  ***We have tradesecrets, unpatented technology and proprietary knowledge related to the sale,promotion, design, operation, and development of our products. We generallyenter into confidentiality agreements with our employees and consultants. However,we cannot guarantee that our trade secrets, unpatented technology orproprietary knowledge will not become known or be independently developed bycompetitors. If any of this proprietary information becomes known o thirdparties, we may have no practical recourse against these parties.

***Copyrights.******  ***We claimcopyrights in our software and also claim trademark rights in the United Statesand in some other foreign countries where we sell our products. However, we canmake no assurance that we will be able to obtain enforceable copyright andtrademark protection, nor that this protection will provide us a significantcommercial advantage.

*CCA operates in aconsolidating industry which creates barriers to market penetration.*

The healthcare information technology industry inrecent years has been characterized by consolidation by both healthcareproviders who are our clients and by those companies that we compete against. Largehospital chains and groups of affiliated hospitals prefer to negotiatecomprehensive contracts for all of their system needs with larger vendors whooffer broader product lines and services. The convenience offered by theselarge vendors are administrative and financial incentives that we cannot offerour clients.

*CCA’s products may be subject to government regulationin the future that could impair our operations.*

CCA’s products could be subject to stringentgovernment regulation in the United States and other countries in the future. Theseregulatory processes can be lengthy, expensive and uncertain. Additionally,securing necessary clearances or approvals may require the submission ofextensive data and other supporting information. Failure to comply withapplicable requirements could result in fines, recall, total or partialsuspension of distribution, or withdrawal of existing product. If any of thesethings occur, it could have a material adverse impact on our business.

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*Changesin government regulation of the healthcare industry could adversely affect CCA’sbusiness.*

Federal and state legislative proposals are periodicallyintroduced or proposed that would affect major changes in the healthcaresystem, nationally, at the state level or both. Future legislation, regulationor payment policies of Medicare, Medicaid, private health insurance plans,health maintenance organizations and other third-party payors could adverselyaffect the demand for our current or future products and our ability to sellour products on a profitable basis. Moreover, healthcare legislation is an areaof extensive and dynamic change, and we cannot predict future legislativechanges in the healthcare field or their impact on our industry or ourbusiness.

*Defective products may subject CCA to liability.*

CCA’s products are used to gather information forprofessionals to make medical decisions, diagnosis, and treatment. Accordingly,the manufacture and sale of our products entails an inherent risk of productliability arising from an inaccurate, or allegedly inaccurate, test orprocedure result. We currently maintain product liability insurance coveragefor up to $2.0 million per incident and up to an aggregate of$4.0 million per year. Although management believes this liabilitycoverage is sufficient protection against future claims, there can be noassurance of the sufficiency of these policies. We have not received anyindication that our insurance carrier will not renew our product liabilityinsurance at or near current premiums; however, we cannot guarantee that thiswill continue to be the case.

*Health InsurancePortability and Accountability Act (HIPAA).*

Our business is substantially impacted by therequirements of HIPAA and our products must maintain the confidentiality of apatents medical records and information. These requirements also apply to mostof our clients. We believe our products meet the standards of HIPAA and mayrequire our clients to upgrade their systems, but our clients’ preoccupationwith HIPAA may adversely impact sales of our products, and the costs ofcompliance with HIPAA could have an impact on our product margins and selling,general and administrative expenses incurred by us and could negatively impactour net income.

*Loss of theservices of our key personnel could adversely affect our business.*

Our future success and growth depend on the continuedservices of our key management and employees, including Steve Besbeck, BruceMiller, and James Helms. The loss of the services of any of these individualsor any other key employee could materially affect our business. Our futuresuccess also depends on our ability to identify, attract and retain additionalqualified personnel. Competition for employees in our industry is intense andwe may not be successful in attracting or retaining them.

*We depend on ourcomputer and communications system.*

We rely on our management information systems tooperate our business and to track our operating results. Our managementinformation systems will require modification and refinement as we grow and ourbusiness needs change. If we experience a significant system failure or if weare unable to modify our management information systems to respond to changesin our business needs, then our ability to properly run our business could beadversely affected.

*Our evaluation ofinternal controls and remediation of potential problems will be costly and timeconsuming and could expose weakness in our financial reporting.*

While we believe that we currently have adequateinternal control procedures in place, we are still exposed to potential risksfrom recent legislation requiring companies to evaluate controls under Section 404of the Sarbanes-Oxley Act of 2002. We are evaluating our internal controlssystem in order to allow management to report on, and our independent auditorsto attest to, our internal controls over financial reporting, as requiring Section 404of the Sarbanes-Oxley Act of 2002.

20

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*Futuresales of our common stock could adversely affect our stock price.*

Future sales ofsubstantial amounts of shares of our common stock in the public market, or theperception that these sales could occur, may cause the market price of ourcommon stock to decline. In addition, we may be required to issue additionalshares upon exercise of previously granted options that are currentlyoutstanding. Increased sales of our common stock in the market after exerciseof our currently outstanding stock options could exert significant downwardpressure on our stock price. These sales also might make it more difficult forus to sell equity or equity-related securities in the future at a time andprice we deem appropriate.

**New Accounting Pronouncements**

On December 17, 2003, the SEC’s Office of theChief Accountant and Division of Corporation Finance issued Staff AccountingBulletin (SAB) 104, Revenue Recognition. The SAB updates portions of theinterpretive guidance included in Topic 13 of the codification of staffaccounting bulletins (SAB 103 codification) in order to make the guidanceconsistent with current authoritative accounting literature. The principalrevisions relate to the incorporation of certain sections of the staff’s FAQdocument on revenue recognition into Topic 13. SAB 104 did not have a materialeffect on the Company’s financial statements.

In November 2002, the EITF reached a consensus onEITF 00-21, “Revenue Arrangements with Multiple Deliverables,” related tothe separation and allocation of consideration for arrangements that includemultiple deliverables. The EITF requires that when the deliverables included inthis type of arrangement meet certain criteria they should be accounted forseparately as separate units of accounting. This may result in a difference inthe timing of revenue recognition but will not result in a change in the totalamount of revenue recognized in a bundled sales arrangement. The allocation ofrevenues to the separate deliverables is based on the relative fair value ofeach item. If the fair value is not available for the delivered items then theresidual method must be used. This method requires that the amount allocated tothe undelivered items in the arrangement is their full fair value. This wouldresult in the discount, if any, being allocated to the delivered items. Thisconsensus is effective prospectively for arrangements entered into in fiscalperiods beginning after June 15, 2003. The adoption of EITF 00-21did not have a material impact on the Company’s financial statements.

In December 2003, theFASB issued FASB Interpretation No. 46R (FIN 46R), “Consolidation ofvariable Interest Entities.” FIN 46R expands upon existing accounting guidancethat addresses when a company should include in its financial statements theassets, liabilities and activities of another entity. A variable interestentity is a corporation, partnership, trust or any other legal structure usedfor business purposes that either (a) does not have equity investors withvoting rights or (b) has equity investors that do not provide sufficientfinancial resources for the entity to support its activities. FIN 46R requiresa variable interest entity to be consolidated by a company if that company issubject to a majority of the risk of loss from the variable interest entity’sactivities or is entitled to receive a majority of the entity’s residualreturns or both. The adoption of this interpretation did not have any impact onour financial position or results of operations.

**Item 7.   Financial Statements.**

For a list of financialstatements filed as part of this report, see index to Financial Statements andFinancial Statement Schedules on page F-1.

**Item 8.   Changes in and Disagreements withAccountants on Accounting and Financial Disclosures.**

Not applicable.

21

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**Item 8A.   Controls and Procedures**

(a)   *Evaluation of DisclosureControls and Procedures*.   The Company’s Chief Executive Officerand Chief Accounting Officer, with the participation of the Company’smanagement, carried out an evaluation of the effectiveness of the Company’sdisclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e).Based upon that evaluation, the Chief Executive Officer and the ChiefAccounting Officer believe that, as of the end of the period covered by thisreport, the Company’s disclosure controls and procedures are effective inmaking known to them material information relating to the Company (includingits consolidated subsidiary) required to be included in the report.

(b)   *Changes in InternalControls*.   There were no significant changes in the Company’sinternal controls or in other factors that could significantly affect theCompany’s disclosure controls and procedures subsequent to the Evaluation Date,nor any significant deficiencies or material weaknesses in such disclosurecontrols and procedures requiring corrective actions.

The Company maintains a system of internal controlsdesigned to provide reasonable assurance that transactions are executed inaccordance with management’s general or specific authorization; transactionsare recorded as necessary (1) to permit preparation of financialstatements in conformity with generally accepted accounting principles, (2) tomaintain accountability for assets, and (3) to ensure that access toassets is permitted only in accordance with management’s general or specificauthorization; and the recorded accountability for access is compared with theexisting assets at reasonable intervals and appropriate action is taken withrespect to any differences.

