**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-KSB**

| **x**                                                | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITES EXCHANGE ACT OF 1934**     |
|------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
| **For the Fiscal Year Ended December 31, 2005** |
| **o**                                                | **TRANSITION REPORT PURSUANT TO  SECTION 12 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934** |

 

**Forthe Transition Period From              to              **

**CommissionFile Number 000-29367**

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**VantageMed Corporation**

(Exact name of Registrantas specified in its charter)

| **Delaware**                     | ** ** | **68-0383530**       |
|----------------------------------|------------|----------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  No.) |

 

**11060 White Rock Road, Suite 210,Rancho Cordova, California 95670**

**(916) 638-4744**

(Address, including zip code, and telephone number,including

area code, of Registrant’sprincipal executive offices)

Securities registered pursuant to Section 12(b) ofthe Act: None

Securities registeredpursuant to Section 12(g) of the Act: Common Stock $0.001 Par Value

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Check whether the issuer is not required to filereports pursuant to the Section 13 or 15(d) of the Exchange Act o

Check whether the issuer (1) has filed allreports required to be filed by Section 13 or 15 (d) of the ExchangeAct during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes þNo o

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B in this form and if nodisclosure will be contained, to the best of issuer’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-KSB or any amendment to this Form 10-KSB. þ

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Issuer’s revenues for the year ended December 31,2005 were $15,295,000.

We had 14,239,178 common shares and no preferred sharesoutstanding at March 17, 2006. As of March 17, 2006, the aggregatemarket value of the voting and non-voting common equity held by non-affiliateswas approximately $8.8 million, based upon the last reported sales price of ourcommon equity as reported by the Over-The-Counter Bulletin Board on that dateof $0.64 per share.

Documents incorporated by reference:  None

Traditional Small Business Disclosure Format:  No

 

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**VantageMed Corporation**

**Index**

| Item  Number  | ** ** | ** **                                                                                                                 | ** ** | **Page** | ** ** |
|---------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   |       |
| Item 1        |       | Description  of Business                                                                                                   |       |     | 1          |   |   |
| Item 2        |       | Description  of Property                                                                                                   |       |     | 9          |   |   |
| Item  3       |       | Legal  Proceedings                                                                                                         |       |     | 9          |   |   |
| Item 4        |       | Submission of Matters to a Vote of Securities Holders                                                                      |       |     | 10         |   |   |
| PART II  |       |
| Item 5        |       | Market for Registrant’s Common Equity and Related  Stockholders Matters                                               |       |     | 11         |   |   |
| Item 6        |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                |       |     | 12         |   |   |
|          |       | Forward-Looking Statements and Risk Factors                                                                                |       |     | 23         |   |   |
| Item  7       |       | Financial  Statements                                                                                                      |       |     | 31         |   |   |
| Item 8        |       | Changes in and Disagreements With Accountants on  Accounting and Financial Disclosure                                 |       |     | 51         |   |   |
| Item 8A       |       | Controls and Procedures                                                                                                    |       |     | 52         |   |   |
| Item  8B      |       | Other  Information                                                                                                         |       |     | 52         |   |   |
| PART III |       |
| Item 9        |       | Directors, Executive Officers, Promoters and Control  Persons; Compliance with Section 16(a) of the Exchange Act |       |     | 53         |   |   |
| Item 10       |       | Executive Compensation                                                                                                     |       |     | 55         |   |   |
| Item 11       |       | Security Ownership of Certain Beneficial Owners and  Management                                                            |       |     | 57         |   |   |
| Item 12       |       | Certain Relationships and Related Party Transactions                                                                       |       |     | 59         |   |   |
| Item 13       |       | Exhibits                                                                                                                   |       |     | 59         |   |   |
| Item 14       |       | Principal Accountant Fees and Services                                                                                     |       |     | 61         |   |   |
|          |       | Signatures                                                                                                                 |       |     | 62         |   |   |

 

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*This report contains forward-looking statements withinthe meaning of Section 21E of the Securities and Exchange Act of 1934 and Section 27Aof the Securities Act of 1933. These forward-looking statements involve anumber of risks and uncertainties, including those identified in the section ofthis Form 10-KSB entitled “Risk Factors,” that may cause actualresults to differ materially from those discussed in, or implied by, suchforward-looking statements. Forward-looking statements within this Form 10-KSBare identified by words such as “believes,” “anticipates,” “expects,” “intends,”“may,” “will” and other similar expressions. However, these words are not theonly means of identifying such statements. In addition, any statements thatrefer to expectations, projections or other characterizations of future eventsor circumstances are forward-looking statements. We are not obligated andexpressly disclaim any obligation to publicly release any update to anyforward-looking statement. Our actual results could differ materially fromthose anticipated in, or implied by, forward-looking statements as a result ofvarious factors, including the risks outlined elsewhere in this report. Readersare urged to carefully review and consider the various disclosures made byVantageMed Corporation in this report and in our other reports filed with theSEC, and available on their website at www.sec.gov, that attempt toadvise interested parties of the risks and factors that may affect ourbusiness.*

**PART I**

**Item 1. Business**

**The Company**

VantageMed is a provider of healthcare softwareproducts and services to more than 18,000 physician and behavioral healthproviders nationwide. These providers use our core software products includingRidgeMark, Northern Health Anesthesia, Therapist Helper and ChartKeeper as wellas our SecureConnect electronic transaction services. VantageMed is dedicatedto providing these cost effective, easy to use solutions that empowerhealthcare providers and their staff with the tools and data they need to improveproductivity and reimbursements.

Although over 95% of physician practices today utilizea Practice Management Solution (PMS), the majority of those practices utilizeoutdated legacy technology (e.g., DOS, SCO Unix, flat-file databases, etc.)systems that are expensive to support and develop and may not continue to meetthe privacy, Electronic Data Interchange (EDI) transactions and securitystandards introduced by the Federal Health Insurance Portability andAccountability Act of 1996 (HIPAA) HIPAA legislation. Given that the EDIstandards for transactions other than claims (i.e., eligibility, electronicremittance advice and claim status) are finally being adopted in large numbersby insurance companies, the rate of obsolescence of legacy systems is increasing.As a result of our acquisitions, wecontinued to support numerous legacy technologies for several years. Throughout2003 and 2004, however, we announced support discontinuance, or sunset,programs to these legacy customers. These legacy systems generally lack thecurrent state-of-the-art technology of our Windows-based products, butprovide similar functionality. We have derived significant revenues fromsupporting these legacy systems in the past; however, these revenues havedecreased throughout 2005 as a result of our decision to discontinue support ofthese costly products as we migrate customers to our core products. Some ofthis revenue has been replaced by the deployment of our core products,particularly RidgeMark, to some of these customers. During this sunset andmigration process, we received an accelerated number of orders to purchase ourRidgeMark system. The migration orders decreased significantly startingwith the second quarter of 2005 as the migration process came to a conclusionand despite our sales and marketing efforts aimed at our RidgeMark product, wehave generated insignificant revenues from new customers. We are currentlyfocusing our operations on customer satisfaction of our RidgeMark customerbase, increasing recurring revenues from our Helper customer base and growth ofour Northern Health market niche.

This process of migrating customers from our legacysystems to our core Windows-based products represented a significantsales and marketing opportunity over the last two years and was completed in 

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2005. Also in 2005 wereleased a major product upgrade to our Northern Health product that improvedour ability to compete in our target market.

In 2006 and beyond, our growth and success will comelargely from our ability to either migrate physician practices that usecompetitors’ systems to one of our core products or install and interface ourChartKeeper Computerized Medical Records product on top of their existingsystem. We believe that the adoption of our core Windows-based products willincrease the customers’ access to clinical and administrative information whilealso increasing their ability to communicate with and digitally storeinformation from numerous healthcare participants, such as third-partyinsurance payers, laboratories and other providers.

Our recurring revenueswere approximately 73% of total revenues in 2005 and 64% of total revenues in2004. We define recurring revenues as any revenues derived from softwaremaintenance and hardware support contracts as well as revenues derived frombilling and electronic services. Please refer to the Introduction portion ofItem 6, Management’s Discussion and Analysis of Financial Condition and Resultsof Operations for additional details and a reconciliation to our GAAP revenues.In an attempt to retain and increase recurring revenues, we have expanded ourservice offerings, including expanded electronic services offerings. With theincreasing penetration of our SecureConnect electronic transaction services wehave improved our ability to deliver these electronic services. These expandedelectronic service offerings include HIPAA mandated electronic claims,remittance advice, eligibility and claim status with patient statements. In2005, recurring revenues from our electronic transaction services associatedwith our core products increased by 25% over 2004.

**The VantageMed Solution**

Our software products and services have positioned usto address the information needs of healthcare providers through the developmentof integrated clinical and administrative solutions.

We offer Windows-based healthcare informationsystems that reduce the growing impact of economic pressures, administrativeburdens and increased information requirements now faced by healthcare providersby  enabling our customers to access andprocess information more efficiently and reliably, reduce staff time, andcollect money from patients and insurance payers faster and easier. With a teamof experienced sales, customer support and product development professionals,we feel that we are positioned to address the opportunities that result fromthe increasingly complex needs of the healthcare industry.

Our objective is toexpand our market share, retain and then increase our recurring revenues inorder to strengthen our position as a trusted supplier of information systemsand services to healthcare providers. We intend to increase our revenues andmarket share through growth strategies that focus on:

·        *Offering our Core Windows-based Products and Services *These products and services aredesigned to meet the changing and expanding needs of our customers and toenable them to meet the increasingly complex demands of the healthcare market. Giventhat the vast majority of providers in our overall industry utilize legacytechnology today (for example, DOS, SCO Unix, flat-file databases, etc.),migrating new customers to our Windows-based products is a key growth strategy.

·        *Expanding Clinical Solutions * We provide a Computerized Medical Record (CMR)system, ChartKeeper, designed to eliminate the vast quantities of paper andcost involved in creating, storing and communicating patient charts. Given thatincreased spending by healthcare providers is forecasted for clinical productsover the course of the next several years, we believe this is a key area forfuture growth.

·        *Cross-Selling our SecureConnect EDI Products and Services*Withover 18,000 providers using our products, we have the ability to generatesignificant growth by cross-selling additional EDI products 

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and services to ourinstalled customer base. These EDI products currently include claims, claimscrubbing, eligibility, electronic remittance advice and patient statementservices. Given the HIPAA laws, providers and insurance payers are rapidly expandingthe volume and types of electronic transactions that are exchanged. Theseadditional EDI transactions and services are important sources of our recurringrevenues.

·        *Strengthening our National and Regional Presence * Through sales and marketing programs as wellas VAR networks, training and information systems, we continue to strengthenour processes and systems on a national level providing a consistent frameworkwith which to provide support to a national customer base.

**Principal Products**

We classify our software products as “coreWindows-based” or “legacy.” Our core Windows-based products are the productswe currently offer to our new customers and are the focus of our ongoingproduct development efforts. Our Windows-based products provide ourcustomers with software designed to automate administrative, financial,practice management and clinical requirements of a practice. These productsoffer advanced functionality and are compatible with the latest generation ofoperating systems and hardware platforms and can accommodate from one tohundreds of healthcare providers and users.

Wehave designed our products to enable our customers to transition from theirlegacy systems to Windows-based products and services. The features,functions and primary customers of our core Windows-based products andservices are described below.

| **Core Windows-  based**Products  and Services   | ** ** | **Features and Functions**                                                                                                                                                                                                                                                                                | ** ** | ****Primary Customer orType of Practice                                                                                                                                                              |
|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Northern Health  Anesthesia®                |       | Practice management—scheduling, billing, patient  registration, collections, reporting and EDI transactions (claims, electronic  remittance advice and patient statements)                                                                                                                           |       | Anesthesia and enterprise billing operations (target  5 to 100 provider operations)                                                                                                                  |
| Therapist Helper®  and Medical Helper® |       | Patient registration, scheduling, billing, managed  care tracking, reporting and EDI transactions (claims, electronic remittance  advice, patient credit card payments and patient statements); also includes a  Palm Pilot enabled application and automated credit card processing for  patient billing |       | Therapist Helper is used by psychologists,  psychiatrists and behavioral health practitioners. Medical Helper is used by  primary and specialty medical practices (target 1 to 5 provider practices) |
| RidgeMark®                                  |       | Practice management—scheduling, billing, patient  registration, collections, reporting, claim scrubbing and EDI transactions  (claims, eligibility, electronic remittance advice and patient statements)                                                                                             |       | Primary and specialty medical practices (target 1 to 10  provider practices)                                                                                                                         |
| ChartKeeper®                                |       | Computerized Medical Record system for secure,  electronic storage and tracking of patient charts, transcription notes,  document imaging, lab results, security, authentication and electronic chart  distribution                                                                                       |       | Primary and specialty medical practices (target 1 to  10 provider practices)                                                                                                                         |
| SecureConnectTM                              |       | (EDI transaction service including hosted servers  that exchange, translate and manage HIPAA compliant (e.g., claims, electronic  remittance advice and eligibility) and other (e.g., patient statements) EDI  transactions with our core practice management system products                             |       | Healthcare providers submitting electronic  transactions (available to customers that use Northern Health, RidgeMark,  Therapist Helper and Medical Helper)                                          |

 

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**Electronic Services**

Our products enableEDI functions, through our SecureConnect services. EDI improves a healthcarepractice’s cash flow and operations by converting costly paper andtelephone-based communications into cost-efficient electronic transactionprocessing. Our centralized SecureConnect services, some or all of which areavailable for each of our products, currently include the following:

·        *Electronic Claims*Receives insurance claims from providerpractices, reformats the claims into appropriate formats and sends them topayers/insurance companies, either directly or through third partyclearinghouse partners. In addition, claim submission reports are deliveredback to provider practices.

·        *Electronic Patient Billing Statements*  Submits patient billing information frompractices by electronic connection to a processing center that prints, insertsand mails patient invoices and provides billing reports to the practice.

·        *Electronic Remittance Advice* Receives and posts insurance payment information automatically into thepractice management system thus eliminating costly and error-prone manual dataentry.

·        *Electronic Eligibility* Checks a patient’s eligibility data with an insurance payer and in somecases provides detailed information regarding co-pays, deductible status andcoverage information.

·        *Electronic Credit Card Transactions* Bills a patient’s creditcard directly from the practice management system.

We generate revenues byproviding these SecureConnect services on a per transaction or flat monthly feebasis. We expect that the benefits of these transactions along with the HIPAAmandate requiring third-party payers to support standardized electronictransaction sets will increase provider adoption of electronic services. Asadditional HIPAA transactions are more clearly defined and payers begin supportof these new transactions (e.g., claims status and referrals/authorizations),SecureConnect will expand on these service offerings to include allHIPAA-supported transactions. The continued development of our SecureConnectservices will add further differentiation for all of our product offerings.

**Support Services**

We believe that customer satisfaction with ourcustomer support and installation, data conversion, network support andtraining services is critical to our success. Some of these services areperformed at the customer’s site. In addition to providing on-site training formany of our product lines, we perform classroom-based training and offeron-line Web-based training options. We publish periodic newsletters and sponsoruser group conferences. These forums provide the user with current informationand offer us an opportunity to demonstrate our new products and services.

We provide our customerswith ongoing software support and services under monthly, quarterly and annualmaintenance agreements. These agreements provide for help desk support,software maintenance, upgrades (when and if available) and remote diagnostics.As of December 31, 2005, our customer service and support groups consistedof 83 employees, or approximately 64% of our employee base.

**Hardware and Supplies**

In many cases, the sale ofour software products is combined with the sale of third-party software,hardware systems and installation services. Because many medical practicesrequire additional hardware as their practices grow, we also offer computer,peripherals and computer supplies as part of our product offerings. We oftenreceive installation and ongoing maintenance revenues as a result of thesehardware sales.

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**Product Development**

As of December 31,2005, our Windows-based product development and quality testing organizationconsisted of 17 employees. Our development teams are organized by product. Eachproduct team has a product manager and various developers. In certain cases, wehave contracted with third-party development or quality testing and assurancegroups to assist us with the development of our products. Our quality assuranceand testing teams follow established guidelines and subject matter experts andanalysts contribute to work flow design, content and businessrule development. A formalized process for software enhancement requestsprovides feedback from customers and our sales teams. Project management tools,project schedules and distribution of technical and training notes are managedthrough our corporate Intranet.

**Privacy and Security Issues**

Because ourproducts and services are utilized to transmit and manage highly sensitive andconfidential medical information, we provide security and confidentialityfeatures for our customers,  helping themto comply with the HIPAA privacy and security regulations. To enable the use ofour products and services for the transmission of protected health information(PHI), we utilize advanced technology designed to provide a high degree ofsecurity. This technology includes:

·        userID and password access to all of our software;

·        sophisticatedaccess restrictions that allow our customers to determine the individuals whowill have access to data and what level of access such individual will have;

·        encryptionof data transmitted as required over public networks (where use is shared withthe public, including over the Internet); and

·        useof mechanisms for preventing outsiders from improperly accessing private data resourceson our network, commonly referred to as a “firewall.”

We intend to support our customers in complying with the HIPAA privacy, transactionand security rules and timeframes.

Internally, withinour billing service, SecureConnect clearinghouse and Client Servicesorganizations, we work to ensure the safe handling of PHI by:

·        providingeach employee with our privacy and security manual explaining practices andprocedures for handling PHI;

·        mandatingprivacy and security training and updates for all VantageMed employees or newhires;

·        monitoringemployee activities to ensure compliance with the standards set forth in ourprivacy and security manual;

·        requiringindividual user names and passwords for each employee handling PHI; and

·        requiringall employees to sign confidentiality agreements.

We monitor proposedregulations that might affect our software products and services in order toensure that we make appropriate improvements in our products to aid ourcustomers with their compliance programs. Internally, we also monitor thephysical layout and access controls of our operating facilities to minimize therisk of incidental disclosure of PHI to individuals not directly required toview such data.

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**Sales and Marketing Strategy**

Organized primarily by productline, the members of our sales and marketing teams focus on building andmaintaining strong customer and prospect relationships within local markets togenerate new sales. Within our existing customer base, we promote and sellhardware upgrades, maintenance services, add-on software modules and EDIservices. As of December 31, 2005, we had 15 sales and marketingpersonnel, including sales and marketing management, telemarketing,telesales  and field salesrepresentatives.

**Competition**

The healthcare informationsystems market is highly competitive on both a local and a national level. Webelieve that the primary competitive factors in this market are:

·        qualityservice and support;

·        productfeatures, functionality and ease of use;

·        abilityto comply with new and changing regulations;

·        ongoingproduct enhancements;

·        reputationand stability of the seller; and

·        price.

Our experienced staff and management team providecustomer support and training programs and feature-rich Windows-based products,including our SecureConnect HIPAA-compliant transaction solutions, to ourinstalled customer base.

Our principal competitorsinclude organizations such as Emdeon Practice Services/Medical Manager,Per-Se/Medisoft, QSI/NextGen, Misys Physician Systems and GE Centricity/Millbrook.Additionally, within each local market there are several smaller competitorswho have developed niche products offered with varying feature sets and atvarious price points. Finally, with the integration of clinical informationsystems into practice management systems, several well-funded pharmaceutical,medical supply and biotech companies have entered the practice managementsystems market. Many of our competitors have greater financial, development,technical, marketing and sales resources than we do. These competitors may beable to respond more rapidly to new or emerging technologies and regulationsand changes in customer requirements than we can. In addition, as the marketfor our products continues to develop, additional competitors may enter themarket and competition may intensify, requiring us to lower the prices of ourproducts and services.

**Acquisitions**

Prior to our initialpublic offering in February 2000, we completed 26 acquisitions. Due to thevolatility of the financial markets and the uncertainty in the healthcareindustry, we have not pursued any acquisitions since 1999; however, we maypursue additional acquisitions in the future as opportunities arise.  As part ofour integration process and throughout 2003 and 2004, we integrated allaccounting, administrative and sales functions within our corporateinfrastructure.

**Intellectual Property**

Our success is dependent,in part, on our ability to protect our proprietary software and confidentialinformation from unauthorized use and disclosure. We rely on a combination oftrade secrets, common law intellectual property rights, license agreements,nondisclosure and other contractual provisions and technical measures toestablish and protect our proprietary rights in our intellectual property andconfidential information. We do not own any patents on our products. Employees,technical consultants 

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andcontractors are required to execute agreements with us providing for theconfidentiality of information and the assignment to us of all proprietaryrights. The legal protections afforded to us or the steps taken by us may notbe adequate to prevent misappropriation of our technology and confidentialinformation. In addition, these protections do not prevent independent third-partydevelopment of competitive products or services. We believe that ourproprietary rights do not infringe upon the proprietary rights of thirdparties. However, third parties may assert infringement claims against us inthe future and any such assertion may require us to enter into a licenseagreement or royalty arrangement with the party asserting the claim. Litigationmay be necessary in the future to enforce our intellectual property rights, toprotect our confidential information or trade secrets, or to determine thevalidity or scope of the rights of others. Litigation could result insubstantial costs and diversion of management and other resources and couldseriously harm our business.

**Government Regulation**

**HealthInsurance Portability and Accountability Act of 1996 (HIPAA)**

HIPAA was enactedin 1996 and required the Department of Health and Human Services, or HHS, toadopt national standards for the electronic transmission of healthcaretransactions, and to adopt standards to ensure the privacy and security of suchinformation. The confidentiality of protected health information (PHI) and thecircumstances under which such information may be used or released are subjectto substantial regulation by state and federal laws. Regulations governing theelectronic transmission of, privacy and security of PHI are covered by HIPAAguidelines which are often vague and open to interpretation. There are threeprimary sets of standards included within the HIPAA regulations:

·              Transaction Standards thatprescribe specific transaction formats and data code sets for certainelectronic health care transactions;

·              Privacy Standards that protectindividual privacy by limiting the uses and disclosures of individuallyidentifiable health information; and

·              Security Standards that requirecovered entities to implement administrative, physical and technologicalsafeguards to ensure the confidentiality, integrity, availability and securityof individually identifiable health information in electronic form.

Failure to comply with these standards may subject usto civil monetary penalties and, in certain cases, criminal penalties. Coveredentities, including our SecureConnect clearinghouse, may be subject to civilmonetary penalties in the amount of $100 per violation and the U.S. Departmentof Justice may seek to impose criminal penalties for certain violations. Criminalpenalties under the statute vary depending on the nature of the violation butcould include fines of up to $250,000 and/or imprisonment.

*TransactionStandards.**  *TheTransaction Standards became effective in October 2003; however, manycovered entities, including many providers and insurance payers were not fullycompliant as of that date. In response to concerns communicated to the Centersfor Medicare and Medicaid Services (CMS) regarding the readiness of asignificant portion of the covered entities for the October 2003 deadlineand the consequences to the healthcare industry if significant claim processingproblems occur at that time, CMS released its “Guidance on Compliance withHIPAA Transactions and Code Sets After the October 2003 ImplementationDeadline” (which we refer to as the CMS Guidance). Under CMS’s contingency planfor Medicare, it announced that it will continue to accept claims in both HIPAAstandard and legacy formats, with the legacy formats to be accepted for aperiod to be determined by CMS based upon a regular reassessment of thereadiness of its electronic “trading partners.” However, effective in July 2004, only claims that are compliant withthe Transaction Standards were to be reported as electronic media claims (EMC),which may be paid no earlier than after a 13 day waiting period. All otherclaims (including both electronic claims that are not compliant with theTransaction Standards, as well as paper claims) may be paid no earlier thanafter a 26 day waiting period. Our SecureConnect clearninghouse has beenprocessing HIPAA compliant transactions since August 2003.

