**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-KSB**

**x**                              ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF1934

**Forthe Fiscal Year Ended December 31, 2006**

**o**                                 TRANSITIONREPORT UNDER 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**

(Name of small businessissuer 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**

(Address of principalexecutive offices)

Issuer’s telephone number:**(916) 638-4744**

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 þ No o

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained in this form and 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. o

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 31,2006 were $10,960,000.

We had 15,358,745 common shares and no preferredshares outstanding at February 28, 2007. As of February 28, 2007, theaggregate market value of the voting and non-voting common equity held bynon-affiliates was approximately $5.6 million, based upon the last reportedsales price of our common equity as reported by the Over-The-Counter BulletinBoard on that date of $0.72 per share.

Documents incorporated by reference: None

TransitionalSmall Business Disclosure Format: Yes o No þ

 

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**VantageMedCorporation**

**Index**
| Item  Number  | ** ** | ** **                                                                                                                  | ** ** | **Page** | ** ** |
|---------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   |       |
| Item 1        |       | Description of  Business                                                                                                    |       |     | 1          |   |   |
| Item 2        |       | Description of  Property                                                                                                    |       |     | 10         |   |   |
| Item 3        |       | Legal Proceedings                                                                                                           |       |     | 10         |   |   |
| Item 4        |       | Submission of  Matters to a Vote of Security Holders                                                                        |       |     | 11         |   |   |
| PART II  |       |
| Item 5        |       | Market for  Common Equity, Related Stockholder Matters and Small Business Issuer  Purchases of Equity Securities            |       |     | 11         |   |   |
| Item 6        |       | Management’s  Discussion and Analysis or Plan of Operation                                                             |       |     | 12         |   |   |
|          |       | Forward-Looking Statements and Risk Factors                                                                                 |       |     | 23         |   |   |
| Item 7        |       | Financial Statements                                                                                                        |       |     | 34         |   |   |
| Item 8        |       | Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure              |       |     | 52         |   |   |
| Item 8A       |       | Controls and  Procedures                                                                                                    |       |     | 52         |   |   |
| Item  8B      |       | Other  Information                                                                                                          |       |     | 53         |   |   |
| 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 and Related Stockholder  Matters             |       |     | 58         |   |   |
| Item 12       |       | Certain  Relationships and Related Transactions                                                                             |       |     | 61         |   |   |
| Item 13       |       | Exhibits                                                                                                                    |       |     | 61         |   |   |
| Item 14       |       | Principal  Accountant Fees and Services                                                                                     |       |     | 63         |   |   |
|          |       | Signatures                                                                                                                  |       |     | 64         |   |   |

 

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*This reportcontains forward-looking statements within the meaning of Section 21E ofthe Securities and Exchange Act of 1934 and Section 27A of the SecuritiesAct of 1933. These forward-looking statements involve a number of risks anduncertainties, including those identified in the section of this Form 10-KSBentitled “Risk Factors,” that may cause actual results to differ materiallyfrom those discussed in, or implied by, such forward-looking statements.Forward-looking statements within this Form 10-KSB are identified bywords such as “believes,” “anticipates,” “expects,” “intends,” “may,” “will”and other similar expressions. However, these words are not the only means ofidentifying such statements. In addition, any statements that refer toexpectations, projections or other characterizations of future events orcircumstances 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 to adviseinterested parties of the risks and factors that may affect our business.*

*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.*

**PART I**

**Item 1. Descriptionof Business**

**The Company**

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, anesthesiologists, behavioral health professionals, andother healthcare providers in the operation of their practices andorganizations. These providers use our core software products includingRidgeMark, Northern Health Anesthesia, Helper (Therapist Helper and MedicalHelper) and ChartKeeper as well as our SecureConnect electronic transactionservices. We have developed a customer base of approximately 18,000 physicians,anesthesiologists and behavioral health providers nationwide through bothacquisitions and internal growth.

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) legislation. Because EDI standards fortransactions other than claims (i.e., eligibility, electronic remittance adviceand claim status) are finally being adopted in large numbers by insurancecompanies, the rate of obsolescence of legacy systems is increasing. As a result of our acquisitions, we continued tosupport numerous legacy technologies for several years. Throughout 2003 and2004, however, we announced support discontinuance, or sunset, programs tothese legacy customers. These legacy systems generally lack the currentstate-of-the-art technology of our Windows-based products, but providesimilar functionality. We have derived significant revenues from supportingthese legacy systems in the past; however, these revenues have decreasedthroughout 2005 and 2006 as a result of our decision to discontinue support ofthese costly legacy products as we migrate customers to our core products. Aportion of this revenue has been replaced by the deployment of our coreproducts, particularly RidgeMark, to some of these customers. During thissunset and migration process, we received an accelerated number of orders topurchase our RidgeMark system. The migration orders decreasedsignificantly starting with the second quarter of 2005 as the migration processcame to a 

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conclusion and despite oursales and marketing efforts aimed at our RidgeMark product, we have generatedinsignificant revenues from new customers.

We are currently focusing our operations on customersatisfaction of our RidgeMark customer base, selling product upgrades andmaintenance contracts to inactive Helper customers, increasing recurringrevenues from our Helper customer base and growth of our Northern Health marketniche. During 2006, we completed the sale of our Hawaii-based customers whichmarked the last phase of our product sunset and migration efforts. This allowedus to concentrate our full attention on stabilizing and growing our coreproducts. In January 2006, we released a significant upgrade to ourRidgeMark customers that has resulted in a higher quality of support andincreased customer satisfaction. Our focus for the Helper product has been togrow recurring revenues from maintenance contracts and EDI services and we wereable to capitalize on successful marketing campaigns on both of these fronts. Weanticipate that our substantial market share to behavioral and mental healthprofessionals will enable us to continue strong sales of our Helper productsand services. Our efforts to grow sales of our Northern Health product began tomaterialize during the latter part of 2006. We expect to continue selling ouranesthesia product to new customers throughout 2007.

Our recurring revenues were approximately 78% of totalrevenues in 2006 and 73% of total revenues in 2005. We define recurringrevenues as any revenues derived from software maintenance and hardware supportcontracts as well as revenues derived from billing and electronic services. Pleaserefer to the Introduction portion of Item 6, Management’s Discussion andAnalysis of Financial Condition and Results of Operations for additionaldetails and a reconciliation to our GAAP revenues. In an attempt to retain andincrease recurring revenues, we have expanded our service offerings, includingexpanded electronic services offerings. With the increasing penetration of ourSecureConnect electronic transaction services we have improved our ability todeliver these electronic services. These expanded electronic service offeringsinclude HIPAA mandated electronic claims, remittance advice and eligibilitywith patient statements.

On February 16, 2007, we signed a definitiveagreement to be acquired by Nightingale Informatix Corporation (Nightingale)(TSX-V: NGH) of Ontario, Canada. The acquisition, expected to close in thesecond quarter of 2007, is conditioned upon a majority vote of the commonstockholders and other customary conditions. The definitive agreement withNightingale calls for our stockholders to receive a fixed cash price of $0.75per share. We have filed materials related to the proposed merger with theSecurities and Exchange Commission and mailed the definitive proxy statementfor the special stockholders meeting scheduled to take place on April 18,2007.

In its report dated March 23,2007 regarding our financial statements, our registered independent publicaccounting firm expressed substantial doubt about our ability to continue as agoing concern as a result of our net losses, accumulated deficit, stockholdersdeficit and other factors. Our future profitability will depend on manyfactors, including those discussed below under the caption “Forward-LookingStatements and Risk Factors—Risks Associated With Our Business.”

**The VantageMedSolution**

Our software products and services have positioned usto address the information needs of healthcare providers through thedevelopment of 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 healthcareproviders by enabling our customers to access and process information moreefficiently and reliably, reduce staff time, and collect money from patientsand insurance payers faster and easier. With a team of experienced sales,customer support and product development professionals, we feel that we arepositioned to address the opportunities that result from the increasinglycomplex needs of the healthcare industry.

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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 enablethem to satisfy the increasingly complex demands of the healthcare market. Giventhat the majority of healthcare providers utilize legacy technologies inmanaging their practice (for example, DOS, SCO Unix, flat-file databases,etc.), migrating new and existing customers to our Windows-based products hasbeen a key strategy. Through sales and marketing programs, including tradeshowsand advertising, we aim to strengthen our product brands and increase sales ona national level as well as within targeted local markets.

·       *Expanding Clinical Solutions*We offer a Computerized MedicalRecord (CMR) system, ChartKeeper, designed to eliminate the vast quantities ofpaper and cost involved in creating, storing and communicating patient charts. Giventhat increased spending by healthcare providers is expected for clinicalproducts over the course of the next several years, we believe this is a keyarea for future growth. In order for us to capitalize on the expected demandfor clinical products, we believe that an Electronic Medical Record (EMR)product with functionality not available in ChartKeeper, is required.

·       *Cross-Sellingour SecureConnect EDI Products and Services*With over 18,000providers using our products, we believe we have the ability to generaterevenue growth by cross-selling additional EDI products and services toour installed customer base. These EDI products currently include claims, claimscrubbing, eligibility, electronic remittance advice and patient statementservices. We believe these services provide value to our customers and we havean opportunity to sell to customers who are not using our EDI services, as wellas to customers who are only utilizing one or a few of the services.

**Principal Products**

We classify our software products as “coreWindows-based” or “legacy”. Our core Windows-based products are theproducts we currently offer to our new customers and are the focus of ourongoing product development efforts. Our Windows-based products provideour customers 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.

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We have designed our products to enable our customersto transition from their legacy systems to Windows-based products andservices. The features, functions and primary customers of our core Windows-basedproducts and services 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  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, claim status, eligibility,  electronic remittance advice and patient statements)                                                                |       | Primary and specialty  medical practices (target 1 to 10 provider practices)                                                                                                                         |
| ChartKeeper                                    |       | Computerized Medical  Record, document management 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)                                                                                                                         |
| SecureConnect                                  |       | EDI transaction service  including hosted servers that exchange, translate and manage HIPAA compliant  (e.g., claims, electronic remittance advice, claim status 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)                                          |

 

**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**insuranceclaims from provider practices, reformats the claims into appropriate formatsand sends them to payers/insurance companies, either directly or through third 

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party clearinghousepartners. In addition, claim submission reports are delivered back to providerpractices.

·       *Electronic Patient Billing Statements*: Submits patientbilling information from practices by electronic connection to a processingcenter that prints, inserts and mails patient invoices and provides billingreports to the practice.

·       *Electronic Remittance Advice*: Receives and posts insurancepayment information automatically into the practice management system thuseliminating costly and error-prone manual data entry.

·       *Electronic Eligibility*: Checks a patient’s eligibility datawith an insurance payer and in some cases provides detailed informationregarding co-pays, deductible status and coverage information.

·       *Electronic Claim Status*: Checks the status of a patient’sclaim with an insurance payer and in some cases provides detailed informationregarding the status and disposition by the payer.

·       *Electronic Credit Card Transactions*: Bills a patient’scredit card 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, 2006, our customer service and support groups consistedof 48 employees, or approximately 56% of our employee base.

**Hardware andSupplies**

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.

**Product Development**

As of December 31,2006, our Windows-based product development and quality testing organizationconsisted of 16 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. 

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Our qualityassurance and testing teams follow established guidelines and subject matterexperts and analysts contribute to work flow design, content and business rule development.A formalized process for software enhancement requests provides feedback fromcustomers and our sales teams. Project management tools, project schedules anddistribution of technical and training notes are managed through our corporateIntranet.

**Privacy andSecurity 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 them to comply with the HIPAA privacy andsecurity regulations. To enable the use of our products and services for the transmissionof protected health information (PHI), we utilize advanced technology designedto provide a high degree of security. 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 dataresources on our network, commonly referred to as a “firewall.”

We support our customers in complying with the HIPAAprivacy, transaction and security rules and timeframes.

Internally, withinour SecureConnect clearinghouse and Client Services organizations, we work toensure 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 of our 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.

**Sales and MarketingStrategy**

Organized primarily byproduct line, the members of our sales and marketing teams focus on buildingand maintaining strong customer and prospect relationships within local marketsto generate new sales. Within our existing customer base, we promote and sellhardware upgrades, maintenance services, add-on software modules and EDIservices. As of December 31, 2006, we had 10 sales and marketingpersonnel, including sales and marketing management, telemarketing, telesales andfield sales representatives.

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**Competition**

The healthcareinformation systems market is highly competitive on both a local and a nationallevel. We believe 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 principal competitorsinclude organizations such as Sage Software Healthcare Solutions /MedicalManager, Per-Se/Medisoft, QSI/NextGen, Misys Physician Systems and GECentricity/Millbrook. Additionally, within each local market there are severalsmaller competitors who have developed niche products offered with varyingfeature sets and at various price points. Finally, with the integration ofclinical information systems into practice management systems, severalwell-funded pharmaceutical, medical supply and biotech companies have enteredthe practice management systems market. Many of our competitors have greaterfinancial, development, technical, marketing and sales resources than we do.These competitors may be able to respond more rapidly to new or emergingtechnologies and regulations and changes in customer requirements than we can.In addition, as the market for our products continues to develop, additionalcompetitors may enter the market and competition may intensify, requiring us tolower the prices of our products and services.

**IntellectualProperty**

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 and contractors are required to execute agreements withus providing for the confidentiality of information and the assignment to us ofall proprietary rights. The legal protections afforded to us or the steps takenby us may not be adequate to prevent misappropriation of our technology andconfidential information. In addition, these protections do not preventindependent third-party development of competitive products or services.We believe that our proprietary rights do not infringe upon the proprietaryrights of third parties. However, third parties may assert infringement claimsagainst us in the future and any such assertion may require us to enter into alicense agreement or royalty arrangement with the party asserting the claim.Litigation may be necessary in the future to enforce our intellectual propertyrights, to protect our confidential information or trade secrets, or todetermine the validity or scope of the rights of others. Litigation couldresult in substantial costs and diversion of management and other resources andcould seriously harm our business.

**GovernmentRegulation**

**Health InsurancePortability 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 

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(PHI)and the circumstances under which such information may be used or released aresubject to substantial regulation by state and federal laws. Regulationsgoverning the electronic transmission, privacy, and security of PHI are coveredby HIPAA guidelines which are often vague and open to interpretation. There arethree primary sets of standards included within the HIPAA regulations:

·       TransactionStandards that prescribe specific transaction formats and data code sets forcertain electronic health care transactions;

·       PrivacyStandards that protect individual privacy by limiting the uses and disclosuresof individually identifiable health information; and

·       SecurityStandards that require covered entities to implement administrative, physicaland technological safeguards to ensure the confidentiality, integrity,availability and security of individually identifiable health information inelectronic 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 clearinghouse has beenprocessing HIPAA compliant transactions since August 2003.

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 agreements with certain of our customers to provide assurances that wewill appropriately safeguard any PHI we receive from such customers. Thecontracts establish the permitted and required disclosures of PHI, preclude useor further disclosure of the information in a manner that would violate theRegulations and allow the covered entity to pursue remedies outlined in HIPAAor terminate the contract in the case of a material breach by us. We continueto monitor HIPAA activity and are prepared to incorporate the necessary changesto our software products or our operations 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 

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certain of our portalservices 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. The rules have required usto incur 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.

*SecurityStandards.**  *Theserules became effective in April 2005 and establish detailedrequirements for safeguarding patient information that is electronicallytransmitted or electronically stored. The rule establishes 42implementation specifications, 20 of which are “required,” meaning they must beimplemented 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, provide certain technical services to otherparticipants in the healthcare industry, or enable electronic communications ofpatient information among healthcare industry participants, and certain of ourportal services may be affected through contractual relationships. Some of theSecurity Standards are technical in nature, while others may be addressedthrough policies and procedures for using information systems. In 2005 wedeployed enhancements to our core products that allow a practice to more easilycomply with the Security Standards. We are unable to predict what changes mightbe made to the Security Standards or how those changes might help or hinder ourbusiness. The effect of the Security Standards on our business is difficult topredict and there can be no assurances that we will adequately address therisks created by the Security Standards and their implementation or that wewill be able to take advantage of any resulting opportunities.

*NPI Standard.*   OnJanuary 23, 2004, HHS published the final HIPAA standard for a uniquehealth identifier for healthcare providers, commonly referred to as theNational Provider Identifier (NPI) Standard. The NPI Standard requireshealthcare providers that transmit any health information in electronic form inconnection with a HIPAA covered transaction to obtain a single, 10 positionall-numeric NPI from the National Provider System, and to use the NPI in standardtransactions where a provider identifier is required. Health plans andhealthcare clearinghouses must use a provider’s NPI to identify the provider onall standard transactions where that provider’s identifier is required. Mostparticipants in the healthcare industry are required to be in compliance withthe NPI Standard by May 23, 2007. We have made product developmentinvestments to all of our core products that allow our clients to meet thecompliance date for the NPI Standard. We believe that our products will allowour customers to meet this requirement, however, factors out of our control mayprevent our customers from successfully complying with the NPI Standard usingour products. We are unable to predict how successful our customers will be inadopting and implementing these changes. For example, if our customers are notable to upgrade their systems to the product version that supports the NPIStandard, customers may choose to cancel their contract with us. The effect ofthe NPI Standard is difficult to predict and there can be no assurances thatour revenues will not be adversely affected, that we will adequately addressbusiness risks created by the NPI standard and its implementation, or that wewill be able to take advantage of business opportunities resulting fromimplementation of the NPI Standard.