22

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**PART III**

**Item 9.   Directors, Executive Officers, Promotersand Control Persons; Compliance with Section 16(a) of the ExchangeAct.**

Backgroundinformation concerning each present Director, executive officer and eachnominee for the office of Director of Company is as follows:
| ** **                        | ** ** | **Office with Company;**                                                                                                                                                                                                            | ** ** | **Year First**             |
|-----------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|
| **Name, Age**                     | ** ** | ** **                                                                                                                                                                                                                          | ** ** | **Background Information** | ** ** | **Elected Director** |
| Bruce M. Miller, 58               |       | Chairman of the Board and Chief Technology Officer  since its inception in 1978.                                                                                                                                                    |       | 1978                       |
| Steven M. Besbeck, 56             |       | President, Chief  Executive Officer of the Company since August 1983 and a Director of the  Company since November 1980 and Chief Financial Officer. Director of  International Remote Imaging Systems.                        |       | 1980                       |
| James R. Helms, 60                |       | Vice  President/Operations since 1982 and Secretary.                                                                                                                                                                                |       | 1987                       |
| Lawrence S. Schmid, 63            |       | President and Chief  Executive Officer, Strategic Directions International, Inc., a  management consulting firm specializing in technology companies.                                                                          |       | 1991                       |
| Robert S.  Fogerson, Jr., 51 |       | General Manager, of  ViroMED Laboratories, Inc., a leading laboratory providing clinical  testing services since 1998. Mr. Fogerson had previously served in  various capacities at PharmChem Laboratories since 1975.    |       | 1992                       |
| Norman R. Cohen, 67               |       | Private Investor,  retired attorney. Prior to his retirement in August 2003 Mr. Cohen  had been engaged in the active practice of law for more than forty years,  primarily in the areas of corporate and securities law. |       | 2003                       |
| Christopher S. Coleman,  36       |       | Vice-President/Sales  since March 2002. Director of Sales from February 2000, and  Regional Sales Manager previously since 1996.                                                                                          |       |                       |
| Anahita Villafane, 34             |       | Controller and Chief  Accounting Officer since April 2000. Previously Ms. Villafane was  an audit manager with BDO Seidman, LLP since 1996.                                                                               |       |                       |
|                                   |            |                                                                                                                                                                                                                                     |            |                            |  |  |

 

**Section 16(a) Beneficial Ownership ReportingCompliance**

Section 16(a) of the Securities Exchange Actof 1934 (1934 Act) requires the Company’s directors and executive officers, andpersons who own more than 10% of a registered class of the Company’s equitysecurity, to file with the Securities and Exchange Commission and the AmericanStock Exchange (AMEX) reports of ownership and changes in ownership of commonstock and other equity securities of the Company. Officers, directors andgreater than 10% shareholders are required by SEC regulation to furnish theCompany with copies of all Section 16(a) forms they file.

To the Company’sknowledge, based solely on a review of the copies of such reports furnished tothe Company and written representations that no other reports were required,during the fiscal year ended August 31, 2004, all Section 16(a) filingrequirements applicable to its officers, directors and greater than ten percentbeneficial owners were complied with.

23

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**Item 10.   Executive Compensation.**

Incorporated by referencefrom “Executive Compensation” in the Definitive Proxy Statement to be filedwith the Securities and Exchange Commission for the 2005 Annual Meeting of theCompany’s Shareholders.

**Item 11.   Security Ownership of CertainBeneficial Owners and Management.**

Incorporated by referencefrom “Security Ownership of Certain Beneficial Owners and Management” in theDefinitive Proxy Statement to be filed with the Securities and ExchangeCommission for the 2005 Annual Meeting of the Company’s Shareholders.

**Item 12.   Certain Relationships and RelatedTransactions.**

Incorporated by referencefrom “Certain Relationships and Related Transactions” in the Definitive ProxyStatement to be filed with the Securities and Exchange Commission for the 2005Annual Meeting of the Company’s Shareholders.

**Item 13.   Exhibits and Reports on Form 8-K.**

(a)   Exhibits
| 2.1   | (4) | Asset Purchase  Agreement.                                                                            |
|-------|-----|-------------------------------------------------------------------------------------------------------|
| 3.1   | (1) | Restated Articles  of Incorporation, as Amended.                                                      |
| 3.2   | (1) | By-Laws, as  amended.                                                                                 |
| 4.1   | (1) | Specimen Share  Certificate.                                                                          |
| 4.2   | (2) | Specimen Warrant  Certificate.                                                                        |
| 4.3   | (2) | Form of  Underwriter’s Warrant.                                                             |
| 4.8   | (4) | Warrant Agreement  and Warrant Certificate between CCA and Western States Pharmacy Consultants,  Ltd. |
| 4.9   | (4) | Warrant Agreement  and Warrant Certificate between CCA and James L.D. Roser.                          |
| 4.10  | (4) | Warrant Agreement  and Warrant Certificate between CCA and The Roser Partnership.                     |
| 4.11  | (4) | Warrant Agreement  and Warrant Certificate between CCA and Epigen, Inc.                          |
| 4.12  | (6) | Registration  Rights Agreement.                                                                       |
| 10.1  | (2) | Warrant Agreement.                                                                                    |
| 10.2  | (2) | The Company’s  product warranties.                                                               |
| 10.5  | (1) | 14% Subordinated  Convertible Debenture due December 21, 1987.                                   |
| 10.6  | (1) | Form of 1983  Warrants.                                                                          |
| 10.7  | (1) | Form of 1982  Warrant.                                                                           |
| 10.8  | (2) | Original  Equipment Manufacturer Contracts.                                                           |
| 10.9  | (2) | Michael Miller  Consulting Agreement.                                                                 |
| 10.10 | (2) | Boehringer  Mannheim (Canada) Joint Marketing Agreement.                                              |
| 10.12 | (3) | Lease for  Premises at 26664 Agoura Road, Calabasas, California.                                      |

24

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| 10.13                                          | (3)    | SAC Shareholders’  Agreement.                                                                         |
|------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|
| 10.14                                          | (6)    | Lease for  Premises at 26115-A Mureau Road, Calabasas, California.                                         |
| 10.15                                          | (6)    | Mission Park  Agreement.                                                                                   |
| 23.1                                           |   | Consent of BDO Seidman, LLP                                                                                |
| 31.1                                           |   | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.  |
| 31.2                                           |   | Certification of Chief Accounting Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
| 32.1                                           |   | Certification of Chief Executive Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.  |
| 32.2                                           |   | Certification of Chief Accounting Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
| Executive compensation plans and arrangements. |
| 4.4                                            | (1)    | 1982 Non-Qualified Stock Option Plan.                                                                      |
| 4.5                                            | (2)    | 1982 Incentive Stock Option Plan, as amended.                                                              |
| 4.6                                            | (4)    | 1992 Incentive Stock Option Plan.                                                                          |
| 4.7                                            | (5)    | 1992 Non-Qualified Stock Option Plan.                                                                      |
| 4.8                                            | (7)    | 1997 Stock Option Plan                                                                                     |
| 10.3                                           | (2)    | Bruce Miller Employment Agreement.                                                                         |
| 10.4                                           | (2)    | Steven Besbeck Employment Agreement.                                                                       |

----

(1)          Previously filed as anexhibit to the Company’s Registration Statement on Form S-18 dated September 22,1983, SEC File No. 2- 85265.

(2)          Previously filed as anexhibit to the Company’s Registration State­ment on Form S-1 dated October 1,1985 SEC File No. 2-99878.

(3)          Previously filed as anexhibit to the Company’s Form 10-K for the year ended August 31,1986.

(4)          Previously filed as anexhibit to the Company’s Form 8-K dated October 21, 1992.

(5)          Previously filed as anaddendum to the Company’s Proxy Statement and Notice of Annual Meeting ofShareholders dated April 10, 1992.

(6)          Previously filed as anexhibit to the Company’s Form 10-K for the year ended August 31,1992.

(b)   Reports on Form 8-K

The Company filed a report on Form 8-K on November 25,2003.

The Company filed a report on Form 8-K on January 14,2004.

TheCompany filed a report on Form 8-K on April 14, 2004.

The Company filed a report on Form 8-K on July 15,2004.

(7)          Previouslyfiled as an exhibit to the Company’s Proxy Statement and Notice of AnnualMeeting of Shareholders dated March 24, 1997.

**Item 14.   Principal Accountant Fees and Services.**

Incorporated by reference from Principal AccountantFees and Services in the Definitive Proxy Statement to be filed with theSecurities and Exchange Commission for the 2004 Annual Meeting of the Company’sShareholders.