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We cannot provide assurance regarding how CMS willregulate clearinghouses in general, in particular our SecureConnectclearinghouse. In addition, even though major disruptions in the flow ofelectronic transactions may be less likely in light of CMS’s current approachto enforcement of the Transaction Standards, we have experienced isolateddisruptions and some delays and we expect there will continue to be someproblems for a period of time.

Because we also provide services to covered entities,we have entered into agreements with certain of our customers to provideassurances that we will appropriately safeguard any PHI we receive from suchcustomers.  The contracts establish thepermitted and required disclosures of PHI, preclude use or further disclosureof the information in a manner that would violate the Regulations and allow thecovered entity to pursue remedies outlined in HIPAA or terminate the contractin the case of a material breach by us.  We continue to monitor HIPAA activity and areprepared to incorporate the necessary changes to our software products or ouroperations to ensure compliance.

*PrivacyStandards.**  *Theserules became effective in April 2001 and the compliance date for mostentities was April 2003. The Privacy Standards apply to the portions ofour business that process healthcare transactions or provide certain technicalservices to other participants in the healthcare industry, and certain of ourportal services may be affected through contractual relationships. These rules requireus, our customers and our partners to use health information in a highlyrestricted manner, to establish policies and procedures to safeguard theinformation, to obtain individual authorizations for some activities, and toprovide certain access rights to individuals. This rule has required us toincur product development costs and we may continue to incur additional coststo comply. The rules restrict the manner in which we transmit and use theinformation, and may adversely affect our ability to generate revenue from theprovision of de-identified information to third parties. The effect of thePrivacy Standards on our business is difficult to predict and there can be noassurances that we will adequately address the risks created by the PrivacyStandards and their implementation or that we will be able to take advantage ofany resulting opportunities. In addition, we are unable to predict what changesto the Privacy Standards might be made in the future or how those changes couldaffect our business.

*Security Standards.**  *These rules became effectivein April 2005 and establish detailed requirements for safeguarding patientinformation that is electronically transmitted or electronically stored. The rule establishes42 implementation specifications, 20 of which are “required,” meaning they mustbe implemented as specified in the rule. Twenty-two are “addressable.”  Complying with addressable implementationspecifications requires a business to assess whether they constitute areasonable and appropriate safeguard for the particular business; if not, analternative approach must be designed and implemented to achieve the particularstandard. The Security Standards apply to the portions of our business thatprocess healthcare transactions, that provide certain technical services toother participants in the healthcare industry, or that enable electroniccommunications of patient information among healthcare industry participants,and certain of our portal services may be affected through contractualrelationships. Some of the Security Standards are technical in nature, whileothers may be addressed through policies and procedures for using informationsystems. In 2005 we deployed enhancements to our core products that allow apractice to more easily comply with the Security Standards. We are unable topredict what changes might be made to the Security Standards or how thosechanges might help or hinder our business. The effect of the Security Standardson our business is difficult to predict and there can be no assurances that wewill adequately address the risks created by the Security Standards and theirimplementation or that we will be able to take advantage of any resultingopportunities.

**Other Government Regulations**

The U.S. Food and Drug Administration (the FDA) hasjurisdiction under the 1976 Medical Device Amendments to the Federal Food,Drug, and Cosmetic Act to regulate computer products and software as medicaldevices if they are intended for use in the diagnosis, cure, mitigation,treatment or prevention of 

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disease in humans. Webelieve that our healthcare information systems products are not medicaldevices currently subject to FDA regulation. However, FDA regulations areconstantly changing and the FDA may promulgate regulations, or interpretcurrent regulations in a way that would cover our products. In addition, we maydevelop products that subject us to FDA regulation. Compliance with FDAregulations could substantially increase our cost of doing business and maylimit the extent of our planned product development.

The Federal Drug Enforcement Agency has promulgatedregulations that may prohibit a pharmacy from the initial dispensing and/orrefilling of certain controlled substances through an electronicallytransmitted prescription. A violation of these regulations may result in civiland criminal penalties. Such regulations may limit the scope of our plannedprescription ordering and refill functions.

*Northern Health Anesthesia, Therapist Helper, MedicalHelper, RidgeMark, ChartKeeper and SecureConnect are either registeredtrademarks or trademarks of VantageMed Corporation. Any other trademarks usedin this Report are the property of their respective owners.*

**Employees**

As of March 24, 2006, we employed 93 persons,including 14 in sales and marketing, 51 in customer support services, 14 inproduct development and 14 in administration, finance and management. In orderto augment our hiring of ready-to-work skilled individuals, we utilize severalprograms to educate and train our work force. Our employees are not representedby a labor union and we have not experienced any work stoppages andconsider relations with our employees to be good.

Our filings with the SEC,including our annual reports on Form 10-KSB, quarterly reports on Form 10-QSB,  periodic current reports on Form 8-Kand amendments to these reports, are available on the SEC’s website free ofcharge at www.sec.gov. In addition, the SEC’s website contains reports, proxy,information statements and other information regarding issuers that fileelectronically with the SEC, including us.

**Item 2. Properties**

We currently leaseapproximately 8,500 square feet at our principal executive and corporateheadquarters at 11060 White Rock Road, Suite 210, Rancho Cordova,California, that expires in September 2007. We also lease space at severallocations throughout the United States, with lease terms expiring at variousdates through 2007. We believe that these facilities are adequate for ourcurrent operations, and additional leased space can be obtained as needed. Wehave subleased some space in our Boulder, Colorado facility. This subleaseexpires in July 2007.

**Item 3. Legal Proceedings**

In December 2003, several employees resigned fromVantageMed to form a separate company named Pacific Practice Services. In February 2004and March 2004, VantageMed notified these former employees regardingseveral matters including VantageMed’s assertion that the use of the PacificPractice Services name infringes VantageMed’s rights regarding the name  Pacific Software, among other things. In March 2005,the parties entered into a release and settlement agreement that, among otherthings, requires the former employees to discontinue the use of the namePacific Practice Services.

On March 16, 2004, we filed a notice ofarbitration with the American Arbitration Association in Sacramento, Californiato arbitrate claims against Robert S. Putnam and Duangchan Putnam arising outof their alleged use of trade secrets and other proprietary informationobtained while they were employees of VantageMed to unfairly compete withVantageMed after their employment terminated. The claim is for money damagesand injunctive relief for several causes of action related to misappropriationof trade 

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secrets, unfaircompetition and breach of an asset purchase agreement and other contracts. Respondentsanswered the claim denying the allegations contained therein and assertingvarious affirmative defenses. The matter was settled in January 2005 andin connection with the settlement, VantageMed agreed to pay the formeremployees’ legal expenses totaling $27,500. This settlement amount was paid infull in February 2005.

In June 2004, a former employee filed a claimagainst the Company alleging fraud and discrimination. The Company respondedand the case was dismissed in June 2005.

In February 2005, a former VantageMed customerfiled a complaint in state court in New York against the Company alleging thatthe Company breached a contract with and certain warranties to the customer byfailing to deliver certain direct payer transaction software and failing toprovide software that was HIPAA compliant. The customer seeks damages of$192,896. In March 2005, the Company removed the case to the United StatesDistrict Court for the Western District of New York. The Company believes theallegations to be without merit and is actively defending the claims. TheCompany has answered the complaint denying the claims and asserting certainaffirmative defenses.

In June 2005, a former employee filed a complaintagainst VantageMed alleging discrimination based on age and gender inconnection with his February 2005 termination. VantageMed’s insurer agreedto settle this claim for a total payment of $24,500 plus $9,500 in legal feeswhich was accrued for in September 2005 and paid in December 2005.

In January 2006, a VantageMed customer, theCarson Medical Group, filed suit in state court in Nevada alleging breach ofcontract, breach of the implied covenant of good faith and fair dealing, andunjust enrichment. Carson seeks $236,049 in damages. The case was removed tofederal court in Nevada and upon motion by VantageMed, transferred to thefederal district court in Sacramento. VantageMed has answered the complaint andfiled a counterclaim for recovery of the value of uncompensated servicesprovided by VantageMed.

We are party to variouslegal actions arising in the normal course of business. Matters that areprobable of unfavorable outcome and which can be reasonably estimated areaccrued. Such accruals were $82,000 and $129,000 at December 31, 2005 and2004, respectively, and are based on information known about the matters, ourestimates of the outcomes of such matters, and our experience contesting,litigating and settling similar matters. This amount is included in accruedliabilities in the accompanying consolidated balance sheet. None of the actionsare believed by management to involve amounts that would be material to ourconsolidated financial position, operations, or liquidity after considerationof recorded accruals.

**Item 4. Submission of Matters to a Vote of SecuritiesHolders**

None.

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**PART II**

**Item 5. Market for Registrant’s Common Stock andRelated Stockholders Matters**

VantageMed’s common stockwas listed on the NASDAQ National Market under the symbol “VMDC” from February 15,2000 (the date of our initial public offering) through April 17, 2002.  On April 18, 2002, in connection with thelate filing of our Annual Report on Form 10-K for the year ended December 31,2001, the ticker symbol for the Company’s common stock changed to “VMDCE” andon September 24, 2002, our securities were delisted for failure to complywith the minimum bid price per share ($1.00) requirement. Our securitiescurrently trade on the OTC Bulletin Board under the symbol “VMDC.OB.” Thefollowing table shows the high and low closing prices for our common stock asreported by the exchanges listed above:

| ** **     | ** ** | **2005**   | ** ** | **2004** | ** ** |
|----------------|------------|------------|------------|----------|------------|
| **Period**     | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $          | 1.75       |     | $          | 0.80 |   | $ | 1.73 |   | $ | 1.00 |   |
| Second Quarter |       | $          | 1.25       |     | $          | 0.85 |   | $ | 1.54 |   | $ | 0.55 |   |
| Third Quarter  |       | $          | 0.95       |     | $          | 0.51 |   | $ | 0.86 |   | $ | 0.54 |   |
| Fourth Quarter |       | $          | 0.94       |     | $          | 0.44 |   | $ | 0.95 |   | $ | 0.54 |   |
|                |            |            |            |          |            |  |  |  |  |  |  |  |  |  |  |

 

As of March 17, 2006, we had 143 registeredowners of our common stock and a substantially greater number of beneficialowners.

We have not declared any cash dividends on our commonstock since our inception in 1995. We currently intend to retain any futureearnings for growth and, therefore, do not anticipate paying cash dividends inthe foreseeable future.

In March 2005, we completed a $5.0 millionprivate placement of 5,376,344 shares of common stock priced at $0.93 per share(see Note 7 to consolidated financial statements). Institutional investorspurchased 90 percent of the shares, with members of our management team and amember of our Board of Directors combining for the purchase of 10 percent. Theinvestors in the transaction also received warrants to purchase an additional1,075,269 shares of common stock priced at $1.30 per share, and warrants topurchase 1,075,269 shares of common stock priced at $1.55 per share. Inconnection with this transaction, we paid a fee to our broker equal to 7.0% ofthe total amount of capital we received, or $350,000. Our broker also receivedan additional 451,613 warrants to purchase common stock as part of this feearrangement. After broker commissions and legal expenses, the net proceeds toVantageMed were approximately $4.6 million. VantageMed has filed a registrationstatement with the Securities and Exchange Commission covering the resale ofthe shares. We have used these funds for working capital purposes, includinginvestments in sales and marketing for our RidgeMark product which have notpaid off.

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**Item 6. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

*This report contains forward-looking statements withinthe meaning of Section 21E of the Securities and Exchange Act of 1934 and Section 27Aof the Securities Act of 1933. These forward-looking statements involve anumber of risks and uncertainties, including those identified in the section ofthis Form 10-KSB entitled “Risk Factors,” that may cause actualresults to differ materially from those discussed in, or implied by, suchforward-looking statements. Forward-looking statements within this Form 10-KSBare identified by words such as “believes,” “anticipates,” “expects,” “intends,”“may,” “will” and other similar expressions. However, these words are not theonly means of identifying such statements. In addition, any statements thatrefer to expectations, projections or other characterizations of future eventsor circumstances are forward-looking statements. We are not obligated andexpressly disclaim any obligation to publicly release any update to anyforward-looking statement. Our actual results could differ materially fromthose anticipated in, or implied by, forward-looking statements as a result ofvarious factors, including the risks outlined elsewhere in this report. Readersare urged to carefully review and consider the various disclosures made byVantageMed Corporation in this report and in our other reports filed with theSEC, and available on its website at www.sec.gov, that attempt to adviseinterested parties of the risks and factors that may affect our business.*

**Overview**

Management’sdiscussion and analysis of financial condition and results of operations, orMD&A, is provided as a supplement to the consolidated financial statementsand notes included elsewhere in this Form 10-KSB and are designed toprovide an understanding of our results of operations, financial condition andchanges in financial condition. Our MD&A is comprised of:

·       *Introduction*. This section provides a general description ofour business and summarizes any acquisitions and/or restructuring plans we haveundertaken over the last two years. This section also includes a table ofselected financial data for the most recent five years.

·       *Results of Operations*. This section provides our analysis ofthe significant line items on our consolidated statements of operations.

·       *Critical Accounting Policies*. This section discusses theaccounting policies we consider important to our financial condition andresults of operations and that require us to exercise subjective or complexjudgments in their application. This section also includes a discussion aboutrecent accounting pronouncements and the impact those pronouncements areexpected to have on our financial condition and results of operations.

·       *Liquidity and Capital Resources, Debt and Lease Obligations*.This section provides an analysis of our liquidity and cash flows as well as adiscussion of our outstanding debt and commitments as of December 31,2005.

·       *ForwardLooking Statements and Risk Factors*. This section describescircumstances or events that could have a negative effect on our financialresults or operations that could change, for the worse, existing trends in ourbusiness. The factors discussed in this section are divided into two categories—risksassociated with our business and risks associated with our industry.

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**Introduction**

VantageMed Corporation was incorporated in Californiaon June 1, 1995, and on April 9, 1997, we reincorporated in Delaware.In February 2000, we completed our initial public offering (IPO) of 3million shares of our common stock, the gross proceeds of which aggregatedapproximately $36 million. VantageMed is a diversified healthcare informationsystems supplier headquartered in Rancho Cordova, California with supportpersonnel and sales representatives in various locations throughout the UnitedStates. We develop, sell, install and support software products and servicesthat assist physicians, behavioral health professionals, and other healthcareproviders in the operation of their practices and organizations. We have builta national customer presence by acquiring established regional healthcarepractice management systems companies to sell and support our Windows-basedsoftware and services. In 2005 and 2006 we established numerous relationshipswith Value Added Resellers (VARs). We hope to begin distributing product usingthe VAR distribution channel in 2006. We have not completed any acquisitionssince 1999.

We have developed a customer base of approximately18,000 physician and behavioral health providers nationwide through bothacquisitions and internal growth. In 2003 through 2005, we focused on migratingour customers that were using our legacy technology products (products that wewere supporting in 2004 and earlier but no longer actively selling ormarketing)  to our Windows-based productsand services. The process of discontinuing support of, or sunsetting, theselegacy technology products was substantially completed during the first quarterof 2005 and as this process concluded, we experienced a significant decline inorder activity. Throughout 2003 and 2004, we initiated various restructuringplans that included an evaluation of our product development initiatives,consolidation of certain operating facilities and a reduction of our workforce.Throughout 2005 we implemented numerous cost cutting measures includingadditional workforce reductions reducing our staffing levels from 174 at theend of March 2005 to 130 at the end of December 2005. We also made anumber of investments in products, support, sales and marketing efforts thathave not paid off. We are currently focusing our operations on customersatisfaction of our RidgeMark customer base, increasing recurring revenues fromour Helper customer base and growth of our Northern Health market niche. SeeNote 2 to our Consolidated Financial Statements included in this Form 10-KSB.

We derive revenuesfrom three primary sources:

·       *Software and systems*. These revenues result from thelicensing of our proprietary software, as well as the sale of third-partysoftware (primarily desktop operating systems and standardcommunication/security software), computer hardware and supplies. We considerthese revenues to be non-recurring in nature.

·       *Customer support*. These revenues are derived from softwareand hardware maintenance contracts, installation, training, data conversion andbilling services. Revenues from software and hardware maintenance contracts andbilling services are considered to be recurring in nature. Revenues frominstallation, training and data conversion services are non-recurring.

·       *Electronic services.*These revenues are derived fromsupporting electronic transactions initiated by our customers includinginsurance claims processing, electronic patient statement printing and mailingand remittance advice. We consider these revenues to be recurring in nature.

Recurringrevenues (revenues derived from software andhardware maintenance, billing and electronic services) represent asignificant portion of our total revenues and we believe that this willcontinue. Recurring revenue is not a measurement defined by US GAAP and shouldnot be considered an alternative to, or more meaningful than, revenues asdefined by US GAAP. Not all companies calculate recurring revenues in the samemanner as we do or at all. Accordingly, our recurring revenue data may not becomparable with that of other companies. We have included the followinginformation concerning 

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recurring revenues because we believe recurring revenuesprovide useful information regarding our overall revenue mix.

| ** **     | ** ** | **Years Ended  December 31,** | ** ** |
|----------------|------------|-----------------------------------------|------------|
| ** **     | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| Recurring      |       | $                                       | 11,138     |   | $ | 14,090 |   |
| Non-recurring  |       | 4,157                                   |       | 8,030 |   |
| Total revenues |       | $                                       | 15,295     |   | $ | 22,120 |   |

 

The selected consolidatedfinancial data set forth below are derived from our audited financialstatements and should be read in connection with our consolidated financialstatements and related notes included in this Form 10-KSB.

**SelectedConsolidated Financial Data(In thousands, except per share amounts)**

| ** **                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002(1)** | ** ** | **2001** | ** ** |
| Consolidated  Statement of Operations Data:   |       |                                        |       |   |   |   |   |   |   |   |   |
| Revenues:                                     |       |                                        |       |   |   |   |   |   |   |   |   |
| Software and systems                          |       | $                                           | 3,126      |   | $ | 5,870 |   | $ | 5,495 |   | $ | 5,153 |   | $ | 6,958 |   |
| Customer support                              |       | 8,104                                       |       | 11,496 |   | 11,576 |   | 11,978 |   | 12,441 |   |
| Electronic services                           |       | 4,065                                       |       | 4,754 |   | 4,784 |   | 4,613 |   | 4,536 |   |
| Total revenues                                |       | 15,295                                      |       | 22,120 |   | 21,855 |   | 21,744 |   | 23,935 |   |
| Cost of revenues:                             |       |                                        |       |   |   |   |   |   |   |   |   |
| Software and systems                          |       | 1,138                                       |       | 2,971 |   | 2,494 |   | 1,854 |   | 2,420 |   |
| Customer support                              |       | 5,894                                       |       | 7,347 |   | 6,893 |   | 7,469 |   | 7,289 |   |
| Electronic services                           |       | 2,706                                       |       | 2,791 |   | 2,925 |   | 3,176 |   | 3,012 |   |
| Total cost of revenues                        |       | 9,738                                       |       | 13,109 |   | 12,312 |   | 12,499 |   | 12,721 |   |
| Total gross  margin                           |       | 5,557                                       |       | 9,011 |   | 9,543 |   | 9,245 |   | 11,214 |   |
| Operating  expenses:                          |       |                                        |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative           |       | 7,082                                       |       | 8,699 |   | 8,510 |   | 11,391 |   | 12,283 |   |
| Product development                           |       | 2,184                                       |       | 2,519 |   | 2,637 |   | 2,975 |   | 5,129 |   |
| Depreciation and amortization                 |       | 243                                         |       | 477 |   | 769 |   | 1,184 |   | 3,286 |   |
| Stock-based compensation                      |       | 334                                         |       | 113 |   | 27 |   | — |   | — |   |
| Restructuring, impairment and other charges   |       | (13                                         | )          | 1,052 |   | 1,318 |   | 1,748 |   | 5,792 |   |
| Gain on sale of DentalMate business           |       | —                                      |       | (41 | ) | (571 | ) | — |   | — |   |
| Total operating expenses                      |       | 9,830                                       |       | 12,819 |   | 12,690 |   | 17,298 |   | 26,490 |   |
| Loss from  operations                         |       | (4,273                                      | )          | (3,808 | ) | (3,147 | ) | (8,053 | ) | (15,276 | ) |
| Shareholder  litigation settlement            |       | —                                      |       | — |   | — |   | — |   | (1,300 | ) |
| Interest and  other income (expense), net     |       | (7                                          | )          | (97 | ) | 10 |   | 7 |   | 614 |   |
| Loss before  income taxes                     |       | (4,280                                      | )          | (3,905 | ) | (3,137 | ) | (8,046 | ) | (15,962 | ) |
| Income tax  provision                         |       | —                                      |       | — |   | — |   | — |   | (15 | ) |
| Net Loss                                      |       | $                                           | (4,280     | ) | $ | (3,905 | ) | $ | (3,137 | ) | $ | (8,046 | ) | $ | (15,977 | ) |
| Basic and diluted  loss per share(2)          |       | $                                           | (0.31      | ) | $ | (0.47 | ) | $ | (0.37 | ) | $ | (0.95 | ) | $ | (1.86 | ) |
| Weighted-average  shares-basic and diluted(2) |       | 13,951                                      |       | 8,285 |   | 8,400 |   | 8,493 |   | 8,596 |   |

 

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| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002(1)** | ** ** | **2001** | ** ** |
| Consolidated Balance  Sheet Data:                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Net working  capital                               |       | $                                     | (3,936     | ) | $ | (4,900 | ) | $ | (2,187 | ) | $ | (769 | ) | $ | 4,131 |   |
| Cash, cash  equivalents and short-term investments |       | 636                                   |       | 946 |   | 2,359 |   | 2,682 |   | 5,456 |   |
| Long-term  investments                             |       | —                                |       | — |   | — |   | 804 |   | 2,583 |   |
| Total assets                                       |       | 2,764                                 |       | 3,950 |   | 7,638 |   | 9,964 |   | 17,806 |   |
| Long-term  debt, net of current portion            |       | —                                |       | — |   | 195 |   | 555 |   | 924 |   |
| Accumulated  deficit                               |       | (81,175                               | )          | (76,895 | ) | (72,990 | ) | (69,853 | ) | (61,807 | ) |
| Total stockholders’  equity (deficit)         |       | $                                     | (3,410     | ) | $ | (4,262 | ) | $ | (483 | ) | $ | 2,694 |   | $ | 10,791 |   |

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(1)          As restated. See Note 2to Consolidated Financial Statements included in VantageMed’s Form10K-SB filed with the Securities and Exchange Commission on March 30,2005.

(2)          Potentiallydilutive securities from preferred stock, stock options, warrants orconvertible notes have been excluded for all loss years.