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**Other GovernmentRegulations**

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 disease in humans. We believe that our healthcareinformation systems products are not medical devices currently subject to FDAregulation. However, FDA regulations are constantly changing and the FDA maypromulgate regulations, or interpret current regulations in a way that wouldcover our products. In addition, we may develop products that subject us to FDAregulation. Compliance with FDA regulations could substantially increase ourcost of doing business and may limit the extent of our planned productdevelopment.

The Federal DrugEnforcement Agency has promulgated regulations that may prohibit a pharmacyfrom the initial dispensing and/or refilling of certain controlled substancesthrough an electronically transmitted prescription. A violation of theseregulations may result in civil and criminal penalties. Such regulations maylimit the scope of our planned prescription ordering and refill functions.

**Employees**

As of February 28,2007, we employed 85 persons, including 10 in sales and marketing, 48 incustomer support services, 16 in product development and 11 in administration,finance and management. In order to augment our hiring of ready-to-work skilledindividuals, we utilize several programs to educate and train our work force. Ouremployees are not represented by a labor union and we have not experienced anywork stoppages and consider relations with our employees to be good.

**AdditionalInformation**

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-K and amendments to thesereports, are available on the SEC’s website free of charge at www.sec.gov. Inaddition, the SEC’s website contains reports, proxy, information statements andother information regarding issuers that file electronically with the SEC,including us.

**Item 2. Descriptionof Property**

We currently leaseapproximately 6,500 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 fouradditional locations throughout the United States, with lease terms expiring atvarious dates through 2011. We believe that these facilities are adequate forour current operations, and that additional leased space or changes to existingspaces can be obtained as needed. We have subleased some space in our Boulder,Colorado facility. Both this lease and the sublease expire in July 2007.

**Item 3. LegalProceedings**

In June 2005, a former employee filed a complaintagainst us alleging discrimination based on age and gender in connection withhis February 2005 termination. Although we did not agree that we acted ina discriminatory manner, our insurer agreed to settle this claim for a totalpayment of $24,500 plus $9,500 in legal fees which was accrued for in September 2005and paid in December 2005.

In February 2005, a former customer filed acomplaint in state court in New York against the Company alleging that webreached a contract with, and certain warranties to, the customer by failing todeliver certain direct payer transaction software and failing to provide softwarethat was HIPAA 

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compliant. The customerseeks damages of $192,896.00. In March 2005, we removed the case to theUnited States District Court for the Western District of New York. We believethe allegations to be without merit and are actively defending the claims. Wehave answered the complaint denying the claims and asserting certainaffirmative defenses. We have moved for summary judgment in our favor againstall of plaintiff’s claims. This motion is pending before the Court.

In January 2006, a former customer filed suit instate court in Nevada alleging breach of contract, breach of the impliedcovenant of good faith and fair dealing, and unjust enrichment. The customersought $236,049 in damages. The case was removed to Federal court in Nevada andupon motion by us, transferred to the Federal district court in Sacramento. Weanswered the complaint and filed a counterclaim for recovery of the value ofuncompensated services we provided. The matter was settled in November 2006and in connection with the settlement, we agreed to pay $55,000 to thiscustomer over a twelve month period. This settlement amount was accrued at December 31,2006.

We are party to variouslegal actions arising in the normal course of business. Matters where anunfavorable outcome is probable and which can be reasonably estimated areaccrued. Such accruals were $98,000 and $82,000 at December 31, 2006 and December 31,2005, 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 condensed consolidated balance sheet. None ofthe actions are believed by management to involve amounts that would bematerial to our consolidated financial position, operations, or liquidity afterconsideration of recorded accruals.

**Item 4. Submissionof Matters to a Vote of Security Holders**

None.

**PART II**

**Item 5. Market for Registrant’s Common Equity, RelatedStockholder Matters and Small Business Issuer Purchases of Equity Securities**

Ourcommon stock currently trades on the OTC Bulletin Board under the symbol “VMDC.OB”.The following table shows the high and low bid information for our common stockas reported by the OTC Bulletin Board:

| ** **     | ** ** | **2006**   | ** ** | **2005** | ** ** |
|----------------|------------|------------|------------|----------|------------|
| **Period**     | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $          | 0.74       |     | $          | 0.40 |   | $ | 1.75 |   | $ | 0.80 |   |
| Second Quarter |       | $          | 0.75       |     | $          | 0.26 |   | $ | 1.25 |   | $ | 0.85 |   |
| Third Quarter  |       | $          | 0.55       |     | $          | 0.37 |   | $ | 0.95 |   | $ | 0.51 |   |
| Fourth Quarter |       | $          | 0.52       |     | $          | 0.30 |   | $ | 0.94 |   | $ | 0.44 |   |
|                |            |            |            |          |            |  |  |  |  |  |  |  |  |  |  |

 

The quotations above reflect inter-dealer priceswithout retail mark-up, mark-down or commission and may not represent actualtransactions.

As of February 28, 2007, 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.

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OnFebruary 16, 2007, we signed a definitive agreement to be acquired byNightingale Informatix Corporation (Nightingale) (TSX-V: NGH) of Ontario,Canada. The acquisition, expected to close in the second quarter of 2007, isconditioned upon a majority vote of the common stockholders and other customaryconditions. The definitive agreement with Nightingale calls for ourstockholders to receive a fixed cash price of $0.75 per share. We have filedmaterials related to the proposed merger with the Securities and ExchangeCommission and mailed the definitive proxy statement for the specialstockholders meeting scheduled to take place on April 18, 2007.

**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 February 28, 2007.

| ** **                                                  | ** ** | **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     |       |                                                                                                                                                 | 2,213,443  |                                                                                                            |       |                                                                                                                                                                                                             | $0.70      |   |   |   | 1,028,683 |   |   |
| Equity compensation  plans not approved by security holders |       |                                                                                                                                                 | 4,574,771  |                                                                                                            |       |                                                                                                                                                                                                             | $1.06      |   |   |   | — |   |   |

 

**Item6. Management’s Discussion and Analysis or Plan of Operation**

*This reportcontains forward-looking statements within the meaning of Section 21E ofthe Securities and Exchange Act of 1934 and Section 27A of the SecuritiesAct of 1933. These forward-looking statements involve a number of risks anduncertainties, including those identified in the section of this Form 10-KSBentitled “Risk Factors,” that may cause actual results to differ materiallyfrom those discussed in, or implied by, such forward-looking statements.Forward-looking statements within this Form 10-KSB are identified bywords such as “believes,” “anticipates,” “expects,” “intends,” “may,” “will”and other similar expressions. However, these words are not the only means ofidentifying such statements. In addition, any statements that refer toexpectations, projections or other characterizations of future events orcircumstances 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 is 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.

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·       *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 31,2006.

·       *Forward Looking Statements and Risk Factors*. This sectiondescribes circumstances or events that could have a negative effect on ourfinancial results or operations that could change, for the worse, existingtrends in our business. The factors discussed in this section are divided intothree categories—risks associated with the proposed merger, risks associatedwith our business and risks associated with our industry.

**Introduction**

VantageMed Corporation wasincorporated in California on June 1, 1995, and on April 9, 1997, wereincorporated in Delaware. We are a diversified healthcare information systemssupplier headquartered in Rancho Cordova, California with support personnel andsales representatives in various locations throughout the United States. Wedevelop, sell, install and support software products and services that assistphysicians, anesthesiologists, behavioral health professionals, and otherhealthcare providers in the operation of their practices and organizations.These providers use our core software products including RidgeMark, NorthernHealth Anesthesia, Helper and ChartKeeper as well as our SecureConnectelectronic transaction services. We are dedicated to providing these costeffective, easy to use solutions that empower healthcare providers and theirstaff with the tools and data they need to improve productivity andreimbursements. We have developed a customer base of approximately 18,000physicians, anesthesiologists and behavioral health providers nationwidethrough both acquisitions and internal growth. We have not completed anyacquisitions since 1999. In 2005 and 2006 we established relationships withValue Added Resellers (VARs). We hope to generate revenues from theserelationships in the future; however this has not been an area of focus for us.

From 2003 and through2005, we focused on migrating our customers that were using our legacytechnology products (products that we were actively selling and supporting in2004 and prior) to our Windows-based products and services. The process ofdiscontinuing support of, or sunsetting, these legacy technology products wassubstantially completed during the first quarter of 2005 and as this processconcluded, we experienced a significant decline in order activity. During thismigration and sunset process we initiated various restructuring plans includingan evaluation of our product development initiatives, consolidation of certainoperating facilities, reductions of our workforce, and other cost-cuttingmeasures that have significantly reduced our cash usage and net losses. We alsomade a number of investments to enhance our products and improve the quality ofour customer support and are currently focusing our operations on growing ourmarket share with new sales of our Northern Health product, improving customersatisfaction of our RidgeMark customer base and increasing recurring revenuesfrom our Helper customers.

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 combining for the purchase of 10 percent. The investors in thetransaction also received warrants to purchase an additional 1,155,247 sharesof common stock priced at $1.21 per share, and warrants to purchase 1,165,498shares of common stock priced at $1.43 per share. We used these funds forworking capital purposes, including investments in sales and marketing for ourRidgeMark product which have not resulted in increased sales.

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In February 2006, wecompleted the sale of our Hawaii operation to TeamPraxis. We received $605,000of cash in connection with the sale including $25,000 associated with ongoingservice and transaction fees that were earned and recognized as revenues in thefirst quarter of 2006.

In June 2006, wecompleted a $500,000 private placement of 1,111,112 shares of common stockpriced at $0.45 per share. Institutional investors purchased 97 percent of theshares, with members of our management team combining for the purchase of 3percent. The investors in the transaction received warrants to purchase anadditional 1,111,112 shares of common stock priced at $0.55 per share, and anadditional 555,556 shares of common stock priced at $0.90 per share. Afterlegal expenses, the net proceeds were approximately $492,000. We have usedthese funds for working capital purposes and for consideration of broaderstrategic opportunities, including the proposed merger with NightingaleInformatix Corporation (“Nightingale”) described below. This issuance triggeredan adjustment to the purchase price and number of warrants that were issued inthe March 2005 transaction described above. The information in thisdocument has been updated to reflect the adjusted strike price and number ofwarrants following this adjustment.

On February 16, 2007,we signed a definitive agreement to be acquired by Nightingale InformatixCorporation (Nightingale) (TSX-V: NGH) of Ontario, Canada. The acquisition,expected to close in the second quarter of 2007, is conditioned upon a majorityvote of the common stockholders and other customary conditions. The definitiveagreement with Nightingale calls for our stockholders to receive a fixed cashprice of $0.75 per share. We have filed materials related to the proposedmerger with the Securities and Exchange Commission and mailed the definitiveproxy statement for the special stockholders meeting scheduled to take place onApril 18, 2007.

Wederive revenues from 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 claim processing, electronic patient statement printing and mailing, electronic remittanceadvice, claim scrubbing and claim eligibility and related set up fees.With the exception of set up fees, we consider these revenues to be recurringin nature.

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Recurring revenues (revenues derived from software and hardwaremaintenance, billing and electronic services) represent a significantportion of our total revenues. We believe that recurring revenues will continueto constitute a substantial share of our total revenues. Non-recurring revenuesinclude revenues generated from sales ofsoftware and systems and related training, data conversion and installationservices. Recurring revenue is not a measurement defined by US GAAP andshould not be considered an alternative to, or more meaningful than, revenuesas defined by US GAAP. Not all companies calculate recurring revenues in thesame manner as we do or at all. Accordingly, our recurring revenue data may notbe comparable with that of other companies. We have included the followinginformation concerning recurring revenues because we believe recurring revenuesprovide useful information regarding our overall revenue mix. Although totalrecurring revenues decreased from 2005 to 2006, as our legacy product sunsetprocess concluded with the sale of our Hawaii division, recurring revenuesassociated with our core product group have increased 4.2% from $7.6 million inthe year ended December 31, 2005 to $7.9 million for the year ended December 31,2006.

| ** **                | ** ** | **Years Ended  December 31,** | ** ** |
|---------------------------|------------|-----------------------------------------|------------|
| ** **                | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| Recurring  (non-GAAP)     |       | $                                       | 8,550      |   | $ | 11,138 |   |
| Non-recurring  (non-GAAP) |       | 2,410                                   |       | 4,157 |   |
| Total revenues (GAAP)     |       | $                                       | 10,960     |   | $ | 15,295 |   |

 

The selected consolidated financial data set forthbelow are derived from our audited financial statements and should be read inconnection with our consolidated financial statements and related notesincluded in this Form 10-KSB.

**SelectedConsolidated Financial Data**

**(In thousands, except per share amounts)**

| ** **                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002(1)** | ** ** |
| Consolidated Statement  of Operations Data:   |       |                                        |       |   |   |   |   |   |   |   |   |
| Total revenues                                |       | $                                           | 10,960     |   | $ | 15,295 |   | $ | 22,120 |   | $ | 21,855 |   | $ | 21,744 |   |
| Total cost of  revenues                       |       | 5,337                                       |       | 9,738 |   | 13,109 |   | 12,312 |   | 12,499 |   |
| Total gross  margin                           |       | 5,623                                       |       | 5,557 |   | 9,011 |   | 9,543 |   | 9,245 |   |
| Gross margin  percentage                      |       | 51.3                                        | %          | 36.3 | % | 40.7 | % | 43.7 | % | 42.5 | % |
| Operating expenses:                           |       |                                        |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative           |       | 4,627                                       |       | 7,082 |   | 8,699 |   | 8,510 |   | 11,391 |   |
| Product development                           |       | 1,585                                       |       | 2,184 |   | 2,519 |   | 2,637 |   | 2,975 |   |
| Depreciation and amortization                 |       | 145                                         |       | 243 |   | 477 |   | 769 |   | 1,184 |   |
| Stock-based compensation                      |       | 391                                         |       | 334 |   | 113 |   | 27 |   | — |   |
| Restructuring, impairment and other charges   |       | 13                                          |       | (13 | ) | 1,052 |   | 1,318 |   | 1,748 |   |
| Gain on sale of DentalMate business           |       | —                                      |       | — |   | (41 | ) | (571 | ) | — |   |
| Total operating expenses                      |       | 6,761                                       |       | 9,830 |   | 12,819 |   | 12,690 |   | 17,298 |   |
| Loss from  operations                         |       | (1,138                                      | )          | (4,273 | ) | (3,808 | ) | (3,147 | ) | (8,053 | ) |
| Gain on sale of  Hawaii operation             |       | 235                                         |       | — |   | — |   | — |   | — |   |
| Interest and  other income (expense), net     |       | (80                                         | )          | (7 | ) | (97 | ) | 10 |   | 7 |   |
| Net Loss                                      |       | $                                           | (983       | ) | $ | (4,280 | ) | $ | (3,905 | ) | $ | (3,137 | ) | $ | (8,046 | ) |
| Basic and diluted  loss per share(2)          |       | $                                           | (0.07      | ) | $ | (0.31 | ) | $ | (0.47 | ) | $ | (0.37 | ) | $ | (0.95 | ) |
| Weighted-average  shares-basic and diluted(2) |       | 14,869                                      |       | 13,951 |   | 8,285 |   | 8,400 |   | 8,493 |   |

 

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| ** **                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002(1)** | ** ** |
| Consolidated Balance  Sheet Data:                 |       |                                  |       |   |   |   |   |   |   |   |   |
| Working capital                                   |       | $                                     | (3,558     | ) | $ | (3,936 | ) | $ | (4,900 | ) | $ | (2,187 | ) | $ | (769 | ) |
| Cash, cash equivalents and short-term investments |       | 820                                   |       | 636 |   | 946 |   | 2,359 |   | 2,682 |   |
| Long-term  investments                            |       | —                                |       | — |   | — |   | — |   | 804 |   |
| Total assets                                      |       | 1,877                                 |       | 2,764 |   | 3,950 |   | 7,638 |   | 9,964 |   |
| Long-term  debt, net of current portion           |       | 32                                    |       | 42 |   | — |   | 195 |   | 555 |   |
| Accumulated  deficit                              |       | (82,158                               | )          | (81,175 | ) | (76,895 | ) | (72,990 | ) | (69,853 | ) |
| Total stockholders’  equity (deficit)        |       | $                                     | (3,500     | ) | $ | (3,410 | ) | $ | (4,262 | ) | $ | (483 | ) | $ | 2,694 |   |

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(1)          Asrestated. See Note 2 to Consolidated Financial Statements included in our Form 10K-SBfiled with the Securities and Exchange Commission on March 30, 2005.