25

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**SIGNATURES**

In accordance with Section 13or 15(d) of the Exchange Act, the Company has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.
|                               | CREATIVE COMPUTER APPLICATIONS, INC. |
|-------------------------------|--------------------------------------|
|                          | By:                                  | /s/ STEVEN M. BESBECK |
|                          |                                 | Steven M. Besbeck, |
| Dated: November 19, 2004 |                                 | *President, Chief Executive Officer, and  Chief Financial Officer.* |

 

In accordance with Section 13or 15(d) of the Exchange Act, this report has been signed below by thefollowing persons on behalf of the Company and in the capacities and on thedates indicated.
|                                  | **Signatures** | ** **                             | ** ** | ** **             | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|----------------------------------|----------------|----------------------------------------|------------|------------------------|-----------|------------|------------|------------|----------|------------|
| /s/ BRUCE M. MILLER              |           | Chairman of the Board  and Chief       |       | November 19, 2004 |
| Bruce M. Miller                  |           | Technology  Officer                    |       |                   |
| /s/ STEVEN M. BESBECK            |           | President, Chief  Executive Officer,   |       | November 19, 2004 |
| Steven M. Besbeck                |           | Chief Financial  Officer and Director  |       |                   |
| /s/ JAMES R. HELMS               |           | Vice President,  Operations, Secretary |       | November 19, 2004 |
| James R. Helms                   |           | and Director                           |       |                   |
| /s/ LAWRENCE S. SCHMID           |           | Director                               |       | November 19, 2004 |
| Lawrence S. Schmid               |           |                                   |       |                   |
| /s/ ROBERT S. FOGERSON, JR. |           | Director                               |       | November 19, 2004 |
| Robert S. Fogerson, Jr.     |           |                                   |       |                   |
| /s/ NORMAN R. COHEN,             |           | Director                               |       | November 19, 2004 |
| Norman R. Cohen                  |           |                                   |       |                   |
| /s/ ANAHITA VILLAFANE            |           | Controller                             |       | November 19, 2004 |
| Anahita Villafane                |           | Chief Accounting  Officer              |       |                   |
| /s/ CHRISTOPHER S. COLEMAN       |           | Vice President, Sales                  |       | November 19, 2004 |
| Christopher S. Coleman           |           |                                   |       |                   |

 

 

26

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**CREATIVECOMPUTER APPLICATIONS, INC.**

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ConsolidatedFinancial Statements

**Forthe Years Ended August 31, 2004 and 2003**

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CREATIVE COMPUTER APPLICATIONS, INC.

**INDEX**
|                                                                                                     | ** ** | **Page**    |
|-----------------------------------------------------------------------------------------------------|------------|-------------|
| **Report of Independent Registered  Public Accounting Firm**                                        |       | F-2         |
| **Consolidated  Financial Statements**                                                              |       |        |
| Balance Sheets––August 31, 2004 and  2003                                            |       | F-3         |
| Statements of Operations––Years  ended August 31, 2004, 2003 and 2002                |       | F-4         |
| Statements of Shareholders’  Equity––Years ended August 31, 2004, 2003 and 2002 |       | F-5         |
| Statements of Cash Flows––Years  ended August 31, 2004, 2003 and 2002                |       | F-6         |
| **Notes  to Consolidated Financial Statements**                                                     |       | F-7  - F-18 |

 

F-1

----

 

**Report ofIndependent Registered Public Accounting Firm**

Board of Directors andShareholders

Creative Computer Applications, Inc. andSubsidiary

We have audited the accompanying consolidated balancesheets of Creative Computer Applications, Inc. and subsidiary as of August 31,2004 and 2003 and the related consolidated statements of operations,shareholders’ equity and cash flows for each of the three years in the periodended August 31, 2004. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Creative ComputerApplications, Inc. and subsidiary at August 31, 2004 and 2003 and theresults of their operations and their cash flows for each of the three years inthe period ended August 31, 2004, in conformity with accounting principlesgenerally accepted in the United States of America.
|                         | /s/ BDO SEIDMAN,  LLP |
|-------------------------|-----------------------|
| Los Angeles, California |                  |
| October 22, 2004   |                  |

 

F-2

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**CREATIVE COMPUTER APPLICATIONS, INC.CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                            | ** ** | **August 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                                                                            | ** ** | **2004**            | ** ** | **2003** | ** ** |
| **ASSETS**                                                                                                                            |       |                |       |   |   |
| CURRENT ASSETS:                                                                                                                       |       |                |       |   |   |
| Cash                                                                                                                                  |       | $                   | 1,574,377  |   | $ | 1,075,323 |   |
| Receivables, net                                                                                                                      |       | 1,722,340           |       | 2,063,311 |   |
| Inventory                                                                                                                             |       | 118,517             |       | 164,581 |   |
| Prepaid expenses                                                                                                                      |       | 266,848             |       | 231,117 |   |
| Deferred tax asset                                                                                                                    |       | 539,420             |       | 362,850 |   |
| TOTAL CURRENT ASSETS                                                                                                                  |       | 4,221,502           |       | 3,897,182 |   |
| PROPERTY AND EQUIPMENT, net                                                                                                           |       | 183,814             |       | 219,627 |   |
| INVENTORY OF  COMPONENT PARTS                                                                                                         |       | 199,031             |       | 267,275 |   |
| CAPITALIZED  SOFTWARE COSTS, net of accumulated amortization   of $1,103,009 and $1,114,645                                           |       | 1,492,661           |       | 1,360,374 |   |
| DEFERRED TAX  ASSET                                                                                                                   |       | 254,457             |       | 536,885 |   |
|                                                                                                                                  |       | $                   | 6,351,465  |   | $ | 6,281,343 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                        |       |                |       |   |   |
| CURRENT  LIABILITIES:                                                                                                                 |       |                |       |   |   |
| Notes payable to bank                                                                                                                 |       | $                   | —     |   | $ | — |   |
| Accounts payable                                                                                                                      |       | 185,869             |       | 207,624 |   |
| Accrued  liabilities:                                                                                                                 |       |                |       |   |   |
| Vacation pay                                                                                                                          |       | 230,183             |       | 185,508 |   |
| Accrued payroll                                                                                                                       |       | 158,092             |       | 105,768 |   |
| Other                                                                                                                                 |       | 188,338             |       | 159,241 |   |
| Deferred service contract income                                                                                                      |       | 1,175,509           |       | 1,115,366 |   |
| Deferred revenue on system sales                                                                                                      |       | 244,882             |       | 501,507 |   |
| Capital lease obligation, current portion                                                                                             |       | —              |       | 361 |   |
| TOTAL CURRENT LIABILITIES                                                                                                             |       | 2,182,873           |       | 2,275,375 |   |
| COMMITMENTS                                                                                                                           |       |                |       |   |   |
| SHAREHOLDERS’  EQUITY:                                                                                                           |       |                |       |   |   |
| Common shares, no par value; 20,000,000 shares  authorized; 3,318,900 shares issued and outstanding at August 31, 2003  and 2004 |       | 6,192,692           |       | 6,192,692 |   |
| Accumulated deficit                                                                                                                   |       | (2,024,100          | )          | (2,186,724 | ) |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                       |       | 4,168,592           |       | 4,005,968 |   |
|                                                                                                                                  |       | $                   | 6,351,465  |   | $ | 6,281,343 |   |

 