**Results of Operations**

Thefollowing table sets forth certain data expressed as a percentage of totalrevenues for the periods indicated.

| ** **                                  | ** ** | **Years Ended  December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| Revenues:                                   |       |                                    |       |   |   |
| Software and systems                        |       | 20.4                                    | %          | 26.5 | % |
| Customer support                            |       | 53.0                                    |       | 52.0 |   |
| Electronic services                         |       | 26.6                                    |       | 21.5 |   |
| Total revenues                              |       | 100.0                                   |       | 100.0 |   |
| Cost of revenues:                           |       |                                    |       |   |   |
| Software and systems                        |       | 7.4                                     |       | 13.5 |   |
| Customer support                            |       | 38.6                                    |       | 33.2 |   |
| Electronic services                         |       | 17.7                                    |       | 12.6 |   |
| Total cost of revenues                      |       | 63.7                                    |       | 59.3 |   |
| Total gross  margin                         |       | 36.3                                    |       | 40.7 |   |
| Operating  expenses:                        |       |                                    |       |   |   |
| Selling, general and administrative         |       | 46.3                                    |       | 39.3 |   |
| Product development                         |       | 14.3                                    |       | 11.4 |   |
| Depreciation and amortization               |       | 1.6                                     |       | 2.2 |   |
| Stock-based compensation                    |       | 2.2                                     |       | 0.5 |   |
| Restructuring, impairment and other charges |       | 0.1                                     |       | 4.8 |   |
| Gain on sale of DentalMate business         |       | —                                  |       | (0.2 | ) |
| Total operating expenses                    |       | 64.3                                    |       | 58.0 |   |
| Loss from  operations                       |       | (28.0                                   | )          | (17.3 | ) |
| Interest and  other income (expense), net   |       | (0.1                                    | )          | (0.4 | ) |
| Net loss                                    |       | (28.1                                   | )%         | (17.7 | )% |

 

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*Results ofOperations for the year ended December 31, 2005 compared to the year endedDecember 31, 2004*

*Revenues.*   Totalrevenues for the year ended December 31, 2005 were $15.3 million comparedto $22.1 million for the year ended December 31, 2004, a decrease of $6.8million, or 30.9%. As expected, revenues from our legacy product linesdecreased significantly in connection with our legacy product sunset processwhich was substantially completed during the second half of 2004 and the firstquarter of 2005. Revenues associated with these legacy technology productsdecreased from $7.0 million for the year ended December 31, 2004 to $2.6million for the year ended December 31, 2005. As of December 31, 2005we had discontinued support of all but two of our legacy software products. Wesold the largest of these products in February 2006 in connection with thesale of our Hawaii based operations to TeamPraxis (see Note 12 to our consolidatedfinancial statements). Revenues from this product represented approximately$1.3 million, or 8.4%, of our total revenues in 2005. The amount of revenuederived from sales of the remaining product represented approximately 1.7% ofour total revenues in 2005 and 1.3% of our revenues, or $48,000, for the fourthquarter of 2005. We expect this amount to decrease once sunset timing has beenannounced.

Revenues associated with our RidgeMark product alsodecreased $2.2 million, or 29.0%, from $7.5 million for the year ended December 31,2004 to $5.3 million for the year ended December 31, 2005. This decreasewas due to our selling and installing fewer RidgeMark systems during 2005compared to 2004. This decrease was primarily due to the early success of themigration of our legacy customers to the RidgeMark product in the first half of2004 compared to 2005 when the sunset process reached conclusion. Since ourlegacy customer migration process was substantially completed in the secondhalf of 2004 and first quarter of 2005, we have experienced a significantdecrease in order activity that has continued through the first quarter of 2006.We believe that this decrease in order activity was due in part to our delay intransitioning to a focus on acquiring new customers and away from the processof migrating our legacy customers to RidgeMark and quality of service issues. Weare currently focusing our operations on customer satisfaction of our RidgeMarkcustomer base, increasing recurring revenues from our Helper customer base andgrowth of our Northern Health market niche.

Non-recurring revenues (revenues generated from salesof software and systems and related training, data conversion and installationservices) decreased $3.9 million, or 48.2%, to $4.2 million for the year ended December 31,2005 down from $8.0 million for the year ended December 31, 2004. Recurringrevenues (revenues derived from software and hardware maintenance, billing andelectronic services) also decreased $3.0 million, or 21.0%, to $11.1 millionfor the year ended December 31, 2005 down from $14.1 million for yearended December 31, 2004. This decrease was primarily due to a decrease insoftware maintenance and electronic services revenues derived from our legacyproducts which we discontinued support of during the fourth quarter of 2004 andthe first quarter of 2005.

*Softwareand Systems.*   Software and systems revenuesdecreased $2.7 million, or 46.7%, from $5.9 million for the year ended December 31,2004 to $3.1 million for the year ended December 31, 2005. The decrease insoftware and systems revenues was due to our installing significantly fewerRidgeMark systems during 2005 compared to 2004. We installed 219 RidgeMarksystems in 2004 compared to only 52 systems in 2005, due primarily to our earlysuccess in converting existing legacy customers to RidgeMark in 2004 comparedto 2005 when the sunset process had reached conclusion.

*CustomerSupport.**  *Customersupport revenues are derived from software maintenance and customer service,network and computer hardware support, billing services, training, dataconversion and system installation. Customer support revenues decreased $3.4million, or 29.5% from $11.5 million for the year ended December 31, 2004to $8.1 million for the year ended December 31, 2005. This decrease wasprimarily due to a $2.9 million decrease in software maintenance revenuesderived from our legacy software programs that were discontinued during thefourth quarter of 2004 and the 

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first quarter of 2005. Thisdecrease was partially offset by a $658,000 increase in software maintenancerevenues derived from our RidgeMark software program.

*ElectronicServices.**  *Electronicservices revenues are derived from electronic claims processing and electronicpatient statement printing and mailing services. These revenues decreased$689,000, or 14.5%, from $4.8 million for the year ended December 31, 2004to $4.1 million for the year ended December 31, 2005. This decrease wasprimarily due to a $1.2 million decrease in electronic services revenues fromour legacy products which was partially offset by a $590,000 increase inelectronic services revenues from our core products; RidgeMark, TherapistHelper and Northern Health.

*Costof Revenues.*   Total cost of revenues decreased$3.4 million, or 25.7%, from $13.1 million for the year ended December 31,2004 to $9.7 million for the year ended December 31, 2005. Gross margin(total revenues less cost of revenues divided by total revenues) decreased from40.7% to 36.3%. This decrease in our gross margin was primarily the result of adecrease in customer support revenues that outpaced the reductions in laborrelated spending.

*Softwareand Systems.*   Software and systems cost ofrevenues include software licensing costs and costs of computer hardware andsupplies. Software and systems cost of revenues decreased $1.8 million, or61.7%, from $3.0 million for the year ended December 31, 2004 to $1.1million for the year ended December 31, 2005. Gross margin on software andsystems improved from 49.4% to 63.6%. The improvement in gross margin isprimarily due to a decrease in sales of our RidgeMark product that oftenincluded a significant amount of hardware at very low margins as well as  an adjustment to the inventory reserves wecarry related to certain third party software costs for our RidgeMark product.

*CustomerSupport.*   Costs for customer support includesalary and benefits for employees responsible for customer support, productinstallation and training as well as costs for support provided bythird-parties. Customer support cost of revenues decreased $1.5 million, or19.8%, from $7.3 million for the year ended December 31, 2004 to $5.9million for the year ended December 31, 2005. Gross margin on customersupport decreased from 36.1% for the year ended December 31, 2004 to 27.3%for the year ended December 31, 2005. This decrease in gross margin wasprimarily the result of our decision to retain certain staff for a period oftime to improve customer satisfaction on our RidgeMark product line despite asignificant decrease in revenues.

*ElectronicServices.*   Costs for electronic services consistof third-party costs and salaries and benefits of staff for electronic claimprocessing as well as costs for patient statement printing and mailing. Electronicservices cost of revenue decreased $85,000, or 3.0%, from the year ended December 31,2004 to 2005. Gross margin on electronic services decreased from 41.3% for theyear ended December 31, 2004 to 33.4% for the year ended December 31,2005. This decrease in gross margin is primarily due to an increase inpersonnel we use to support our electronic transaction services in an effort toimprove the extent and quality of support provided.

*Selling,General and Administrative(SG&A).*   SG&A expenses consist primarilyof salaries, commissions and benefits of sales staff, executive,accounting and administrative personnel, advertising and promotional materials,travel, communications, facility costs and insurance. SG&A expensesdecreased $1.6 million, or 18.6%, and were $8.7 million, or 39.3% of revenuesfor the year ended December 31, 2004 and $7.1 million, or 46.3% ofrevenues for the year ended December 31, 2005. The change in SG&Aexpense included a $607,000 reduction in commission expense related to thedecrease in revenues during these periods as well as a $230,000 reduction inbad debt expense and a $143,000 reduction in professional fees and a reductionin rent and facilities costs as several offices were closed. These decreaseswere partially offset by a $280,000 increase in spending on marketing and leadgeneration activities aimed at identifying and obtaining new customers as wellas a $270,000 investment in information technology resources.

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*ProductDevelopment.*   Product development expensesconsist primarily of compensation and related costs for employees and fees forindependent contractors and relate primarily to the development and producttesting activities for our Windows-based products. Product development expensesdecreased $335,000, or 13.3%, from $2.5 million, or 11.4% of revenues for theyear ended December 31, 2004 to $2.2 million, or 14.3% of revenues, forthe year ended December 31, 2005. This decrease was primarily due to adecrease in contract labor associated with our legacy software programs, HIPAArelated development and product upgrade activities in 2004 that were offset byincreased costs associated with our quality and product testing programs in2005.

*Depreciationand Amortization.*   Depreciation expense isrecognized on a straight line basis over the estimated useful lives of ourfixed assets and decreased $69,000, or 23.2%, from the year endedDecember 31, 2004 to 2005, primarily due to certain fixed assets thatbecame fully depreciated during 2004 and 2005. Amortization expense isrecognized on a straight line basis over the estimated useful lives of ournon-goodwill related intangible assets and decreased $165,000, or 91.7%, to$15,000 for the year ended December 31, 2005 to 2004, primarily due to theasset impairment charge recorded in the fourth quarter of 2004 that reduced thegross asset values that are subject to amortization.

*Restructuring*.   Ourrestructuring reserve balance consists of a reserve related to two leasedfacilities in Boulder, Colorado that were vacated in 2002. In the secondquarter of 2004, we entered into an agreement to terminate and buyout the leasefor one of the two facilities. In connection with the signing of thisagreement, we recognized a benefit of $147,000 representing the differencebetween the payments that will be made under the revised arrangement and theamounts previously reserved for through our restructuring reserve. Thetermination agreement required us to pay approximately $22,000 upon signing andrequires us to make monthly payments of approximately $4,000 through July 2006.

Thecomponents of our restructuring provision and activity in the reserve for the twoyears ended December 31, 2005 were as follows (in thousands):

| ** **                      | ** ** | **Leased  Facilities** | ** ** |
|---------------------------------|------------|------------------------|------------|
| December 31,  2003 balance |       |                   | $          | 701 |   |   |
| 2004 net benefit                |       |                   | (126       | ) |   |
| Cash payments                   |       |                   | (331       | ) |   |
| December 31,  2004 balance |       |                   | 244        |   |   |
| 2005 net benefit                |       |                   | (13        | ) |   |
| Cash payments                   |       |                   | (147       | ) |   |
| December 31, 2005  balance |       |                   | $          | 84 |   |   |

 

Lease payments will be made through the end of thelease term (June 2007).

In the fourth quarter of 2004 we performed ourimpairment review of goodwill required by SFAS 142 and determined that thevalue of the intangible assets associated with our legacy products wassignificantly impaired due to our implementation of an accelerated supportsunset program for these legacy products. In addition, continued poorperformance and a declining number of customers for one of our billing serviceunits resulted in an impairment charge in 2004 of $1,176,000. Approximately$477,000 of this charge was related to the impairment of goodwill associatedwith one of our billing services business units.

To determine the amount of the impairment charge andimplied fair value of goodwill, we performed an allocation of the estimatedfair value of each reporting unit to the identifiable tangible and intangibleassets and non-goodwill intangible assets and liabilities.

*Stock-basedcompensation.**  *EffectiveJanuary 1, 2003, we began to account for stock options using a fair valuemethod, as allowed under SFAS No. 123R. We have elected to use theprospective method of 

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adoption, resulting in therecognition of stock-based compensation expense of $334,000 for the year ended December 31,2005 and $113,000 for the year ended December 31, 2004. This expense isassociated with options we have granted to employees, directors and executivesduring 2003, 2004 and 2005 and is based on an estimate of fair market valueusing the Black-Scholes option pricing model.

*Interestand Other Income (Expense), Net.**  *Interestincome increased $20,000 from the year December 31, 2004 to 2005 andinterest expense and other, net decreased $70,000 from the year ended December 31,2004 to 2005.

*Income Taxes.*   Wedid not record a provision for income taxes for the years ended December 31,2005 or 2004, as we did not generate book or taxable income. At December 31,2005, we had net operating loss carryforwards for federal and state income taxpurposes of approximately $50 million and $9 million, respectively, that expirein various years through 2025. These future tax benefits have not beenrecognized as an asset on our balance sheet due to uncertainties surroundingour ability to generate sufficient taxable income in future periods to realizethe benefits. The extent to which these loss carryforwards can be used tooffset future taxable income may be limited.

**Critical Accounting Policies**

Certain of our accounting policies are particularlyimportant to the presentation of our financial position and results ofoperations and require the application of significant judgment by ourmanagement. As a result, they are subject to an inherent degree of uncertainty.In applying those policies, we use our judgment to determine the appropriateassumptions to be used in the determination of certain estimates. Thoseestimates are based on our historical experience, terms of existing contracts,our observance of trends in the industry, information provided by our customersand information available from other outside sources, as appropriate. Our criticalaccounting policies include:

*RevenueRecognition.*   We enter into license agreementswith customers that allow for the use of our products, usually restricted bythe number of employees, the number of users, or the license term. Fees fromlicenses are recognized as revenue in accordance with AICPA Statement ofPosition 97-2, (SOP 97-2) “Software Revenue Recognition,” asamended by SOP 98-9, and Staff Accounting Bulletin No. 104(SAB 104) “Revenue Recognition,” when all shipment obligations have been met,fees are fixed and determinable, collection of the sale proceeds is deemedprobable and persuasive evidence of an arrangement exists. Multiple elementarrangements generally include a proprietary software license, third-partysoftware, hardware, and implementation, training and other specified services.The fee for multiple element arrangements is allocated to the various elementsbased on vendor-specific objective evidence (VSOE) of fair market valueestablished by the price of the elements sold separately, or renewal rates, ifan element is not yet being sold separately. The residual method is used whenVSOE exists for the undelivered elements, primarily post-contract support andtraining. Also, to the extent that a discount exists on any of the elements, wefollow the residual method and attribute that discount entirely to thedelivered elements. In accordance with SOP 97-2, software subscriptionlicense fees and revenue from annual support agreements are recognized ratablyover the contract term. Revenues from the sale of computer hardware andsupplies are recognized as products are shipped and revenues from otherservices, including training, data conversion, electronic services and billingservices are recognized as services are rendered. Provisions for productreturns and product warranties are estimated based on historical experience andare evaluated regularly.

*Allowancefor doubtful accounts.**  *Wereview accounts receivable and provide a reserve for amounts we estimate willnot be collectible. During our review, we consider our historical experience,the age of the receivable balance, the credit-worthiness of the customer andthe reason for the delinquency.

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*Inventoryreserves.*   Reserves are provided for excess orobsolete inventory, which are estimated based on the age of the items and ourability to utilize the items in future sales. Generally, items that are greaterthan one year old are fully reserved and the related charge is recorded as costof revenue.

*Long-livedAssets.*   For certain long-lived assets, primarilyproperty and equipment and intangible assets, we estimate the useful life ofthe asset and recognize its cost as an expense over the estimated useful life.We use the straight-line method to expense long-lived assets, which results inan equal amount of expense in each period. Additionally, pursuant to applicableaccounting rules, we periodically assess whether long-lived assets have beenimpaired. We deem an asset to be impaired if its estimated fair value is lessthan the carrying value on our balance sheet. Our estimate of fair value isbased on the net present value of expected future cash flows attributable tothe asset. Predicting future cash flows attributable to a particular asset isdifficult, and requires the use of significant judgment.

*Accruedliabilities.**  *Certainof our accrued liabilities are based largely on estimates. For instance, werecord a liability on our balance sheet each period for the estimated cost ofgoods and services rendered to us, for which we have not received an invoice.Additionally, our restructuring reserve includes an estimate for the loss weexpect to incur for excess leased facility space. This estimate is based onnumerous assumptions and estimates, such as the market value of the space andthe time it will take to sublease the space. Our estimates are based onhistorical experience, input from sources outside the Company, and otherrelevant facts and circumstances.

*Income taxes.**  *We usethe asset and liability method of accounting for income taxes under whichdeferred income taxes are provided based upon the applicable enacted tax lawsand rates. A valuation allowance is provided against the future benefits ofdeferred tax assets if it is determined that it is more likely than not thatthe future tax benefits associated with the deferred tax asset will not be realized. This determination is based upon ourlimited operating history, history of losses and the possibility that we maynever achieve profitability. As of December 31, 2005, we had net operatingloss carryforwards for federal and state income tax purposes of approximately$50 million and $9 million, respectively. The potential tax benefits were fullyreserved and therefore are not recorded on the balance sheet as an asset.

**Recent Accounting Pronouncements**

In November 2004, the FASB issued SFAS No. 151“Inventory Costs—an Amendment of Accounting Research Bulletin No. 43,Chapter 4.” SFAS 151 amends the guidance in ARB No. 43,Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material,or spoilage. Paragraph 5 of ARB 43, previously stated that under somecircumstances, items such as idle facility expense, excessive spoilage, doublefreight, and re-handling costs may be so abnormal as to require treatment ascurrent period charges. SFAS 151 requires that such items be recognized ascurrent period charges regardless of whether they meet the criterion of “soabnormal.” In addition, SFAS 151 requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities. SFAS 151 is effective for fiscal periodsbeginning after June 15, 2005. The adoption of SFAS 151 did not havea significant impact on our consolidated statement of operations and financialcondition.

In December 2004, the FASB issued Statement ofFinancial Accounting Standards (SFAS) No. 123 (Revised) (SFAS 123-R),“Share-Based Payment.” This standard requires expensing of stock options andother share-based payments and supersedes SFAS No. 123 which had allowedcompanies to choose between expensing stock options or showing pro formadisclosure only. This standard is effective for the Company as of July 1,2005 and will apply to all awards granted, modified, cancelled or repurchasedafter that date. We adopted FAS 123R in the third quarter of 2005, using theprospective method of adoption which requires that compensation expense berecorded for all unvested stock options and restricted stock at the beginningof the first quarter of adoption of FAS 123R. The adoption of FAS 123R did nothave an 

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impact on our statementsof operations as we already expense all unvested option and restricted stockawards in connection with our adoption of SFAS 148 effective January 1,2003.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections.”SFAS 154 replaces APB Opinion No. 20 “Accounting Changes” and SFAS No. 3,“Reporting Accounting Changes in Interim Financial Statements”. SFAS 154requires retrospective application to prior periods’ financial statements ofchanges in accounting principle, unless it is impractical to determine eitherthe period-specific effects or the cumulative effect of the change. We do notexpect the adoption of SFAS No. 154 to have a material impact on ourconsolidated financial statements.

**Liquidity and Capital Resources**

Since 1996, we have financed our operations primarilythrough a combination of indebtedness, capital leases, private equity financingand an IPO. Approximately 82% of the consideration paid for our acquisitionswas paid with our stock or stock options. The balance of the consideration waspromissory notes and cash. In March 2005, we raised $5.0 million through aprivate placement of 5,376,344 shares of common stock priced at $0.93 pershare.

Net cash used for operating activities was $4.6million for the year ended December 31, 2005 compared to $747,000 for theyear ended December 31, 2004. A significant portion of this difference wasdue to an increase in our net loss from $3.9 million for the year ended December 31,2004 to $4.3 million for the year ended December 31, 2005. The increase inour net loss from 2004 to 2005 was primarily due to the timing of our legacyproduct sunset process, unsuccessful sales and marketing efforts to increasesales of our RidgeMark product line and a decision to retain certain staffinglevels in light of the decrease in revenues to address certain service relatedissues. A $1.2 million decrease in accounts payable and accrued liabilities anda $620,000 decrease in deferred revenues and customer deposits due to adecrease in order activity and purchasing volumes, both used cash during the2005 period. A $302,000 decrease in accounts receivable and a $336,000 decreasein prepaid and other expenses provided cash and partially offset the cash used.In the 2004 period, a $374,000 increase in deferred revenue and customerdeposits and a $298,000 decrease in prepaid and other expenses both providedcash.

Investing activities included capital expenditures of$49,000 in the year ended December 31, 2005 and $131,000 in the year endedDecember 31, 2004. In 2005, we purchased $4.0 million of investments withthe proceeds from our March 2005 private placement which were later sold. In2004, a short term investment matured providing cash of $751,000.

Financing activities provided cash of $4.4 million forthe year ended December 31, 2005 primarily due to our receipt of $4.6million received for the sale of stock and warrants which was partially offsetby a use of cash of $448,000 for payments on debt. In addition, we receivedcash of $222,000 during the year ended December 31, 2005 from stock optionexercises. Net cash used in financing activities was $562,000 for the yearended December 31, 2004 and was primarily due to $591,000 of payments ondebt which was partially offset by the receipt of $29,000 for stock optionexercises.

In March 2005, we completed a $5.0 millionprivate placement of 5,376,344 shares of common stock priced at $0.93 per share(see Note 7 to consolidated financial statements). Institutional investorspurchased 90 percent of the shares, with members of our management team and amember of our Board of Directors combining for the purchase of 10 percent. Theinvestors in the transaction also received warrants to purchase an additional1,075,267 shares of common stock priced at $1.30 per share, and warrants topurchase 1,075,267 shares of common stock priced at $1.55 per share. Inconnection with this transaction, we paid a fee to our broker equal to 7.0% ofthe total amount of capital we received, or $350,000. Our broker also receivedwarrants to purchase an additional 451,613 shares of our common stock as partof this fee arrangement. After broker commissions and legal expenses, the netproceeds to VantageMed were approximately $4.6 million. We have used thesefunds for working capital purposes.

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At December 31, 2005, we had $636,000 of cash andcash equivalents, had negative working capital of $3.9 million and we used $4.6million of cash in our operations for the year ended December 31, 2005. Wealso had a deficit in stockholder’s equity. We have taken a number of stepsdesigned to improve future operations and reduce our operating costs includingreorganizations, management changes, fund raising and the enhancement of oursales and marketing functions. In addition, we have reduced our headcount from174 at March 31, 2005 to 130 at December 31, 2005 and to 93 atMarch 24, 2006. Although we believe these steps have had a positive impacton our operations, they have not resulted in our achieving positive operatingcash flow or profitability. Since our legacy customer migration process wassubstantially completed in the second half of 2004 and first quarter of 2005,we have experienced a significant decrease in order activity that has continuedinto the first quarter of 2006. To date, we have not been successful in ourpursuit of new customers despite our efforts. We are currently focusing ouroperations on customer satisfaction of our RidgeMark customer base, increasingrecurring revenues from our  Helpercustomer base and growth of our Northern Health market niche.

In February 2006, we completed the sale of ourHawaii operation to TeamPraxis. We received $605,000 of cash in connection withthe sale including $25,000 associated with service and transaction fees thatare expected to be earned within the first quarter of 2006.