(2)          Potentiallydilutive securities from stock options, warrants or convertible notes have beenexcluded 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,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| Total revenues                              |       | 100.0                                   | %          | 100.0 | % |
| Total cost of  revenues                     |       | 48.7                                    |       | 63.7 |   |
| Total gross  margin                         |       | 51.3                                    |       | 36.3 |   |
| Operating  expenses:                        |       |                                    |       |   |   |
| Selling, general and administrative         |       | 42.2                                    |       | 46.3 |   |
| Product development                         |       | 14.5                                    |       | 14.3 |   |
| Depreciation and amortization               |       | 1.3                                     |       | 1.6 |   |
| Stock-based compensation                    |       | 3.6                                     |       | 2.2 |   |
| Restructuring, impairment and other charges |       | 0.1                                     |       | (0.1 | ) |
| Total operating expenses                    |       | 61.7                                    |       | 64.3 |   |
| Loss from operations                        |       | (10.4                                   | )          | (28.0 | ) |
| Interest and  other income (expense), net   |       | 1.4                                     |       | (0.1 | ) |
| Net loss                                    |       | (9.0                                    | )%         | (28.1 | )% |

 

*Results of Operations for the year ended December 31,2006 compared to the year ended December 31, 2005*

*Revenues.*   Totalrevenues for the year ended December 31, 2006 were $11.0 million comparedto $15.3 million for the year ended December 31, 2005, a decrease of $4.3million, or 28.3%. A significant portion of the decrease in revenues wasrelated to our legacy product sunset process which was substantially completedduring the first quarter of 2005 and completed with the sale of our Hawaiioperation in February 2006. A decrease in sales of our RidgeMark productalso contributed to the decrease as we ended our focus on RidgeMark migrationsales in 2006 and experienced a significant decline in related order activity.These decreases were partially offset by increases in revenues from our Helperand Northern Health product lines. While we continue to derive some revenues fromour legacy product lines, we expect these revenues to be insignificant in 2007.

Non-recurring revenues(revenues generated from sales of software and systems and related training,data conversion and installation services) decreased $1.7 million, or 42.0%, to$2.4 million for the year ended December 31, 2006 down from $4.2 millionfor the year ended December 31, 2005 primarily due to the decrease insales of RidgeMark as the migration process concluded as described above. Recurring

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revenues(revenues derived from software and hardware maintenance, billing andelectronic services) also decreased $2.6 million, or 23.2%, to $8.6 million forthe year ended December 31, 2006 down from $11.1 million for the yearended December 31, 2005. This decrease was primarily due to the loss ofcustomer support revenues in connection with the sale of our Hawaii operationin February 2006 that we believed to be unprofitable as well as otherlegacy product lines in connection with the sunset process. These decreases inrecurring revenues were partially offset by a $316,000, or 4.2%, increase inrecurring revenues from our core product lines.

*Software and Systems.*   Softwareand systems revenues decreased $1.1 million, or 36.5%, from $3.1 million forthe year ended December 31, 2005 to $2.0 million for the year ended December 31,2006. The decrease in software and systems revenues was due to our installingsignificantly fewer RidgeMark systems during 2006 compared to 2005 as themigration process came to an end.

*Customer Support*.   Customersupport revenues decreased $2.6 million, or 31.5% from $8.1 million forthe year ended December 31, 2005 to $5.6 million for the year ended December 31,2006. A significant portion of this decrease in revenues was related to ourlegacy product sunset process which was substantially completed during thefirst quarter of 2005 and completed with the sale of our Hawaii operation in February 2006.A decrease in service revenues related to our RidgeMark product alsocontributed to the decrease in revenues.

*Electronic Services*.   Electronicservices revenues decreased $641,000, or 15.8%, from $4.1 million for the yearended December 31, 2005 to $3.4 million for the year ended December 31,2006. This decrease was primarily due to an $825,000 decrease in electronicservices revenues from our legacy products which was partially offset by anincrease in electronic services revenues from our core products.

*Cost of Revenues.*   Totalcost of revenues decreased $4.4 million, or 45.2%, from $9.7 million for theyear ended December 31, 2005 to $5.3 million for the year ended December 31,2006. Gross margin (total revenues less cost of revenues, divided by totalrevenues) increased from 36.3% to 51.3%. The decrease in total cost of revenuesis a result of various factors including: fewer new product sales, reducedlabor spending, and better pricing from vendors as described below, as well asother cost-cutting measures.

*Software and Systems.*   Softwareand systems cost of revenues include software licensing costs and costs ofcomputer hardware and supplies. Software and systems cost of revenues decreased$727,000, or 63.9%, from $1.1 million for the year ended December 31, 2005to $411,000 for the year ended December 31, 2006. Gross margin on softwareand systems improved from 63.6% to 79.3%. The improvement in gross margin isprimarily due to the decrease in sales of our RidgeMark product that oftenincluded a significant amount of hardware at low margins.

*Customer Support**.   Costs for customer supportinclude salary and benefits for employees responsible for customer support,product installation and training as well as costs for support provided bythird-parties. Customer support cost of revenues decreased $3.0 million, or50.8%, from $5.9 million for the year ended December 31, 2005 to $2.9million for the year ended December 31, 2006. Gross margin on customersupport increased from 27.3% for the year ended December 31, 2005 to 47.8%for the year ended December 31, 2006. This increase in gross margin wasprimarily the result of reductions in labor costs, including contract labor, aswell as improved pricing from vendors.*

*Electronic Services**.   Costs for electronic servicesconsist of third-party costs and salaries and benefits of staff for electronicclaim processing as well as costs for patient statement printing and mailing. Electronicservices cost of revenue decreased $677,000, or 25.0%, from $2.7 million forthe year ended December 31, 2005 to $2.0 million for the year ended December 31,2006. Gross margin on electronic services increased from 33.4% for the yearended December 31, 2005 to 40.7% for the year ended December 31, 2006.The improvement in gross margin is primarily due to better pricing from service*vendors.

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*Selling, General andAdministrative (SG&A).*   SG&A expenses consist primarily of salaries, commissionsand benefits of sales staff, executive, accounting and administrativepersonnel, legal and professional service fees, advertising and promotionalmaterials, communications, facility costs and insurance. SG&A expensesdecreased $2.5 million, or 34.7%, and were $7.1 million, or 46.3% of revenuesfor the year ended December 31, 2005 and $4.6 million, or 42.2% ofrevenues for the year ended December 31, 2006. The decrease in SG&Aexpense was primarily related to a reduction in spending on sales and marketingactivities as we completed the RidgeMark migration process and shifted ourfocus to customer satisfaction of our RidgeMark customer base, market positionof Helper and growth of our Northern Health market niche. To a lesser extent,the decrease was related to decreases in bad debt expense, office rent, travel,telecommunications costs and the impact of several other cost cutting measuresimplemented throughout 2005 and 2006.

*Product Development.*   Productdevelopment expenses consist primarily of compensation and related costs foremployees and fees for independent contractors and relate primarily to theon-going development and product testing activities for our Windows-basedproducts. Product development expenses decreased $599,000, or 27.4%, from $2.2million, or 14.3% of revenues for the year ended December 31, 2005 to $1.6 million,or 14.5% of revenues, for the year ended December 31, 2006. This decreasewas due to reductions in labor as we completed certain development milestonesfor our products and reorganized our development organization.

*Depreciation andAmortization.*   Depreciation expense is recognizedon a straight line basis over the estimated useful lives of our fixed assetsand decreased $84,000, or 36.7%, from the year ended December 31, 2005 to2006, primarily due to certain fixed assets that became fully depreciatedduring 2005 and 2006. Amortization expense is recognized on a straight linebasis over the estimated useful lives of our non-goodwill related intangibleassets and decreased $14,000, or 92.3%, to $1,000 for the year ended December 31,2006 as we wrote off all remaining intangible asset balances in connection withthe sale of our Hawaii based operation in February 2006.

*Restructuring.**  *In 2005 and 2006, our restructuring reserve includedcosts related to two leased facilities in Boulder, Colorado that were vacatedin 2002. In the second quarter of 2004, we signed an agreement to terminate andbuyout the lease for one of the facilities. In connection with the signing ofthis agreement, we recognized a benefit of $147,000 representing the differencebetween the payments that were to 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 andrequired us to make monthly payments of approximately $4,000 through July 2006.The balance of the restructuring reserve covers lease payments we expect tomake on the second facility which expires in June 2007.

Thecomponents of our restructuring provision and activity in the reserve for thetwo years ended December 31, 2006 were as follows (in thousands):

| ** **                      | ** ** | **Leased  Facilities** | ** ** |
|---------------------------------|------------|------------------------|------------|
| December 31,  2004 balance |       |                   | $          | 244 |   |   |
| 2005 net benefit                |       |                   | (13        | ) |   |
| Cash payments                   |       |                   | (147       | ) |   |
| December 31,  2005 balance |       |                   | 84         |   |   |
| 2006 net expense                |       |                   | 13         |   |   |
| Cash payments                   |       |                   | (74        | ) |   |
| December 31, 2006  balance |       |                   | $          | 23 |   |   |

 

*Stock-based compensation.**  *We account for stock options using a fair valuemethod, as allowed under SFAS No. 123R. We have elected to use theprospective method of adoption, resulting in the recognition 

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of stock-basedcompensation expense of $391,000 for the year ended December 31, 2006 and$334,000 for the year ended December 31, 2005. This expense is associatedwith options we have granted to employees, directors and executives from 2003to 2006 and is based on an estimate of fair market value of each option on itsdate of grant using the Black-Scholes option pricing model.

*Interest and Other Income(Expense), Net.**  *Interestincome decreased $22,000 from the year December 31, 2005 to 2006 andinterest expense and other, net increased $51,000 from the year ended December 31,2005 to 2006. In 2006, we recorded a gain of $235,000 relating to the sale ofour Hawaii operation.

*Income Taxes.*   Wedid not record a provision for income taxes for the years ended December 31,2006 or 2005, as we did not generate book or taxable income. At December 31,2006, we had net operating loss carryforwards for federal and state income tax purposesof approximately $51 million and $10 million, respectively, thatexpire in various years through 2026. 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 accountingpolicies are particularly important to the presentation of our financialposition and results of operations and require the application of significantjudgment by our management. As a result, they are subject to an inherent degreeof uncertainty. In applying those policies, we use our judgment to determinethe appropriate assumptions to be used in the determination of certainestimates. Those estimates are based on our historical experience, terms ofexisting contracts, observance of trends in the industry, information providedby our customers and information available from other outside sources, asappropriate. Our critical accounting policies include:

*Revenue Recognition.*   Feesfrom sales of licenses are recognized as revenue in accordance with AICPAStatement of Position 97-2 (SOP 97-2), “Software RevenueRecognition,” as amended by SOP 98-9, and Staff Accounting Bulletin No. 104(SAB 104) “Revenue Recognition,” when all shipment obligations have beenmet, fees are fixed and determinable, collection of the sale proceeds is deemedprobable and persuasive evidence of an arrangement exists. We generally chargea one-time license fee for the right to use our proprietary software. Theamount of the license fee is fixed and specified at the inception of thelicense agreement and is generally part of a multiple element arrangement. Thelicense fee is not subject to adjustment based on future usage or an obligationto distribute further copies. Payment of the license fee for one of ourproducts is due prior to shipment and for our other products is due upondelivery and acceptance, generally within 90 days from the date ofcontract execution. We do not offer cancellation provisions and in a limitednumber of cases, we have offered extended payment terms.

Multiple elementarrangements generally include (i) a proprietary software license, (ii) third-partysoftware, hardware, and implementation, and (iii) training and otherspecified services. The fee for multiple element arrangements is allocated tothe various elements based on vendor specific objective evidence (VSOE) of fairmarket value established by the price of the elements sold separately orrenewal rates if an element is not being sold separately. The residual methodis used when VSOE exists for the undelivered elements, primarily post-contractsupport and training. Also, to the extent that a discount exists on any of theelements, we follow the residual method and attribute that discount entirely tothe delivered elements. We generally collect a deposit upon contract executionof at least 50% before proceeding to fulfill the contract. Revenue isrecognized when all of the criteria of SOP 97-2 are met. Depositsreceived in advance of revenue recognition are recorded as customer depositsand included in current liabilities.

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We also provide post-contractsupport under annual maintenance and support agreements as well as otherservices including electronic claims processing, electronic statement printing,mailing and other services provided independently from software licensingactivities. Support agreements are billed annually, semi-annually, quarterly ormonthly and all other services are billed as the services are rendered. Inaccordance with SOP 97-2, revenue from annual support agreements arerecognized ratably over the contract term. Support fees received in advance ofrevenue recognition are recorded as deferred revenue. Revenue from all otherservices is recognized as the services are rendered.

For one of our softwareproducts, we offer a limited return provision for 60 days from the date ofpurchase. Based on historical information available to us based on past salesand returns experience, we are able to reasonably estimate future productreturns. Although not significant, we make adequate provision for returnsexpected on sales made within 60 days of each reporting period.

*Allowance for doubtfulaccounts.**  *Wereview accounts receivable and provide a reserve for amounts we estimate willnot be collectible. During our review we consider the age of the receivablebalance, the reason for the delinquency, our historical experience, and thecredit-worthiness of the customer . We consider a number of matters whengranting credit to customers including our prior experience with them, theircurrent cash resources, and ability to obtain lease financing, if applicable.

*Inventory reserves.*   Reservesare provided for excess or obsolete inventory, which are estimated based on theage of the items and our ability to utilize the items in future sales.Generally, items that are greater than one year old or that are expected totake longer than one year to consume are reserved and the related charge isrecorded as cost of software and systems revenue.

*Long-lived Assets.*   Forcertain long-lived assets, primarily property and equipment and intangibleassets, we estimate the useful life of the asset and recognize its cost as anexpense over the estimated useful life. We use the straight-line method toexpense long-lived assets, which results in an equal amount of expense in eachperiod. Additionally, pursuant to applicable accounting rules, we periodicallyassess whether long-lived assets have been impaired. We deem an asset to beimpaired if its estimated fair value is less than the net book value at whichit is recorded on our balance sheet. Our estimate of fair value is based on thenet present 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.

*Accrued liabilities.**  *Certain of our accrued liabilitiesare based largely 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.

*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 berealized. This determination is based upon our limited operating history,history of losses and the possibility that we may never achieve profitability. Asof December 31, 2006, we had net operating loss carryforwards for federaland state income tax purposes of approximately $51 million and $10 million,respectively. The potential tax benefits were fully reserved and therefore arenot $-recorded on the balance sheet as an asset.

**Recent Accounting Pronouncements**

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).SFAS 159 provides companies with an option to report selected financialassets and liabilities at fair value and establishes presentation anddisclosure requirements designed to facilitate comparisons between companiesthat 

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choosedifferent measurement attributes for similar types of assets and liabilities.SFAS 159 will be effective for us beginning January 1, 2008. We arecurrently evaluating the impact of adopting SFAS 159 but do not believethat it will have a material impact on our consolidated financial statements.

In September 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “FairValue Measurements” (“SFAS 157”), which clarifies the definition of fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurement.SFAS 157 does not require any new fair value measurements and eliminatesinconsistencies in guidance found in various prior accounting pronouncements.SFAS 157 will be effective for the Company on January 1, 2008. We arecurrently evaluating the impact of adopting SFAS 157 but do not believethat it will have a material impact on our consolidated financial statements.

In September 2006,the SEC released Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements” (“SAB 108”). SAB 108 provides interpretiveguidance on the SEC’s views on how the effects of the carryover or reversal ofprior year misstatements should be considered in quantifying a current yearmisstatement. The provisions of SAB 108 became effective for us beginning January 1,2006. SAB 108 has not had a significant impact on our consolidatedfinancial statements included in this annual report.

In June 2006, theFASB issued Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes, an interpretation of SFAS No. 109” (“FIN 48”), to create asingle model to address the accounting for uncertainty in tax positions. FIN 48clarifies the accounting for income taxes by prescribing the minimumrecognition threshold a tax position is required to meet before beingrecognized in the financial statements. FIN 48 also provides guidance onderecognition, measurement, classification, interest, and penalties, accountingin interim periods, disclosure, and transition. FIN 48 will be effectivefor the Company beginning January 1, 2007. The cumulative-effect ofadopting FIN 48 will be recorded to opening retained earnings. We arecurrently evaluating the effect, if any, that the adoption of FIN 48 willhave on our consolidated financial statements.

In March 2006, FASBissued SFAS No. 156,  “Accountingfor Servicing of Financial Assets, an amendment of FASB Statement No. 140”(“SFAS 156” ). SFAS 156 requires that all separately recognized servicingassets and liabilities in accordance with SFAS 140 be initially measured atfair value, if practicable. SFAS 156 is effective for us beginning January 1,2007. The implementation of this standard is not expected to have an impact onour consolidated financial position, results of operations or cash flows.

In February 2006,FASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments” (“SFAS 155”). SFAS 155 establishes, among other items, theaccounting for certain derivative instruments embedded within other types offinancial instruments and eliminates a restriction on the passive derivativeinstruments that a qualifying special-purpose entity may hold. SFAS 155 is effectivefor us beginning January 1, 2007. The implementation of this standard isnot expected to have an impact on our consolidated financial position, resultsof operations or cash flows.

**Liquidity and Capital Resources**

Since 1996, we havefinanced our operations primarily through a combination of indebtedness,capital leases, private equity financing and an IPO. Approximately 82% of theconsideration paid for our acquisitions was paid with our stock or stockoptions. The balance of the consideration was promissory notes and cash. In March 2005,we raised $5.0 million through a private placement of 5,376,344 shares ofcommon stock priced at $0.93 per share. In June 2006, we raised $500,000through a private placement of 1,111,112 shares of common stock priced at $0.45per share.

Net cash used foroperating activities was $702,000 for the year ended December 31, 2006compared to $4.6 million for the year ended December 31, 2005. A majorityof this difference was due to a decrease in our net loss from $4.3 million forthe year ended December 31, 2005 to $983,000 for the year ended 

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December 31,2006. The decrease in our net loss from 2005 to 2006 was primarily due to areduction in spending in a number of categories, most notably salaries andwages. A $745,000 decrease in accounts payable and accrued liabilities and$235,000 gain from the sale of our Hawaii operation were the primary uses ofcash in 2006. These uses of cash were partially offset by cash generated from a$331,000 reduction in accounts receivable, as well as decreases in prepaidexpenses, customer deposits and deferred revenues. Cash used in operations in2005 included a $1.2 million reduction in accounts payable and accruedliabilities and a $620,000 reduction in customer deposits and deferred revenues.These uses of cash were partially offset by decreases in accounts receivableand prepaid expenses.