*See notes to consolidatedfinancial statements.*

F-3

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**CREATIVECOMPUTER APPLICATIONS, INC.CONSOLIDATED STATEMENTS OFOPERATIONS**
| ** **                                      | ** ** | **Years ended August 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| NET SYSTEM SALES  AND SERVICE REVENUE:          |       |                                      |       |   |   |   |   |
| System sales                                    |       | $                                         | 3,295,708  |   | $ | 3,144,293 |   | $ | 3,723,551 |   |
| Service revenue                                 |       | 4,360,264                                 |       | 4,236,828 |   | 4,107,466 |   |
| TOTAL SYSTEM SALES AND SERVICE REVENUE          |       | 7,655,972                                 |       | 7,381,121 |   | 7,831,017 |   |
| COSTS OF PRODUCTS  AND SERVICES SOLD:           |       |                                      |       |   |   |   |   |
| System sales                                    |       | 1,913,745                                 |       | 2,099,738 |   | 2,118,221 |   |
| Service revenue                                 |       | 1,592,801                                 |       | 1,470,861 |   | 1,467,940 |   |
| TOTAL COSTS OF PRODUCTS AND SERVICES SOLD       |       | 3,506,546                                 |       | 3,570,599 |   | 3,586,161 |   |
| GROSS PROFIT                                    |       | 4,149,426                                 |       | 3,810,522 |   | 4,244,856 |   |
| RESEARCH AND DEVELOPMENT EXPENSE                |       | 1,014,235                                 |       | 901,564 |   | 790,609 |   |
| SELLING AND ADMINISTRATIVE EXPENSES             |       | 2,855,703                                 |       | 2,780,214 |   | 2,730,107 |   |
| OPERATING INCOME                                |       | 279,488                                   |       | 128,744 |   | 724,140 |   |
| OTHER INCOME  (EXPENSE):                        |       |                                      |       |   |   |   |   |
| Interest income                                 |       | 4,603                                     |       | 19,776 |   | 12,490 |   |
| Interest and other expense                      |       | (3,704                                    | )          | (8,863 | ) | (15,471 | ) |
| TOTAL OTHER INCOME (EXPENSE)                    |       | 899                                       |       | 10,913 |   | (2,981 | ) |
| INCOME BEFORE PROVISION FOR INCOME TAXES        |       | 280,387                                   |       | 139,657 |   | 721,159 |   |
| PROVISION FOR INCOME TAXES                      |       | 117,763                                   |       | 45,556 |   | 289,500 |   |
| NET INCOME                                      |       | $                                         | 162,624    |   | $ | 94,101 |   | $ | 431,659 |   |
| EARNINGS PER  SHARE:                            |       |                                      |       |   |   |   |   |
| Basic                                           |       | $                                         | .05        |   | $ | .03 |   | $ | .13 |   |
| Diluted                                         |       | $                                         | .05        |   | $ | .03 |   | $ | .13 |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING: |       |                                      |       |   |   |   |   |
| Basic                                           |       | 3,318,900                                 |       | 3,294,108 |   | 3,243,317 |   |
| Diluted                                         |       | 3,467,939                                 |       | 3,526,681 |   | 3,310,286 |   |

 

*See notes to consolidatedfinancial statements.*

F-4

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**CREATIVE COMPUTER APPLICATIONS, INC.**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**
| ** **                       | ** ** | **Common  Shares** | ** ** | **Common  Shares  Amount** | ** ** | **Accumulated  Deficit** | ** ** | **Total    Shareholders’    Equity** | ** ** |
|----------------------------------|------------|--------------------|------------|----------------------------|------------|--------------------------|------------|---------------------------------------------------------------|------------|
| BALANCE,  September 1, 2001 |       | 3,221,025          |       | $                          | 6,108,164  |                     | $          | (2,712,484                                                    | )          |   | $ | 3,395,680 |   |   |
| Exercise of stock options        |       | 35,375             |       | 32,378                     |       | —                   |       |                                                          | 32,378     |   |   |
| Issuance of common shares        |       | 10,000             |       | 3,500                      |       | —                   |       |                                                          | 3,500      |   |   |
| Net income                       |       | —             |       | —                     |       | 431,659                  |       |                                                          | 431,659    |   |   |
| BALANCE, August 31, 2002    |       | 3,266,400          |       | 6,144,042                  |       | (2,280,825               | )          |                                                          | 3,863,217  |   |   |
| Exercise of stock options        |       | 52,500             |       | 48,650                     |       | —                   |       |                                                          | 48,650     |   |   |
| Net income                       |       | —             |       | —                     |       | 94,101                   |       |                                                          | 94,101     |   |   |
| BALANCE, August 31, 2003    |       | 3,318,900          |       | 6,192,692                  |       | (2,186,724               | )          |                                                          | 4,005,968  |   |   |
| Net income                       |       | —             |       | —                     |       | 162,624                  |       |                                                          | 162,624    |   |   |
| BALANCE,  August 31, 2004   |       | 3,318,900          |       | $                          | 6,192,692  |                     | $          | (2,024,100                                                    | )          |   | $ | 4,168,592 |   |   |

 

*See notes toconsolidated financial statements.*

F-5

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**CREATIVECOMPUTER APPLICATIONS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Increase (Decrease)in Cash**
| ** **                                                                          | ** ** | **Years ended August 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| OPERATING ACTIVITIES                                                                |       |                                      |       |   |   |   |   |
| Net income                                                                          |       | $                                         | 162,624    |   | $ | 94,101 |   | $ | 431,659 |   |
| Adjustments to  reconcile net income to net cash provided  by operating activities: |       |                                      |       |   |   |   |   |
| Depreciation and amortization                                                       |       | 116,473                                   |       | 152,112 |   | 332,185 |   |
| Amortization of capitalized software costs                                          |       | 432,516                                   |       | 467,079 |   | 424,596 |   |
| Provision for doubtful accounts                                                     |       | 70,000                                    |       | 5,785 |   | — |   |
| Deferred tax provision                                                              |       | 105,858                                   |       | 45,556 |   | 285,209 |   |
| Increase  (decrease) from changes in:                                               |       |                                      |       |   |   |   |   |
| Receivables                                                                         |       | 270,971                                   |       | 20,178 |   | (879,402 | ) |
| Inventories                                                                         |       | 114,308                                   |       | (2,327 | ) | 110,704 |   |
| Prepaid expenses                                                                    |       | (35,731                                   | )          | (47,866 | ) | (41,032 | ) |
| Other assets                                                                        |       | —                                    |       | — |   | 13,795 |   |
| Accounts payable                                                                    |       | (21,755                                   | )          | (16,794 | ) | 8,331 |   |
| Accrued liabilities                                                                 |       | 126,096                                   |       | (195,797 | ) | 211,234 |   |
| Deferred service contract income                                                    |       | 60,143                                    |       | 141,435 |   | 142,058 |   |
| Deferred revenue on system sales                                                    |       | (256,625                                  | )          | (59,878 | ) | 87,294 |   |
| Net cash provided by operating activities                                           |       | 1,144,878                                 |       | 603,584 |   | 1,126,631 |   |
| INVESTING  ACTIVITIES                                                               |       |                                      |       |   |   |   |   |
| Additions to property and equipment                                                 |       | (80,660                                   | )          | (120,281 | ) | (80,719 | ) |
| Additions to capitalized software costs                                             |       | (564,803                                  | )          | (461,690 | ) | (452,887 | ) |
| Net cash used in investing activities                                               |       | (645,463                                  | )          | (581,971 | ) | (533,606 | ) |
| FINANCING  ACTIVITIES                                                               |       |                                      |       |   |   |   |   |
| Borrowings on notes payable                                                         |       | —                                    |       | — |   | 300,000 |   |
| Payments on notes payable                                                           |       | —                                    |       | — |   | (539,351 | ) |
| Payments on capital lease obligations                                               |       | (361                                      | )          | (22,750 | ) | (22,750 | ) |
| Proceeds from issuance of stock                                                     |       | —                                    |       | — |   | 3,500 |   |
| Exercise of stock options and warrants                                              |       | —                                    |       | 48,650 |   | 32,378 |   |
| Net cash provided  by (used in) financing activities                                |       | (361                                      | )          | 25,900 |   | (226,223 | ) |
| NET INCREASE IN CASH                                                                |       | 499,054                                   |       | 47,513 |   | 366,802 |   |
| CASH, beginning  of year                                                            |       | 1,075,323                                 |       | 1,027,810 |   | 661,008 |   |
| CASH, end of year                                                                   |       | $                                         | 1,574,377  |   | $ | 1,075,323 |   | $ | 1,027,810 |   |

 

*See notes to consolidatedfinancial statements.*

F-6

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**NOTE 1—SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

**Business Activities**

Creative Computer Applications, Inc. (the “Company”),a California corporation, was formed in 1978. The Company develops, assembles,markets, installs and services computer-based Clinical Information Systems andproducts, which automate the acquisition and management of clinical data forthe healthcare industry. The Company sells its products and systems, includingthe implementation of such products and systems, primarily to hospitals,clinics, reference laboratories and other healthcare institutions. The Companyalso generates revenue through service contracts with customers to providetechnical support and repair services for specified periods of time. TheCompany primarily markets its products and services in the United States,Canada, The Caribbean and South-east Asia.

The accompanyingconsolidated financial statements include the accounts of Creative ComputerApplications, Inc. and its wholly owned subsidiary, Xymed.com, which wasformed in September 1999. During the year ended August 31, 2004 and2003 the operations of Xymed.com were immaterial. All intercompany transactionshave been eliminated.

**Cash and Cash Equivalents**

The Company considers all liquidassets with an initial maturity of three months or less to be cash equivalents.

**Receivables andConcentration of Credit Risk**

Receivables potentially expose the Company toconcentrations of credit risk. The Company provides credit to a large number ofhospitals, clinics, reference laboratories and other healthcare institutions invarious geographical areas. The Company performs ongoing credit evaluations andmaintains a general security interest in the item sold until full payment isreceived.