In order for us to achieve positive operating cashflow, working capital or profitability we will need to make changes to our coststructure and operating plan.  Considering our current sales forecast, cashmanagement practices, projected operating expenses as well as a number ofstructural alternatives, we believe that we can make the changes necessary toensure that our cash and investments will be sufficient to meet our cash flow needsthrough at least December 2006. However, there can be no assurances thatour plans will succeed and sustained long term profitability will depend on ourability to significantly increase our sales volumes. We may seek to raiseadditional funds for working capital purposes, to fund expansion, fundadditional marketing expenditures, enhance our operating infrastructure,respond to competitive pressures, or acquire or develop complementarybusinesses or necessary technologies. Additional financing may not be availableon terms acceptable to us, or at all. If adequate funds are not available onacceptable terms, our ability to fund our operations, take advantage ofopportunities, develop products or services or otherwise respond to competitivepressure could be limited without a substantial increase in sales. Capitalexpenditures for equipment, furniture and software are expected to be limitedduring the next 12 months.

In its report dated February 22,2006 regarding our financial statements, our registered independent publicaccounting firm referred to substantial doubt about our ability to continue asa going concern as a result of our net losses, accumulated deficit,stockholders deficit and other factors. Our future profitability will depend onmany factors, including those discussed below under the caption “Forward-LookingStatements and Risk Factors—Risks Associated With Our Business.”

**Debt and Lease Obligations**

At December 31, 2005, we had $130,000 in debt primarilyissued in connection with our acquisitions as well as in connection with ourfinancing of certain annual insurance premiums. Interest rates on these notesrange from 6.0% to 7.0%. In addition, we lease certain computers and officeequipment under lease agreements accounted for as capital leases. AtDecember 31, 2005, we had $52,000 in capital leases that mature fromFebruary 2010 to July 2010. At December 31, 2004, we had$320,000 in assumed debt or promissory notes primarily issued in connection withacquisitions and $55,000 in capital leases.

We lease space at our principal executive andcorporate headquarters and at several locations throughout the United States,with lease terms expiring at various dates through 2007. We have subleased somespace in our facility in Boulder, Colorado and in our facility in Honolulu,Hawaii.

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Futureminimum payments under all debt and lease obligations at December 31, 2005are as follows (in thousands):

| **Year Ending December 31,**                                    | ** ** | ** ** | ** ** | **Debt** | ** ** | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|-----------------------|------------|
| 2006                                                                           |       | $          | 130        |     |       | $                   | 15         |                  |       |   | $ | 326 |   |   |
| 2007                                                                           |       | —     |       |     | 15         |                |       |                  | 159        |   |   |
| 2008                                                                           |       | —     |       |     | 15         |                |       |                  | 79         |   |   |
| 2009                                                                           |       | —     |       |     | 15         |                |       |                  | 79         |   |   |
| 2010                                                                           |       | —     |       |     | 5          |                |       |                  | 79         |   |   |
| 2011                                                                           |       | —     |       |     | —     |                |       |                  | 13         |   |   |
| Total minimum  payments                                                        |       | 130        |       |     | 65         |                |       |                  | $          | 735 |   |   |
| Less: interest on  capital lease obligations at rates of 10.77% to 11.8%  |       | —     |       |     | (13        | )                   |       |                  |       |   |   |
| Less: current  maturities                                                      |       | (130       | )          |     | (10        | )                   |       |                  |       |   |   |
| Long-term portion                                                              |       | $          | —     |     |       | $                   | 42         |                  |       |   |   |   |   |

 

The future minimumoperating lease payments above have been reduced for estimated income fromsublease arrangements of $117,000 and $46,000 in 2006 and 2007, respectively.

**Forward-LookingStatements and Risk Factors**

*Special CautionaryNotice Regarding Forward-Looking Statements and Risk Factors*

*This Annual Report on Form 10-KSB containscertain forward-looking statements within the meaning of Section 27A ofthe Securities Act and Section 21 of the Securities Exchange Act of 1934,as amended (the Exchange Act), which are intended to be covered by the safeharbors created thereby. Investors are cautioned that forward-lookingstatements involve risks and uncertainties. Although we believe that theassumptions underlying the forward-looking statements contained herein arereasonable, any of the assumptions could be inaccurate and therefore, there canbe no assurance that the forward-looking statements will prove to be accurate. Inlight of the significant uncertainties inherent in the forward-lookingstatements included herein, the inclusion of such information should not beregarded as a representation by us or any other person that our objectives andplans will be achieved. We are not obligated and expressly disclaim any obligation,to update any forward-looking statements.*

*Risks Associatedwith our Business*

**WeHave Received a “Going Concern” Opinion from Our Registered Independent PublicAccounting Firm, We Have a History of Operating Losses and May Not AchieveProfitability Sufficient to Generate a Positive Return on Shareholders’Investment**

We incurred a net loss of$4.3 million for the year ended December 31, 2005 and as of December 31,2005 our accumulated deficit was $81.2 million. Our consolidated financialstatements for the year ended December 31, 2005 have been prepared on a “goingconcern” basis; however, in its report dated February 22, 2006 regardingour 2005 financial statements, our registered independent public accountingfirm expressed substantial doubt about the Company’s ability to continue as agoing concern as a result of our recurring losses, accumulated deficit,stockholders deficit and other factors. Our future profitability will depend onmany factors, including those disclosed in the risk factors below, but in thenear-term will depend primarily on our ability to (i) increase sales ofour core Windows-based products to new customers and (ii) restructure ouroperations to match our sales volumes. We cannot assure you that these planswill succeed or that we will ever become profitable.

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**If WeFail To Generate New Sales Of Our Windows-Based Products, We May Not BeAble To Sustain Our Recurring Revenues And We May Be Unable To Achieve OrSustain Revenue Growth, Profitability or Positive Cash Flow**

Our financial successdepends upon our ability to generate revenues by selling our products to newand existing customers. Loss of our existing customers to competition, the lossof the associated recurring revenues and the cost of obtaining new customers aswell as the failure to generate new system sales would have a significantimpact on our ability to achieve profitability or positive cash flows in thenear term or at all.

**OurNeed For Additional Financing Is Uncertain, As Is Our Ability To Raise FurtherFinancing If Required**

At December 31, 2005, we had $636,000 of cash andcash equivalents and had negative working capital of $3.9 million. We may needto raise additional funds to respond to business contingencies which mayinclude the need to: cover any losses; fund expansion; fund additionalmarketing expenditures; enhance our operating infrastructure; respond to competitivepressures; or acquire or develop complementary businesses or necessarytechnologies.

Additional financing maynot be available on terms acceptable to us, or at all. In the event that suchfinancing, if it occurred, requires the issuance of additional shares of ourcapital stock, a shareholder will experience dilution in their ownership. Ifadequate funds are not available or are not available on acceptable terms, ourability to fund our operations, take advantage of opportunities, developproducts or services, expand sales and marketing efforts or otherwise respondto competitive pressure could be significantly limited.

**If WeFail To Properly Manage Our Revenues and Expenses, We May Be Unable ToAchieve Profitability or Positive Cash Flow; Our Cost Reduction Efforts HaveStrained Our Resources**

Throughout 2003, 2004 and2005, we have experienced significant fluctuations in the volume of orderactivity received which has put a significant strain on our resources, includingcash. In the event that we are unable to properly scale our client services andother groups to timely install, implement and support our current levels oforder activity and our current customer base in a cost effective manner, we maynot be successful in our future operations.

**WeHave A History Of Losses And We May Never Achieve Profitability orPositive Cash Flow**

We have incurred operatinglosses and have generated cash flow deficits since our inception in 1995 and asof December 31, 2005, our accumulated deficit was $81.2 million. Ourbusiness strategies may not be successful and we may not be able to achieve revenuegrowth, profitability or positive cash flow. 

**AnyFailure To Comply With the HIPAA Legislation, Including Regulations GoverningThe Confidentiality And Integrity Of Protected Health Information (PHI) CouldResult In Severe Legal And Financial Liability and Could Harm Our BusinessReputation**

Federal regulations underHIPAA governing the confidentiality and integrity of PHI are complex and areevolving rapidly. As these regulations mature and become better defined, weanticipate that they will continue to directly affect certain of our productsand services, but we cannot fully predict the impact at this time. We havetaken steps to modify our products, services and internal practices, asnecessary, to facilitate our and our customer’s compliance with theseregulations, but there can be no assurance that we will be able to continue todo so in a timely or complete manner. Achieving compliance with theseregulations could be costly and distract management’s attention from ouroperations. Any failure on our part to comply with current or futureregulations could subject us to severe legal and financial liability, 

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includingcivil and criminal penalties. In addition, development of related federal andstate regulations and policies regarding the confidentiality of healthinformation or other matters could positively or negatively affect ourbusiness.

**If WeFail to Incorporate Product Enhancements or Develop New Products In A TimelyManner, We May Be Unable To Achieve Revenue Growth And Profitability**

There can be no assurancethat we will be successful in our product development efforts, that the marketwill continue to accept our existing products, or that new products or productenhancements will be developed and implemented in a timely manner, meet therequirements of healthcare providers, or achieve market acceptance. If newproducts or product enhancements do not achieve market acceptance, ourbusiness, results of operations and financial condition could be materiallyadversely affected. 

**IfThe Definition And Adoption Of Electronic Transactions In The HealthcareInformation Technology Industry Sector Grows At A Slow Pace, We May BeUnable To Achieve Revenue Growth And Profitability From Electronic Services**

Our current services andanticipated future services are dependent on the use and growth of electronictransaction processing. To the extent that the HIPAA standard transactions arenot adopted or are modified by individual payers, or do not further penetratethe healthcare information technology industry, our ability to realize revenuefrom electronic services will be limited and we may not be able to increase ourrevenues.

**InternetOr Telecommunication Service Or Performance Problems Or Software Errors ArisingAfter The Installation Of Our Software At Customer Sites Could Delay MarketAcceptance Of Our Products, Lead To Customer Dissatisfaction, Loss Of RevenueOr Increase in Expense And Injure Our Business Reputation**

The performance of ourproducts depends upon the efficient operation and timely installation ofInternet and telephone connections, web browsers and Internet service providersand upon the reliability of our software, including third-party softwareincorporated into our software. The Internet and telecommunication relatedequipment could experience operational problems, delays or outages that arefrequently outside our ability to control. In addition, software errors that wefail to detect may result in software performance problems. The occurrence ofany of these problems could cause customers to experience system delays,failures and loss of data. Such problems could delay market acceptance, lead tocustomer dissatisfaction, a loss of revenue, an increase in expense or injureour business reputation. 

**We May Be Subject ToState or Local Taxes That Could Harm Our Business**

In the past, we have notconsistently collected sales or local taxes on revenues from customers locatedin states other than the state where the sale originated. We are monitoring ourstate-by-state obligations to collect sales tax and have made provisions, whereconsidered necessary, in the event one or more states seek to impose sales taxcollection obligations on out-of-state companies similar to ours. We have alsoentered into agreements, or intend to enter into agreements, with tax reportingjurisdictions and have revised our tax collection procedures. However, based onthe nature of our operations and the acquisitions we have made, as well as thecomplexity of the laws that govern state and local taxes, the determination ofour obligation to collect taxes in certain jurisdictions is complex andrequires significant judgment. A successful assertion by states where we havenot made provisions for sales and local taxes could seriously harm ourbusiness.

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**IfSecurity And Legal Liability Concerns Make Customers Unwilling To Utilize OurProducts And Services To Transmit Medical Information Electronically, TheDemand For Our Products May Diminish And We May Be Unable To AchieveOr Sustain Profitability**

Potential customers may choose not to utilize oursoftware products because of concerns related to the electronic transfer andmanagement of protected health information (PHI), including: security of PHIbeing transferred; errors in the transmission of PHI;  legal liability for data security failures ortransmission errors; and regulatory burdens imposed on healthcare participantswho transfer PHI electronically. 

If these concerns preventpotential or existing customers from buying or continuing to use our products,our revenues may not increase and we may be unable to achieve or sustainprofitability. 

**BreachesOf Network Security Could Damage Our Business Reputation, Lead To CustomerDissatisfaction, Delay Market Acceptance Of Our Products And Result In LegalAnd Financial Liability And A Loss Of Revenue**

Our electronic transactionservices involve the storage and transmission of PHI through our network datacenters over the Internet and over dedicated private data lines. Despite theimplementation of security measures, our infrastructure may be vulnerable tophysical break-ins, computer viruses or similar disruptive problems. In the eventof such a security breach, proprietary and confidential information could bemisappropriated or our operations could be interrupted. These problems coulddamage our business reputation, lead to customer dissatisfaction and delaymarket acceptance of our products. We may also incur legal and financialliability and a loss of revenue as a result of such problems. 

**WeRely on Third Parties To Provide Services That Are Critical To Our BusinessWhich Reduces Our Control Over Pricing and Quality Assurance**

We rely on thirdparties to provide services that are critical to our business. For example, weuse national clearinghouses for the processing of insurance claims and theprinting and delivery of patient billings for our customers. We have alsooutsourced some of our product testing, medical billing, installation andhardware maintenance services. Our reliance on these third parties involves anumber of risks, including, but not limited to:

·       reducedcontrol over delivery schedules, quality assurance and equipment costs;

·       lackof guaranteed production capacity or product supply;

·       ourability to transition to alternate sources, if necessary; and

·       dependence on externalresources to implement HIPAA transaction standards.

**OurStock Trades on the Over the Counter Bulletin Board**

On September 24,2002, our stock was delisted from the NASDAQ Stock Market for failing to meetthe minimum bid price requirement of $1.00. As a result, our stock now tradeson the OTC Bulletin Board. Stockholders may have difficulty buying and sellingour stock on the OTC. We are dependent on professional market makers tofacilitate trading of our stock on the OTC. If market makers do not register totrade our stock on the OTC, stockholders may not have a public market for thepurchase and sale of our securities. In addition, because the market price forour stock has been below $1.00, the stock may be deemed a penny stock, whichwould subject the stock to additional sales practice rules onbroker-dealers who sell the Company’s securities. As a result of theseadditional obligations, some brokers may not effect transactions in our stock,which could adversely affect the liquidity and pricing of our stock.

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**FluctuationsIn Our Quarterly Operating Results May Cause Volatility Or Decline In TheMarket Price Of Our Common Stock**

It is possible that our revenues and operating resultsmay fall below the expectations of securities analysts or investors in futurequarters and years. If we fail to meet or surpass the expectations ofsecurities analysts or investors, the market price of our common stock willmost likely decline. We expect that our quarterly revenue and operating resultsmay fluctuate as a result of a number of factors, including: changes incustomer demand for our applications and services; entry into new healthcaremarkets; introduction of new products and service offerings and reductions inprices of products by our competitors; delays in development and other qualityfactors; and changes within the healthcare industry. 

We base our expense levelsin part upon our expectations concerning future revenues. If we have lowerrevenues, we may not be able to make corresponding reductions in our spendingin the short term. Any shortfall in revenues would have a direct impact on ourresults of operations. Fluctuations in our quarterly results or the failure tomeet analysts’ expectations could affect the market price of our common stockin a manner unrelated to our long-term operating performance. 

**If WeAre Unable To Protect Our Intellectual Property We May Lose Assets OrContinue to Incur Costly Litigation To Protect Our Rights**

We rely primarily on a combination of copyrights,trademarks, trade secret laws and restrictions on disclosure to protect ourintellectual property. We currently have no patents and limited registeredcopyrights covering technology related to our products. We have no plans toseek such legal protection and, if we do, protection may not be granted. 

Despite our efforts to protect our intellectualproperty, we have experienced and may continue to experience instances where athird party or a former employee could attempt to copy, reverse engineer orotherwise obtain and use our intellectual property, customer lists or tradesecrets without authorization or could develop software competitive to ours.  We aggressively pursue these matters as theyarise.

In addition, our intellectualproperty may be misappropriated or infringed upon or may infringe upon therights of others. Consequently, litigation may be necessary in the future toenforce our intellectual property rights, to protect our confidentialinformation or trade secrets, or to determine the validity or scope of therights of others. Litigation could result in substantial costs and diversion ofmanagement and other resources and may not successfully protect ourintellectual property. Additionally, we may deem it advisable to enter intoroyalty or licensing agreements to resolve such claims. Such agreements, ifrequired, may not be available on commercially reasonable or desirable terms orat all. In addition, we indemnify our customers in the event that infringementoccurs.

**TheLoss Of Experienced Personnel To Competitors Or Our Inability To Attract AndRetain Qualified Personnel Could Significantly Interrupt Our BusinessOperations**

Our future success willdepend, to a significant extent, on the ability of our management to operateeffectively, both individually and as a group. The loss of the services of anyof our senior management could negatively impact our ability to carry out ourbusiness plan. We are dependent on our ability to attract, retain and motivatehigh caliber key personnel. Competition for qualified personnel in our industryis intense, and we may not be successful in attracting and retaining suchpersonnel. There are a limited number of persons with the requisite skillsavailable to serve in these key positions and it may become increasinglydifficult to hire or retain such persons. Competitors and others have in thepast and may in the future attempt to recruit our employees.

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**DelawareLaw And Our Charter Documents Contain Provisions That Could Have The Effect OfDelaying Or Preventing A Corporate Takeover, Even If Such A Transaction WouldBe Beneficial To Our Stockholders**

Some provisions of ourcertificate of incorporation and bylaws, as well as provisions of Delaware law,may discourage, delay or prevent a merger or acquisition that a stockholder mayconsider favorable. These provisions include: authorizing the board to issueadditional preferred stock; limiting the persons who may call special meetingsof stockholders; prohibiting stockholder actions by written consent; creating aclassified board of directors pursuant to which our directors are elected forstaggered three-year terms; and establishing advance notice requirements fornominations for election to the board of directors or for proposing mattersthat can be acted on by stockholders at stockholder meetings.

**We May Notbe Able to Realize the Benefits of Our Marketing Programs and Relationships**

We have entered intocertain marketing agreements intended to increase the awareness of our Companyin the market and increase future revenues. The marketing programs may not besuccessful nor generate the level of interest we expect and we may not be ableto realize revenues from these programs.

***Risks Associated with our Industry***

**WeCould be Subject to Breach of Warranty, Product Liability or Other Claims ifOur Software Products Contain Errors or Experience Failures**

Undetected errors in the software and systems weprovide to customers or the software and systems we use to provide servicescould cause serious problems for our customers. If errors like this occur, ourcustomers may seek compensation from us or may seek to terminate theiragreements with us, withhold payments due to us, seek refunds from us of partor all of the fees charged under those agreements or initiate litigation orother dispute resolution procedures. We also provide products and services thatassist in healthcare decision-making, including some that relate to patientmedical histories and treatment plans. If these products malfunction or fail toprovide accurate and timely information, we could be subject to productliability claims. In addition, we could face breach of warranty or other claimsor additional development costs if our software and systems do not meetcontractual performance standards, do not perform in accordance with theirdocumentation, or do not meet the expectations that our customers have for them.Our software and systems are inherently complex and, despite testing andquality control, we cannot be certain that errors will not be found in priorversions, current versions or future versions or enhancements.

We attempt to limit, bycontract, our liability for damages arising from negligence, errors ormistakes. However, contractual limitations on liability may not be enforceablein certain circumstances or may otherwise not provide sufficient protection tous from liability for damages. Even if claims do not result in liability to us,investigating and defending against them could be expensive and time consumingand could divert management’s attention away from our operations. In addition,negative publicity caused by these events may delay market acceptance of ourproducts and services, including unrelated products and services.

**IntenseCompetition In The Market For Healthcare Information Systems And Services CouldPrevent Us From Increasing Or Sustaining Revenues And Prevent Us From AchievingOr Sustaining Profitability**

Our competitors vary insize, geographic coverage and scope of products and services offered. Themarket demand for certain products varies across geographic territories. Ourprincipal competitors include practice management systems and clinical softwarecompanies. Industry competitors include organizations such as Emdeon PracticeServices/Medical Manger, Per-Se/Medisoft, Misys Physician  Systems, QSI/NextGen and GECentricity/Millbrook. Additionally, within each local market there are several 

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smallercompetitors who have developed technologically advanced niche products offeredat lower prices. Finally, with the integration of clinical information systemsinto practice management systems, several well-funded pharmaceutical, medicalsupply and biotech companies have entered the practice management systemsmarket. Many of our competitors have greater financial, development, technical,marketing and sales resources than we do. These competitors may be able torespond more rapidly to new or emerging technologies and regulations andchanges in customer requirements than we can. Specifically, some of ourcompetitors are able to deliver totally integrated practice management toolsincluding full featured electronic medical record systems. In addition, as themarket for our products develops, additional competitors may enter the marketand competition may intensify, requiring us to lower the prices of our productsand services. In addition to these factors, our current financial condition andSEC reporting and disclosure requirements may be used against us by ourcompetitors.

**EconomicAnd Cost Reduction Pressures Faced By Healthcare Providers May Limit TheAbility Of Our Customers To Buy Our Products And Services And Could Limit OurProfitability**

Economic and costreduction pressures may limit the ability of healthcare providers to makeexpenditures for new software systems or for upgrades to existing softwaresystems. A reluctance or inability on the part of healthcare providers to makesuch expenditures could result in fewer sales and could limit our ability toachieve or sustain profitability. 

**IfThere Is A Delay In The Release Of Our Products and If We Fail To Respond ToThe Rapidly Changing Technology That Characterizes Our Market, Our Products May BeRendered Obsolete, We May Lose Our Market Opportunity And Fail To AchieveOr Sustain Profitability**

We can make no assurancesthat delays in product releases will not occur in the future. The market forour products is highly competitive and changes rapidly. Therefore, timelydevelopment and introduction of new products, features and services to existingcustomers will significantly impact our future success. We will be required tomeet rapidly changing market demands, respond to market requirements, developnew proprietary solutions, and successfully market new products andenhancements to new customers and our existing customer base. 

**OurBilling And Claims Services Are Subject To Federal And State Regulation And AnyNon-Compliance With These Regulations Could Lead To Civil, Criminal AndFinancial Liability**

The performance of ourbilling and claims services are governed by numerous federal and state civiland criminal laws. Increased scrutiny has been placed on the billing andcollection practices of healthcare providers and related entities. Although webelieve that we are in compliance with any such regulations that may relate tothe provision of our billing and claims services, any non-compliance could leadto civil monetary penalties, criminal fines, imprisonment or exclusion fromparticipation in Medicare, Medicaid and other federally funded healthcareprograms for us and the customer involved in the non-compliance. 

**RegulationsThat Restrict The Ability To Dispense Or Refill Controlled Substances ThroughAn Electronically Transmitted Prescription Could Limit The Functionality Of OurSoftware Products And Could Diminish The Revenue Generated From These Products**

The Federal DrugEnforcement Agency has promulgated regulations that may prohibit a pharmacyfrom dispensing and refilling controlled substances through an electronicallytransmitted prescription. These regulations may limit the scope of theprescription ordering and refill functions in our current and future softwareproducts and may diminish the revenues we obtain from the sale of theseproducts. 

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**IfOur Software Products Are Deemed Medical Devices, We Will Be Subject ToAdditional Regulation That Could Result In Criminal, Civil And FinancialLiability, Increase Our Costs And Delay The Marketing Of Our New Or ExistingProducts**

The U.S. Food and DrugAdministration has jurisdiction under the 1976 Medical Device Amendments to theFederal Food, Drug and Cosmetic Act to regulate computer products and softwareas medical devices if they are intended for use in the diagnosis, cure,mitigation, treatment or prevention of disease in humans. We believe that ourhealthcare information systems are not subject to FDA regulation. If, however,the FDA determined that our products were subject to regulation, non-compliancewith applicable requirements could result in, among other things, fines,injunctions, civil penalties, total or partial suspension of production,refusal by the government to approve products, revocation of approval orclearance previously granted and criminal prosecution. Future FDA policies,laws or regulations concerning the development or marketing of healthcareinformation systems may cause our products to be subject to FDA regulation,which could increase our costs or delay the marketing of new or existingproducts. 