Investing activitiesincluded capital expenditures of $29,000 in the year ended December 31,2006 and $49,000 in the year ended December 31, 2005. In 2006, we receivedcash of $605,000 in connection with the sale of our Hawaii operation. In 2005,we purchased $4.0 million of investments with the proceeds from our March 2005private placement which were later sold.

Net cash provided byfinancing activities was $310,000 for the year ended December 31, 2006 andwas primarily due to the $500,000 private placement in June, which waspartially offset by $192,000 for payments on debt. Financing activitiesprovided cash of $4.4 million for the year ended December 31, 2005primarily due to our receipt of $4.6 million received for the sale of stock andwarrants which was partially offset by a use of cash of $448,000 for paymentson debt. In addition, we received cash of $222,000 during the year ended December 31,2005 from stock option exercises.

In February 2006, wecompleted the sale of our Hawaii operation to TeamPraxis. We received $605,000of cash in connection with the sale including $25,000 associated with serviceand transaction fees that were earned within the first quarter of 2006.

In June 2006, wecompleted a $500,000 private placement of 1,111,112 shares of common stockpriced at $0.45 per share. Institutional investors purchased 97 percent of theshares, with members of our management team combining for the purchase of 3percent. The investors in the transaction received warrants to purchase anadditional 1,111,112 shares of common stock priced at $0.55 per share, and anadditional 555,556 shares of common stock priced at $0.90 per share. Afterlegal expenses, the net proceeds were approximately $492,000.

At December 31, 2006,we had $820,000 of cash and cash equivalents and negative working capital of$3.6 million, and we used $702,000 of cash in our operations for the year endedDecember 31, 2006. We also had a deficit in stockholder’s equity. In order for us to achieve and sustain positiveoperating cash flow, working capital or profitability we will need to increaseour revenues from non-recurring sources and may need to make additional changesto our cost structure and operating plan. Considering our current salesforecast, cash management practices and projected operating expenses, webelieve that we can make any changes necessary to ensure that our cash andinvestments will be sufficient to meet our cash flow needs through at least December 2007.However, there can be no assurances that our plans will succeed and sustainedlong term profitability will depend on our ability to significantly increaseour sales volumes. If the acquisition by Nightingale is not completed, we mayseek to raise additional funds for working capital purposes, to fund theacquisition or development of an Electronic Medical Records product, fundadditional marketing expenditures, enhance our operating infrastructure andrespond to competitive pressures. Additional financing may not be available onterms 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 March 23,2007 regarding our financial statements, our registered independent publicaccounting firm expressed substantial doubt about our ability to continue as agoing concern as a result of our net losses, accumulated deficit, stockholdersdeficit and other factors. Our future profitability 

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willdepend on many 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, 2006,we had $104,000 in debt primarily issued in connection with our acquisitions aswell as in connection with our financing of certain annual insurance premiums. Interestrates on these notes range from 7.0% to 10.0%. In addition, we lease certaincomputers and office equipment under lease agreements accounted for as capitalleases. At December 31, 2006, we had $42,000 in capital leases that maturefrom February 2010 to July 2010. At December 31, 2005, we had$130,000 in assumed debt or promissory notes primarily issued in connection withacquisitions and $52,000 in capital leases.

We lease space at ourprincipal executive and corporate headquarters and at several locationsthroughout the United States, with lease terms expiring at various datesthrough 2011. We have subleased some space in our facility in Boulder,Colorado.

Future minimum paymentsunder all debt and lease obligations at December 31, 2006 are as follows(in thousands):

| **Year Ending December 31,**                              | ** ** | ** ** | ** ** | **Debt** | ** ** | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|-----------------------|------------|
| 2007                                                                     |       | $          | 104        |     |       | $                   | 16         |                  |       |   | $ | 258 |   |   |
| 2008                                                                     |       | —     |       |     | 15         |                |       |                  | 179        |   |   |
| 2009                                                                     |       | —     |       |     | 15         |                |       |                  | 98         |   |   |
| 2010                                                                     |       | —     |       |     | 5          |                |       |                  | 79         |   |   |
| 2011                                                                     |       | —     |       |     | —     |                |       |                  | 13         |   |   |
| Total minimum  payments                                                  |       | 104        |       |     | 51         |                |       |                  | $          | 627 |   |   |
| Less: interest on  capital lease obligations at rates of 10.77% to 11.8% |       | —     |       |     | (9         | )                   |       |                  |       |   |   |
| Less: current  maturities                                                |       | (104       | )          |     | (10        | )                   |       |                  |       |   |   |
| Long-term portion                                                        |       | $          | —     |     |       | $                   | 32         |                  |       |   |   |   |   |

 

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

**Forward-LookingStatements and Risk Factors**

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

*This Annual Report on Form 10 KSB contains certainforward-looking statements within the meaning of Section 27A of the SecuritiesAct and Section 21 of the Securities Exchange Act of 1934, as amended (theExchange Act), which are intended to be covered by the safe harbors createdthereby. Investors are cautioned that forward-looking statements involve risksand uncertainties. Although we believe that the assumptions underlying theforward-looking statements contained herein are reasonable, any of theassumptions could be inaccurate and therefore, there can be no assurance thatthe forward-looking statements will prove to be accurate. In light of thesignificant uncertainties inherent in the forward-looking statements includedherein, the inclusion of such information should not be regarded as arepresentation by us or any other person that our objectives and plans will beachieved. We are not obligated and expressly disclaim any obligation, to updateany forward-looking statements.*

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***RisksAssociated with the Proposed Merger***

**Failure To CompleteThe Proposed Merger With Nightingale Could Negatively Impact Our Stock Price,Future Business, Or Operations**

We have signed a merger agreement with NightingaleInformatix Corporation of Ontario, Canada, whereby all of our outstandingshares will be purchased at a fixed cash price of $0.75 per share. We cannotguarantee that we will be able to meet all of the requirements for completingthe merger, nor can we guarantee that Nightingale will be able to secure theamount of funds required to purchase all of our outstanding common shares. Inaddition, certain terms of the agreement allow for Nightingale to withdraw itsoffer in the event of a material adverse event that may occur between now andclosing. If the merger is not completed as a result of these or any otherfactor, our reputation could be seriously damaged and this news would likelycause our share price to drop and cause substantial financial losses for ourshareholders.

If the merger is notcompleted, we may be subject to a number of material risks, including thefollowing:

·       Wemay be required under certain circumstances to pay Nightingale a terminationfee of $900,000 plus all out-of-pocket expenses up to a maximum of $1,200,000;

·       Theprice of our common stock may decline to the extent that the relevant currentmarket price reflects a market assumption that the merger will be completed;and

·       Costsrelated to the merger, such as legal, accounting, certain financial advisoryand financial printing fees, must be paid, even if the merger is not completed.

Further, if the merger isterminated and our board of directors determines to seek another merger orbusiness combination, there can be no assurance that it will be able to find apartner on terms as attractive as those provided for in the merger agreement.In addition, while the merger agreement is in effect and subject to verynarrowly defined exceptions, we are prohibited from soliciting, initiating,encouraging or entering into certain extraordinary transactions, such as amerger, disposition, consolidation, dissolution, sale of assets or otherbusiness combination, other than with Nightingale.

**Failure To SatisfyOr Waive Certain Conditions Could Prevent The Merger From Occurring.**

The closing of themerger is contingent upon various conditions being satisfied or waived. If allthe conditions are not satisfied or waived, the merger will not occur. If themerger does not occur, we will lose the intended benefits of the merger. Thefollowing conditions, in addition to other customary closing conditions, mustbe satisfied or waived, if permissible, before we and/or Nightingale areobligated to complete the merger:

·       Themerger agreement must be adopted and the merger approved by the holders of amajority of the outstanding shares of our common stock as of the record date;

·       Theremust not be any order, injunction or decree preventing the completion of themerger;

·       Thereshall have been no material adverse effect on our business, assets (includingintangible assets),  financial condition,capitalization or results of operations;

·       Atthe effective time of the merger we must have available cash on hand of atleast $500,000, less certain fees and expenses;

·       Employmentand non-competition agreements between Nightingale and our management mustremain in full force and effect

·       Certainagreements must be terminated or amended;

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·       Allof our outstanding options and warrants must be terminated.

Any termination of themerger agreement, regardless of whether termination expenses are required to bepaid, could lead to a possible decline in the market price of our common stockto the extent current market prices reflect a market assumption that the mergerwill be completed on the agreed-upon terms.

**The ContractualProvision That Requires Us To Pay A Termination Fee Could Adversely Affect OurFinancial Condition And May Discourage Other Companies From Trying ToAcquire Us**

Under the mergeragreement, we have agreed to pay a termination fee to Nightingale of $900,000plus out-of-pocket expenses up to an aggregate of $1,200,000 in particularcircumstances, including circumstances in which a third party seeks to acquireor acquires us. This termination fee could discourage other companies fromtrying to acquire us even though those other companies might be willing tooffer greater consideration to our stockholders than Nightingale has offered inthe merger agreement. In addition, payment of the termination fee could have amaterial adverse effect on our financial condition.

**General UncertaintyRelated To The Merger Could Harm Our Revenues, Ability To Retain Key Personnel,Stock Price And Operating Results**

Our customers may, inresponse to the pendency of the proposed merger, delay or defer purchasingdecisions. If our customers delay or defer purchasing decisions, our revenuescould materially decline. Similarly, our employees may experience uncertaintyabout their future role after the merger is completed. This may harm ourability to attract and retain key management, sales, marketing and technicalpersonnel. The disruption of our businesses caused by these issues could causequarterly and annual operating results to be lower than expected.

**ContractualProvisions In The Merger Agreement Contain Significant Restrictions On OurOperations That Would Require The Consent Of Nightingale To Deviate From**

Under the mergeragreement, we have agreed to certain restrictions on the conduct of ourbusiness, including but not limited to not making capital expenditures inexcess of $10,000, not issuing any additional securities, not acquiring anyother business or company, not amending any employee plan, not commencing anylitigation, not incurring any additional indebtedness, and others, in each casewithout the consent of Nightingale. The effect of these provisions is that wemay not be able to take actions we otherwise might believe are in the bestinterests of our stockholders unless we can convince Nightingale to consent,and there can be no assurances that such consent would be obtained onacceptable terms or at all.

***RisksAssociated with our Business***

**We Have Received A “GoingConcern” Opinion From Our Registered Independent Public Accounting Firm, WeHave A History of Operating Losses And May Not Achieve ProfitabilitySufficient To Generate A Positive Return On Shareholders’ Investment**

We incurred a net loss of$983,000 for the year ended December 31, 2006 and as of December 31,2006 our accumulated deficit was $82.2 million. Our consolidated financialstatements for the year ended December 31, 2006 have been prepared on a “goingconcern” basis; however, in its report dated March 23, 2007 regarding our2006 financial statements, our registered independent public accounting firmreferred to substantial doubt about our ability to continue as a going concernas a result of our recurring losses, accumulated deficit, stockholders deficitand other factors. Our future profitability will depend on many factors,including those disclosed in the risk factors below, but in the near-term will dependprimarily on our ability to (i) increase sales of our core Windows-basedproducts to new customers and (ii) restructure our operations to match oursales volumes. We cannot assure you that these plans will succeed or that wewill ever become profitable.

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**If We Fail ToGenerate New Sales Of Our Windows-Based Products, We May Not Be Able ToSustain Our Recurring Revenues And We May Be Unable To Achieve Or SustainRevenue 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 flow in thenear term or at all.

**Our Need ForAdditional Financing Is Uncertain, As Is Our Ability To Raise Further FinancingIf Required**

At December 31, 2006, we had $820,000 of cash andcash equivalents and had negative working capital of $3.6 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 tocompetitive pressures; or acquire or develop complementary businesses ornecessary technologies.

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. Whilethe merger agreement with Nightingale is in effect, we are restricted fromissuing new securities without their consent. If adequate funds are notavailable or are not available on terms acceptable to us or, if applicable,Nightingale, our ability to fund our operations, take advantage ofopportunities, develop products or services, expand sales and marketing effortsor otherwise respond to competitive pressure could be significantly limited.

**If We Fail ToProperly Manage Our Revenues And Expenses, We May Be Unable To AchieveProfitability Or Positive Cash Flow; Our Cost Reduction Efforts Have StrainedOur Resources**

We have experiencedsignificant fluctuations, both increases and decreases, in the volume of orderactivity received which has put a significant strain on our resources,including cash. In the event that we are unable to properly scale our clientservices and other groups to timely install, implement and support our currentlevels of order activity and our current customer base in a cost effectivemanner, we may not be successful in our future operations.

**Any Failure ToComply With the HIPAA Legislation, Including The NPI Standard And RegulationsGoverning The Confidentiality And Integrity Of Protected Health Information(PHI), Could Result In Severe Legal And Financial Liability, And Could Harm OurBusiness Reputation And Cause Our Revenues To Decrease**

Federal regulations under HIPAA governing theconfidentiality and integrity of PHI are complex and are evolving rapidly. Asthese regulations mature and become better defined, we anticipate that theywill continue to directly affect certain of our products and services, but wecannot fully predict the impact at this time. We have taken steps to modify ourproducts, services and internal practices, as necessary, to facilitate our andour customer’s compliance with these regulations, but there can be no assurancethat we will be able to continue to do so in a timely or complete manner.Achieving compliance with these regulations could be costly and distractmanagement’s attention from our operations. Any failure on our part to complywith current or future regulations could subject us to severe legal andfinancial liability, including civil and criminal penalties. In addition,development of related federal and state regulations and policies regarding theconfidentiality of health information or other matters could positively ornegatively affect our business.

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If we are unable todevelop our products to meet the NPI Standard in a timely manner, or at all,our revenues may be significantly impacted. In order for our products andelectronic services to comply with the NPI requirements, we must makeprogramming changes to our core practice management products as well as ourSecureConnect clearinghouse. Even if we make the programming changes requiredby NPI, our customers may not be able to upgrade their systems. Any failure todeliver NPI functionality to our customers could subject us to severe legal andfinancial liability.

**We Could Be SubjectTo Breach Of Warranty, Product Liability Or Other Claims If Our SoftwareProducts 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 product liabilityclaims. In addition, we could face breach of warranty or other claims oradditional 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, 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.

**If We Fail ToIncorporate Product Enhancements Or Develop New Products In A Timely Manner, WeMay 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. We believethat we will need an Electronic Medical Records (EMR) product that we can sellto new and existing customers in order to maintain and grow our business. It isunlikely that we can develop this product offering in a timely mannerconsidering our current financial position. If we cannot develop or acquirethis technology, or complete the Nightingale merger and successfully implementtheir EMR technology, we may be unable to grow our business or achievesustained profitability and positive operating cash flow. If new products orproduct enhancements do not achieve market acceptance, our business, results ofoperations and financial condition could be materially adversely affected.

**If The DefinitionAnd Adoption Of Electronic Transactions In The Healthcare InformationTechnology Industry Sector Grows At A Slow Pace, We May Be Unable To AchieveRevenue 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 

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aremodified by individual payers, or do not further penetrate the healthcareinformation technology industry, our ability to realize revenue from electronicservices will be limited and we may not be able to increase our revenues.

**Internet OrTelecommunication 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 of anyof these problems could cause customers to experience system delays, failuresand loss of data. Such problems could delay market acceptance, lead to customerdissatisfaction, a loss of revenue, an increase in expense or injure ourbusiness reputation.

**We May Be SubjectTo State 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, where audits have revealed deficiencies or in the eventthat one or more states seek to impose sales tax collection obligations onout-of-state companies similar to ours. We have also entered into agreements,or intend to enter into agreements, with tax reporting jurisdictions and haverevised our tax collection procedures. However, based on the nature of ouroperations and the acquisitions we have made, as well as the complexity of thelaws that govern state and local taxes, the determination of our obligation tocollect taxes in certain jurisdictions is complex and requires significantjudgment. A successful assertion by states where we have not made provisionsfor sales and local taxes could seriously harm our business.

**If Security AndLegal Liability Concerns Make Customers Unwilling To Utilize Our Products AndServices To Transmit Medical Information Electronically, The Demand For OurProducts May Diminish And We May Be Unable To Achieve Or SustainProfitability  **

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.  

**Breaches Of NetworkSecurity Could Damage Our Business Reputation, Lead To Customer Dissatisfaction,Delay Market Acceptance Of Our Products And Result In Legal And FinancialLiability 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 theevent of such a security breach, proprietary and confidential information couldbe misappropriated or our operations could be interrupted. These problems coulddamage our business 

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reputation,lead to customer dissatisfaction and delay market acceptance of our products.We may also incur legal and financial liability and a loss of revenue as aresult of such problems.

**We Rely On ThirdParties To Provide Services That Are Critical To Our Business Which Reduces OurControl 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, installation and hardware maintenanceservices. Our reliance on these third parties involves a number 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.

**Our Stock Trades OnThe 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 our securities. As a result of these additionalobligations, some brokers may not effect transactions in our stock, which couldadversely affect the liquidity and pricing of our stock.