The Company maintains themajority of its cash and cash equivalents in a number of commercial bankaccounts. Accounts at these banks are guaranteed by the Federal DepositInsurance Corporation (“FDIC”) up to $100,000 each. At August 31, 2004,the Company had approximately $970,042 at a bank, which was in excess of theFDIC insurance limit.

**Inventories**

Inventories consist primarily of computer hardwareheld for resale and are stated at the lower of cost or market (net realizablevalue). Cost is determined using the first-in, first-out method. Supplies arecharged to expense as incurred.

The Company also maintainsan inventory pool of component parts to service systems previously sold, whichis classified as non-current in the accompanying balance sheets. Such inventoryis carried at the lower of cost or market and is charged to cost of sales basedon usage. Allowances are made for quantities on hand in excess of estimatedfuture usage. At August 31, 2004 and 2003 the inventory allowance was$136,273 and $76,273.

**Property andEquipment**

Property, equipment, andleasehold improvements are stated at cost less accumulated depreciation. Depreciationof machinery and equipment, furniture and fixtures, and data processingequipment is computed for financial reporting purposes using the straight-linemethod over the estimated useful life of the related asset, ranging from threeto five years. Amortization of leasehold improvements is computed using thestraight-line method over the lease term. Accelerated depreciation methods areused for income 

F-7

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**NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

taxreporting purposes. The Company periodically reviews such assets for possibleimpairments and expected losses, if any, are recorded currently.

**CapitalizedSoftware Costs**

In accordance with SFAS No. 86,“Accounting for the Costs of Computer Software to be Sold, Leased or OtherwiseMarketed”‘ software costs incurred internally in creating computersoftware products are expensed until technological feasibility has beenestablished upon completion of a detailed program design. Thereafter, allsoftware development costs are capitalized until the point that the product isready for sale and subsequently reported at the lower of unamortized cost ornet realizable value. The Company considers annual amortization of capitalizedsoftware costs based on the ratio of current year revenues by product to theproduct’s total estimated revenues method, subject to an annual minimum basedon straight-line amortization over the product’s estimated economic usefullife, not to exceed five years. The Company reviews capitalized software costsfor impairment on an annual basis. To the extent that the carrying amountexceeds the estimated net realizable value of the capitalized software cost, animpairment charge is recorded.

During the years ended August 31,2004, 2003 and 2002, the Company capitalized $564,803, $461,690, and $452,887of software development costs. Amortization expense of capitalized softwaredevelopment costs, included in cost of sales, for the years ended August 31,2004, 2003 and 2002 amounted to $432,516, $467,079, and $424,596.

**Revenue Recognition**

*System Sales*

In accordance with Statement of Position 97-2, “SoftwareRevenue Recognition”, (“SOP 97-2”), as amended by SOP 98-4, SOP98-9, and clarified by Staff Accounting Bulletin (SAB) 104, “RevenueRecognition in Financial Statements”, the Company recognizes revenue on salesof Clinical Information Systems and data acquisition products when thefollowing criteria are met: (i) persuasive evidence of an arrangementexists, (ii) delivery has occurred and the system is functional, (iii) thevendor’s fee is fixed or determinable and (iv) collectability is probable.Also in accordance with SOP 97-2, as amended, the Company allocates the fee ofa multiple element contract to the various elements based on vendor-specificobjective evidence of fair value. Revenue allocated to a specific element isrecognized when the basic revenue recognition criteria above is met for thatelement. If sufficient vendor-specific objective evidence for all elements doesnot exist to allocate revenue to the elements, all revenue from the arrangementgenerally is deferred until such evidence does exist or until all elements havebeen delivered. Revenues related to installation of systems requiringsubstantial future performance by the Company are recognized using thepercentage-of-completion method based on meeting key milestone events over theterms of the contract. Implementation revenue, consisting primarily ofinstallation and training, is recognized as revenue as the services areperformed.

As a result of the aboveprovisions, the Company recorded deferred revenue on system sales of $244,882and $501,507 at August 31, 2004 and 2003.

*Service Revenue*

Service revenues arerecognized ratably over the contractual period (usually one year) or as theservices are provided. These services are not essential to the functionality ofany other elements and are separately stated. At August 31, 2004 and 2003,the Company had deferred service revenues of $1,175,509 and $1,115,366.

F-8

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**NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

*Deferred Revenue and Income*

Deferred revenue on systemsales and deferred service contract income represent cash received in advanceor accounts receivable from system and service sales of which the abovecriteria have not been met for the current reporting of income.

**Stock BasedCompensation**

Statement of Financial Accounting Standards No. 123,“Accounting for Stock-based Compensation” (SFAS No. 123), as amended byStatement of Financial Accounting Standards No. 148, “Accounting forStock-Based Compensation- Transition and Disclosure-an amendment of FASB No. 123”(SFAS No. 148), establishes a fair value method of accounting forstock-based compensation plans and for transactions in which a company acquiresgoods or services from non-employees in exchange for equity instruments. SFAS No. 123,as amended by SFAS No. 148, also gives the option to account forstock-based employee compensation in accordance with Accounting PrinciplesBoard Opinion No. 25 (APB 25), “Accounting for Stock issued toEmployees,” or SFAS No. 123.

The Company accounts for stock based compensation toemployees using the intrinsic value method in accordance with APB 25 whichmeasures compensation cost for employee stock options as the excess, if any, ofthe fair market price of the Company’s stock at the measurement date over theamount an employee must pay to acquire stock. The Company accounts for stockbased compensation to non-employees in accordance with SFAS No. 123, asamended by SFAS No. 148. The Company applies SFAS No. 123 and 148 invaluing options granted to non-employees and estimates the fair value of suchoptions using the Black-Scholes option-pricing model. The fair value isrecorded as expense as services are provided. See “Recent AccountingPronouncements” for additional discussion.

Thefollowing table illustrates the effect on net income (loss) if the Company hadapplied the fair value recognition provisions of SFAS No. 123 to stockbased compensation.
| ** **                                                                                                                                                                       | ** ** | **August 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2004**            | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income, as  reported                                                                                                                                                         |       | $                   | 162,624    |   | $ | 94,101 |   | $ | 431,659 |   |
| Add:            Stock-based  compensation expense included in reported net income, net of related tax  effects            |       | —              |       | — |   | — |   |
| Deduct:             Total  stock-based compensation expense determined under fair value based method for  all awards |       | (81,803             | )          | (41,854 | ) | (64,370 | ) |
| Net income, pro forma                                                                                                                                                            |       | $                   | 80,821     |   | $ | 52,247 |   | $ | 367,289 |   |
| Basic net earnings per share, as reported                                                                                                                                        |       | $                   | .05        |   | $ | .03 |   | $ | .13 |   |
| Basic net  earnings per share, pro forma                                                                                                                                         |       | .02                 |       | .02 |   | .11 |   |
| Diluted net earnings per share, as reported                                                                                                                                      |       | .05                 |       | .03 |   | .13 |   |
| Diluted net earnings per  share, pro forma                                                                                                                                       |       | .02                 |       | .02 |   | .11 |   |

 

**Earnings Per Share**

The Company computesearnings (loss) per common share under Statement of Financial AccountingStandards No. 128, “Earnings per Share” (SFAS No. 128), whichrequires presentation of Basic and Diluted earnings (loss) per share. Basicearnings (loss) per share includes no dilution and is computed by dividingincome (loss) available to common shareholders by the weighted average numberof common shares outstanding for the period. Diluted earnings (loss) per sharereflects the potential dilution of 

F-9

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**NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

securitiesthat could share in the earnings of an entity, such as stock options, warrantsor convertible debentures, unless antidilutive (see Note 8).

**Income Taxes**

The Company accounts forincome taxes in accordance with the Statement of Financial Accounting Standards(SFAS) No. 109, “Accounting for Income Taxes. SFAS No. 109 requires aCompany to use the asset and liability method of accounting for income taxes. Underthe asset and liability method, deferred income taxes are recognized for thetax consequences of “temporary differences” by applying enacted statutory taxrates applicable to future years to differences between the financial statementcarrying amounts and the tax bases of existing assets and liabilities. UnderSFAS No. 109, the effect on deferred income taxes of a change in tax ratesis recognized in income in the period that includes the enactment date.

**AccountingEstimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

**Fair Value ofFinancial Instruments**

Quoted market pricesgenerally are not available for all of the Company’s financial instruments. Accordingly,fair values are based on judgments regarding current economic conditions, riskcharacteristics of various financial instruments and other factors. Theseestimates involve uncertainties and matters of judgment, and therefore, cannotbe determined with precision. Changes in assumptions could significantly affectthe estimates. Cash, receivables, accounts payable, accrued liabilities,deferred service contract income and deferred revenue on system sales arerecorded at carrying amounts which approximate fair value due to the shortmaturity of these instruments.