**FutureRegulations Enacted By Congress Or By State Governments May AdverselyImpact The Healthcare Industry In Ways That Could Damage Our BusinessOpportunities Or Profitability**

The healthcare industry ishighly regulated and has been the subject of increasing levels of governmentregulation during the past several years. We cannot predict with any certaintythe types of regulations that might be imposed or the impact that thoseregulations might have on our business. The adoption of regulations currentlyunanticipated by us or by the healthcare industry could impose burdensomerequirements or restrictions on our products or on the activities of healthcareproviders. These restrictions could decrease the demand for our products andcould prevent us from growing our business and attaining profitability. 

**Changesin Accounting and Legal Standards Could Adversely Affect our Future OperatingResults**

During the past several years, various accountingguidance has been issued with respect to revenue recognition rules in thesoftware industry. However, much of this guidance addresses software revenuerecognition primarily from a conceptual level, and is silent as to specificimplementation requirements. As a consequence, accounting firms and theirclients have been required to make assumptions and judgments, in certaincircumstances, regarding application of the rules to transactions notaddressed by the existing rules. We believe our current business arrangementsand contract terms have been properly reported under the current rules. However,if final interpretations of, or changes to, these or other accounting rules necessitatea change in our current revenue recognition or other accounting practices, ourresults of operations, financial condition and business could be materially andadversely affected.

In addition to the changes discussed above, the U.S.Congress enacted the Sarbanes-Oxley Act of 2002, or the SOA, in July 2002,providing for or mandating the implementation of extensive corporate governancereforms relating to public company financial reporting, corporate ethics, andoversight of the accounting profession, among other areas. Many of these newSEC-mandated rules and procedures became effective during the latter halfof 2002 and during 2003, and we are now required to comply with certain ofthese requirements and we are required to comply with additional requirementsin 2006. We believe our corporate practices and standards meet the current rules andregulations currently in effect. However, compliance with existing or new rules thatinfluence significant adjustments to our business practices and procedurescould adversely affect our results of operations and will likely require asignificant financial investment.

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**Item 7. Financial Statements**

The Company’s ConsolidatedFinancial Statements are located on the pages indicated below:

**INDEXTO FINANCIAL STATEMENTSVANTAGEMED CORPORATION**

|                                                                                                                                        | ** ** |        | **Page** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------|----------|------------|------------|
| Financial Statements:                                                                                                                  |       |   |     |       |       |
| Report of Independent Registered Public Accounting  Firm—Farber Hass Hurley & McEwen LLP                                 |       |   | 32       |       |       |
| Consolidated Statements of Operations for the two  years ended December 31, 2005                                                  |       |   | 33       |       |       |
| Consolidated  Balance Sheets as of December 31, 2005 and 2004                                                                     |       |   | 34       |       |       |
| Consolidated Statements of Stockholders’ Equity  (Deficit) and Comprehensive Loss for the two years ended December 31,  2005 |       |   | 35       |       |       |
| Consolidated Statements of Cash Flows for the two years  ended December 31, 2005                                                  |       |   | 36       |       |       |
| Notes to Consolidated Financial Statements                                                                                             |       |   | 37       |       |       |
|                                                                                                                                        |            |        |          |            |            |  |  |

 

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directorsand Shareholders ofVantageMed CorporationRancho Cordova, California

We have audited the accompanying consolidated balancesheets of VantageMed Corporation (a Delaware corporation) (the Company)as of December 31,2005 and 2004, and the related consolidated statements of operations andcomprehensive income, stockholders’ equity (deficit), and cash flows for thetwo years then ended. These consolidated financial statements are theresponsibility of VantageMed Corporation’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

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 consolidated financial statements are free ofmaterial misstatement. The Company has determined that it is not required tohave, nor were we engaged to perform, an audit of its internal control overfinancial reporting. Our audit included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall consolidated financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of VantageMed Corporation as of December 31, 2005, andthe results of their operations and their cash flows for the two years thenended, in conformity with accounting principles generally accepted in theUnited States of America.

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note 1, the Companysustained recurring losses from operations and had an accumulated deficit andstockholders deficit of $81.2 million and $3.4 million, respectively as ofDecember 31, 2005. These factors, among others, raise substantial doubtabout the Company’s ability to continue as a going concern. Management’s plansin regard to these matters are also described in Note 1. The consolidatedfinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

Farber Hass Hurley &McEwen LLPGranada Hills, CaliforniaFebruary 22, 2006

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**VANTAGEMED CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)**

| ** **                                      | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Revenues:                                       |       |                                   |       |   |   |
| Software and systems                            |       | $                                      | 3,126      |   | $ | 5,870 |   |
| Customer support                                |       | 8,104                                  |       | 11,496 |   |
| Electronic services                             |       | 4,065                                  |       | 4,754 |   |
| Total revenues                                  |       | 15,295                                 |       | 22,120 |   |
| Cost of revenues:                               |       |                                   |       |   |   |
| Software and systems                            |       | 1,138                                  |       | 2,971 |   |
| Customer support                                |       | 5,894                                  |       | 7,347 |   |
| Electronic services                             |       | 2,706                                  |       | 2,791 |   |
| Total cost of revenues                          |       | 9,738                                  |       | 13,109 |   |
| Total gross margin                              |       | 5,557                                  |       | 9,011 |   |
| Operating  expenses:                            |       |                                   |       |   |   |
| Selling, general and administrative             |       | 7,082                                  |       | 8,699 |   |
| Product development                             |       | 2,184                                  |       | 2,519 |   |
| Depreciation and amortization                   |       | 243                                    |       | 477 |   |
| Stock-based compensation                        |       | 334                                    |       | 113 |   |
| Restructuring and impairment                    |       | (13                                    | )          | 1,052 |   |
| Gain on sale of DentalMate business             |       | —                                 |       | (41 | ) |
| Total operating expenses                        |       | 9,830                                  |       | 12,819 |   |
| Loss from operations                            |       | (4,273                                 | )          | (3,808 | ) |
| Other income  (expense):                        |       |                                   |       |   |   |
| Interest income                                 |       | 60                                     |       | 40 |   |
| Interest expense and other, net                 |       | (67                                    | )          | (137 | ) |
| Total other income (expense)                    |       | (7                                     | )          | (97 | ) |
| Net loss                                        |       | $                                      | (4,280     | ) | $ | (3,905 | ) |
| Basic and diluted net loss per share            |       | $                                      | (0.31      | ) | $ | (0.47 | ) |
| Weighted-average  shares—basic and diluted |       | 13,951                                 |       | 8,285 |   |

 

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

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**VANTAGEMED CORPORATIONCONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts)**

| ** **                                                                                                                                                                                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                                                                                                                                                     |       |     |       |     |       |
| Current assets:                                                                                                                                                                                                                            |       |     |       |     |       |
| Cash and cash  equivalents                                                                                                                                                                                                                 |       | $        | 636        |     | $          | 946 |   |
| Accounts  receivable, net of allowance of $352 and $413, respectively                                                                                                                                                                      |       | 1,213    |       | 1,761    |       |
| Inventories, net  of reserve of $103 and $21, respectively                                                                                                                                                                                 |       | 62       |       | 116      |       |
| Prepaid expenses  and other                                                                                                                                                                                                                |       | 263      |       | 396      |       |
| Total current assets                                                                                                                                                                                                                       |       | 2,174    |       | 3,219    |       |
| Other assets, net  of current portion                                                                                                                                                                                                      |       | —   |       | 6        |       |
| Property and  equipment, net                                                                                                                                                                                                               |       | 213      |       | 333      |       |
| Intangibles, net                                                                                                                                                                                                                           |       | 377      |       | 392      |       |
| Total assets                                                                                                                                                                                                                               |       | $        | 2,764      |     | $          | 3,950 |   |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                |       |     |       |     |       |
| Current liabilities:                                                                                                                                                                                                                       |       |     |       |     |       |
| Current portion  of long-term debt                                                                                                                                                                                                         |       | $        | 140        |     | $          | 375 |   |
| Accounts payable                                                                                                                                                                                                                           |       | 1,543    |       | 1,754    |       |
| Accrued  liabilities                                                                                                                                                                                                                       |       | 1,128    |       | 2,071    |       |
| Customer deposits  and deferred revenue                                                                                                                                                                                                    |       | 3,299    |       | 3,919    |       |
| Total current liabilities                                                                                                                                                                                                                  |       | 6,110    |       | 8,119    |       |
| Long-term portion  of restructuring reserve, net of current portion                                                                                                                                                                        |       | 22       |       | 93       |       |
| Long-term debt,  net of current portion                                                                                                                                                                                                    |       | 42       |       | —   |       |
| Total liabilities                                                                                                                                                                                                                          |       | 6,174    |       | 8,212    |       |
| Commitments and contingencies (Notes 6 and 12)                                                                                                                                                                                             |       | —   |       | —   |       |
| Stockholders’  deficit:                                                                                                                                                                                                               |       |     |       |     |       |
| Preferred stock,  $0.001 par value, 5,000,000 shares authorized; no shares issued or  outstanding 2005 and 2004                                                                                                                            |       | —   |       | —   |       |
| Common stock,  $0.001 par value, 40,000,000 shares authorized; 14,239,178 shares issued and  outstanding as of December 31, 2005; 20,000,000 shares authorized;  8,279,323 shares issued and outstanding as of December 31, 2004 |       | 14       |       | 8        |       |
| Additional paid-in  capital                                                                                                                                                                                                                |       | 77,751   |       | 72,625   |       |
| Accumulated  deficit                                                                                                                                                                                                                       |       | (81,175  | )          | (76,895  | )          |
| Total  stockholders’ deficit                                                                                                                                                                                                          |       | (3,410   | )          | (4,262   | )          |
| Total liabilities and  stockholders’ deficit                                                                                                                                                                                          |       | $        | 2,764      |     | $          | 3,950 |   |

 

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

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**VANTAGEMED CORPORATIONCONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY (DEFICIT)AND COMPREHENSIVE LOSS(In thousands, except share amounts)**

| ** **                                                          | ** ** | ** **            | ** ** | ** **     | ** ** | **Unrealized**           | ** ** | ** **      | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------------------|------------|-----------------|------------|-------------|------------|
| ** **                                                          | ** ** | ** **            | ** ** | ** **     | ** ** | **Gain (Loss)**     | ** ** | ** **      | ** ** | ** **  | ** ** |
| ** **                                                          | ** ** | ** **            | ** ** | ** **     | ** ** | **On Available-**   | ** ** | ** **      | ** ** | ** **  | ** ** |
| ** **                                                          | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **For-Sale**             | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                                                          | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Paid-In Capital** | ** ** | **Securities**  | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance, December 31, 2003                                     |       | 8,343,770             |       |           | $          | 8                        |       |            |       | $           | 72,483     |   |   |   | $ | 16 |   |   |   | $ | (72,990 | ) |   | $ | (483 | ) |
| Repayment of notes receivable with common stock held  as collateral |       | (128,779              | )          |           | —     |                     |       |            | —     |        |       |   | — |   |   |   | — |   |   | — |   |
| Shares issued in exchange for options exercised                     |       | 64,332                |       |           | —     |                     |       |            | 29         |        |       |   | — |   |   |   | — |   |   | 29 |   |
| Stock-based compensation expense                                    |       | —                |       |           | —     |                     |       |            | 113        |        |       |   | — |   |   |   | — |   |   | 113 |   |
| Subtotal                                                            |       | 8,279,323             |       |           | 8          |                     |       |            | 72,625     |        |       |   | 16 |   |   |   | (72,990 | ) |   | (341 | ) |
| Unrealized loss on investments                                      |       | —                |       |           | —     |                     |       |            | —     |        |       |   | (16 | ) |   |   | — |   |   | (16 | ) |
| Net loss                                                            |       | —                |       |           | —     |                     |       |            | —     |        |       |   | — |   |   |   | (3,905 | ) |   | (3,905 | ) |
| Comprehensive loss                                                  |       |                  |       |           |       |                     |       |            |       |        |       |   |   |   |   |   |   |   |   | (3,921 | ) |
| Balance, December 31, 2004                                     |       | 8,279,323             |       |           | $          | 8                        |       |            |       | $           | 72,625     |   |   |   | $ | — |   |   |   | $ | (76,895 | ) |   | $ | (4,262 | ) |
| Sale of stock and warrants (Note 7)                                 |       | 5,376,344             |       |           | 5          |                     |       |            | 4,571      |        |       |   | — |   |   |   | — |   |   | 4,576 |   |
| Shares issued in exchange for options exercised                     |       | 583,511               |       |           | 1          |                     |       |            | 221        |        |       |   | — |   |   |   | — |   |   | 222 |   |
| Stock-based compensation expense                                    |       | —                |       |           | —     |                     |       |            | 334        |        |       |   | — |   |   |   | — |   |   | 334 |   |
| Subtotal                                                            |       | 14,239,178            |       |           | 14         |                     |       |            | 77,751     |        |       |   | — |   |   |   | — |   |   | 870 |   |
| Net loss                                                            |       | —                |       |           | —     |                     |       |            | —     |        |       |   | — |   |   |   | (4,280 | ) |   | (4,280 | ) |
| Comprehensive loss                                                  |       |                  |       |           |       |                     |       |            |       |        |       |   |   |   |   |   |   |   |   | (4,280 | ) |
| Balance,  December 31, 2005                                    |       | 14,239,178            |       |           | $          | 14                       |       |            |       | $           | 77,751     |   |   |   | $ | — |   |   |   | $ | (81,175 | ) |   | $ | (3,410 | ) |

 

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

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**VANTAGEMED CORPORATIONCONSOLIDATED STATEMENTSOF CASH FLOWS(In thousands)**

| ** **                                                                    | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                        |       |                                   |       |   |   |
| Net loss                                                                      |       | $                                      | (4,280     | ) | $ | (3,905 | ) |
| Adjustments to  reconcile net loss to net cash used for operating activities: |       |                                   |       |   |   |
| Depreciation and amortization                                                 |       | 242                                    |       | 477 |   |
| Loss (gain) on sale or disposal of assets                                     |       | —                                 |       | (34 | ) |
| Bad debt expense                                                              |       | 246                                    |       | 451 |   |
| Impairment of intangibles                                                     |       | —                                 |       | 1,176 |   |
| Stock-based compensation                                                      |       | 334                                    |       | 113 |   |
| Changes in assets and  liabilities:                                           |       |                                   |       |   |   |
| Accounts receivable                                                           |       | 302                                    |       | 152 |   |
| Inventories                                                                   |       | 54                                     |       | 153 |   |
| Prepaid expenses and other                                                    |       | 336                                    |       | 298 |   |
| Accounts payable and accrued liabilities                                      |       | (1,225                                 | )          | (2 | ) |
| Customer deposits and deferred revenue                                        |       | (620                                   | )          | 374 |   |
| Net cash used for operating activities                                        |       | (4,611                                 | )          | (747 | ) |
| Cash flows from  investing activities:                                        |       |                                   |       |   |   |
| Purchases of property and equipment                                           |       | (49                                    | )          | (131 | ) |
| Purchase of investments                                                       |       | (4,000                                 | )          | — |   |
| Proceeds from maturities of investments                                       |       | 4,000                                  |       | 751 |   |
| Cash proceeds from DentalMate sale                                            |       | —                                 |       | 50 |   |
| Net cash provided by (used for) investing activities                          |       | (49                                    | )          | 670 |   |
| Cash flows from  financing activities:                                        |       |                                   |       |   |   |
| Payments on debt                                                              |       | (448                                   | )          | (591 | ) |
| Proceeds from sale of stock and warrants, net                                 |       | 4,576                                  |       | — |   |
| Proceeds from stock option exercises                                          |       | 222                                    |       | 29 |   |
| Net cash provided by (used for) financing activities                          |       | 4,350                                  |       | (562 | ) |
| Net decrease in cash and cash equivalents                                     |       | (310                                   | )          | (639 | ) |
| Cash and cash  equivalents, beginning of year                                 |       | 946                                    |       | 1,585 |   |
| Cash and cash equivalents, end of year                                        |       | $                                      | 636        |   | $ | 946 |   |
| Supplemental cash  flow information:                                          |       |                                   |       |   |   |
| Cash payments for interest                                                    |       | $                                      | 17         |   | $ | 36 |   |
| Acquisition of  property and equipment under capital lease arrangements       |       | $                                      | 58         |   | $ | — |   |

 

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

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**VANTAGEMED CORPORATION****NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**NOTE1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES**

VantageMed Corporation wasincorporated in California on June 1, 1995, and on April 9, 1997, wereincorporated in Delaware. In February 2000, we completed our initialpublic offering (IPO) of 3 million shares of our common stock, the grossproceeds of which aggregated approximately $36 million. VantageMed is adiversified healthcare information systems supplier headquartered in RanchoCordova, California with support personnel and sales representatives in variouslocations throughout the United States. We develop, sell, install and supportsoftware products and services that assist physicians, anesthesiologists,behavioral health professionals, and other healthcare providers in theoperation of their practices and organizations. We have built a nationalcustomer presence by acquiring established regional healthcare practicemanagement systems companies to sell and support our Windows-based software andservices. In 2005 and 2006 we established numerous relationships with ValueAdded Resellers (VARs). We hope to distribute product using the VARdistribution channel in 2006. We have not completed any acquisitions since 1999.We have developed a customer base of approximately 18,000 physician,anesthesiologist and behavioral health providers nationwide through bothacquisitions and internal growth.

**Basis of presentation**

The accompanying consolidated financial statementshave been prepared assuming that VantageMed will continue as a going concern;however, we have experienced recurring losses from operations since ourinception. These losses have resulted in negative operating cash flows andnegative working capital. At December 31, 2005 we had cash and cashequivalents totaling $636,000, negative working capital of $3.9 million and astockholders’ deficit of $3.4 million. These factors, among others, raisesubstantial doubt as to our ability to continue as a going concern. We are alsosubject to a number of additional risks, including, but not limited touncertainties in the healthcare industry, our ability to continue to developnecessary complementary technologies including clinical focused software suchas an Electronic Medical Records (EMR) product as well as market acceptance ofour existing products. In order for us to achieve positive operating cash flow,working capital or profitability we will need to make changes to our cost structureand operating plan. These changes also involve significant risks anduncertainties including our ability to execute these strategies in an effectiveand timely manner. The accompanying consolidated financial statements do notinclude any adjustments relating to the recoverability and classification ofrecorded asset amounts or the amounts and classification of liabilities thatmight be necessary should VantageMed be unable to continue as a going concern.

Throughout 2003 and 2004 we migrated a number of ourlegacy technology customers to our RidgeMark product line increasing the numberof RidgeMark customers supported from approximately 110 at December 2002to 401 at December 2004 and 437 at December 2005. This rapid increasein the number of RidgeMark customers placed a significant strain on ourresources and had a negative impact on the quality of product support we wereable to deliver. In February 2006 the number of RidgeMark customers beingsupported decreased to approximately 407 following the sale of our Hawaii basedoperations. Since our legacy customer migration process was completed in thesecond half of 2004 and into the first quarter of 2005, we have experienced asignificant decrease in order activity from 189 orders in 2004 to 31 orders in2005. We invested resources in acquiring new customers to supplement thisdecrease in order activity but were not successful in this pursuit. Due to ourneed to balance costs and cash against this opportunity, we have reduced ourspending on this process and are currently focusing our operations on customersatisfaction of our RidgeMark customer base, market position of Helper andgrowth of our Northern Health market niche.

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While we have taken a number of steps designed toimprove the quality of customer support, increase sales to new customers andalign our costs with this reduced level of revenues, including a reduction inheadcount from 174 at March 31, 2005 to 130 at December 31, 2005 andto 93 at March 24, 2006, additional changes are necessary to improve ourfinancial condition.  These additionalchanges may require further cost reductions. Additional financing may not beavailable on terms acceptable to us, or at all. If adequate funds are notavailable on acceptable terms, our ability to fund our operations, takeadvantage of opportunities, develop products or services or otherwise respondto competitive pressure may be limited.

Considering our currentsales forecast, cash management practices, projected operating expenses as wellas a number of structural and other alternatives described above, we believethat we can make the changes necessary to ensure that our cash and investmentswill be sufficient to meet our cash flow needs through at least December 2006.There can be no assurance that our plans will succeed.

**Use of estimates**

The preparation of theconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires us to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. For instance, we record a liability on our balancesheet each period for the estimated cost of goods and services rendered to usfor which we have not received an invoice and our tax accruals require us tointerpret and apply complex tax laws in numerous states and local jurisdictions.Additionally, our restructuring reserve includes an estimate for the loss weexpect to incur for excess leased facility space. This estimate is based oncertain assumptions, such as the market value of the space and the time it willtake to sublease the space. Our estimates are based on historical experience,input from third parties, and other relevant facts and circumstances. Actualresults could differ from these estimates. Certain prior year amounts have beenreclassified to conform to the current year presentation.

**Revenue recognition**

Fees from licenses are recognized as revenue inaccordance with AICPA Statement of Position 97-2, (SOP 97-2) “SoftwareRevenue Recognition,” as amended by SOP 98-9, and Staff AccountingBulletin No. 104 (SAB 104) “Revenue Recognition,” when all shipmentobligations have been met, fees are fixed and determinable, collection of thesale proceeds is deemed probable and a contract has been signed. We generallycharge a one-time license fee for the right to use our proprietary software. Theamount of the license fee is fixed and based on a specific number of usersspecified at the inception of the license agreement and is generally part of amultiple element arrangement. The license fee is not subject to adjustmentbased on future usage or an obligation to distribute further copies. Payment ofthe license fee is due upon delivery and acceptance, generally 30 to 45 daysfrom the date of contract execution. We do not offer cancellation provisionsand in a limited number of cases, we have offered extended payment terms. Wealso license one of our proprietary software products on a monthly subscriptionbasis. No long-term commitment is required and the customer can cancel thesubscription agreement at any time. Under the subscription agreement, licensefee revenue is recognized ratably over the license period.

Multiple element arrangements generally include aproprietary software license, third-party software, hardware, andimplementation, training and other specified services. The fee for multipleelement arrangements is allocated to the various elements based on vendor-specificobjective evidence (VSOE) of fair market value established by the price of theelements sold separately or renewal rates if an element is not yet being soldseparately. The residual method is used when VSOE exists for the undeliveredelements, primarily post-contract support and training. Also, to the extentthat a discount exists on any of the elements, we follow the residual methodand attribute that discount entirely to the delivered elements. 

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Upon contract execution,we collect a deposit, which can vary from 0% to 50% based on the customer’scredit profile and previous relationship with us, if any. In the event that acustomer elects to finance their purchase, we obtain a 10% deposit from thecustomer and we obtain a copy of the approved lease documents prior to movingforward with the contract. Payments from leasing companies are either receivedupon contract execution or when the system has been delivered and accepted bythe customer.  Revenue is recognized whenall of the criteria of SOP 97-2 are met. Deposits received in advance ofrevenue recognition are recorded as deferred revenue.