**Fluctuations In OurQuarterly Operating Results May Cause Volatility Or Decline In The Market PriceOf Our Common Stock**

It is possible that our revenues and operating resultsmay fall below the expectations of our investors in future quarters and years.If we fail to meet or surpass the expectations of our investors, the marketprice of our common stock will most likely decline. We expect that ourquarterly revenue and operating results may fluctuate as a result of a numberof factors, including our ability to successfully sell our products, 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, and these expense levelsare relatively fixed in the short term. If we recognize revenues less than whatwe expect, 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 investor expectations could affect the market price of our common stock ina manner unrelated to our long-term operating performance.

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**If We Are Unable ToProtect Our Intellectual Property We May Lose Assets Or Continue To IncurCostly 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 toours.  We aggressively pursue thesematters as they arise.

In addition, ourintellectual property may be misappropriated or infringed upon or may infringeupon the rights of others. Consequently, litigation may be necessary in thefuture to enforce 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. 

**The Loss OfExperienced Personnel To Competitors Or Our Inability To Attract And RetainQualified Personnel Could Significantly Interrupt Our Business Operations**

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.

**Delaware Law AndOur Charter Documents Contain Provisions That Could Have The Effect Of DelayingOr Preventing A Corporate Takeover, Even If Such A Transaction Would BeBeneficial 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 Not BeAble To Realize The Benefits Of Our Marketing Programs And Relationships**

We have entered intocertain marketing agreements intended to increase the awareness of our companyand products in the market and increase future revenues. The marketing programsmay not be successful nor generate the level of interest we expect and we maynot be able to realize revenues from these programs.

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***Risks Associated With Our Industry***

**Intense CompetitionIn The Market For Healthcare Information Systems And Services Could Prevent UsFrom Increasing Or Sustaining Revenues And Prevent Us From Achieving Or SustainingProfitability**

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 Sage SoftwareHealthcare Solutions/Medical Manager, Per-Se/Medisoft, Misys Physician  Systems, QSI/NextGen and GECentricity/Millbrook. Additionally, within each local market there are severalsmaller competitors who have developed technologically advanced niche productsoffered with varying feature sets and atvarious price points. Finally, with the integration of clinicalinformation systems into practice management systems, several well-fundedpharmaceutical, medical supply and biotech companies have entered the practicemanagement systems market. Many of our competitors have greater financial,development, technical, marketing and sales resources than we do. These competitorsmay be able to respond more rapidly to new or emerging technologies andregulations and changes in customer requirements than we can. Specifically,some of our competitors are able to deliver totally integrated practicemanagement tools including full featured electronic medical record systems. Inaddition, as the market for our products develops, additional competitors mayenter the market and competition may intensify, requiring us to lower theprices of our products and services. In addition to these factors, our currentfinancial condition and SEC reporting and disclosure requirements may be usedagainst us by our competitors.

**Economic And CostReduction Pressures Faced By Healthcare Providers May Limit The Ability OfOur 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.

**If There Is A DelayIn The Release Of Our Products And If We Fail To Respond To The RapidlyChanging 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.

**Our Billing AndClaims 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.

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**Regulations ThatRestrict The Ability To Dispense Or Refill Controlled Substances Through AnElectronically 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.

**If Our SoftwareProducts Are Deemed Medical Devices, We Will Be Subject To AdditionalRegulation That Could Result In Criminal, Civil And Financial Liability,Increase Our Costs And Delay The Marketing Of Our New Or Existing Products**

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, whichcould increase our costs or delay the marketing of new or existing products.

**Future RegulationsEnacted By Congress Or By State Governments May Adversely Impact TheHealthcare Industry In Ways That Could Damage Our Business Opportunities OrProfitability**

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 those regulationsmight have on our business. The adoption of regulations currently unanticipatedby us or by the healthcare industry could impose burdensome requirements orrestrictions on our products or on the activities of healthcare providers.These restrictions could decrease the demand for our products and could preventus from growing our business and attaining profitability.

**Changes InAccounting 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 

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certain of theserequirements and we are required to comply with additional requirements in 2007.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 a significantfinancial investment.

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**Item 7. FinancialStatements**

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

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTSVANTAGEMED CORPORATION**

|                                                                                                            | ** ** | **Page** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Financial Statements:                                                                                      |       |     |       |
| Report of Independent Registered Public Accounting  Firm—Farber Hass Hurley & McEwen LLP     |       | 35  |       |
| Consolidated Statements of Operations for the years  ended December 31, 2006 and 2005                 |       | 36  |       |
| Consolidated Balance Sheets as of December 31,  2006 and 2005                                         |       | 37  |       |
| Consolidated Statements of Stockholders’ Deficit for  the years ended December 31, 2006 and 2005 |       | 38  |       |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006 and 2005                 |       | 39  |       |
| Notes to Consolidated Financial Statements                                                                 |       | 40  |       |

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofVantageMed CorporationRancho Cordova, California

We have audited the accompanying consolidated balancesheets of VantageMed Corporation (a Delaware corporation) as of December 31,2006 and 2005, and the related consolidated statements of operations,stockholders’ deficit, and cash flows for the years then ended. Theseconsolidated financial statements are the responsibility of VantageMed Corporation’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall consolidatedfinancial statement presentation. We believe that our audits provide areasonable 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, 2006 and2005, and the results of its operations, changes in stockholders’ deficit, andcash flows for the years then ended, in conformity with accounting principlesgenerally accepted in the United States of America.

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note 1 to theconsolidated financial statements, the Company has signed a definitiveagreement to be acquired by Nightingale Informatix Corporation, pending approvalby a majority of the Company’s stockholders. These financial statements do notinclude any adjustments that might result from that transaction. The Companyhas sustained recurring losses from operations and had a working capitaldeficit and stockholders deficit of $3.6 million and $3.5 million, respectivelyas of December 31, 2006. If the agreement is not approved, the previouslymentioned factors, among others, raise substantial doubt about the Company’sability to continue as a going concern. The consolidated financial statementsdo not include any adjustments that might result from the outcome of thisuncertainty.

Farber Hass Hurley & McEwen LLPGranada Hills, CaliforniaMarch 23, 2007

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

| ** **                                      | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Revenues:                                       |       |                                   |       |   |   |
| Software and systems                            |       | $                                      | 1,984      |   | $ | 3,126 |   |
| Customer support                                |       | 5,552                                  |       | 8,104 |   |
| Electronic services                             |       | 3,424                                  |       | 4,065 |   |
| Total revenues                                  |       | 10,960                                 |       | 15,295 |   |
| Cost of revenues:                               |       |                                   |       |   |   |
| Software and systems                            |       | 411                                    |       | 1,138 |   |
| Customer support(1)                             |       | 2,897                                  |       | 5,894 |   |
| Electronic services(2)                          |       | 2,029                                  |       | 2,706 |   |
| Total cost of revenues                          |       | 5,337                                  |       | 9,738 |   |
| Total gross margin                              |       | 5,623                                  |       | 5,557 |   |
| Operating  expenses:                            |       |                                   |       |   |   |
| Selling, general and administrative(3)          |       | 4,627                                  |       | 7,082 |   |
| Product development(4)                          |       | 1,585                                  |       | 2,184 |   |
| Depreciation and amortization                   |       | 145                                    |       | 243 |   |
| Stock-based compensation                        |       | 391                                    |       | 334 |   |
| Restructuring and impairment                    |       | 13                                     |       | (13 | ) |
| Total operating expenses                        |       | 6,761                                  |       | 9,830 |   |
| Loss from operations                            |       | (1,138                                 | )          | (4,273 | ) |
| Other income  (expense):                        |       |                                   |       |   |   |
| Gain on sale of Hawaii operation                |       | 235                                    |       | — |   |
| Interest income                                 |       | 38                                     |       | 60 |   |
| Interest expense and other, net                 |       | (118                                   | )          | (67 | ) |
| Total other income (expense)                    |       | 155                                    |       | (7 | ) |
| Net loss                                        |       | $                                      | (983       | ) | $ | (4,280 | ) |
| Basic and diluted net loss per share            |       | $                                      | (0.07      | ) | $ | (0.31 | ) |
| Weighted-average  shares—basic and diluted |       | 14,869                                 |       | 13,951 |   |

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(1)          Excludes stock-basedcompensation of $50,000 and $60,000 for the years ended December 31, 2006and 2005, respectively.

(2)          Excludes stock-basedcompensation of $7,000 the year ended December 31, 2006.

(3)          Excludes stock-basedcompensation of $281,000 and $256,000 for the years ended December 31,2006 and 2005, respectively.

(4)          Excludes stock-basedcompensation of $53,000 and $18,000 for the years ended December 31, 2006and 2005, respectively.

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

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

| ** **                                                                                                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                  | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ASSETS                                                                                                                                                                                                                                      |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                                                             |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                  |       | $                     | 820        |   | $ | 636 |   |
| Accounts  receivable, net of allowance of $173 and $352, respectively                                                                                                                                                                       |       | 741                   |       | 1,213 |   |
| Inventories, net  of reserve of $76 and $103, respectively                                                                                                                                                                                  |       | 13                    |       | 62 |   |
| Prepaid expenses  and other                                                                                                                                                                                                                 |       | 213                   |       | 263 |   |
| Total current assets                                                                                                                                                                                                                        |       | 1,787                 |       | 2,174 |   |
| Property and  equipment, net                                                                                                                                                                                                                |       | 90                    |       | 213 |   |
| Intangibles, net                                                                                                                                                                                                                            |       | —                |       | 377 |   |
| Total assets                                                                                                                                                                                                                                |       | $                     | 1,877      |   | $ | 2,764 |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                  |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                                                                        |       |                  |       |   |   |
| Current portion  of long-term debt                                                                                                                                                                                                          |       | $                     | 114        |   | $ | 140 |   |
| Accounts payable                                                                                                                                                                                                                            |       | 766                   |       | 1,543 |   |
| Accrued  liabilities                                                                                                                                                                                                                        |       | 1,182                 |       | 1,128 |   |
| Customer deposits  and deferred revenue                                                                                                                                                                                                     |       | 3,283                 |       | 3,299 |   |
| Total current liabilities                                                                                                                                                                                                                   |       | 5,345                 |       | 6,110 |   |
| Long-term portion  of restructuring reserve, net of current portion                                                                                                                                                                         |       | —                |       | 22 |   |
| Long-term debt,  net of current portion                                                                                                                                                                                                     |       | 32                    |       | 42 |   |
| Total liabilities                                                                                                                                                                                                                           |       | 5,377                 |       | 6,174 |   |
| 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 2006 and 2005                                                                                                                             |       | —                |       | — |   |
| Common stock,  $0.001 par value, 40,000,000 shares authorized; 15,358,745 shares issued and  outstanding as of December 31, 2006; 20,000,000 shares authorized;  14,239,178 shares issued and outstanding as of December 31, 2005 |       | 15                    |       | 14 |   |
| Additional paid-in  capital                                                                                                                                                                                                                 |       | 78,643                |       | 77,751 |   |
| Accumulated  deficit                                                                                                                                                                                                                        |       | (82,158               | )          | (81,175 | ) |
| Total stockholders’  deficit                                                                                                                                                                                                           |       | (3,500                | )          | (3,410 | ) |
| Total liabilities and  stockholders’ deficit                                                                                                                                                                                           |       | $                     | 1,877      |   | $ | 2,764 |   |

 

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

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**VANTAGEMEDCORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)(In thousands, except share amounts)**

| ** **                                       | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Accumulated**          | ** ** | ** **  | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------------------|------------|-------------|------------|
| ** **                                       | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Paid-In Capital** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| 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 |   |
| Net loss                                         |       | —                |       |           | —     |                     |       |        | —     |   |   |   | (4,280 | ) |   | (4,280 | ) |
| Balance,  December 31, 2005                 |       | 14,239,178            |       |           | $          | 14                       |       |        |       | $ | 77,751 |   |   |   | $ | (81,175 | ) |   | $ | (3,410 | ) |
| Sale of stock and  warrants (Note 7)             |       | 1,111,112             |       |           | 1          |                     |       |        | 499        |   |   |   | — |   |   | 500 |   |
| Shares issued in  exchange for options exercised |       | 8,455                 |       |           | —     |                     |       |        | 2          |   |   |   | — |   |   | 2 |   |
| Stock-based  compensation expense                |       | —                |       |           | —     |                     |       |        | 391        |   |   |   | — |   |   | 391 |   |
| Net loss                                         |       | —                |       |           | —     |                     |       |        | —     |   |   |   | (983 | ) |   | (983 | ) |
| Balance,  December 31, 2006                 |       | 15,358,745            |       |           | $          | 15                       |       |        |       | $ | 78,643 |   |   |   | $ | (82,158 | ) |   | $ | (3,500 | ) |

 

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

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**VANTAGEMEDCORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                                    | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                        |       |                                   |       |   |   |
| Net loss                                                                      |       | $                                      | (983       | ) | $ | (4,280 | ) |
| Adjustments to  reconcile net loss to net cash used for operating activities: |       |                                   |       |   |   |
| Gain on sale or disposal of assets                                            |       | (235                                   | )          | — |   |
| Depreciation and amortization                                                 |       | 145                                    |       | 242 |   |
| Bad debt expense                                                              |       | —                                 |       | 246 |   |
| Stock-based compensation                                                      |       | 391                                    |       | 334 |   |
| Changes in assets and  liabilities:                                           |       |                                   |       |   |   |
| Accounts receivable                                                           |       | 331                                    |       | 302 |   |
| Inventories                                                                   |       | 33                                     |       | 54 |   |
| Prepaid expenses and other                                                    |       | 205                                    |       | 336 |   |
| Accounts payable and accrued liabilities                                      |       | (745                                   | )          | (1,225 | ) |
| Customer deposits and deferred revenue                                        |       | 156                                    |       | (620 | ) |
| Net cash used for operating activities                                        |       | (702                                   | )          | (4,611 | ) |
| Cash flows from  investing activities:                                        |       |                                   |       |   |   |
| Purchases of property and equipment                                           |       | (29                                    | )          | (49 | ) |
| Purchase of investments                                                       |       | —                                 |       | (4,000 | ) |
| Proceeds from maturities of investments                                       |       | —                                 |       | 4,000 |   |
| Cash proceeds from sale of Hawaii operation                                   |       | 605                                    |       | — |   |
| Net cash provided by (used for) investing activities                          |       | 576                                    |       | (49 | ) |
| Cash flows from  financing activities:                                        |       |                                   |       |   |   |
| Payments on debt                                                              |       | (192                                   | )          | (448 | ) |
| Proceeds from sale of stock and warrants, net                                 |       | 500                                    |       | 4,576 |   |
| Proceeds from stock option exercises                                          |       | 2                                      |       | 222 |   |
| Net cash provided by (used for) financing activities                          |       | 310                                    |       | 4,350 |   |
| Net decrease in cash and cash equivalents                                     |       | 184                                    |       | (310 | ) |
| Cash and cash  equivalents, beginning of year                                 |       | 636                                    |       | 946 |   |
| Cash and cash equivalents, end of year                                        |       | $                                      | 820        |   | $ | 636 |   |
| Supplemental cash  flow information:                                          |       |                                   |       |   |   |
| Cash payments for interest                                                    |       | $                                      | 11         |   | $ | 17 |   |
| 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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**VANTAGEMEDCORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1—THE COMPANYAND ITS SIGNIFICANT ACCOUNTING POLICIES**

VantageMed Corporation was incorporated in Californiaon June 1, 1995, and on April 9, 1997, we reincorporated in Delaware.We are a diversified healthcare information systems supplier headquartered inRancho Cordova, California, with support personnel and sales representatives invarious locations throughout the United States. We develop, sell, install andsupport software products and services that assist physicians,anesthesiologists, behavioral health professionals, and other healthcareproviders in the operation of their practices and organizations. Theseproviders use our core software products including RidgeMark, Northern HealthAnesthesia, Helper and ChartKeeper as well as our SecureConnect electronictransaction services. We have developed a customer base of approximately 18,000physicians, anesthesiologists and behavioral health providers nationwidethrough both acquisitions and internal growth.

On February 16, 2007,we signed a definitive agreement to be acquired by Nightingale InformatixCorporation (Nightingale) (TSX-V: NGH) ofOntario, Canada. The acquisition, expected to close in the second quarter of2007, is conditioned upon a majority vote of the common stockholders and othercustomary conditions. The definitive agreement with Nightingale calls for ourstockholders to receive a fixed cash price of $0.75 per share. We have filedmaterials related to the proposed merger with the Securities and ExchangeCommission and mailed the definitive proxy statement for our specialstockholders meeting scheduled to take place on April 18, 2007.

**Basis ofpresentation**

The accompanying consolidated financial statementshave been prepared assuming that we will continue as a going concern; however,we are planning to become a fully owned subsidiary of Nightingale during 2007. Noneof the adjustments that will be made as a part of that transaction are recordedin these financial statements. In addition, we have experienced recurringlosses from operations since our inception. These losses have resulted innegative operating cash flows and negative working capital. At December 31,2006 we had cash and cash equivalents totaling $820,000, negative workingcapital of $3.6 million and a stockholders’ deficit of $3.5 million. Thesefactors, among others, raise substantial doubt as to our ability to continue asa going concern if our planned merger with Nightingale does not close asexpected. The financial statements do not include any adjustments that mightresult from the outcome of this uncertainty. We are also subject to a number ofadditional risks, including, but not limited to uncertainties in the healthcareindustry, our ability to continue to develop necessary complementarytechnologies including clinically focused software such as an ElectronicMedical Records (EMR) product as well as market acceptance of our existingproducts.