**Recent AccountingPronouncements**

On December 17, 2003, the SEC’s Office of theChief Accountant and Division of Corporation Finance issued Staff AccountingBulletin (SAB) 104, Revenue Recognition. The SAB updates portions of theinterpretive guidance included in Topic 13 of the codification of staffaccounting bulletins (SAB 103 codification) in order to make the guidanceconsistent with current authoritative accounting literature. The principalrevisions relate to the incorporation of certain sections of the staff’s FAQdocument on revenue recognition into Topic 13. SAB 104 did not have a materialeffect on the Company’s financial statements.

In November 2002, theEITF reached a consensus on EITF 00-21, “Revenue Arrangements with MultipleDeliverables,” related to the separation and allocation of consideration forarrangements that include multiple deliverables. The EITF requires that when thedeliverables included in this type of arrangement meet certain criteria theyshould be accounted for separately as separate units of accounting. This mayresult in a difference in the timing of revenue recognition but will not resultin a change in the total amount of revenue recognized in a bundled salesarrangement. The allocation of revenues to the separate deliverables is basedon the relative fair value of each item. If the fair value is not available forthe delivered items then the residual method must be used. This method requiresthat the amount allocated to

F-10

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**NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

the undelivered items inthe arrangement is their full fair value. This would result in the discount, ifany, being allocated to the delivered items. This consensus is effective prospectivelyfor arrangements entered into in fiscal periods beginning after June 15,2003. The adoption of EITF 00-21 did not have a material impact on the Company’sfinancial statements.

In December 2003, theFASB issued FASB Interpretation No. 46R (FIN 46R), “Consolidation ofvariable Interest Entities”. FIN 46R expands upon existing accounting guidancethat addresses when a company should include in its financial statements theassets, liabilities and activities of another entity. A variable interest entityis a corporation, partnership, trust or any other legal structure used forbusiness purposes that either (a) does not have equity investors withvoting rights or (b) has equity investors that do not provide sufficientfinancial resources for the entity to support its activities. FIN 46R requiresa variable interest entity to be consolidated by a company if that company issubject to a majority of the risk of loss from the variable interest entity’sactivities or is entitled to receive a majority of the entity’s residualreturns or both. The adoption of this interpretation did not have any impact onour financial position or results of operations.

**NOTE2—RECEIVABLES**

Receivables are summarized asfollows:
| ** **                       | ** ** | **August 31,** | ** ** |
|----------------------------------|------------|---------------------|------------|
| ** **                       | ** ** | **2004**            | ** ** | **2003** | ** ** |
| Billed  receivables              |       | $                   | 1,250,073  |   | $ | 1,215,357 |   |
| Unbilled  receivables            |       | 559,629             |       | 865,316 |   |
| Allowance for  doubtful accounts |       | (87,362             | )          | (17,362 | ) |
|                             |       | $                   | 1,722,340  |   | $ | 2,063,311 |   |

** **

**NOTE 3—PROPERTY ANDEQUIPMENT**

Property and equipment aresummarized as follows:
| ** **                                 | ** ** | **August 31,** | ** ** |
|--------------------------------------------|------------|---------------------|------------|
| ** **                                 | ** ** | **2004**            | ** ** | **2003** | ** ** |
| Machinery and  equipment                   |       | $                   | 239,444    |   | $ | 315,549 |   |
| Furniture and  fixtures                    |       | 267,932             |       | 304,584 |   |
| Data processing  equipment                 |       | 918,472             |       | 1,155,653 |   |
| Leasehold  improvements                    |       | 103,153             |       | 103,153 |   |
|                                       |       | 1,529,001           |       | 1,878,939 |   |
| Accumulated  depreciation and amortization |       | (1,345,187          | )          | (1,659,312 | ) |
|                                       |       | $                   | 183,814    |   | $ | 219,627 |   |

** **

At August 31,2003, the Company had various computer equipment under capital lease agreementsin the amount of $68,251 with related accumulated amortization thereon of$67,890. The lease agreement was fulfilled in fiscal 2004.

Duringthe years ended August 31, 2004 and 2003, the Company wrote-off fullyamortized assets of $430,599 and $99,143, respectively.

Depreciation and amortization expense for property andequipment for the years ended August 31, 2004, 2003 and 2002 was $116,473,$152,112, and $227,441.

F-11

----

**NOTE4—NOTESPAYABLE TO BANK**

At August 31, 2004 and2003, the Company had a line of credit of $500,000 with a bank withinterest at the bank’s prime rate plus 1% (4.50% at August 31, 2004). Theline matures on February 1, 2005, and is collateralized by substantiallyall of the Company’s assets

The outstanding line ofcredit at August 31, 2004 is currently available. At August 31, 2004,the Company does not have an outstanding balance under the line of credit.

**NOTE 5—COMMITMENTS**

**Operating Leases**

The Company leases office and warehouse space inCalabasas, California under a non-cancelable operating lease expiring in fiscal2008.

Futureminimum lease payments, by year and in the aggregate, under the facility leasewith initial or remaining terms of one year or more are as follows:
| **Fiscal year ending August 31,** | ** ** | ** ** | ** ** | **Operating Leases** | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------------------|------------|
| 2005                                                  |       |       | $          | 276,963                   |       |   |
| 2006                                                  |       |       | 285,030    |                      |       |
| 2007                                                  |       |       | 293,097    |                      |       |
| 2008                                                  |       |       | 49,074     |                      |       |
| 2009                                                  |       |       | —     |                      |       |
| Total minimum  lease payments                         |       |       | $          | 904,164                   |       |   |

 

Rent expense for the yearsended August 31, 2004, 2003 and 2002 was approximately $278,000, $254,000,and $220,000.

**Employee BenefitPlan**

The Company maintains a401(k) profit sharing plan that allows eligible employees to defer up to 100%of their earnings, on a pre-tax basis, subject to dollar limitations of theInternal Revenue Code. The Company provides a discretionary match on eligibleemployee contributions, which is determined on an annual basis. The amount ofmatching contribution for 2004 and 2003 was 25% of the eligible employee’scontribution up to 4% of the eligible employee’s total salary. Vesting of thematching contributions by the Company is 20% for each full year of employment.For the years ended August 31, 2004 and 2003, contributions were $25,356and $24,825, respectively.

**Guarantees andIndemnifications**

In accordance with the bylaws of the Company, officersand directors are indemnified for certain events or occurrences arising as aresult of the officer or director’s serving in such capacity. The term of theindemnification period is for the lifetime of the officer or director. Themaximum potential amount of future payments the Company could be required tomake under the indemnification provisions of its bylaws is unlimited. However,the Company has a director and officer liability insurance policy that reducesits exposure and enables it to recover a portion of any future amounts paid. Asa result of its insurance policy coverage, the Company believes the estimatedfair value of the indemnification provisions of its bylaws is minimal andtherefore, the Company has not recorded any related liabilities.

F-12

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**NOTE 5—COMMITMENTS(Continued)**

The Company enters intoindemnification provisions under agreements with various parties in the normalcourse of business, typically with customers and landlords. Under theseprovisions, the Company generally indemnifies and holds harmless theindemnified party for losses suffered or incurred by the indemnified party as aresult of the Company’s activities or, in some cases, as a result of theindemnified party’s activities under the agreement. These indemnificationprovisions often include indemnifications relating to representations made bythe Company with regard to intellectual property rights. These indemnificationprovisions generally survive termination of the underlying agreement. Themaximum potential amount of future payments the Company could be required tomake under these indemnification provisions is unlimited. The Company maintainsgeneral liability, errors and omissions, and professional liability insurancein order to mitigate such risks. The Company has not incurred material costs todefend lawsuits or settle claims related to these indemnification agreements. Asa result, the Company believes the estimated fair value of these agreements isminimal. Accordingly, the Company has not recorded any related liabilities.

**Warranties andProduct Liability**

The Company warrants thatits products conform to their respective functional specifications. The Company’sdata acquisition products and components are warranted against faulty materialsand workmanship for 90 days. The Company also warrants its application softwareincorporated in its Laboratory, Radiology, and Pharmacy Information Systems for90 days. However, such warranties are extended throughout the term of extendedservice agreements that clients may elect to enter into with the Company. Directcosts associated with the initial warranties have been insignificant. Thecomputers that the Company currently sells as part of its Clinical InformationSystems are subject to the warranties of their manufacturers. The manufacturersgenerally warrant their products against faulty material and workmanship forone to three years. The Company passes through the manufacturers warranties tothe end users and in most cases contracts with the manufacturers are to provideonsite warranty services through the manufacturers service network.

The Company currentlycarries an aggregate of $4,000,000 in product liability insurance. Managementbelieves that this amount of insurance is adequate to cover its risks. Tofurther mitigate its risks, the Company’s standard hardware sales/softwarelicense agreement as well as its service agreement expressly limits itsliabilities and the warranties of its products and services in accordance withaccepted provisions of the Uniform Commercial code as adopted in most states.