We also provide post-contract support under annualmaintenance and support agreements as well as other services includingelectronic claims processing, electronic statement printing, mailing, dataprocessing and other services provided independently from software licensingactivities. Annual support agreements are billed annually, quarterly or monthlyand all other services are billed as the services are rendered. In accordancewith SOP 97-2, software subscription license fees and revenue from annualsupport agreements are recognized ratably over the contract term. Subscriptionand support fees received in advance of revenue recognition are recorded asdeferred revenue. Revenue from all other services is recognized as the servicesare rendered.

We offer a limited returnprovision for 60 days from the date of purchase, for one of our off-the-shelfsoftware products. Based on historical information available to us based onpast sales and returns experience, we are able to reasonably estimate futureproduct returns. Although not material, we make adequate provision for returnsexpected on sales made within 60 days of each reporting period.

**Software development costs**

To date, all of our costsfor research and development of software products have been expensed asincurred since the amount of software development costs incurred subsequent tothe establishment of technological feasibility, evidenced by establishment of aworking model, have been immaterial. To the extent that we incur additionaldevelopment costs after technological feasibility has been established, we wouldcapitalize those development costs in accordance with the Statement ofFinancial Accounting Standards No. 86, “Accounting for the Costs ofComputer Software to be Sold, Leased or Otherwise Marketed.”

**Allowance for doubtful accounts**

We review accounts receivableand provide a reserve for amounts we estimate will not be collectible. Duringour review we consider our historical experience, the age of the receivablebalance, the credit-worthiness of the customer and the reason for thedelinquency. We consider a number of matters when granting credit to customersincluding our prior experience with them, their current cash resources, andability to obtain lease financing.

**Inventories and related reserves**

Inventories are stated atthe lower of cost (specific identification method) or market and consistprimarily of supplies and new computer equipment purchased to fill customerorders. Reserves are provided for excess or obsolete inventory, which areestimated based on the age of the items and our ability to utilize the items infuture sales. Generally, items that are greater than one year old are reservedand the related charge is recorded as cost of software and systems revenue.

**Long-lived assets**

For certain long-livedassets, primarily property and equipment and intangible assets, we estimate theuseful life of the asset and recognize its cost as an expense over theestimated useful life. We use the straight-line method to expense long-livedassets, which results in an equal amount of expense in each 

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period.Additionally, pursuant to applicable accounting rules, we periodically assesswhether long-lived assets have been impaired. We deem an asset to be impairedif its estimated fair value is less than the net book value at which it isrecorded on our balance sheet. Our estimate of fair value is based on the netpresent value of expected future cash flows attributable to the asset.Predicting future cash flows attributable to a particular asset is difficult,and requires the use of significant judgment.

**Property and Equipment**

Property and equipment arestated at cost less accumulated depreciation. Depreciation is computed usingthe straight-line method over the shorter of the estimated useful lives of theassets or the lease term, if applicable, generally three to seven years. Repairand maintenance costs are expensed as they are incurred.

**Goodwill**

We evaluate the carrying value of goodwill annually inaccordance with SFAS No. 142. The annual impairment review required bySFAS 142 involves a two-step process as follows:

Step 1—Compare the fair value of each reporting unitto the carrying value, including goodwill, of each of the reporting units. Foreach reporting unit where the carrying value, including goodwill, exceeds theunit’s fair value, Step 2 is performed. If a unit’s fair value exceeds thecarrying value, no further work is performed and no impairment charge isnecessary.

Step 2—Perform anallocation of the fair value of the reporting unit to its identifiable tangibleand non-goodwill intangible assets and liabilities. This derives an impliedfair value for the reporting unit’s goodwill. Compare the implied fair value ofthe reporting unit’s goodwill with the carrying value of the reporting unit’sgoodwill. If the carrying value of the reporting unit’s goodwill is greaterthan the implied fair value of its goodwill, an impairment charge would berecognized for the excess.

**Finite-livedIntangibles and Long-lived Assets**

Finite-lived intangible assets are presented at cost,net of accumulated amortization. Amortization is calculated using thestraight-line method over estimated useful lives of the assets. An impairmentcharge will be recorded on finite-lived intangibles or long-lived assets whenit is determined that the carrying value of the intangibles and long-livedassets may not be recoverable. There are several factors considered importantwhich could trigger an impairment including changes in our use of the acquiredassets or the strategy for our business and significant negative industry oreconomic trends.

Based upon the existenceof one or more of the above indicators of impairment, we measure any impairmentbased on a projected discounted cash flow method using a discount ratedetermined to be commensurate with the risk inherent in our current business model.

**Cash equivalents and investments**

We consider all highlyliquid investments with an original maturity of three months or less whenpurchased to be cash equivalents. We classify marketable securities asavailable-for-sale in accordance with the provisions of Statement of FinancialAccounting Standards No. 115, “Accounting for Certain Investments in Debtand Equity Securities.”  These securitiesare carried at fair market value, with unrealized gains and losses reported asa separate component of stockholders’ equity. Gains or losses on securitiessold are based on the specific identification method. We had no short or longterm investments at December 31, 2005 or 2004.

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**Concentration of credit risk**

As of December 31,2005 and 2004, we had cash deposits at financial institutions exceedingfederally insured limits totaling $512,822 and $749,323, respectively.

**Financial instruments**

The fair values offinancial instruments are the amounts at which the instruments could beexchanged in a current transaction between willing parties. We estimate thatthe carrying amounts of the financial instruments included in the accompanyingconsolidated balance sheets are not materially different from their fair values. The carrying amounts reported for cashand cash equivalents, accounts receivable and accounts payable are consideredto approximate fair values based upon the short maturities of these financialinstruments. The carrying amounts of short-term and long-term debt are alsoconsidered to approximate fair values based upon current interest rates.

**Accrued liabilities**

Certain of our accruedliabilities are based on estimates. For instance, we record a liability on ourbalance sheet each period for the estimated cost of goods and services renderedto us for which we have not received an invoice and we have made provisions toaddress certain state or local tax liabilities that require us to interpretnumerous complex tax laws. Additionally, our restructuring reserve includes anestimate for the loss we expect to incur for excess leased facility space. Thisestimate is based on certain assumptions, such as the market value of the spaceand the time it will take to sublease the space. Our estimates are based onhistorical experience, input from sources outside the company, and otherrelevant facts and circumstances.

**Legal Costs**

Legal costs incurred bythe Company arising in the normal course of business are expensed as incurred. Estimatedfuture actual attorney fees cannot be accrued for future services. Costsassociated with loss contingencies will be accrued when a liability is probableand the costs are reasonably estimable.

**Warranty Costs**

We provide a 90-daywarranty on proprietary software and services delivered. No warranty isprovided on third-party software or hardware. Although we do not have a historyof material warranty claims, the need for a warranty accrual is evaluatedperiodically in accordance with Statement of Financial Accounting Standard No. 5,“Accounting for Contingencies.”

**Income taxes**

We use the asset and liabilitymethod of accounting for income taxes under which deferred income taxes areprovided based upon currently enacted tax laws and rates. A valuation allowanceis provided against the future benefits of deferred tax assets if it isdetermined that it is more likely than not that the future tax benefitsassociated with the deferred tax asset will not be realized.

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**Net loss per share**

Basicnet loss per share is based on weighted average shares outstanding and dilutednet loss per share is based on weighted average common shares and dilutiveequivalents outstanding, if any. As a result of our net losses, all commonshare equivalents would have been anti-dilutive and have therefore beenexcluded from the diluted net loss per share calculation. The following tablesummarizes securities outstanding as of each period end, that wereanti-dilutive and not included in the calculation of diluted net loss per share(in thousands):

| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Stock options                      |       | 1,692                 |       | 2,002 |   |
| Warrants to purchase common  stock |       | 2,702                 |       | 100 |   |

 

**Comprehensive loss**

We report comprehensiveloss and its components in accordance with Statement of Financial AccountingStandards No. 130 (SFAS 130), “Reporting Comprehensive Income.”Comprehensive income includes all changes in equity (net assets) during aperiod from non-owner sources. During 2004 other comprehensive income consistedof unrealized holding gains and losses on available-for-sale investmentsecurities.

**Stock-based compensation**

Effective January 1, 2003, we began to accountfor stock options using a fair value method, as allowed under SFAS No. 123,as amended. We have elected to use the prospective method of transition,resulting in the recognition of stock-based compensation expense of $334,000and $113,000 in the years ended December 31, 2005 and 2004, respectively.

Hadcompensation cost for our option plan been determined based on the fair valueat the grant dates for the awards, calculated in accordance with the methodprescribed by SFAS 123 prior to January 1, 2003, our pro forma netloss would have been as follows (in thousands, except per share amounts):

| ** **                                                                                                                          | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net loss, as  reported                                                                                                              |       | $                                      | (4,280     | ) | $ | (3,905 | ) |
| Add stock-based  compensation expense included in reported net loss, net of related tax  effects                                    |       | 334                                    |       | 113 |   |
| Deduct total  stock-based compensation expense determined under fair value based method for  all awards, net of related tax effects |       | (341                                   | )          | (279 | ) |
| Pro forma net loss                                                                                                                  |       | $                                      | (4,287     | ) | $ | (4,071 | ) |
| Basic and diluted  loss per share:                                                                                                  |       |                                   |       |   |   |
| As reported                                                                                                                         |       | $                                      | (0.31      | ) | $ | (0.47 | ) |
| Pro forma                                                                                                                           |       | $                                      | (0.31      | ) | $ | (0.49 | ) |

 

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Forpurposes of the pro forma disclosure above, the fair value of each option grantis estimated on the date of the grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions for2005 and 2004:

| Dividend yield           |   | 0         | %      |
|--------------------------|--------|-----------|--------|
| Risk-free  interest rate |   | 3.3       | %      |
| Stock price  volatility  |   | 201       | %      |
| Expected life            |   | 3.5 years |   |

 

The resulting pro formacompensation cost may not be representative of that to be expected in futureyears.

**NOTE 2—RESTRUCTURING ACTIVITIES**

Ourrestructuring reserve balance consists of a reserve related to two leasedfacilities in Boulder, Colorado that were vacated in 2002. In the secondquarter of 2004, we entered into an agreement to terminate and buyout the leasefor one of the two facilities. In connection with the signing of thisagreement, we recognized a benefit of $147,000 representing the differencebetween the payments that will be made under the revised arrangement and theamounts previously reserved for through our restructuring reserve. Thetermination agreement required us to pay approximately $22,000 upon signing andrequires us to make monthly payments of approximately $4,000 through July 2006.Payments on the balance of the lease will be made through the end of the leaseterm (December 2007). The components of our restructuring provision andactivity in the reserve for 2005 and 2004 are as follows (in thousands):

| ** **                                | ** ** | **Leased  Facilities** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| December 31,  2003 balance           |       |                   | $          | 701 |   |   |
| 2004 net benefit                          |       |                   | (126       | ) |   |
| Cash payments                             |       |                   | (331       | ) |   |
| December 31,  2004 balance           |       |                   | 244        |   |   |
| First quarter  2005 restructuring benefit |       |                   | 13         |   |   |
| Cash payments                             |       |                   | (173       | ) |   |
| December 31, 2005  balance           |       |                   | $          | 84 |   |   |

 

**NOTE 3—SALE OF DENTALMATE BUSINESS**

In September 2003 wesold our DentalMate business in exchange for $500,000 in cash, notes receivabletotaling $100,000 and other consideration of $60,000. We deferred the gainassociated with the $100,000 in notes until the payment was received. Inconnection with this transaction we recognized a gain totaling $571,000 in 2003and upon collection of the final note installment, $41,000 in 2004.

**NOTE4—GOODWILL AND OTHER INTANGIBLE ASSETS**

In the fourth quarter of 2005 we performed ourimpairment review of goodwill required by SFAS 142 and determined that thevalue of the intangible assets associated with our legacy billing serviceproduct based in the State of Hawaii was appropriate given the sale of ourHawaii based operations in February 2006 (see Note 12). As such, noimpairment amount was recorded. Throughout 2005 we wrote off the value ofintangible assets as the sunset process associated with each of the legacytechnology products was completed. There was no impact to our statement ofoperations as the net book value of these assets was zero.

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In the fourth quarter of 2004 we determined that thevalue of the intangible assets associated with our legacy products wassignificantly impaired due to our implementation of an accelerated supportsunset program for these legacy products. In addition, continued poorperformance and declining number of customers for one of our billing servicesunits resulted in an impairment charge in 2004 of $1,176,000. Approximately$477,000 of this charge was related to the impairment of goodwill associatedwith one of our billing services business units.

To determine the amount of the impairment charge andimplied fair value of goodwill in each year, we performed an allocation of theestimated fair value of each reporting unit to the identifiable tangible andintangible assets and non-goodwill intangible assets and liabilities.

Componentsof intangible assets were as follows (in thousands):

| ** **                                      | ** ** | **December 31,**       | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible assets  subject to amortization:     |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquired software                               |       |                        | $          | 984 |   |   |   | $ | (984 | ) |   |   | $ | 4,276 |   |   |   | $ | (4,276 | ) |   |
| Customer lists                                  |       |                        | 750        |   |   |   | (731 | ) |   |   | 3,989 |   |   |   | (3,955 | ) |   |
| Other                                           |       |                        | 60         |   |   |   | (60 | ) |   |   | 297 |   |   |   | (297 | ) |   |
|                                            |       |                        | $          | 1,794 |   |   |   | $ | (1,775 | ) |   |   | $ | 8,562 |   |   |   | $ | (8,528 | ) |   |
| Intangible assets not  subject to amortization: |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                                        |       |                        | $          | 358 |   |   |   |   |   |   |   | $ | 835 |   |   |   |   |   |   |

 

Amortization of intangibleassets was approximately $15,000 and $180,000 for the years ended December 31,2005 and 2004, respectively. We expect to recognize approximately $1,000 ofamortization expense in the first quarter of 2006 and expect to write off thebalance of the intangible assets and goodwill in connection with the sale ofour Hawaii based operations in the first quarter of 2006 (Note 12).

**NOTE 5—BALANCE SHEET COMPONENTS**

Propertyand equipment net, consisted of the following (in thousands):

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Office and  computer equipment                   |       | $                     | 2,036      |   | $ | 2,022 |   |
| Furniture and  fixtures                          |       | 140                   |       | 201 |   |
| Vehicles                                         |       | 18                    |       | 20 |   |
| Leasehold  improvements                          |       | 94                    |       | 176 |   |
|                                             |       | 2,288                 |       | 2,419 |   |
| Less: accumulated  amortization and depreciation |       | (2,075                | )          | (2,086 | ) |
|                                             |       | $                     | 213        |   | $ | 333 |   |

 

Depreciation expense was approximately $227,000 and$297,000 for the years ended December 31, 2005 and 2004, respectively.

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Accruedliabilities consisted of the following (in thousands):

| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Accrued payroll  and related expenses        |       | $                     | 292        |   | $ | 626 |   |
| State and Local  taxes payable               |       | 294                   |       | 482 |   |
| Restructuring,  current portion (see Note 2) |       | 62                    |       | 151 |   |
| Accrued purchases                            |       | 178                   |       | 352 |   |
| Accrued legal  matters                       |       | 82                    |       | 129 |   |
| Other                                        |       | 220                   |       | 331 |   |
|                                         |       | $                     | 1,128      |   | $ | 2,071 |   |

 

**NOTE 6—DEBT AND LEASE OBLIGATIONS**

At December 31, 2005, we had $130,000 in debtprimarily issued in connection with our acquisitions as well as in connectionwith our financing of certain annual insurance premiums. Interest rates onthese notes range from 6.0% to 7.0%. In addition, we lease certain computersand office equipment under lease agreements accounted for as capital leases. AtDecember 31, 2005, we had $52,000 in capital leases that mature from February 2010to July 2010. At December 31, 2004, we had $320,000 in assumed debtor promissory notes primarily issued in connection with acquisitions and$55,000 in capital leases.

We lease space at our principal executive andcorporate headquarters and at several locations throughout the United States,with lease terms expiring at various dates through 2007. We have subleased somespace in our facility in Boulder, Colorado.

Futureminimum payments under all debt and lease obligations at December 31, 2005are as follows (in thousands):

| **Year Ending December 31,**                              | ** ** | ** ** | ** ** | **Debt** | ** ** | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|-----------------------|------------|
| 2006                                                                     |       | $          | 130        |     |       | $                   | 15         |                  |       |   | $ | 326 |   |   |
| 2007                                                                     |       | —     |       |     | 15         |                |       |                  | 159        |   |   |
| 2008                                                                     |       | —     |       |     | 15         |                |       |                  | 79         |   |   |
| 2009                                                                     |       | —     |       |     | 15         |                |       |                  | 79         |   |   |
| 2010                                                                     |       | —     |       |     | 5          |                |       |                  | 79         |   |   |
| 2011                                                                     |       | —     |       |     | —     |                |       |                  | 13         |   |   |
| Total minimum payments                                                   |       | 130        |       |     | 65         |                |       |                  | $          | 735 |   |   |
| Less: interest on  capital lease obligations at rates of 10.77% to 11.8% |       | —     |       |     | (13        | )                   |       |                  |       |   |   |
| Less: current  maturities                                                |       | (130       | )          |     | (10        | )                   |       |                  |       |   |   |
| Long-term portion                                                        |       | $          | —     |     |       | $                   | 42         |                  |       |   |   |   |   |

 

The future minimumoperating lease payments above have been reduced for estimated income fromsublease arrangements of $117,000 and $46,000 in 2006 and 2007, respectively.

**NOTE 7—STOCKHOLDERS’ EQUITY**

**Preferred Stock**

We are authorized to issue5,000,000 shares of non-cumulative preferred stock with a par value of $0.001per share, of which no shares are issued or outstanding at December 31,2005 or 2004. Each share has the same voting rights as the number of shares ofcommon stock to which it would be converted.

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**Warrants**

In March 2005, we completed a $5.0 millionprivate placement of 5,376,344 shares of common stock priced at $0.93 per share.The investors in the transaction also received warrants to purchase anadditional 1,075,267 shares of common stock priced at $1.30 per share, andwarrants to purchase 1,075,267 shares of common stock priced at $1.55 per share.Our broker also received warrants to purchase an additional 225,807 shares ofour common stock at $1.30 per share and 226,806 shares of our common stock at$1.55 per share as part of their fee arrangement. The fair value of thesewarrants was estimated to be $2.1 million using a Black-Scholes option pricingmodel and was recorded to additional paid in capital upon issuance. Thewarrants were immediately exercisable and expire on March 15, 2010.

In June 2003, weissued warrants to purchase 100,000 shares of our common stock in connectionwith a consulting arrangement. The fair value of the warrants was estimated tobe $33,000 using a Black-Scholes option pricing model and is being amortized toexpense over the three-year term of the arrangement.

**Private Placement**

In March 2005, wecompleted a $5.0 million private placement of 5,376,344 shares of common stockpriced at $0.93 per share. Institutional investors purchased 90 percent of theshares, with members of our management team and a member of our Board ofDirectors combined to purchase 10 percent. The investors in the transactionalso received warrants to purchase an additional 1,075,269 shares of commonstock priced at $1.30 per share, and warrants to purchase 1,075,269 shares ofcommon stock priced at $1.55 per share. In connection with this transaction, wepaid a fee to our broker equal to 7.0% of the total amount of capital wereceived, or $350,000. Our broker also received an additional 225,806 warrantsat a strike price of $1.30 and 225,807 warrants at a strike price of $1.55 topurchase common stock as part of this fee arrangement. After broker commissionsand legal expenses, the net proceeds to VantageMed were approximately $4.6million. We invested these funds in growing our business with a focus ondelivering higher quality service to our customers and expanding the marketscope of our products.

**Stock Option Plans**

Under the Stock Option/Stock Issuance Plan (1998 Plan)the Board of Directors is authorized to grant options to purchase our commonstock to employees, directors and consultants at prices not less than the fairmarket value at date of grant for incentive stock options and  not less than 85% of fair market value for non-statutory stock options. The1998 Plan is divided into two programs: the Option Grant Program under whicheligible persons may be granted options to purchase shares of common stock andthe Stock Issuance Program under which eligible persons may be issued shares ofcommon stock directly, either through the immediate purchase of shares or as abonus for services rendered to VantageMed. The stock options generally vest 25%in the first year and ratably over the following three-year period and expireten years from the date of grant. At December 31, 2005, there wereapproximately 848,000 shares available for issuance under the 1998 Plan. Thenumber of shares reserved for issuance under the 1998 Plan will be increasedautomatically on January 1 of each year by an amount equal to 5% of ourtotal outstanding common shares as of the proceeding December 31.

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Asummary of stock option activity and related information is as follows (inthousands except per share amounts):

| ** **                    | ** ** | **Year  Ended December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **Number of  Options**       | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Balance,  beginning of period |       |                              | 2,002      |   |   |   | $ | 0.67 |   |   |   | 1,657 |   |   |   | $ | 0.75 |   |   |
| Granted                       |       |                              | 842        |   |   |   | 0.98 |   |   |   | 682 |   |   |   | 0.86 |   |   |
| Exercises                     |       |                              | (583       | ) |   |   | 0.39 |   |   |   | (64 | ) |   |   | 0.47 |   |   |
| Cancelled                     |       |                              | (569       | ) |   |   | 1.05 |   |   |   | (273 | ) |   |   | 1.19 |   |   |
| Balance, end of period        |       |                              | 1,692      |   |   |   | $ | 0.79 |   |   |   | 2,002 |   |   |   | $ | 0.67 |   |   |

 

Thefollowing table summarizes information about our outstanding stock options at December 31,2005 (in thousands, except per share amounts):

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**    | ** ** |
|---------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **# Options  Outstanding** | ** ** | **Wtd. Avg.  Contractual Life  Remaining (Years)** | ** ** | **Wtd. Avg.  Exercise Price** | ** ** | **Vested** | ** ** | **Wtd. Avg.  Exercise  Price** | ** ** |
| $0.12 - $0.35                               |       |                         | 228        |                            |       |   | 8.46 |   |   |   | $ | 0.26 |   |   |   | 186 |   |   |   | $ | 0.25 |   |   |
| $0.40 - $0.47                               |       |                         | 206        |                            |       |   | 7.13 |   |   |   | 0.44 |   |   |   | 147 |   |   |   | 0.44 |   |   |
| $0.55 - $1.00                               |       |                         | 740        |                            |       |   | 8.90 |   |   |   | 0.78 |   |   |   | 267 |   |   |   | 0.74 |   |   |
| $1.18 - $9.60                               |       |                         | 518        |                            |       |   | 8.91 |   |   |   | $ | 1.18 |   |   |   | 31 |   |   |   | 2.89 |   |   |
| Total                                       |       |                         | 1,692      |                            |       |   | 8.46 |   |   |   | $ | 0.79 |   |   |   | 631 |   |   |   | $ | 0.64 |   |   |
|                                             |            |                              |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The weighted-average grantdate fair value of options granted was $0.92 and $0.82  per option during 2005 and 2004,respectively.

**NOTE 8—401K SAVINGS PLAN**

We maintain a 401(k) SavingsPlan (the Plan) under which employees may elect to contribute up to 15% oftheir pre-tax compensation to the Plan. All employees are eligible toparticipate in the Plan upon performing 90 consecutive days of service. Employeecontributions are 100% vested at all times. We may make discretionarycontributions to the Plan, which vest annually over a six-year period. We madeno discretionary contributions to the Plan in 2005 or 2004.