In order for us to achieve positive operating cashflow, working capital or profitability we may need to make changes to our coststructure and operating plan that may include additional financing. Thesechanges also involve significant risks and uncertainties including our abilityto execute these strategies in an effective and timely manner and our abilityto obtain financing on terms that are acceptable to us, or at all. If adequatefunds are not available on acceptable terms, our ability to fund ouroperations, take advantage of opportunities, develop products or services orotherwise respond to competitive pressure may be limited. The accompanyingconsolidated financial statements do not include any adjustments relating tothe recoverability and classification of recorded asset amounts or the amountsand classification of liabilities that might be necessary should we be unableto continue as a going concern.

Throughout 2003 and 2004 we announced supportdiscontinuance, or sunset, programs to hundreds of customers using our legacytechnology systems. Our focus during this time and throughout 2005 was onmigrating these legacy technology customers to our RidgeMark product line whilemaintaining the 

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revenues from our othercore product lines, Helper, Northern Health and ChartKeeper. Since thismigration process was completed, we have experienced a significant decrease inRidgeMark order activity. In 2005 and 2006 we invested resources in acquiringnew customers to supplement this decrease in activity but we were notsuccessful in this pursuit due to a number of reasons including the market’sdemand for integrated billing/PMS and clinical/EMR software. Due to our need tobalance costs and cash against this opportunity, we reduced our spending onthis process and in 2006 we focused our operations on customer satisfaction ofour RidgeMark customer base, market position of Helper and growth of ourNorthern Health market niche.

Considering our currentsales forecast, cash management practices, projected operating expenses as wellas a number of structural and other alternatives described above, we believethat our cash and investments will be sufficient to meet our cash flow needsthrough at least December 2007. There can be no assurance that our planswill succeed.

***Significant Accounting Policies***

**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. Our estimates are based on historical experience,input from third parties, and other relevant facts and circumstances. Actualresults could differ from these estimates.

**Revenue recognition**

Fees from sales of licenses are recognized as revenuein accordance 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 persuasive evidence of an arrangementexists. We generally charge a one-time license fee for the right to use ourproprietary software. The amount of the license fee is fixed and specified atthe inception of the license agreement and is generally part of a multipleelement arrangement. The license fee is not subject to adjustment based onfuture usage or an obligation to distribute further copies. Payment of thelicense fee is due upon delivery and acceptance, generally within 90 days fromthe date of contract execution. We do not offer cancellation provisions and ina limited number of cases, we have offered extended payment terms.

Multiple element arrangements generally include (i) aproprietary software license, (ii) third-party software, hardware, andimplementation, and (iii) training and other specified services. The feefor multiple element arrangements is allocated to the various elements based onvendor specific objective evidence (VSOE) of fair market value established bythe price of the elements sold separately or renewal rates if an element is notbeing sold separately. The residual method is used when VSOE exists for theundelivered elements, primarily post-contract support and training. Also, tothe extent that a discount exists on any of the elements, we follow theresidual method and attribute that discount entirely to the delivered elements.We generally collect a deposit upon contract execution of at least 50% beforeproceeding to fulfill the contract. Revenue is recognized when all of thecriteria of SOP 97-2 are met. Deposits received in advance of revenuerecognition are recorded as customer deposits and included in currentliabilities.

We also provide post-contract support under annualmaintenance and support agreements as well as other services includingelectronic claims processing, electronic statement printing, mailing and otherservices provided independently from software licensing activities. Supportagreements are billed annually, 

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semi-annually, quarterlyor monthly and all other services are billed as the services are rendered. Inaccordance with SOP 97-2, revenue from annual support agreements arerecognized ratably over the contract term. Support fees received in advance ofrevenue recognition are recorded as deferred revenue. Revenue from all otherservices is recognized as the services are rendered.

For one of our softwareproducts, we offer a limited return provision for 60 days from the date ofpurchase. Based on historical information available to us based on past salesand returns experience, we are able to reasonably estimate future productreturns. Although not significant, we make adequate provision for returnsexpected on sales made within 60 days of each reporting period.

**Softwaredevelopment 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, wewould capitalize those development costs in accordance with the Statement ofFinancial Accounting Standards No. 86 (SFAS No. 86), “Accounting forthe Costs of Computer Software to be Sold, Leased or Otherwise Marketed.”

**Accounts Receivable**

Accounts receivable arerecorded upon shipment of products or completion of services to the customerand are generally due upon receipt of invoice. Trade receivables are notcollateralized and interest is not accrued on past due accounts.

**Allowance fordoubtful accounts**

We review accountsreceivable and provide a reserve for amounts we estimate will not becollectible. During our review we consider the age of the receivable balance,the reason for the delinquency, our historical experience, and thecredit-worthiness of the customer. We consider a number of matters whengranting credit to customers including our prior experience with them, theircurrent cash resources, and ability to obtain lease financing, if applicable.

**Inventories andrelated reserves**

Inventories are stated atthe lower of cost (specific identification method) or market and consistprimarily of third party software and new computer equipment purchased to fillcustomer orders. Reserves are provided for excess or obsolete inventory, whichare estimated based on the age of the items and our ability to utilize theitems in future sales. Generally, items that are greater than one year old orthat are expected to take longer than one year to consume are reserved and therelated charge is recorded as cost of software and systems revenue.

**Property andEquipment**

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.

**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 

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will be recorded onfinite-lived intangibles or long-lived assets when it is determined that thecarrying value of the intangibles and long-lived assets may not be recoverable.There are several factors considered important which could trigger animpairment including changes in our use of the acquired assets or the strategyfor our business and significant negative industry or economic 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 businessmodel. We did not record an impairment to finite-lived intangibles orlong-lived assets during 2005 or 2006.

**Cash equivalentsand 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, 2006 or 2005.

**Concentration ofcredit risk**

As of December 31, 2006 and 2005, we had cashdeposits at financial institutions exceeding federally insured limits totaling$784,083 and $512,822, respectively.

Concentration of creditrisk with respect to trade receivables has decreased as we continue todiversify our customer base. We routinely assess the financial strength of ourcustomers. At December 31, 2006, we had one customer whose balanceapproximated 6.0% of gross accounts receivable. No other customer exceeded 3.0%of gross accounts receivable at December 31, 2006. At December 31,2005, no customer exceeded 3.0% of gross accounts receivable.

**Financialinstruments**

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 cash and cash equivalents, accountsreceivable and accounts payable are considered to approximate fair values basedupon the short maturities of these financial instruments. The carrying amountsof short-term and long-term debt are also considered to approximate fair valuesbased upon current interest rates.

**Accrued liabilities**

Certain of our accruedliabilities are based largely on estimates. For instance, we record a liabilityon our balance sheet each period for the estimated cost of goods and servicesrendered to us for which we have not received an invoice and we have madeprovisions to address certain state or local tax liabilities that require us tointerpret numerous complex tax laws. Additionally, our restructuring reserveincludes an estimate for the loss we expect to incur for excess leased facilityspace.

**Legal Costs**

Legal costs we incur inthe normal course of business, as well as those incurred for special projectsincluding private placements of our stock and the proposed merger withNightingale, are expensed as 

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incurred.Estimated future attorney fees are not accrued. Costs associated with losscontingencies are accrued when a liability is probable and the costs arereasonably estimable.

**Warranty Costs**

We provide a limited 60-daywarranty on proprietary software and services delivered. No warranty isprovided on third-party software or hardware. We do not record a liability forwarranty costs as we do not have a history of material warranty claims.

**Income taxes**

We use the asset andliability method of accounting for income taxes under which deferred incometaxes are provided based upon the applicable enacted tax laws and rates. Avaluation allowance is provided against the future benefits of deferred taxassets if it is determined that it is more likely than not that the future taxbenefits associated with the deferred tax asset will not be realized. Thisdetermination is based upon our limited operating history, history of lossesand the possibility that we may never achieve profitability. As of December 31,2006, we had net operating loss carryforwards for federal and state income taxpurposes of approximately $51 million and $10 million, respectively. Thepotential tax benefits were fully reserved and therefore are not recorded onthe balance sheet as an asset.

**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 were anti-dilutiveand not included in the calculation of diluted net loss per share (inthousands):

| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Stock options                      |       | 2,214                 |       | 1,692 |   |
| Warrants to purchase  common stock |       | 4,575                 |       | 2,702 |   |

 

**Stock-basedcompensation**

We account for stock options using a fair valuemethod, as allowed under SFAS No. 123R, as amended. We have elected to usethe prospective method of transition, resulting in the recognition ofstock-based compensation expense of $391,000 and $334,000 in the years endedDecember 31, 2006 and 2005, respectively.

Thefair value of each option grant is estimated on the date of the grant using theBlack-Scholes option-pricing model with the following weighted-averageassumptions for 2006 and 2005:

| ** **               | ** ** | **Year Ended**   | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **December 31,** | ** ** |
| ** **               | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Dividend yield           |       | 0                     | %          | 0 | % |
| Risk-free  interest rate |       | 3.3                   | %          | 3.3 | % |
| Stock price  volatility  |       | 179                   | %          | 201 | % |
| Expected life            |       | 3.5 years             |       | 3.5 years |   |

 

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**NOTE 2—RESTRUCTURINGACTIVITIES**

Ourrestructuring reserve included costs related to two leased facilities inBoulder, Colorado that were vacated in 2002. In the second quarter of 2004, wesigned an agreement to terminate and buyout the lease for one of the twofacilities. In connection with the signing of this agreement, we recognized abenefit of $147,000 representing the difference between the payments that willbe made under the revised arrangement and the amounts previously reserved forthrough our restructuring reserve. The termination agreement required us to payapproximately $22,000 upon signing and to make monthly payments ofapproximately $4,000 through July 2006. The balance of the restructuringreserve covers lease payments that we expect to make on the second facilitywhich expires in June 2007. The components of our restructuring provisionand activity in the reserve for 2006 and 2005 are as follows (in thousands):

| ** **                      | ** ** | **Leased  Facilities** | ** ** |
|---------------------------------|------------|------------------------|------------|
| December 31,  2004 balance |       |                   | $          | 244 |   |   |
| 2005  restructuring benefit     |       |                   | (13        | ) |   |
| Cash payments                   |       |                   | (147       | ) |   |
| December 31,  2005 balance |       |                   | 84         |   |   |
| 2006  restructuring expense     |       |                   | 13         |   |   |
| Cash payments                   |       |                   | (74        | ) |   |
| December 31, 2006  balance |       |                   | $          | 23 |   |   |

 

**NOTE 3—SALE OFHAWAII OPERATION**

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 were earned and recognized as revenues in the first quarter of 2006. Werecognized a gain of $235,000 in the first quarter of 2006 in connection withthis transaction.

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 our notice oftermination effective February 28, 2006. Post termination billing andcollection services under these terminated contracts are being provided byTeamPraxis under our direction. Contractual rights and responsibilitiestransferred to TeamPraxis were made effective for services delivered effective February 9,2006.

OurHawaii 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 included in theaccompanying financial statements (in thousands):

| ** **                                         | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Revenues                                           |       | $                                      | 250        |   | $ | 2,794 |   |
| Costs of Sale                                      |       | 213                                    |       | 2,122 |   |
| Gross Margin                                       |       | 37                                     |       | 672 |   |
| Direct and  Allocated Operating Costs and Expenses |       | 183                                    |       | 1,267 |   |
| Net Loss                                           |       | $                                      | (146       | ) | $ | (595 | ) |

 

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Following are the major classes of assets andliabilities that were sold in the February 2006 transaction and thebalances as of February 9, 2006 (in thousands):

| Accounts Receivable, net |   | $   | 141    |   |
|--------------------------|--------|-----|--------|--------|
| Inventories, net         |   | 16  |   |
| Fixed Assets, net        |   | 9   |   |
| Intangible  Assets, net  |   | 376 |   |
| Total Assets             |   | 542 |   |
| Deferred Revenues        |   | 197 |   |
| Total Liabilities        |   | $   | 197    |   |

 

**NOTE 4—GOODWILL ANDOTHER 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 3). 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. We wrote off thebalance of the intangible assets and goodwill in connection with the sale ofour Hawaii based operations in the first quarter of 2006

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** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible assets  subject to amortization:     |       |                        |       |   |   |   |   |   |   |
| Acquired software                               |       |                        | $          | 984 |   |   |   | $ | (984 | ) |   |
| Customer lists                                  |       |                        | 750        |   |   |   | (731 | ) |   |
| Other                                           |       |                        | 60         |   |   |   | (60 | ) |   |
|                                            |       |                        | $          | 1,794 |   |   |   | $ | (1,775 | ) |   |
| Intangible assets  not subject to amortization: |       |                        |       |   |   |   |   |   |   |
| Goodwill                                        |       |                        | $          | 358 |   |   |   |   |   |   |

 

Amortization of intangibleassets was approximately $1,000 and $15,000 for the years ended December 31,2006 and 2005, respectively.

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**NOTE 5—BALANCE SHEETCOMPONENTS**

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

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Office and  computer equipment                   |       | $                     | 1,652      |   | $ | 2,036 |   |
| Furniture and  fixtures                          |       | 138                   |       | 140 |   |
| Vehicles                                         |       | —                |       | 18 |   |
| Leasehold  improvements                          |       | 91                    |       | 94 |   |
|                                             |       | 1,881                 |       | 2,288 |   |
| Less: accumulated  amortization and depreciation |       | (1,791                | )          | (2,075 | ) |
|                                             |       | $                     | 90         |   | $ | 213 |   |

 

Depreciation expense was approximately $144,000 and$227,000 for the years ended December 31, 2006 and 2005, respectively.

Accrued liabilities consisted of the following (inthousands):

| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Accrued payroll  and related expenses        |       | $                     | 313        |   | $ | 292 |   |
| State and Local  taxes payable               |       | 354                   |       | 294 |   |
| Restructuring,  current portion (see Note 2) |       | 23                    |       | 62 |   |
| Accrued purchases                            |       | 56                    |       | 178 |   |
| Accrued legal  matters                       |       | 98                    |       | 82 |   |
| Other                                        |       | 338                   |       | 220 |   |
|                                         |       | $                     | 1,182      |   | $ | 1,128 |   |

 

In February 2006, weentered into an arrangement with a vendor that provides for the deferral ofcertain payable balances in exchange for our agreement to use their services ona semi-exclusive basis. We began to pay down the balance in October 2006and expect to take a total of approximately 30 months to repay the amount. At December 31,2006, the deferred balance of $167,000 is included in other accrued liabilities.Under certain circumstances, including a change in ownership, this deferredpayable balance may become immediately due and payable.

**NOTE 6—DEBT ANDLEASE OBLIGATIONS**

At December 31, 2006, we had $104,000 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 7.0% to 10.0%. In addition, we lease certain computersand office equipment under lease agreements accounted for as capital leases. AtDecember 31, 2006, we had $42,000 in capital leases that mature from February 2010to July 2010. At December 31, 2005, we had $130,000 in assumed debtor promissory notes primarily issued in connection with acquisitions and$52,000 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 2011. We have subleased somespace in our facility in Boulder, Colorado.

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Futureminimum payments under all debt and lease obligations at December 31, 2006are as follows (in thousands):

| **Year Ending December 31,**                              | ** ** | ** ** | ** ** | **Debt** | ** ** | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|-----------------------|------------|
| 2007                                                                     |       | $          | 104        |     |       | $                   | 16         |                  |       |   | $ | 258 |   |   |
| 2008                                                                     |       | —     |       |     | 15         |                |       |                  | 179        |   |   |
| 2009                                                                     |       | —     |       |     | 15         |                |       |                  | 98         |   |   |
| 2010                                                                     |       | —     |       |     | 5          |                |       |                  | 79         |   |   |
| 2011                                                                     |       | —     |       |     | —     |                |       |                  | 13         |   |   |
| Total minimum  payments                                                  |       | 104        |       |     | 51         |                |       |                  | $          | 627 |   |   |
| Less: interest on capital lease obligations at rates  of 10.77% to 11.8% |       | —     |       |     | (9         | )                   |       |                  |       |   |   |
| Less: current  maturities                                                |       | (104       | )          |     | (10        | )                   |       |                  |       |   |   |
| Long-term portion                                                        |       | $          | —     |     |       | $                   | 32         |                  |       |   |   |   |   |

 

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

**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 31,2006 or 2005. Each share has the same voting rights as the number of shares ofcommon stock to which it would be converted.

**Private Placementsof Stock and Issuance of Warrants**

In June 2006, we completed a $500,000 privateplacement of 1,111,112 shares of common stock priced at $0.45 per share.Institutional investors purchased 97 percent of the shares, with members of ourmanagement team combining for the purchase of 3 percent. After legal expenses,the net proceeds were approximately $492,000. The investors in the transactionreceived warrants to purchase an additional 1,111,112 shares of common stockpriced at $0.55 per share, and an additional 555,556 shares of common stockpriced at $0.90 per share. The fair value of these warrants was estimated to be$342,000 million using a Black-Scholes option pricing model and was recorded toadditional paid in capital upon issuance. The warrants were immediatelyexercisable and expire on June 15, 2011. We plan to use these funds forworking capital purposes and for consideration of broader strategicopportunities, including the proposed merger with Nightingale (see Note 12).This issuance triggered an adjustment to the purchase price and number ofwarrants that were issued in the March 2005 transaction described below.The information in this document has been updated to reflect the adjustedstrike price and number of warrants following this adjustment.