**NOTE6—SHAREHOLDERS’ EQUITY**

**Stock Option Plan and Warrants**

During 1997, the Company adopted the 1997Non-Qualified and Incentive Stock Option Plan (“the Plan”). Under the 1997Non-Qualified Stock Option Plan, the Company may grant a maximum of 300,000common shares (officers and directors may acquire no more than 150,000 commonshares) and no options may be granted at a price less than 85 percent of thefair market value of the common shares on the date of grant. Under the 1997Incentive Stock Option Plan, the Company may grant a maximum of 500,000 commonshares (officers and directors may acquire no more than 250,000 common shares).In addition, under the 1997 Incentive Stock Option Plan, options can not begranted at a price less than 100 percent of the fair market value of the commonshares on the date of grant for officers, directors and employees who own lessthan 10 percent of the Company’s common shares and not less than 110 percent offair market value for those officers, directors, and employees who own 10percent or more of the Company’s common shares. Under the 1997 Plan, optionsgranted to optionees owning less than 10 percent of the Company’s outstandingvoting securities may exercise their options within ten years from the date ofgrant. Options 

F-13

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**NOTE6—SHAREHOLDERS’ EQUITY (Continued)**

granted to optioneesowning 10 percent or more of the Company’s outstanding voting securities havean exercise term of no more than five years from the date of grant. Optionsgranted to optionees owning 10 percent or more of the Company’s outstandingvoting securities have an exercise term of no more than five years from thedate of grant. No options under either plan can be exercised if the optioneehad been previously granted an option that had not been exercised or had notexpired. No options can be exercised during the first year of the option term. AtAugust 31, 2004, the 1997 plan has 405,000 options outstanding and 242,500options exercisable. The plan expires in 2008.

The Company had also granted special options approvedby the Board of Directors to officers and directors. The options were grantedat the fair market value at the date of grant and were exercisable over periodsranging from two to five years. At August 31, 2004, all options of thespecial grants had expired.

Optionand warrant activity through August 31, 2004 is summarized below:
| ** **                                                | ** ** | **Non-Qualified Plans** | ** ** | **Incentive Plans**               | ** **   | **Warrants**           | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|----------------------------------------|--------------|------------------------|------------|
| ** **                                                | ** ** | **Number  of  Shares**       | ** ** | **Weighted  Average  Exercise  Price** | ** **   | **Number  of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| September 1,  2001                                   |       | 450,000                      |       |                                   | $            | 0.91                   |       |   | 222,000 |   |   | $ | 1.00 |   |   | 125,000 |   |   | $ | 1.50 |   |   |
| Options granted range from $.72 to $1.00                  |       | 20,000                       |       |                                   | $            | 0.72                   |       |   | 80,000 |   |   | $ | 0.84 |   |   | –– |   |   | –– |   |   |
| Options canceled  range from $.90 to $1.00                |       | ––                 |       |                                   | –– |                   |       | (10,000 | ) |   | $ | 1.00 |   |   | –– |   |   | –– |   |   |
| Options expired  range from $.90 to $.99                  |       | (49,000                      | )          |                                   | $            | 0.92                   |       |   | (20,125 | ) |   | $ | 0.92 |   |   | –– |   |   | –– |   |   |
| Options exercised  range from $.90 to $.99                |       | (26,000                      | )          |                                   | $            | 0.93                   |       |   | (9,375 | ) |   | $ | 0.90 |   |   | –– |   |   | –– |   |   |
| Options and warrants outstanding at August 31,  2002 |       | 395,000                      |       |                                   | $            | 0.90                   |       |   | 262,500 |   |   | $ | 1.00 |   |   | 125,000 |   |   | $ | 1.50 |   |   |
| Options granted range from $1.60 to  $1.76                |       | 20,000                       |       |                                   | $            | 1.60                   |       |   | 70,000 |   |   | $ | 1.65 |   |   | –– |   |   | –– |   |   |
| Options cancelled  at $1.00                               |       | ––                 |       |                                   | –– |                   |       | (10,000 | ) |   | $ | 1.00 |   |   | –– |   |   | –– |   |   |
| Options and  warrants expired range from $.90 to $1.50    |       | (15,000                      | )          |                                   | $            | 0.90                   |       |   | (5,000 | ) |   | $ | 0.90 |   |   | (125,000 | ) |   | $ | 1.50 |   |   |
| Options exercised  range from $.90 to  $1.00              |       | (20,000                      | )          |                                   | $            | 0.90                   |       |   | (32,500 | ) |   | $ | 0.94 |   |   | –– |   |   | –– |   |   |
| Options outstanding at August 31, 2003               |       | 380,000                      |       |                                   | $            | 0.94                   |       |   | 285,000 |   |   | $ | 1.13 |   |   | –– |   |   | –– |   |   |
| Options granted range from $1.51 to  $1.66                |       | 30,000                       |       |                                   | $            | 1.51                   |       |   | 30,000 |   |   | $ | 1.56 |   |   | –– |   |   | –– |   |   |
| Options cancelled  at $1.00                               |       | ––                 |       |                                   | –– |                   |       | (20,000 | ) |   | $ | 1.00 |   |   | –– |   |   | –– |   |   |
| Options expired  at $.90                                  |       | (300,000                     | )          |                                   | $            | 0.90                   |       |   | –– |   |   | –– |   |   | –– |   |   | –– |   |   |
| Options  outstanding at August 31, 2004              |       | 110,000                      |       |                                   | $            | 1.20                   |       |   | 295,000 |   |   | $ | 1.18 |   |   | –– |   |   | –– |   |   |
| Options exercisable at August 31, 2004          |       | 55,000                       |       |                                   | $            | 1.00                   |       |   | 187,500 |   |   | $ | 1.05 |   |   |   |   |   |   |   |   |
| Options available  for grant at August 31, 2004 |       | 144,000                      |       |                                   |         |                   |       | 146,875 |   |   |   |   |   |   |   |   |   |   |   |

 

F-14

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**NOTE6—SHAREHOLDERS’ EQUITY (Continued)**

Information relating tostock options and warrants at August 31, 2004 summarized by exercise priceis as follows:
| ** **                       | ** ** | **Outstanding** | ** ** | **Exercisable**           | ** **   |
|----------------------------------|------------|-----------------|------------|---------------------------|--------------|
| ** **                       | ** ** | ** **      | ** ** | **Weighted Average** | ** **   | **Weighted Average** | ** ** |
| **Exercise Price**          | ** ** | ** **      | ** ** | ** **                | ** **   | **Life** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| **Per Share**               | ** ** | ** **      | **Shares** | ** **                | **(Months)** | ** ** | **     Price     ** | ** ** | **Shares** | ** ** | **Price** | ** ** |
| Incentive Stock  Option Plan:    |       |            |       |                      |         |   |   |   |   |   |   |   |   |   |   |   |   |
| $0.72                            |       | 30,000          |       |                      | 30.0         |   |   |   | $ | 0.72 |   |   | 15,000 |   |   | $ | 0.72 |   |   |
| $0.79                            |       | 20,000          |       |                      | 30.0         |   |   |   | $ | 0.79 |   |   | 10,000 |   |   | $ | 0.79 |   |   |
| $1.00                            |       | 105,000         |       |                      | 11.0         |   |   |   | $ | 1.00 |   |   | 105,000 |   |   | $ | 1.00 |   |   |
| $1.10                            |       | 40,000          |       |                      | 11.0         |   |   |   | $ | 1.10 |   |   | 40,000 |   |   | $ | 1.10 |   |   |
| $1.51                            |       | 20,000          |       |                      | 54.0         |   |   |   | $ | 1.51 |   |   | –– |   |   | $ | 1.51 |   |   |
| $1.60                            |       | 50,000          |       |                      | 45.5         |   |   |   | $ | 1.60 |   |   | 12,500 |   |   | $ | 1.60 |   |   |
| $1.66                            |       | 10,000          |       |                      | 54.0         |   |   |   | $ | 1.66 |   |   | –– |   |   | $ | 1.66 |   |   |
| $1.76                            |       | 20,000          |       |                      | 45.5         |   |   |   | $ | 1.76 |   |   | 5,000 |   |   | $ | 1.76 |   |   |
|                             |       | 295,000         |       |                      | 26.8         |   |   |   | $ | 1.18 |   |   | 187,500 |   |   | $ | 1.05 |   |   |
| Non-Qualified Stock Option Plan: |       |            |       |                      |         |   |   |   |   |   |   |   |   |   |   |   |   |
| $0.72                            |       | 20,000          |       |                      | 30.0         |   |   |   | $ | 0.72 |   |   | 10,000 |   |   | $ | 0.72 |   |   |
| $1.00                            |       | 40,000          |       |                      | 11.0         |   |   |   | $ | 1.00 |   |   | 40,000 |   |   | $ | 1.00 |   |   |
| $1.51                            |       | 30,000          |       |                      | 54.0         |   |   |   | $ | 1.51 |   |   | –– |   |   | $ | 1.51 |   |   |
| $1.60                            |       | 20,000          |       |                      | 45.5         |   |   |   | $ | 1.60 |   |   | 5,000 |   |   | $ | 1.60 |   |   |
|                             |       | 110,000         |       |                      | 32.5         |   |   |   | $ | 1.20 |   |   | 55,000 |   |   | $ | 1.00 |   |   |
|                                  |            |                 |            |                           |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company accounts for employee stock-basedcompensation arrangements using the intrinsic value method in accordance withAPB No. 25 and related interpretations and has adopted the disclosure-onlyprovisions of SFAS No.123 as amended by SFAS No. 148.  Accordingly, no compensation expense has beenrecognized for options issued to employees in conjunction with the stock optionagreements and stock-based compensation plans discussed above.