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**NOTE 9 — INCOME TAXES**

Noprovision for income taxes was recorded in 2005 or 2004 since we generated bothbook and tax losses. Our provision for (benefit from) income taxes in 2005 and2004 consisted of (in thousands):

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Current:                       |       |                  |       |   |   |
| Federal                        |       | $                     | —     |   | $ | — |   |
| State                          |       | —                |       | — |   |
| Total current                  |       | $                     | —     |   | $ | — |   |
| Deferred:                      |       |                  |       |   |   |
| Federal                        |       | $                     | (1,643     | ) | $ | (643 | ) |
| State                          |       | (137                  | )          | (111 | ) |
| Total deferred                 |       | (1,780                | )          | (754 | ) |
| Change in  valuation allowance |       | 1,780                 |       | 754 |   |
| Net income tax provision       |       | $                     | —     |   | $ | — |   |

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. At December 31, 2005, we had netoperating loss carryforwards for federal and state income tax purposes ofapproximately $50 million and $9 million, respectively, that expirethrough 2025. The extent to which these loss carryforwards can be used tooffset future taxable income may be limited. The components of our deferredincome taxes were as follows (in thousands):

| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Deferred tax assets:                           |       |                  |       |   |   |
| Net operating loss carryforwards               |       | $                     | 17,726     |   | $ | 15,769 |   |
| Accruals and reserves not currently deductible |       | 1,716                 |       | 2,106 |   |
|                                           |       | 19,442                |       | 17,875 |   |
| Deferred tax  liabilities:                     |       |                  |       |   |   |
| Depreciation                                   |       | (148                  | )          | (361 | ) |
|                                           |       | 19,294                |       | 17,514 |   |
| Valuation allowance                            |       | (19,294               | )          | (17,514 | ) |
| Net deferred tax  asset                        |       | $                     | —     |   | $ | — |   |

 

Webelieve that available objective evidence creates sufficient uncertaintyregarding the realizability of deferred tax assets, and therefore we haverecorded a full valuation allowance to reduce the carrying value of such assetsto zero. We will continue to assess the realizability of deferred tax assetsbased on actual and forecasted operating results.  Our effective tax rate differs from thefederal statutory tax rate due to the following (in thousands):

| ** **                                         | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Expected tax  benefit                              |       | $                                      | (1,455     | ) | $ | (1,328 | ) |
| Decrease in  income taxes resulting from:          |       |                                   |       |   |   |
| State income benefit                               |       | (477                                   | )          | (400 | ) |
| Increase in deferred tax asset valuation allowance |       | 3,253                                  |       | 2,734 |   |
| Nondeductible expenses                             |       | (1,321                                 | )          | (1,006 | ) |
| Net income tax  provision                          |       | $                                      | —     |   | $ | — |   |

 

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**NOTE10—LITIGATION AND CONTINGENCIES**

In December 2003, several employees resigned fromVantageMed to form a separate company named Pacific Practice Services. In February 2004and March 2004, VantageMed notified these former employees regardingseveral matters including VantageMed’s assertion that the use of the PacificPractice Services name infringes VantageMed’s rights regarding the name  Pacific Software, among other things. In March 2005,the parties entered into a release and settlement agreement that, among otherthings, requires the former employees to discontinue the use of the namePacific Practice Services.

On March 16, 2004, we filed a notice ofarbitration with the American Arbitration Association in Sacramento, Californiato arbitrate claims against Robert S. Putnam and Duangchan Putnam arising outof their alleged use of trade secrets and other proprietary informationobtained while they were employees of VantageMed to unfairly compete withVantageMed after their employment terminated. The claim is for money damagesand injunctive relief for several causes of action related to misappropriationof trade secrets, unfair competition and breach of an asset purchase agreementand other contracts. Respondents answered the claim denying theallegations contained therein and asserting various affirmative defenses. Thematter was settled in January 2005 and in connection with the settlement,VantageMed agreed to pay the former employees’ legal expenses totaling $27,500.This settlement amount was paid in full in February 2005.

In June 2004, a former employee filed a claimagainst the Company alleging fraud and discrimination. The Company respondedand the case was dismissed in June 2005.

In February 2005, a former VantageMed customerfiled a complaint in state court in New York against the Company alleging thatthe Company breached a contract with and certain warranties to the customer byfailing to deliver certain direct payer transaction software and failing toprovide software that was HIPAA compliant. The customer seeks damages of$192,896.00.  In March 2005, theCompany removed the case to the United States District Court for the WesternDistrict of New York. The Company believes the allegations to be without meritand is actively defending the claims. The Company has answered the complaintdenying the claims and asserting certain affirmative defenses.

In June 2005, a former employee filed a complaintagainst VantageMed alleging discrimination based on age and gender inconnection with his February 2005 termination. VantageMed’s insurer agreedto settle this claim for a total payment of $24,500 plus $9,500 in legal feeswhich was accrued for in September 2005 and paid in December 2005.

In January 2006, a VantageMed customer, theCarson Medical Group, filed suit in state court in Nevada alleging breach ofcontract, breach of the implied covenant of good faith and fair dealing, andunjust enrichment. Carson seeks $236,049 in damages. The case was removed tofederal court in Nevada and upon motion by VantageMed, transferred to thefederal district court in Sacramento. VantageMed has answered the complaint andfiled a counterclaim for recovery of the value of uncompensated servicesprovided by VantageMed.

We are party to variouslegal actions arising in the normal course of business. Matters that areprobable of unfavorable outcome and which can be reasonably estimated areaccrued. Such accruals were $82,000 and $129,000 at December 31, 2005 and2004, respectively, and are based on information known about the matters, ourestimates of the outcomes of such matters, and our experience contesting,litigating and settling similar matters. This amount is included in accruedliabilities in the accompanying consolidated balance sheet. None of the actionsare believed by management to involve amounts that would be material to ourconsolidated financial position, operations, or liquidity after considerationof recorded accruals.

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**NOTE 11—SEGMENT REPORTING**

We have evaluated our approach for making operatingdecisions and assessing the performance of our business and have determinedthat we have three reportable segments: software and systems, customer support and electronic services. Thesoftware and systems sales group sells and licenses practice managementsoftware products to physicians, and other professionals with comprehensiveoffice management software designed to automate the administrative, financial,practice management and clinical requirements of a medical practice. Thecustomer support group provides software, network and hardware support,training, installation services. The electronic services group provideselectronic claims processing, electronic statement printing and mailing andelectronic remittance advice services.

The accounting policies ofthe segments are the same as those described in the summary of significantaccounting policies. We evaluate performance based on margin level before manyof the selling general and administrative and other operating costs and bysegment we do not currently manage costs below gross margin. Additionally, wedo not track long-lived assets by segment and therefore asset disclosures arenot relevant and are not presented. Our reportable segments offer differentproducts and services, which are sold and serviced by the same selling andsupport personnel. The accompanying statements of operations disclose thefinancial information for these reportable segments for 2005 and 2004.

**NOTE12—SUBSEQUENT EVENTS / DISCONTINUED OPERATIONS**

On February 9, 2006, we completed the sale of ourHawaii operation to TeamPraxis. We received $605,000 of cash in connection withthe sale including $25,000 associated with ongoing service and transaction feesthat are expected to be earned within the first quarter of 2006. We believethat while providing working capital to VantageMed to use in our ongoingoperations, the sale will allow our customers and employees located in Hawaiito benefit from a local experienced management team as well as a company with alocal presence in the medical billing and practice management industry. VantageMedexpects to receive some additional service and transaction fees on an ongoingbasis based on continued RidgeMark usage levels.

The Hawaii operation assets sold included software,certain customer contracts, accounts receivable and other assets as outlined inthe Asset Purchase Agreement. The deferred revenue liability associated withamounts invoiced for software maintenance prior to the effective date of thetransaction was also sold to TeamPraxis. Medical billing service customers weregiven a choice to continue with TeamPraxis or to accept VantageMed’s notice oftermination effective February 28, 2006. Post termination billing andcollection services under these terminated contracts is being provided by TeamPraxisunder VantageMed’s direction. Contractual rights and responsibilitiestransferred to TeamPraxis were made effective for services delivered effective February 9,2006.

VantageMed’sHawaii operation had 27 local employees and while it generated approximately$2.8 million of revenues in 2005 revenues, it was not profitable. The followingresults of operations for the Hawaii operations are reported as results ofdiscontinued operations in the accompanying financial statements (inthousands):

| ** **                                         | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Revenues                                           |       | $                                      | 2,794      |   | $ | 2,601 |   |
| Costs of Sale                                      |       | 2,122                                  |       | 1,552 |   |
| Gross Margin                                       |       | 672                                    |       | 1,049 |   |
| Direct and  Allocated Operating Costs and Expenses |       | 1,267                                  |       | 1,407 |   |
| Loss from Discontinued  Operations                 |       | $                                      | (595       | ) | $ | (358 | ) |

 

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Followingare the major classes of assets and liabilities that were sold in the February 2006transaction and the approximate balances as of December 31, 2005 (inthousands):

| Accounts  Receivable, net |   | $   | 247    |   |
|---------------------------|--------|-----|--------|--------|
| Inventories               |   | 16  |   |
| Fixed Assets              |   | 11  |   |
| Intangible Assets         |   | 377 |   |
| Total Assets              |   | 651 |   |
| Deferred Revenues         |   | 232 |   |
| Total Liabilities         |   | $   | 232    |   |

 

We expect to recognize again of approximately $200,000 in the first quarter of 2006 in connection withthis transaction.

**NOTE13—UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:**

| ** **                                                            | ** ** | ** ** | ** ** | ** **  | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-------------|------------|
| ** **                                                            | ** ** | ** ** | ** ** | **Quarter** | ** ** | **Fiscal** | ** ** |
| **(In thousands, except per share amounts)** | ** ** | ** ** | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **Year** | ** ** |
| 2005:                                                                 |       |       |       |        |       |   |   |   |   |   |   |   |   |
| Total Revenues                                                        |       | $          | 4,354      |        | $          | 3,861 |   | $ | 3,616 |   | $ | 3,464 |   |   | $ | 15,295 |   |   |
| Gross margin                                                          |       | 1,514      |       | 1,160       |       | 1,406 |   | 1,477 |   |   | 5,557 |   |   |
| Net income (loss)                                                     |       | (1,248     | )          | (1,667      | )          | (1,062 | ) | (303 | ) |   | (4,280 | ) |   |
| Basic and diluted net income (loss) per share                         |       | $          | (0.13      | )           | $          | (0.12 | ) | $ | (0.08 | ) | $ | (0.02 | ) |   | $ | (0.31 | ) |   |
| 2004:                                                                 |       |       |       |        |       |   |   |   |   |   |   |   |   |
| Total Revenues                                                        |       | $          | 5,065      |        | $          | 6,125 |   | $ | 5,869 |   | $ | 5,061 |   |   | $ | 22,120 |   |   |
| Gross margin                                                          |       | 2,209      |       | 2,632       |       | 2,449 |   | 1,721 |   |   | 9,011 |   |   |
| Net income (loss)(1)                                                  |       | (706       | )          | (28         | )          | (301 | ) | (2,870 | ) |   | (3,905 | ) |   |
| Basic and diluted  net income (loss) per share                        |       | $          | (0.08      | )           | $          | (0.00 | ) | $ | (0.04 | ) | $ | (0.35 | ) |   | $ | (0.47 | ) |   |

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(1)          Includes$1,176,000 for impairment charges in the fourth quarter.

**Item 8. Changes in and Disagreements with Accountantson Accounting and Financial Disclosure**

On November 8, 2004, we (1) dismissed GrantThornton LLP (Grant Thornton) as our independent accountants responsible forauditing our financial statements and (2) retained Farber Hass Hurley &McEwen, LLP (formerly Hurley & Company or Hurley) as our newindependent accountants.

Grant Thornton’s reports on VantageMed Corporation’sfinancial statements for the two years ended December 31, 2003, did notcontain an adverse opinion or disclaimer of opinion, nor were they modified asto uncertainty, audit scope, or accounting principles, except that the reportfor the period ended December 31, 2003 was modified to indicate that ourrecurring losses from operations, accumulated deficit and stockholder’sdeficit, raised substantial doubts about our ability to continue as a goingconcern. The report for the period ended December 31, 2002 was alsomodified to indicate that effective January 1, 2003, we changed our methodof accounting for stock-based compensation arrangements in accordance Statementof Financial Accounting Standards (SFAS) No. 148, Accounting forStock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.In addition, our financial statements for the year ended December 31, 2002were restated as discussed in Note 2 to the consolidated financial statementsfiled on Form 10-KSB with the Securities and Exchange Commission on March 30,2004.

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The decision to dismiss Grant Thornton and to retainHurley was unanimously approved by our Board of Directors.

From the date of the last audited financial statementsthrough the date of dismissal, we had no disagreements, whether or notresolved, with Grant Thornton on any matter of accounting principles orpractices, financial statement disclosure, or auditing scope or procedure,which, if not resolved to Grant Thornton’s satisfaction, would have causedGrant Thornton to make reference to the subject matter of the disagreement in connectionwith its report. There were no events otherwise reportable under Item 304(a)(1)(iv) ofRegulation S-B.

During the two most recentfiscal years prior to Grant Thornton’s dismissal, 2002 and 2003, and through November 8,2004, the date Grant Thornton was dismissed, we did not consult Hurleyregarding the application of accounting principles to a specific completed orcontemplated transaction, or the type of audit opinion that might be renderedon our financial statements.

**Item 8A. Controls and Procedures**

**Disclosure Controls and Procedures**

Under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Chief Financial Officer, we evaluated theeffectiveness of our disclosure controls and procedures, as such term isdefined under  Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended. Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this annual report. Disclosure controls andprocedures are designed to ensure that information required to be disclosed inthe reports we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms.

**Changesin Internal Controls and Procedures**

There has been no changein our internal control over financial reporting during the quarter ended December 31,2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**Item8B. Other Information**

None.

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**PART III**

**Item9. Directors and Executive Officers of the Registrant**

Our executive officers anddirectors and their ages as of March 17, 2006, are as follows:

| **Name**          | ** ** | ** ** | ** ** | **Age**                                                | ** ** | **Position** |
|-------------------|------------|------------|------------|--------------------------------------------------------|------------|--------------|
| Steven Curd       |       | 46         |       | Director and Chief Executive Officer                   |
| David Philipp     |       | 43         |       | Director                                               |
| Steven E. Simpson |       | 46         |       | Director                                               |
| David Zabrowski   |       | 42         |       | Director                                               |
| Philip D. Ranger  |       | 49         |       | Chief Financial Officer                                |
| Richard Altinger  |       | 41         |       | Vice President—Marketing and Business Development |
| Mark Cameron      |       | 50         |       | Chief Operating Officer                                |

 

**Steven Curd******has served as a director of VantageMedsince January 2005 and as Chief Executive Officer since November 2004.Mr. Curd was at Emdeon (formerly Healtheon/WebMD) from 1999 to 2002, andled the company as its Chief Operating Officer during the company’s successfulInitial Public Offering and period of rapid growth. From 1995 to 1999 Mr. Curdwas at UnitedHealth Group, where he held the title of Chief InformationOfficer. Prior to that Mr. Curd held the position of Vice President atCIGNA Systems. Earlier in his career, Mr. Curd was in various operationsand development roles at American Airlines. Mr. Curd holds a Masters ofBusiness Administration from The Wharton School at the University ofPennsylvania and a Bachelors degree in Physics and Mathematics from WilliamJewell College.

**David M. Philipp**was appointed to our Board of Directors on May 13, 2002. Mr. Philipphas more than 17 years of financial management experience in severalindustries, including technology, financial services and retail. He iscurrently Chief Financial Officer for Mother Lode Holding Company, a realestate information and mortgage services company with national holdings intitle insurance agency, title insurance underwriting and real estate exchangecompliance. Mr. Philipp is a member of the Board of Directors of both MotherLode Holding Company and its affiliate, Westcor Land Title Company, Inc. Priorto joining Mother Lode, Mr. Philipp provided financial management andinvestment banking services to emerging technology companies and was the ChiefFinancial Officer of a supply-chain technology company from 1999 to 2001. From1992 to 1999, Mr. Philipp served as Executive Vice President, CFO andSecretary of First Financial Bancorp (FLLC), a publicly held bank holdingcompany headquartered in Central California. He was a member of the Board ofDirectors of First Financial Bancorp from 1999 to 2004 and served on its AuditCommittee and Compensation Committee. Mr. Philipp holds a Bachelor ofScience degree in Business Administration from California State University,Sacramento. Mr. Philipp is Chairman of our Audit Committee and is a memberof our Compensation Committee.

**Steven E. Simpson**was appointed to our Board of Directors on October 8, 2002. Mr. Simpsonhas more than 17 years of experience in the health care industry, includingsignificant experience in the areas of health care technology and electronicdata interchange. Since August 2002, Mr. Simpson has served as thePresident and Chief Executive Officer of Spheris (previously called Total eMedCorporation). Prior to joining Spheris, Mr. Simpson served as ExecutiveVice President of Sales and Product Management for WebMD Corporation from April 2001to August 2002 and as Transaction Services Division President from May 2000to April 2001. Mr. Simpson served as Chief Operating Officer of QuintilesENVOY Corporation from July 1999 to May 2000, Chief Sales MarketingOfficer from May 1999 to July 1999 and as Senior Vice President Salesand Marketing of Envoy Corporation from November 1998 to May 1999. Priorto joining Envoy, Mr. Simpson served as President and Chief ExecutiveOfficer of Health Stat LLC, an occupational health company. Mr. Simpsonholds a Bachelor of Arts degree from Mercer University. Mr. Simpson is amember of our Audit Committee.

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**Dave Zabrowski**was appointed to our Board of Directors on June 18, 2002. Mr. Zabrowski’s19 year career in technology spans diverse experiences covering sales,marketing, R&D, and operations. Since August of 2002, he has served asPresident and Chief Executive Officer of Neterion (formally S2io, Inc.), aSilicon Valley based company focused on bringing high speed networkingtechnology to computer and storage applications. Mr. Zabrowski spent theprevious 16 years with Hewlett Packard where he was a key leader andcontributor in businesses ranging from semiconductors to PCs to computerservers, most recently as Vice President and General Manager of Hewlett-Packard’sNorth American Business PC organization. Mr. Zabrowski holds a Bachelor ofScience degree in Electrical Engineering from Purdue University and an MBA fromUCLA. Mr. Zabrowski is a member of our Audit and Compensation Committees.

**Philip D. Ranger**became our Chief Financial Officer in May 2003. Prior to joiningVantageMed and from August 2001 to March 2003, Mr. Ranger servedas Chief Financial Officer of Diligent Software Systems, a provider of sourcingand contract management software. Prior to Diligent, Mr. Ranger served asChief Financial Officer at Autovia Corporation from September 2000 to March 2001,Inference Corporation from January 2000 to July 2000 and UltradataCorporation from December 1995 to May 1998. Mr. Ranger alsoserved as Vice President of Sales at Ultradata Corporation from October 1997to October 1998.   Mr. Rangerreceived a Bachelor of Business Administration in Accounting from theUniversity of Texas.

**Richard Altinger**became our Vice President of Marketing and Business Development in February 2003.Prior to joining VantageMed, Mr. Altinger served as Vice President ofBusiness Development for AdvancedMD (formerly, PerfectPractice.MD) from August 2001to February 2003 and from December 1998 to July 2000 he servedas Vice President of Business Development at Emdeon (formerly WebMD Corporation).Mr. Altinger’s WebMD experience also included directing WebMD’s accountmanagement, systems integration and customer support departments from May 1996to November 1998. Mr. Altinger holds a Bachelor of Science inmechanical engineering and an M.S. in engineering management from StanfordUniversity.

**Mark Cameron******joined VantageMed as our Chief Information Officer in February 2005and became our Chief Operating Officer in September 2005. Prior to joiningVantageMed, Mr. Cameron was employed by Beech Street Corporation as ChiefInformation Officer starting in January 2000 and subsequently served asSenior Vice President of Product Development until February 2005. BeechStreet is the nation’s largest independently owned Preferred ProviderOrganization. Prior to Beech Street, Mr. Cameron was Vice President ofProduction Services for Emdeon (formerly WebMD Corporation) from May 1998to December 1999 where he was instrumental in developing and growing WebMD’shosted physician services. From January 1994 to May 1998 Mr. Cameronwas a Vice President at Cigna. Mr. Cameron holds a Masters of BusinessAdministration from the University of Dallas and a Bachelor of Science inComputer Science from the University of Tulsa.

The Board has also adopteda Code of Conduct that applies to all of our employees, officers and directors.A link to our Code of Conduct is available on our website at www.vantagemed.com.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Section 16(a) ofthe Securities Exchange Act of 1934 requires our executive officers, directorsand persons who beneficially own more than 10% of our Common Stock to fileinitial reports of ownership and reports of changes in ownership with theSecurities and Exchange Commission (SEC). Such persons are required by SECregulations to furnish us with copies of all Section 16(a) forms theyfile.

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**Based solely on our review of such forms furnished to usand written representations from**certain reportingpersons, we believe that all filing requirements applicable to our executiveofficers, directors and more than 10% stockholders were complied with.

**Item 10. Executive Compensation**

The following table setsforth the total compensation paid or accrued by us for the fiscal years ended December 31,2005, 2004, and 2003 for each of the Named Executive Officers:

**SummaryCompensation Table**

|                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Long-Term Compensation** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|---------------------------------|------------|
| **Name and Principal Positions** | ** ** | ** ** | ** ** | **Year**   | ** ** | **Annual Salary**          | ** ** | **Securities  Underlying  Options  Granted(#)** | ** ** | **All Other  Compensation** | ** ** |
| Steven Curd                                     |       | 2005       |       |       | $          | 200,000                         |       |   |   | — |   |   |   | $ | — |   |   |
| Chief Executive Officer and  Director           |       | 2004       |       |       | $          | 33,333                          | (1)        |   |   | 405,360 |   |   |   | $ | — |   |   |
| Philip D. Ranger                                |       | 2005       |       |       | $          | 148,333                         |       |   |   | 25,000 |   |   |   | $ | — |   |   |
| Chief Financial  Officer                        |       | 2004       |       |       | $          | 147,500                         |       |   |   | — |   |   |   | $ | — |   |   |
|                                            |       | 2003       |       |       | $          | 82,688                          | (2)        |   |   | 150,000 |   |   |   | $ | — |   |   |
| Rick Altinger                                   |       | 2005       |       |       | $          | 160,000                         |       |   |   | 75,000 |   |   |   |   |   |   |
| Vice President—Marketing and  Business     |       | 2004       |       |       | $          | 167,500                         |       |   |   | — |   |   |   | $ | — |   |   |
| Development                                     |       | 2003       |       |       | $          | 133,333                         | (3)        |   |   | 100,000 |   |   |   | $ | — |   |   |
| Mark Cameron                                    |       | 2005       |       |       | $          | 166,667                         | (4)        |   |   | 275,000 |   |   |   | $ | — |   |   |
| Chief Operating Officer                         |       |       |       |       |       |                            |       |   |   |   |   |   |   |   |   |
|                                                 |            |            |            |            |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Mr. Curd became ourChief Executive Officer in November 2004. On an annual basis, his salaryfor 2004 would have been $200,000.

(2)          Mr. Ranger becameour Chief Financial Officer in May 2003. On an annual basis, his salaryfor 2003 would have been $140,000. Mr. Ranger’s annual salary wasincreased to $160,000 effective August 2005.