In March 2005, we completed a$5.0 million private placement of 5,376,344 shares of common stock priced 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 combining for the purchase of 10 percent. After legal expenses and broker commission, the net proceeds wereapproximately $4.6 million. The investors in the transaction also receivedwarrants to purchase an additional 1,155,247 shares of common stock priced at$1.21 per share, and warrants to purchase 1,165,498 shares of common stockpriced at $1.43 per share. Our broker also received warrants to purchase anadditional 242,603 shares of our common stock at $1.21 per share and244,755 shares of our common stock at $1.43 per share as part of their feearrangement. The fair 

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value of these warrantswas estimated to be $2.1 million using a Black-Scholes option pricing model andwas recorded to additional paid in capital upon issuance. The warrants wereimmediately exercisable and expire on March 15, 2010. We used these fundsfor working capital purposes including investments in sales and marketing forour RidgeMark product which have not resulted in increased sales.

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 was amortized toexpense over the three-year term of the arrangement that ended in June 2006.

**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. The 1998 Plan is dividedinto two programs: the Option Grant Program under which eligible persons may begranted options to purchase shares of common stock and the Stock IssuanceProgram under which eligible persons may be issued shares of common stockdirectly, either through the immediate purchase of shares or as a bonus forservices rendered to us. The stock options generally vest 25% in the first yearand ratably over the following three-year period and expire ten years from thedate of grant. At December 31, 2006, there were approximately 1,028,683shares available for issuance under the 1998 Plan. The number of sharesreserved for issuance under the 1998 Plan will be increased automatically on January 1of each year by an amount equal to 5% of our total outstanding common shares asof the proceeding December 31.

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

| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **Number of  Options**                | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Balance,  beginning of period |       |                                       | 1,692      |   |   |   | $ | 0.79 |   |   |   | 2,002 |   |   |   | $ | 0.67 |   |   |
| Granted                       |       |                                       | 887        |   |   |   | 0.52 |   |   |   | 842 |   |   |   | 0.98 |   |   |
| Exercised                     |       |                                       | (8         | ) |   |   | 0.21 |   |   |   | (583 | ) |   |   | 0.39 |   |   |
| Cancelled                     |       |                                       | (357       | ) |   |   | 0.69 |   |   |   | (569 | ) |   |   | 1.05 |   |   |
| Balance, end of period        |       |                                       | 2,214      |   |   |   | $ | 0.70 |   |   |   | 1,692 |   |   |   | $ | 0.79 |   |   |

 

Thefollowing table summarizes information about our outstanding stock options at December 31,2006 (number of options in thousands):

| ** **                                  | ** ** | **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                              |       |                         | 215        |                            |       |   | 6.17 |   |   |   | $ | 0.27 |   |   |   | 213 |   |   |   | $ | 0.27 |   |   |
| $0.36 -  $0.54                              |       |                         | 546        |                            |       |   | 9.06 |   |   |   | 0.45 |   |   |   | 99 |   |   |   | 0.43 |   |   |
| $0.55 -  $0.75                              |       |                         | 530        |                            |       |   | 8.71 |   |   |   | 0.61 |   |   |   | 135 |   |   |   | 0.60 |   |   |
| $0.76 -  $1.00                              |       |                         | 501        |                            |       |   | 7.96 |   |   |   | 0.84 |   |   |   | 310 |   |   |   | 0.84 |   |   |
| $1.01 - $9.60                               |       |                         | 422        |                            |       |   | 7.92 |   |   |   | $ | 1.19 |   |   |   | 216 |   |   |   | 1.31 |   |   |
| Total                                       |       |                         | 2,214      |                            |       |   | 8.23 |   |   |   | $ | 0.70 |   |   |   | 973 |   |   |   | $ | 0.75 |   |   |
|                                             |            |                              |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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The weighted-average grantdate fair value of options granted was $0.49 and $0.92 per option during 2006and 2005, respectively.

**NOTE 8—401K SAVINGSPLAN**

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 four-year period. We madeno discretionary contributions to the Plan in 2006 or 2005.

**NOTE 9—INCOME TAXES**

Noprovision for income taxes was recorded in 2006 or 2005 since we generated bothbook and tax losses. Our provision for (benefit from) income taxes in 2006 and2005 consisted of (in thousands):

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Current:                       |       |                  |       |   |   |
| Federal                        |       | $                     | —     |   | $ | — |   |
| State                          |       | —                |       | — |   |
| Total current                  |       | $                     | —     |   | $ | — |   |
| Deferred:                      |       |                  |       |   |   |
| Federal                        |       | $                     | (42        | ) | $ | (1,643 | ) |
| State                          |       | (58                   | )          | (137 | ) |
| Total deferred                 |       | (100                  | )          | (1,780 | ) |
| Change in  valuation allowance |       | 100                   |       | 1,780 |   |
| 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, 2006, we had netoperating loss carryforwards for federal and state income tax purposes of approximately$51 million and $10 million, respectively, which expire through 2026. Theextent to which these loss carryforwards can be used to offset future taxableincome may be limited. The components of our deferred income taxes were asfollows (in thousands):

| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred tax assets:                           |       |                  |       |   |   |
| Net operating loss carryforwards               |       | $                     | 17,953     |   | $ | 17,726 |   |
| Accruals and reserves not currently deductible |       | 1,584                 |       | 1,716 |   |
|                                           |       | 19,537                |       | 19,442 |   |
| Deferred tax  liabilities:                     |       |                  |       |   |   |
| Depreciation                                   |       | (143                  | )          | (148 | ) |
| Net deferred tax  asset before allowance       |       | 19,394                |       | 19,294 |   |
| Valuation  allowance                           |       | (19,394               | )          | (19,294 | ) |
| Net deferred tax  asset                        |       | $                     | —     |   | $ | — |   |

 

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We believe that availableobjective evidence creates sufficient uncertainty regarding the realizabilityof deferred tax assets, and therefore we have recorded a full valuationallowance to reduce the carrying value of such assets to zero. We will continueto assess the realizability of deferred tax assets based on actual andforecasted operating results. Our effective tax rate differs from the federalstatutory tax rate due to the following (in thousands):

| ** **                                         | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Expected tax  benefit                              |       | $                                      | (334       | ) | $ | (1,455 | ) |
| Decrease in  income taxes resulting from:          |       |                                   |       |   |   |
| State income benefit                               |       | (251                                   | )          | (477 | ) |
| Increase in deferred tax asset valuation allowance |       | 1,715                                  |       | 3,253 |   |
| Nondeductible expenses                             |       | (1,130                                 | )          | (1,321 | ) |
| Net income tax  provision                          |       | $                                      | —     |   | $ | — |   |

 

**NOTE 10—LITIGATION AND CONTINGENCIES**

In June 2005, aformer employee filed a complaint against us alleging discrimination based onage and gender in connection with his February 2005 termination. Althoughwe did not agree that we acted in a discriminatory manner, our 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 February 2005, aformer customer filed a complaint in state court in New York against usalleging that we breached a contract with, and certain warranties to, thecustomer by failing to deliver certain direct payer transaction software andfailing to provide software that was HIPAA compliant. The customer seeks damagesof $192,896.00. In March 2005, we removed the case to the United StatesDistrict Court for the Western District of New York. We believe the allegationsto be without merit and are actively defending the claims. We have answered thecomplaint denying the claims and asserting certain affirmative defenses. Wehave moved for summary judgment in our favor against all of plaintiff’s claims.This motion is pending before the Court.

In January 2006, acustomer filed suit in state court in Nevada alleging breach of contract,breach of the implied covenant of good faith and fair dealing, and unjustenrichment. The customer sought $236,049 in damages. The case was removed toFederal court in Nevada and upon motion by us, transferred to the Federaldistrict court in Sacramento. We have answered the complaint and filed acounterclaim for recovery of the value of uncompensated services we provided. Thematter was settled in November 2006 and in connection with the settlement,we agreed to pay $55,000 to this customer over a twelve month period. Thissettlement amount was accrued at December 31, 2006.

We are party to variouslegal actions arising in the normal course of business. Matters where anunfavorable outcome is probable and which can be reasonably estimated are accrued.Such accruals were $98,000 and $82,000 at December 31, 2006 and December 31,2005, 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 condensed consolidated balance sheet. None ofthe actions are believed by management to involve amounts that would bematerial to our consolidated financial position, operations, or liquidity afterconsideration of recorded accruals.

**NOTE 11—SEGMENT REPORTING**

We have evaluated ourapproach for making operating decisions and assessing the performance of ourbusiness and have determined that we have three reportable segments:  software and systems, customer support andelectronic services. The software and systems sales group sells and licensespractice management software products to physicians, and other professionalswith comprehensive office 

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managementsoftware designed to automate the administrative, financial, practicemanagement and clinical requirements of a medical practice. The customersupport group provides software, network and hardware support, training,installation services. The electronic services group provides electronic claimsprocessing, electronic statement printing and mailing and electronic remittanceadvice 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 2006 and 2005.

**NOTE 12—SUBSEQUENT EVENTS**

On February 16, 2007,we signed a definitive agreement to be acquired by Nightingale InformatixCorporation (Nightingale) (TSX-V: NGH) of Ontario, Canada. The acquisition, expectedto close in the second quarter of 2007, is conditioned upon a majority vote ofthe common stockholders and other customary conditions. The definitiveagreement with Nightingale calls for our stockholders to receive a fixed cashprice of $0.75 per share. We have filed materials related to the proposedmerger with the Securities and Exchange Commission and mailed the definitiveproxy statement for the special stockholders meeting scheduled to take place onApril 18, 2007.

**NOTE 13—UNAUDITED QUARTERLY CONSOLIDATED FINANCIALDATA:**

| ** **                                                            | ** ** | **Quarter** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|-------------|------------|------------|------------|
| **(In thousands, except per share amounts)** | ** ** | ** **  | ** ** | **First**  | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **Fiscal Year** | ** ** |
| 2006:                                                                 |       |        |       |       |       |   |   |   |   |   |   |   |   |
| Total Revenues                                                        |       | $           | 2,925      |       | $          | 2,556 |   | $ | 2,614 |   | $ | 2,865 |   |   | $ | 10,960 |   |   |
| Gross margin                                                          |       | 1,312       |       | 1,269      |       | 1,369 |   | 1,673 |   |   | 5,623 |   |   |
| Net income (loss)                                                     |       | (390        | )          | (506       | )          | (232 | ) | 145 |   |   | (983 | ) |   |
| Basic and diluted net income (loss) per share                         |       | $           | (0.03      | )          | $          | (0.03 | ) | $ | (0.02 | ) | $ | 0.01 |   |   | $ | (0.07 | ) |   |
| 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 | ) |   |
|                                                                       |            |             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 8. Changes inand Disagreements with Accountants on Accounting and Financial Disclosure**

None.

**Item 8A. Controlsand Procedures**

**Disclosure Controlsand Procedures**

Under the supervision andwith the participation of our management, including our Chief Executive Officerand our Chief Financial Officer, we evaluated the effectiveness of ourdisclosure controls and procedures, as such term is defined 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.

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**Changes in InternalControls and Procedures**

There has been no changein our internal control over financial reporting during the quarter ended December 31,2006 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**Item 8B. OtherInformation**

None.

**PART III**

**Item 9. Directors, Executive Officers, Promoters andControl Persons; Compliance with Section 16(a) of the Exchange Act**

Ourexecutive officers and directors and their ages as of February 28, 2007,are as follows:
| Name              | ** ** | ** ** | ** ** | **Age** | ** ** | **Position**                                                      | ** ** |
|-------------------|------------|------------|------------|---------|------------|-------------------------------------------------------------------|------------|
| Steven Curd       |       |       | 47         |    |       | Director  and Chief Executive Officer                             |       |
| David Philipp     |       |       | 44         |    |       | Director                                                          |       |
| Steven E. Simpson |       |       | 47         |    |       | Director                                                          |       |
| David Zabrowski   |       |       | 43         |    |       | Director                                                          |       |
| Liesel Loesch     |       |       | 37         |    |       | Chief  Financial Officer                                          |       |
| Richard Altinger  |       |       | 42         |    |       | Executive  Vice President—Marketing and Business Development |       |
| Mark Cameron      |       |       | 51         |    |       | Chief Operating Officer                                           |       |

 

**Steven Curd** has served as a director ofVantageMed since 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 Information Officer.Prior to that Mr. Curd held the position of Vice President at CIGNASystems. Earlier in his career, Mr. Curd was in various operations anddevelopment 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 appointedto our Board of Directors on May 13, 2002. Mr. Philipp has more than18 years of financial management experience in several industries, includingtechnology, financial services and retail. He is currently Chief FinancialOfficer for Mother Lode Holding Company, a real estate information and mortgageservices company with national holdings in title insurance agency, titleinsurance underwriting, real estate exchange compliance, and post-closemortgage processing. Prior to joining Mother Lode, Mr. Philipp providedfinancial management and investment banking services to emerging technologycompanies and was the Chief Financial Officer of a supply-chain technologycompany from 1999 to 2001. From 1992 to 1999, Mr. Philipp served asExecutive Vice President, CFO and Secretary of First Financial Bancorp (FLLC),a publicly held bank holding company headquartered in Central California. Hehas been a member of the Board of Directors of First Financial Bancorp since1999 and serves on its Audit Committee and Compensation Committee. Mr. Philippholds a Bachelor of Science degree in Business Administration from CaliforniaState University, Sacramento. Mr. Philipp is Chairman of our AuditCommittee and is a member of our Compensation Committee.

**Steven E. Simpson**was appointed to our Board of Directors on October 8, 2002. Mr. Simpsonhas more than 18 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 Total eMedCorporation). Prior to joining 

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Spheris, Mr. Simpsonserved as Executive Vice President of Sales and Product Management for WebMDCorporation from April 2001 to August 2002 and as TransactionServices Division President from May 2000 to April 2001. Mr. Simpsonserved as Chief Operating Officer of Quintiles ENVOY Corporation from July 1999to May 2000, Chief Sales Marketing Officer from May 1999 to July 1999and as Senior Vice President Sales and Marketing of Envoy Corporation from November 1998to May 1999. Prior to joining Envoy, Mr. Simpson served as Presidentand Chief Executive Officer of Health Stat LLC, an occupational health company.Mr. Simpson holds a Bachelor of Arts degree from Mercer University.Mr. Simpson is a member of our Audit Committee.

**Dave Zabrowski** was appointed toour Board of Directors on June 18, 2002. Mr. Zabrowski’s 20 yearcareer in technology spans diverse experiences covering sales, marketing,R&D, and operations. Since August of 2002, he has served as Presidentand Chief Executive Officer of Neterion (formally S2io, Inc.), a SiliconValley based company focused on bringing high speed networking technology tocomputer and storage applications. Mr. Zabrowski spent the previous 16years with Hewlett Packard where he was a key leader and contributor inbusinesses ranging from semiconductors to PCs to computer servers, mostrecently as Vice President and General Manager of Hewlett-Packard’s NorthAmerican 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.

**Liesel Loesch** hasbeen with VantageMed since January 2003 and has managed the accounting,compliance and financial operations of the Company since that time. Prior toVantageMed, Ms. Loesch was the Controller for Silicon Image, Inc. Sheis a CPA, previously served as an Audit Manager for PricewaterhouseCoopers LLPand graduated with a Bachelor of Science in Business Administration from CaliforniaState University, Hayward.

**Richard Altinger**became our Vice President of Marketing and Business Development in February 2003and was promoted to Executive Vice President in October 2006. Prior tojoining VantageMed, Mr. Altinger served as Vice President of BusinessDevelopment 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 WebMDCorporation). Mr. Altinger’s WebMD experience also included directingWebMD’s account management, systems integration and customer supportdepartments from May 1996 to November 1998. Mr. Altinger holds aBachelor of Science in mechanical engineering and an M.S. in engineeringmanagement from Stanford University.

**Mark Cameron**joined VantageMedas our Chief Information Officer in February 2005 and became our ChiefOperating Officer in September 2005. Prior to joining VantageMed, Mr. Cameronwas employed by Beech Street Corporation as Chief Information Officer startingin January 2000 and subsequently served as Senior Vice President ofProduct Development until February 2005. Beech Street is the nation’slargest independently owned Preferred Provider Organization. Prior to BeechStreet, Mr. Cameron was Vice President of Production Services for Emdeon(formerly WebMD Corporation) from May 1998 to December 1999 where hewas instrumental in developing and growing WebMD’s hosted physician services. FromJanuary 1994 to May 1998 Mr. Cameron was a Vice President atCigna. Mr. Cameron holds a Masters of Business Administration from theUniversity of Dallas and a Bachelor of Science in Computer Science from theUniversity of Tulsa.

The Board has also adopted a Code of Conduct thatapplies to all of our employees, officers and directors. A link to our Code ofConduct is available on our website at www.vantagemed.com.

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

Section 16(a) of the Securities Exchange Actof 1934 requires our executive officers, directors and persons who beneficiallyown more than 10% of our Common Stock to file initial reports of ownership andreports of changes in ownership with the Securities and Exchange Commission(SEC). Such persons are required by SEC regulations to furnish us with copiesof all Section 16(a) forms they file.

Based solely on our reviewof such forms furnished to us and written representations from certainreporting persons, we believe that with exception to a Form 4 for MarkCameron due on June 16, 2006, all filing requirements applicable to ourexecutive officers, directors and more than 10% stockholders were complied with.