The fair value of optiongrants is estimated on the date of grants utilizing the Black-Scholes optionpricing with the following weighted average assumptions for grants in 2004,2003 and 2002; expected life of options, 5 years for all years; expectedvolatility ranging from 67% to 126%; and risk-free interest rate ranging 3.4%to 6.1%.  The weighted average fair valueon the date of grants for options granted during 2004, 2003 and 2002 was $0.91,$1.25, and $0.64 per option.

**StockIssuances**

During the year ended August 31, 2002, 2003 and2002, the Company issued common shares of 0, 0, and 10,000 for cash amountingto $0, $0, and $3,500.

F-15

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**NOTE 7—INCOME TAXPROVISION (BENEFIT)**

Theprovision (benefit) for income taxes consist of the following:
| ** **                      | ** ** | **August 31,** | ** ** |
|---------------------------------|------------|---------------------|------------|
| ** **                      | ** ** | **2004**            | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current taxes:                  |       |                |       |   |   |   |   |
| Federal                         |       | $                   | —     |   | $ | — |   | $ | — |   |
| State                           |       | 7,697               |       | 4,212 |   | 5,891 |   |
| Deferred                        |       |                |       |   |   |   |   |
| Federal                         |       | 102,457             |       | (244,871 | ) | 273,877 |   |
| State                           |       | 8,909               |       | (26,785 | ) | 98,932 |   |
|                            |       | 119,063             |       | (267,444 | ) | 378,700 |   |
| Change in valuation allowance   |       | (1,300              | )          | 313,000 |   | (89,200 | ) |
| Income tax  provision (benefit) |       | $                   | 117,763    |   | $ | 45,556 |   | $ | 289,500 |   |

 

Incometax provision (benefit) differs from the amount obtained by applying thestatutory federal income tax rate to income before income tax expense asfollows:
| ** **                                                                | ** ** | **August 31,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                | ** ** | **2004**            | ** ** | **2003** | ** ** | **2002** | ** ** |
| Computed  provision (benefit) for taxes based on income at statutory rate |       | 34.0                | %          | 34.0 | % | 34.0 | % |
| State taxes, net of benefit of state net operating  loss carryforward     |       | 6.5                 |       | 3.0 |   | 14.5 |   |
| Change in valuation allowance                                             |       | (1.1                | )          | (43.1 | ) | (12.4 | ) |
| Permanent differences and other                                           |       | 2.6                 |       | 38.7 |   | 4.0 |   |
|                                                                      |       | 42.0                | %          | 32.6 | % | 40.1 | % |

 

F-16

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**NOTE7—INCOME TAX PROVISION (BENEFIT) (Continued)**

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. Significant components of the Company’sdeferred tax assets and liabilities as of August 31, 2004 and 2003 areapproximately as follows:
| ** **                                   | ** ** | **August 31,** | ** ** |
|----------------------------------------------|------------|---------------------|------------|
| ** **                                   | ** ** | **2004**            | ** ** | **2003** | ** ** |
| Deferred tax assets:                         |       |                |       |   |   |
| Allowance for doubtful accounts              |       | $                   | 34,900     |   | $ | 6,900 |   |
| Inventory uniform capitalization and reserve |       | 14,000              |       | 20,500 |   |
| Accrued vacation                             |       | 76,700              |       | 63,400 |   |
| Deferred revenue                             |       | 254,100             |       | 226,400 |   |
| Depreciation and amortization                |       | 97,400              |       | 204,400 |   |
| Net operating loss carryforwards             |       | 528,900             |       | 717,400 |   |
| Tax credits                                  |       | 850,300             |       | 672,900 |   |
| Other                                        |       | 13,900              |       | 12,400 |   |
| Gross deferred tax assets                    |       | 1,870,200           |       | 1,924,300 |   |
| Deferred tax liability:                      |       |                |       |   |   |
| Capitalized software costs                   |       | (597,100            | )          | (544,100 | ) |
| Gross deferred tax liability                 |       | (597,100            | )          | (544,100 | ) |
| Valuation allowance                          |       | (479,200            | )          | (480,500 | ) |
| Net deferred tax  assets                     |       | $                   | 793,900    |   | $ | 899,700 |   |

 

At August 31, 2004, the Company had state andfederal net operating loss carryforwards available to offset future taxableincome of approximately $0 and $1,555,000, respectively, that expire at variousdates through 2022 and general business tax credit carryforwards available tooffset future state and federal income tax payable of approximately $285,000and $566,000, respectively, that expire at various dates through 2023. TheCompany also has alternative minimum tax (“AMT”) net operating losscarryforwards of approximately $2,055,000 to offset future AMT taxable incomethat expires through various dates through 2023. The Tax Reform Act of 1986contains provisions, which limit the amount of tax credits that can be utilizedin any one year in subsequent years.

The Company annuallyevaluates the realization of the net deferred tax asset, taking intoconsideration prior earnings history, projected operating results and thereversal of temporary tax differences. At August 31, 2004, the Companyevaluated the net deferred tax asset taking into consideration operatingresults, and determined that a valuation allowance of approximately $479,200should be established. The Company believes it is more likely than not that thenet deferred tax asset of approximately $793,900 will be realized.

**NOTE8—EARNINGS (LOSS) PER SHARE**
| ** **                                    | ** ** | **August 31,** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|
| ** **                                    | ** ** | **2004**            | ** ** | **2003** | ** ** | **2002** | ** ** |
| Basic weighted  average shares outstanding    |       | 3,318,900           |       | 3,294,108 |   | 3,243,317 |   |
| Dilutive effect of stock options and warrants |       | 149,039             |       | 232,573 |   | 66,969 |   |
| Diluted weighted  average shares outstanding  |       | 3,467,939           |       | 3,526,681 |   | 3,310,286 |   |

 

F-17

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**NOTE8—EARNINGS (LOSS) PER SHARE (Continued)**

At August 31, 2004, 2003,and 2002, options and warrants to purchase 150,000, 0, and 125,000 shares,respectively, were outstanding and could affect future periods, but were notincluded in the computation of diluted earnings (loss) per common share becausethe effect would be antidilutive.

**NOTE 9—SEGMENT INFORMATIONAND MAJOR CUSTOMERS**

The Company’s operations are classified into twoprincipal operating segments: (a) development, manufacture, sales andservice of Clinical Information Systems (CIS) for use in hospitals, clinics,reference laboratories and other healthcare institutions, and (b) applicationservice provider (ASP) and data outsourcing services provided by Xymed.com, theCompany’s wholly-owned subsidiary formed in September 1999.

The Company reports as one segment, as the Company wasnot pursuing the ASP Segment, during the years ended August 31, 2004 and2003.

The Company had nocustomers that accounted for more than 10% of the Company’s sales during theyears ended August 31, 2004, 2003 and 2002.

**NOTE 10—SUPPLEMENTAL CASHFLOW INFORMATION**

Supplemental cashflow information is as follows:

(a)  Cash paid for:
| ** **   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------|------------|----------|------------|----------|------------|----------|------------|
| Interest     |       | $        | 3,704      |     | $          | 8,863    |       | $ | 15,471 |   |
| Income taxes |       | $        | 4,099      |     | $          | 14,334   |       | $ | 6,182 |   |

 

**NOTE 11—SUBSEQUENT EVENTS**

The Company has approved the purchase of a newCustomer Relationship Management System (CRM) along with certain upgrades ofcomputer equipment to support the new CRM. The estimated cost for the newsystem, along with the computer equipment, is approximately $300,000. TheCompany intends to finance this transaction by obtaining a term loan from itsbank.

F-18

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