(3)          Mr. Altinger becameour Vice President Marketing and Business Development in February 2003. Onan annual basis, his salary for 2003 would have been $160,000.

(4)          Mr. Cameronbecame our Chief Information Officer in February 2005 and became our ChiefOperating Officer in September 2005. On an annual basis, his salary hissalary for 2005 would have been $160,000.

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**Option Grants in Fiscal Years 2005, 2004 and 2003**

The following tablesets forth option grants for the years ended December 31, 2005, 2004 and2003 to each of the Named Executive Officers who received options:

| ** **       | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **               | ** ** | ** **     | ** ** | **Potential Realizable  Value at Assumed Annual  Rates of Stock Price** | ** ** |
|------------------|------------|------------|------------|----------------------------|------------|--------------------------|------------|----------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **       | ** ** | ** ** | ** ** | **Number of**         | ** ** | ** **               | ** ** | ** **     | ** ** | **Appreciation for**                                                                        | ** ** |
| ** **       | ** ** | **Fiscal** | ** ** | **Shares Underlying** | ** ** | **Exercise**             | ** ** | **Expiration** | ** ** | **Option Term**                                                                             | ** ** |
| **Name**         | ** ** | ** ** | ** ** | **Year End**          | ** ** | **Options Granted** | ** ** | **Price**      | ** ** | **Date**                                                                                         | ** ** | **5%** | ** ** | **10%** | ** ** |
| Steven Curd      |       |       | 2004       |                       |       |                     | 405,360    |           |       |                                                                                             | $          | 0.85 |   |   |   | 11/8/2014 |   |   | $ | 561,245 |   | $ | 893,690 |   |
| Philip D. Ranger |       |       | 2005       |                       |       |                     | 25,000     |           |       |                                                                                             | $          | 1.06 |   |   |   | 2/20/2015 |   |   | $ | 43,166 |   | $ | 68,734 |   |
|             |       |       | 2003       |                       |       |                     | 150,000    |           |       |                                                                                             | $          | 0.46 |   |   |   | 5/20/2013 |   |   | $ | 112,394 |   | $ | 178,968 |   |
| Rick Altinger    |       |       | 2005       |                       |       |                     | 75,000     |           |       |                                                                                             | $          | 1.06 |   |   |   | 2/20/2015 |   |   | $ | 129,497 |   | $ | 206,203 |   |
|             |       |       | 2003       |                       |       |                     | 100,000    |           |       |                                                                                             | $          | 0.35 |   |   |   | 2/25/2013 |   |   | $ | 57,011 |   |  $90,781 |   |
| Mark Cameron     |       |       | 2005       |                       |       |                     | 175,000    |           |       |                                                                                             | $          | 1.06 |   |   |   | 2/20/2015 |   |   | $ | 302,160 |   | $ | 481,139 |   |
|             |       |       | 2005       |                       |       |                     | 100,000    |           |       |                                                                                             | $          | 0.67 |   |   |   | 8/30/2015 |   |   | $ | 109,136 |   | $ | 173,781 |   |
|                  |            |            |            |                            |            |                          |            |                |            |                                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The potential realizablevalues shown in the above table were calculated based on the term of eachoption at its time of grant, which is ten years. These values arecalculated assuming that the fair market value of our common stock on the dateof grant appreciates at the indicated annual rate compounded annually for theentire term of the option and that the option is exercised and sold on the lastday of its term for the appreciated stock price. These assumed annual compoundrates of stock price appreciation do not represent our estimated or projectionof future common stock prices. The fair market value per share exercise pricesfor each option shown in the above table for 2005, 2004 and 2003 were basedupon the closing price of our common stock on the grant date.

**Aggregated Option Exercises in Fiscal Year 2005, 2004and 2003 Option Values**

Thefollowing table sets forth information concerning option exercises and optionholdings for the three year period ended December 31, 2005 with respect tothe Named Executive Officers. Except as set forth below, no options or stockappreciation rights were exercised by any such individual during 2005, and nostock appreciation rights were outstanding on December 31, 2005.

| ****             | ** ** | **Number of Securities  UnderlyingUnexercised  Options  At Fiscal Year End** | ** ** | **Value of Unexercised  In-the-Money Options  At Fiscal Year End(1)** | ** ** |
|------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| **Name**         | ** ** | ** **                                                                                            | ** ** | **Exercisable**                                                                                     | ** ** | **Unexercisable** | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Steven Curd      |       |                                                                                                  | 109,785    |                                                                                                |       |   | 295,575 |   |   |   | — |   |   |   | — |   |   |
| Philip D. Ranger |       |                                                                                                  | 96,875     |                                                                                                |       |   | 78,125 |   |   |   | — |   |   |   | — |   |   |
| Rick Altinger    |       |                                                                                                  | 70,830     |                                                                                                |       |   | 104,170 |   |   |   | 7,083 |   |   |   | 2,917 |   |   |
| Mark Cameron     |       |                                                                                                  | —     |                                                                                                |       |   | 275,000 |   |   |   | — |   |   |   | — |   |   |
|                  |            |                                                                                                       |            |                                                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Basedupon the closing price of our common stock on December 30, 2005 of $0.45less the exercise price per share.

**Employment and Change-In-ControlAgreements**

**StevenCurd.****  **Wehave entered into an employment agreement with Mr. Curd pursuant to whichwe will pay Mr. Curd an annual salary of $200,000, plus an annual bonus ofup to $100,000 subject to meeting goals set by our Compensation Committee. Wehave agreed to issue Mr. Curd an option to purchase 405,360 shares of ourcommon stock, with 25% of such option to vest on the one-year anniversary ofthe 

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agreement and the balanceto vest monthly over the ensuing 36 month period. Twenty-five percent of suchoption will accelerate upon a change in control that occurs within the firstsix months of the term of the agreement and 50% of the remaining unvestedoptions will accelerate upon a change in control thereafter. Upon a terminationwithout cause Mr. Curd will receive a severance payment of 12 monthssalary. We have had no transactions within the last two years in which Mr. Curdhas had a direct or indirect material interest.

**RichardAltinger.**   In February 2003, we entered intoan agreement with Mr. Altinger pursuant to which we agreed to providenine-months severance benefits if, within the initial three year term of theagreement (or any renewal term), his employment is terminated without cause orhe resigns for good reason.

**PhilipD. Ranger.**   In May 2003, we entered into anagreement with Mr. Ranger pursuant to which we agreed to providetwelve-months severance benefits if, within the initial three year term of theagreement (or any renewal term), his employment is terminated without cause orhe resigns for good reason.

**Mark Cameron.**   InSeptember 2005, we entered into an agreement with Mr. Cameronpursuant to which we agreed to provide nine-months severance benefits if,within the initial three year term of the agreement (or any renewal term), hisemployment is terminated without cause or he resigns for good reason.

**Equity Compensation Plans**

Thefollowing table sets forth certain information with respect to the 1998 StockOption/Stock Issuance Plan and equity compensation plans not approved bysecurity holders as of March 17, 2006.

| ** **                                                  | ** ** | **Number of securities to  be issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average exercise  price of outstanding options,  warrants and rights** | ** ** | **Number of securities  Remaining available for  future issuance under  equity compensation plans  (excluding securities reflected  in column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                                                                              | ** ** | **(b)**                                                                                                         | ** ** | **(c)**                                                                                                                                                                  | ** ** |
| Equity  compensation plans approved by security holders     |       |                                                                                                                                                 | 1,666,032  |                                                                                                            |       |                                                                                                                                                                     | $          | 0.78 |   |   |   | 1,585,649 |   |   |
| Equity compensation  plans not approved by security holders |       |                                                                                                                                                 | 2,702,147  |                                                                                                            |       |                                                                                                                                                                     | $          | 1.38 |   |   |   | — |   |   |

 

**Item11. Security Ownership of Certain Beneficial Owners and Management**

The following tablesets forth certain information known to us with respect to the beneficialownership of our common stock as of March 17, 2006, except as noted in thefootnotes below, by:

·       allpersons who are beneficial owners of 5% or more of our common stock;

·       eachof our directors and director-nominees;

·       ourChief Executive Officer and the three other most highly compensated executiveofficers (the Named Executive Officers); and

·       allof our directors and executive officers as a group.

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Thenumber of shares of common stock beneficially owned and the percentage ofshares beneficially owned are based on 14,239,178 shares of our common stockoutstanding as of March 17, 2006.

| Name and Address(1)                            | ** ** | ** ** | ** ** | **Number of  Shares** | ** ** | **Percent  Beneficially  Owned(2)** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------------------|------------|-------------------------------------|------------|
| Austin W. Marxe and David M.  Greenhouse(3)              |       | 4,516,128  |       |                       | 29.1       | %                                   |       |
| 527 Madison Avenue,  Suite 2600                     |       |       |       |                       |       |                                |       |
| New York, NY 10022                                       |       |       |       |                       |       |                                |       |
| S Squared  Technology, LLC(4)                            |       | 2,258,062  |       |                       | 15.2       | %                                   |       |
| 515 Madison Avenue, Suite 4200                      |       |       |       |                       |       |                                |       |
| New York, NY  10022                                      |       |       |       |                       |       |                                |       |
| Bruce Galloway(5)                                        |       | 1,016,135  |       |                       | 7.1        | %                                   |       |
| c/o Strategic Turnaround  Equity Partners, LP            |       |       |       |                       |       |                                |       |
| 720 Fifth Avenue                                         |       |       |       |                       |       |                                |       |
| New York, NY 10019                                       |       |       |       |                       |       |                                |       |
| Steven Curd(6)                                           |       | 490,719    |       |                       | 3.4        | %                                   |       |
| Rick Altinger(7)                                         |       | 291,577    |       |                       | 2.0        | %                                   |       |
| David Philipp(8)                                         |       | 162,769    |       |                       | 1.1        | %                                   |       |
| Philip D. Ranger(9)                                      |       | 131,720    |       |                       | *          |                                |       |
| Mark Cameron(10)                                         |       | 92,319     |       |                       | *          |                                |       |
| Steven E. Simpson(11)                                    |       | 78,326     |       |                       | *          |                                |       |
| David  Zabrowski(12)                                     |       | 78,326     |       |                       | *          |                                |       |
| Executive officers and  directors as a group (7 persons) |       | 1,325,756  |       |                       | 8.8        | %                                   |       |

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*                    Less than 1%

(1)          Except as otherwisenoted, the address of each person listed on the table is c/o VantageMed, 11060White Rock Road, Suite 210, Rancho Cordova, California 95670. Unlessotherwise indicated, each of the stockholders has sole voting and investmentpower with respect to the shares beneficially owned, subject to communityproperty laws, where applicable.

(2)          Beneficial ownership isdetermined in accordance with the rules of the Securities and ExchangeCommission and includes voting and investment power with respect to suchshares. All shares of common stock subject to options or warrants currentlyexercisable or exercisable within 60 days after March 17, 2006, aredeemed to be outstanding and to be beneficially owned by the person holdingsuch options or warrants for the purpose of computing the number of sharesbeneficially owned and the percentage ownership of such person, but are not deemedto be outstanding and to be beneficially owned for the purpose of computing thepercentage ownership of any other person.

(3)          Includes 1,290,322shares underlying warrants issued to Special Situations Private Equity Fund,L.P. MG Advisors, L.L.C. (MG) is the general partner of and investment advisorto the Special Situations Private Equity Fund, L.P. Austin W. Marxe, and DavidM. Greenhouse are the principal owners of MG. Through their control of MG, Messrs. Marxeand Greenhouse share voting and investment control over the portfolio ofsecurities of the Special Situations Private Equity Fund, L.P.

(4)          Includes 1,258,065shares of our Common Stock and warrants to purchase an additional 503,224shares of our Common Stock held by Leaf Investment Partners, L.P. as well as354,839 shares of our Common Stock and warrants to purchase an additional141,934 shares of our Common Stock held by Leaf Offshore Investment Fund, Ltd. SSquared Capital, LLC is the general partner for Leaf Investment Partners, L.P.,and S Squared Technology Partners, L.P. is the investment manager for LeafOffshore Investment Fund, Ltd..

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(5)          Includes 648,900 sharesof our Common Stock over which Mr. Galloway shares investment control. Includedin these shares are 418,900 shares of our Common Stock held by StrategicTurnaround Equity Partners, LP (STEP). Galloway Capital Management, LLC is thegeneral partner and investment advisor to STEP. Bruce Galloway and Gary Hermanare managing members of Galloway Capital Management, LLC and through theircontrol over Galloway Capital Management, LLC they share voting and investmentcontrol of the portfolio of securities of STEP. Also included are 198,000shares of our Common Stock held by Mr. Galloway’s family and 32,000 sharesheld by Rexon Galloway Capital Growth, where Mr. Galloway is a 36.3% owner.

(6)          Includes (i) 152,010shares underlying options granted to Mr. Curd, which are exercisablewithin 60 days of March 17, 2006 and (ii) 96,774 shares underlying warrantsissued to Mr. Curd.

(7)          Includes (i) 101,040shares underlying options granted to Mr. Altinger, which are exercisablewithin 60 days of March 17, 2006; (ii) 43,010 shares underlyingwarrants issued to Altinger Family, LLC for whom Mr. Altinger is a controlperson; and (iii) 137,527 shares held by the Altinger Family,  LLC.

(8)          Includes (i) 87,500shares underlying options granted to Mr. Philip, which are exercisablewithin 60 days of March 17, 2006 and (ii) 21,506 shares underlyingwarrants issued to Mr. Philip.

(9)          Includes (i) 116,665shares underlying options granted to Mr. Ranger, which are exercisablewithin 60 days of March 17, 2006 and (ii) 4,302 shares underlyingwarrants issued to Mr. Ranger.

(10)   Includes (i) 54,685 sharesunderlying options granted to Mr. Cameron, which are exercisable within 60days of March 17, 2006 and (ii) 10,752 shares underlying warrantsissued to Mr. Cameron.

(11)   Includes78,326 shares each underlying options granted to Mr. Simpson and Mr. Zabrowski,which are exercisable within 60 days of March 27, 2006.

**Item 12. Certain Relationships and RelatedTransactions**

On March 15, 2005 weentered into a Stock Purchase Agreement in connection with the completion of a $5.0 million private placement of5,376,344 shares of common stock priced at $0.93 per share. Special SituationsFund, the lead investor, and S Squared Technology purchased 90 percent of theshares, with members of VantageMed’s management team, including named executiveofficers Steven Curd, Richard Altinger, Mark Cameron and Philip D. Ranger, anddirector David Philipp, purchasing an aggregate of 8 percent of the shares. Theinvestors in the transaction also received warrants to purchase an aggregate of1,075,269 shares of common stock priced at $1.30 per share, and warrants topurchase an aggregate of 1,075,269 shares of common stock priced at $1.55 pershare.

**Item13. Exhibits, Financial Statement Schedules and Reports on Form 8-K**

(a)           OurConsolidated Financial Statements are included in Part II, Item 8 of this Report.The exhibits below are filed as part of this Report on Form 10-KSB.

| Exhibit   Number | ** ** | **Exhibit Title**                                                                                                                                                                                                                                         |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1*             |       | Form of Registrant’s Amended and Restated  Form of Certificate of Incorporation                                                                                                                                                                 |
| 3.2*             |       | Form of Registrant’s Amended and Restated  Bylaws                                                                                                                                                                                                    |
| 4.1*             |       | Form of Registrant’s Specimen Stock Certificate                                                                                                                                                                                                      |
| 10.1*            |       | Sublease Agreement dated November 19, 2004  between Electric Lightwave, LLC and the Registrant (previously filed as  Exhibit 10.1 to the Form 8-K filed by VantageMed Corporation on  January 6, 2005)                                     |
| 10.2*            |       | Lease Agreement between Registrant and Jun and  Noriko Hasegawa, as Trustees for the Hasegawa Family Trust dated  August 20, 1999 (previously filed as Exhibit 10.3 to the  Form S-1 filed by VantageMed Corporation on November 24, 1999) |

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| 10.3*  |   | VantageMed’s Amended and Restated 1998 Stock  Option/Stock Issuance Plan (previously filed as Exhibit 10.13 to the  Form S-1/A filed by VantageMed Corporation on January 13,  2000)                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4*  |   | Form of Indemnity Agreement entered into by  Registrant with each of its officers and directors (previously filed as  Exhibit 10.14 to the Form S-1 filed by VantageMed Corporation  on November 24, 1999)          |
| 10.5*  |   | Employment Agreement dated February 18, 2003,  between VantageMed Corporation and Rick Altinger (previously filed as  Exhibit 10.26 to the Form 10-KSB filed by VantageMed  Corporation on March 28, 2003)          |
| 10.6*  |   | Employment Agreement dated May 20, 2003,  between VantageMed Corporation and Philip Ranger (previously filed as  Exhibit 10.27 to the Form 10-QSB filed by VantageMed  Corporation on August 14, 2003)              |
| 10.7*  |   | Employment Agreement dated November 8, 2004,  between VantageMed Corporation and Steve Curd (previously filed as  Exhibit 10.1 to the Form 8-K filed by VantageMed Corporation  on November 9, 2004)                |
| 10.8*  |   | Separation Agreement dated November 30, 2004,  between VantageMed Corporation and Richard M. Brooks (previously filed as  Exhibit 10.1 to the Form 8-K filed by VantageMed Corporation  on December 7, 2004)        |
| 10.9*  |   | Separation Agreement and Release dated July 11,  2005, between VantageMed Corporation and R. Ernest Chastain (previously filed  as Exhibit 10.1 to the Form 8-K filed by VantageMed  Corporation on July 15, 2005). |
| 10.10* |   | Employment Agreement dated September 1, 2005,  between Vantagemed Corporation and Mark Cameron (previously filed as  Exhibit 10.1 to the Form 8-K filed by VantageMed Corporation  on September 8, 2005).           |
| 10.11* |   | Purchase Agreement dated March 15, 2005 between  VantageMed Corporation and Investors (previously filed as Exhibit 10.1  to the Form 8-K filed by VantageMed Corporation on March 18,  2005)                        |
| 10.12* |   | Registration Rights Agreement dated March 15,  2005 between VantageMed Corporation and Investors (previously filed as  Exhibit 10.2 to the Form 8-K filed by VantageMed Corporation  on March 18, 2005)             |
| 10.13* |   | Form of VantageMed Corporation Series A  Warrant dated March 15, 2005 to Investors. previously filed as  Exhibit 10.3 to the Form 8-K filed by VantageMed Corporation  on March 18, 2005)                 |
| 10.14* |   | Form of VantageMed Corporation Series B  Warrant dated March 15, 2005 to Investors. previously filed as  Exhibit 10.4 to the Form 8-K filed by VantageMed Corporation  on March 18, 2005)                 |
| 23.1   |   | Consent of Independent Registered Public Accounting  Firm                                                                                                                                                                               |
| 24.4   |   | Power of Attorney (included on signature page)                                                                                                                                                                                          |
| 31.1   |   | Certification of the Chief Executive Officer under  Exchange Act Rule 13a-14(a)/15d-14(a) (Section 302  of the Sarbanes-Oxley Act), dated March 30, 2006. Filed herewith.                                           |
| 31.2   |   | Certification of the Chief Financial Officer under  Exchange Act Rule 13a-14(a)/15d-14(a) (Section 302  of the Sarbanes-Oxley Act), dated March 30, 2006. Filed herewith.                                           |
| 32.1   |   | Certification of Principal Executive Officer  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                       |
| 32.2   |   | Certification of Principal Financial Officer  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                       |

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*                    Previouslyfiled

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(b)          Reports on Form 8-K:

On February 15, 2006, we filed a current reporton Form 8-K announcing the sale of our Hawaii operation to TeamPraxis.

On March 14, 2006, wefiled a current report on Form 8-K with our press release reportingour results of operations for the fourth quarter and fiscal year 2005.

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

Feesrelated to all professional services rendered by Grant Thornton and Farber HassHurley & McEwen LLP for the fiscal years ended December 31, 2005and 2004, were as follows:

| ** **              | ** ** | ** ** | ** ** | **2004**                | ** ** |
|-------------------------|------------|------------|------------|-------------------------|------------|
| ** **              | ** ** | **2005**   | ** ** | **Grant Thornton** | ** ** | **Hurley** | ** ** | **Total** | ** ** |
| Audit fees (1)          |       | $          | 74,000     |                    |       | $ | 65,000 |   |   | $ | 84,000 |   | $ | 149,000 |   |
| Audit related  fees (2) |       | 0          |       |                    | 5,500      |   |   | 0 |   | 5,500 |   |
| Tax fees (3)            |       | 0          |       |                    | 0          |   |   | 0 |   | 0 |   |
| Total fees              |       | $          | 74,000     |                    |       | $ | 70,500 |   |   | $ | 84,000 |   | $ | 154,500 |   |

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(1)          Audit fees consist offees billed for professional services rendered for the audit of the company’sconsolidated annual financial statements and review of the interim consolidatedfinancial statements included in quarterly reports and services that, in 2004,were provided by Grant Thornton LLP in connection with statutory and regulatoryfilings or engagements.

(2)          Audit-related feesconsist of fees billed for assurance and related services that are reasonablyrelated to the performance of the audit or review of the company’s consolidatedfinancial statements and are not reported under “audit fees”. This categoryprimarily includes fees related to the audit of our employee benefit plan.

(3)          Tax fees consist of feesbilled for professional services rendered for tax compliance, tax advice andtax planning. These services include assistance regarding federal and state taxcompliance.

The Audit Committee’s policy is to pre-approve allaudit and non-audit services provided by our independent auditors. Theseservices may include audit services, audit-related services, tax services andother services. Pre-approval is generally provided for up to one year and anypre-approval is detailed as to the particular service or category of services. Theindependent auditor and management are required to periodically report to theAudit Committee regarding the extent of services provided by the independentauditor in accordance with this pre-approval. The Audit Committee has reviewedthe services provided by Grant Thornton LLP and Farber Hass Hurley &McEwen LLP and the related fees and has determined that the non-audit servicesprovided were compatible with maintaining the independent accountant’sindependence. During 2005, 100% of audit and audit-related fees were approvedby the Audit Committee prior to services being rendered.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the City of RanchoCordova, State of California, on the 31st dayof March 2006.

|        | VANTAGEMED CORPORATION |
|--------|------------------------|
|   | By:                    | /s/  PHILIP D. RANGER |
|   |                   | Philip D. Ranger  Chief Financial Officer |

 

Pursuantto the requirements of the Securities Act of 1934, this report has been signedby the following persons on behalf of the Registrant and in the capacities andon the dates indicated.

|                     | **Signature** | ** **                            | ** ** |                          | **Title** | ** ** | ** ** |  | **Date** | ** ** | ** ** |
|---------------------|---------------|---------------------------------------|------------|--------------------------|-----------|------------|------------|--|----------|------------|------------|
| /s/ STEVE CURD      |          | President and Chief Executive Officer |       | March 31, 2006 |      |
| Steve Curd          |          | (Principal  Executive Officer)        |       |                     |      |
| /s/ DAVID  PHILIPP  |          | Director                              |       | March 31,  2006     |      |
| David Philipp       |          |                                  |       |                     |      |
| /s/ STEVE  SIMPSON  |          | Director                              |       | March 31,  2006     |      |
| Steve Simpson       |          |                                  |       |                     |      |
| /s/ DAVE  ZABROWSKI |          | Director                              |       | March 31,  2006     |      |
| Dave Zabrowski      |          |                                  |       |                     |      |

 

 

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