**Item 10. ExecutiveCompensation**

The following table setsforth the total compensation paid or accrued by us for the fiscal year ended December 31,2006, for each of the Named Executive Officers:

**SummaryCompensation Table**

| Name and Principal Positions | ** ** | ** ** | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Options  Awards(1)** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|------------|------------|----------|------------|------------|------------|-----------|------------|------------------------|------------|----------------------------------|------------|-----------|------------|
| Steven Curd                                 |       | 2006       |       | $        | 200,000    |       | $          | 13,230    |       |                   | $          | 22,994                           |       |      |       | $ | 0 |   |   | $ | 236,224 |   |
| Chief Executive Officer and  Director       |       |       |       |     |       |       |       |      |       |                   |       |                             |       |      |       |   |   |
| Liesel Loesch                               |       | 2006       |       | $        | 135,000    | (2)        | $          | 11,576    |       |                   | $          | 8,490                            |       |      |       | $ | 0 |   |   | $ | 155,066 |   |
| Chief Financial Officer                     |       |       |       |     |       |       |       |      |       |                   |       |                             |       |      |       |   |   |
| Philip D. Ranger                            |       | 2006       |       | $        | 53,000     |       | $          | —    |       |                   | $          | —                           |       |      |       | $ | 41,000 | (3) |   | $ | 94,000 |   |
| former Chief Financial  Officer             |       |       |       |     |       |       |       |      |       |                   |       |                             |       |      |       |   |   |
| Rick Altinger                               |       | 2006       |       | $        | 160,000    |       | $          | 11,576    |       |                   | $          | 1,769                            |       |      |       | $ | 0 |   |   | $ | 173,345 |   |
| EVP Marketing and  Business Development     |       |       |       |     |       |       |       |      |       |                   |       |                             |       |      |       |   |   |
| Mark Cameron                                |       | 2006       |       | $        | 160,000    |       | $          | 41,576    |       |                   | $          | 3,538                            |       |      |       | $ | 0 |   |   | $ | 205,114 |   |
| Chief Operating Officer                     |       |       |       |     |       |       |       |      |       |                   |       |                             |       |      |       |   |   |

----

(1)          Represents the dollaramount recognized for financial statement reporting purposes in accordance withSFAS 123R for awards granted in the year ended December 31, 2006. SeeNote 1 to the Consolidated Financial Statements.

(2)          Ms. Loesch becameour Chief Financial Officer in April 2006. On an annual basis, her salaryfor 2006 would have been $160,000.

(3)          Mr. Ranger becameour Chief Financial Officer in May 2003 and in April 2006 he left theCompany. In 2006, Mr. Ranger received severance pay equal to $27,000 andvacation pay out of approximately $14,000.

**ExecutiveEmployment Agreements and Incentive Plans**

**We have entered into employmentagreements with our current executive officers, Messrs. Curd, Altinger andCameron and Ms. Loesch that became effective upon their employment intheir capacities as officers of VantageMed. A summary of each of theseagreements, including amendments to the agreements, if any, follows. The annualbase salary for each executive is subject to adjustment based on variousfactors including, but not limited to, each employee’s performance as well asVantageMed’s financial performance. Salary adjustments are at the solediscretion of the**Board.

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**StevenCurd.**   In November 2004, we entered into anagreement with Mr. Curd that provided for an initial base salary of$200,000 and pursuant to which we agreed to provide 12 months salary andseverance benefits if, within the initial three year term of the agreement (orany renewal term), his employment is terminated without cause or he resigns forgood reason. Pursuant to an amendment to this agreement dated May 2006, weagreed to vest all unvested options upon a change of control or upon other eventsas defined in that agreement.

**RichardAltinger.**   In February 2003, we entered intoan agreement with Mr. Altinger that provided for an initial base salary of$160,000 and pursuant to which we agreed to provide nine-months severancebenefits if, within the initial three year term of the agreement (or anyrenewal term), his employment is terminated without cause or he resigns forgood reason. In August 2006, the term of this agreement was extended to February 2009.

**MarkCameron.**   In September 2005, we entered intoan agreement with Mr. Cameron that provided for an initial base salary of$160,000 and pursuant to which we agreed to provide nine-months severancebenefits if, within the initial three year term of the agreement (or anyrenewal term), his employment is terminated without cause or he resigns for goodreason. Mr. Cameron is eligible to receive an annual performance-basedcash bonus ranging from $50,000 to $150,000, based on performance, includingVantageMed’s financial performance and at the discretion of the Chief ExecutiveOfficer.

**LieselLoesch.**   In April 2006, we entered into anagreement with Ms. Loesch that provided for an initial base salary of$140,000 and subsequent increases to $150,000 effective September 1, 2006and to $160,000 effective December 1, 2006, and pursuant to which, weagreed to provide nine-months severance benefits if, within the initial threeyear term of the agreement (or any renewal term), her employment is terminatedwithout cause or she resigns for good reason.

**ExecutiveEBITDA Bonus Plan.**   In May 2004, the Boardof Directors established an Executive EBTIDA Bonus Plan that provided for cashbonus payments to each member of the executive management team, currentlyincluding Messrs. Curd, Altinger and Cameron and Ms. Loesch. The Planestablishes a bonus level for each executive officer based on the achievementof revenue and EBITDA targets defined by the Board. The Plan provides for arange of individual bonus payments from a flat amount of $7,500 each for Messrs. Altingerand Cameron and Ms. Loesch and $10,000 for Mr. Curd at a breakevenEBITDA level to 5.75% of EBITDA each for Messrs. Altinger and Cameron and Ms. Loeschand 6.5% of EBTIDA for Mr. Curd for achieving EBITDA ranging from 10% to15% of revenues. The Plan does not provide for an increase in the bonuspercentage beyond the 15% EBITDA level. Bonuses are calculated and paidquarterly and are limited to 50% of the eligible bonus amount in each quarterlyperiod that the revenue target is not met.

**Option Acceleration.****  **Pursuant to the terms of the Company’s 1998 StockOption Plan, all outstanding options granted pursuant to this plan willimmediately vest prior to the effective date of a change in control unless the optionsare assumed by the surviving company or the acquiring company substitutessubstantially equivalent options or replaces the options with a cash incentiveprogram.

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**Outstanding EquityAwards at Fiscal Year End**

Thefollowing table sets forth certain information concerning unexercised optionsfor each named executive officer outstanding as of December 31, 2006.

| Name                                    | ** ** | ** ** | ** ** | **Vesting  Commencement  Date** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable(1)** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable(1)** | ** ** | **Option  Exercise  Price** | ** ** | **Option  Expiration  Date** | ** ** |
|-----------------------------------------|------------|------------|------------|---------------------------------|------------|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Steve Curd                              |       |       | 11/8/2004  |                            |       |                                                                                      | 211,125    |                                                                                        |       |                        | 194,235    |                         |       |   | $0.85 |   |   | 11/8/2014 |   |
| Chief Executive Officer                 |       |       | 5/9/2006   |                            |       |                                                                                      | —     |                                                                                        |       |                        | 325,000    |                         |       |   | $0.45 |   |   | 5/9/2016 |   |
| Liesel Loesch                           |       |       | 1/2/2003   |                            |       |                                                                                      | 29,375     |                                                                                        |       |                        | 625        |                         |       |   | $0.20 |   |   | 1/2/2013 |   |
| Chief Financial Officer                 |       |       | 2/22/2005  |                            |       |                                                                                      | 2,290      |                                                                                        |       |                        | 2,710      |                         |       |   | $1.06 |   |   | 2/22/2015 |   |
|                                    |       |       | 4/25/2006  |                            |       |                                                                                      | —     |                                                                                        |       |                        | 75,000     |                         |       |   | $0.60 |   |   | 4/25/2016 |   |
|                                    |       |       | 5/9/2006   |                            |       |                                                                                      | —     |                                                                                        |       |                        | 20,000     |                         |       |   | $0.45 |   |   | 5/9/2016 |   |
| Rick Altinger                           |       |       | 2/25/2003  |                            |       |                                                                                      | 95,830     |                                                                                        |       |                        | 4,170      |                         |       |   | $0.35 |   |   | 2/25/2013 |   |
| EVP Marketing and Business  Development |       |       | 2/22/2005  |                            |       |                                                                                      | 34,370     |                                                                                        |       |                        | 40,630     |                         |       |   | $1.06 |   |   | 2/22/2015 |   |
|                                         |       |       | 5/9/2006   |                            |       |                                                                                      | —     |                                                                                        |       |                        | 25,000     |                         |       |   | $0.45 |   |   | 5/9/2016 |   |
| Mark Cameron                            |       |       | 2/8/2005   |                            |       |                                                                                      | 80,200     |                                                                                        |       |                        | 94,800     |                         |       |   | $1.06 |   |   | 2/22/2015 |   |
| Chief Operating Officer                 |       |       | 9/1/2005   |                            |       |                                                                                      | 31,249     |                                                                                        |       |                        | 68,751     |                         |       |   | $0.67 |   |   | 9/1/2015 |   |
|                                    |       |       | 5/9/2006   |                            |       |                                                                                      | —     |                                                                                        |       |                        | 50,000     |                         |       |   | $0.45 |   |   | 5/9/2016 |   |

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(1)          Representsshares issuable upon the exercise of stock options awarded under our 1998 StockOption Plan. Option shares vest 25% on the one year anniversary of the VestingCommencement Date and monthly thereafter for an additional 36 months. Allshares are immediately exercisable under certain conditions subject to the rightof repurchase by VantageMed. Such repurchase right expires in accordance withthe vesting schedule outlined.

**DirectorCompensation**

Thefollowing table sets forth, for each director who is not a named executiveofficer that served on our Board during 2006, information concerningcompensation earned for services in all capacities during the year ended December 31,2006.

| **Name**       | ** ** | ** ** | ** ** | **Fees Earned or  Paid in Cash** | ** ** | **Option  Awards(1)** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|----------------|------------|------------|------------|------------------------------------------------------|------------|-----------------------|------------|----------------------------------|------------|-----------|------------|
| David Philipp  |       |       | $—    | ** **                                           |       |                  | $10,613    |                             |       |      | $—    |   |   | $10,613 |   |
| Steve Simpson  |       |       | $—    | ** **                                           |       |                  | $7,075     |                             |       |      | $—    |   |   | $7,075 |   |
| Dave Zabrowski |       |       | $—    | ** **                                           |       |                  | $7,705     |                             |       |      | $—    |   |   | $7,705 |   |

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(1)          Represents the dollaramount recognized for financial statement reporting purposes in accordance withSFAS 123R for awards granted in the year ended December 31, 2006. Eachoption has a 10 year term, was granted on May 9, 2006 and is exercisableat $0.45 per share. Each option vested immediately as to 50% of the shares andthe balance of the shares vest over 12 months. See Note 1 to theConsolidated Financial Statements.

Our directors do not receive a salary or fees forserving as a director, nor do they receive any compensation for attendingmeetings of the board of directors or serving on committees of the board ofdirectors.  On an annual basis, stock optionsare granted to each independent member of our board of directors at thediscretion of the board.

57

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**Item 11. Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

The following tablesets forth certain information known to us with respect to the beneficialownership of our common stock as of February 28, 2007, except as noted inthe footnotes 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.

Thenumber of shares of common stock beneficially owned and the percentage ofshares beneficially owned are based on 15,358,745 shares of our common stockoutstanding as of February 28, 2007.

| Name and Address(1)                                                       | ** ** | ** ** | ** ** | **Number of  Shares** | ** ** | **Percent  Beneficially  Owned(2)** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|-------------------------------------|------------|
| Austin W. Marxe and David M.  Greenhouse(3)                                         |       | 4,618,254  |       |                       | 27.6       | %                                   |       |
| 527 Madison Avenue,  Suite 2600  New York, NY 10022                            |       |       |       |                       |       |                                |       |
| S Squared  Technology, LLC(4)                                                       |       | 2,309,125  |       |                       | 14.6       | %                                   |       |
| 515 Madison Avenue, Suite 4200  New York, NY 10022                             |       |       |       |                       |       |                                |       |
| Bruce Galloway(5)                                                                   |       | 2,527,896  |       |                       | 15.6       | %                                   |       |
| c/o Strategic Turnaround  Equity Partners, LP  720 Fifth Avenue  New York, NY 10019 |       |       |       |                       |       |                                |       |
| Gary Herman(6)                                                                      |       | 2,011,111  |       |                       | 12.4       | %                                   |       |
| c/o Strategic Turnaround Equity Partners, LP  720 Fifth Avenue  New York, NY 10019  |       |       |       |                       |       |                                |       |
| Strategic Turnaround Equity  Partners LP (Cayman)(7)                                |       | 1,969,111  |       |                       | 12.2       | %                                   |       |
| c/o Strategic Turnaround  Equity Partners, LP  720 Fifth Avenue  New York, NY 10019 |       |       |       |                       |       |                                |       |
| Trinad Advisors,  LLC                                                               |       | 865,300    |       |                       | 5.6        | %                                   |       |
| c/o Strategic Turnaround Equity Partners, LP  720 Fifth Avenue  New York, NY 10019  |       |       |       |                       |       |                                |       |
| Steven Curd(8)                                                                      |       | 646,848    |       |                       | 4.1        | %                                   |       |
| Rick Altinger(9)                                                                    |       | 334,568    |       |                       | 2.2        | %                                   |       |
| Mark Cameron(10)                                                                    |       | 200,568    |       |                       | 1.3        | %                                   |       |
| David Philipp(11)                                                                   |       | 195,721    |       |                       | 1.3        | %                                   |       |
| Steven E. Simpson(12)                                                               |       | 99,166     |       |                       | *          |                                |       |
| David  Zabrowski(12)                                                                |       | 99,166     |       |                       | *          |                                |       |
| Liesel Loesch(13)                                                                   |       | 51,458     |       |                       | *          |                                |       |
| Philip D.  Ranger(14)                                                               |       | 10,753     |       |                       | *          |                                |       |
| Executive officers and  directors as a group (7 persons)                            |       | 1,627,585  |       |                       | 9.9        | %                                   |       |

----

*                    Lessthan 1%

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(1)          Exceptas otherwise noted, the address of each person listed on the table is c/oVantageMed Corporation, 11060 White Rock Road, Suite 210, Rancho Cordova,California 95670. Unless otherwise indicated, each of the stockholders has solevoting and investment power with respect to the shares beneficially owned, subjectto community property laws, where applicable.

(2)          Beneficialownership is determined in accordance with the rules of the Securities andExchange Commission and includes voting and investment power with respect tosuch shares. All shares of common stock subject to options or warrantscurrently exercisable or exercisable within 60 days after February 28,2007 (without taking into account acceleration of options in connection withthe proposed merger), are deemed to be outstanding and to be beneficially ownedby the person holding such options or warrants for the purpose of computing thenumber of shares beneficially owned and the percentage ownership of suchperson, but are not deemed to be outstanding and to be beneficially owned forthe purpose of computing the percentage ownership of any other person.

(3)          Includes1,392,448 shares underlying warrants issued to Special Situations PrivateEquity Fund, L.P. MG Advisors, L.L.C. is the general partner of and investmentadvisor to the Special Situations Private Equity Fund, L.P. Austin W. Marxe,and David M. Greenhouse are the principal owners of MG. Through their controlof MG, Messrs. Marxe and Greenhouse share voting and investment controlover the portfolio of securities of the Special Situations Private Equity Fund,L.P.

(4)          Includes1,258,065 shares of our common stock and warrants to purchase an additional543,053 shares of our common stock held by Leaf Investment Partners, L.P. aswell as 354,839 shares of our common stock and warrants to purchase anadditional 153,168 shares of our common stock held by Leaf Offshore InvestmentFund, Ltd. S Squared Capital, LLC is the general partner for Leaf InvestmentPartners, L.P., and S Squared Technology Partners, L.P. is the investmentmanager for Leaf Offshore Investment Fund, Ltd.

(5)          Includes1,160,791 shares held by and 808,320 shares underlying warrants issued toStrategic Turnaround Equity Partners LP (Cayman) (“STEP”). Galloway CapitalManagement, LLC is the general partner and investment advisor to STEP. BruceGalloway and Gary Herman are managing members of Galloway Capital Management,LLC and through their control over Galloway Capital Management, LLC they share votingand investment control of the portfolio of securities of STEP. Also includes1,050 shares held by Mr. Galloway’s children for whom Mr. Gallowayhas the power to vote and dispose.

(6)          Includes1,160,791 shares held by and 808,320 shares underlying warrants issued to STEP.Galloway Capital Management, LLC is the general partner and investment advisorto STEP. Bruce Galloway and Gary Herman are managing members of GallowayCapital Management, LLC and through their control over Galloway CapitalManagement, LLC they share voting and investment control of the portfolio of securitiesof STEP. Also includes 26,000 shares held by FBR, Inc. for which Mr. Hermanis the sole owner and serves as an officer and has the power to vote anddispose.

(7)          Includes808,320 shares underlying warrants issued to STEP. Galloway Capital Management,LLC is the general partner and investment advisor to STEP. Bruce Galloway andGary Herman are managing members of Galloway Capital Management, LLC andthrough their control over Galloway Capital Management, LLC they share votingand investment control of the portfolio of securities of STEP.

(8)          Includes(i) 244,905 shares underlying options granted to Mr. Curd, which areexercisable within 60 days of February 28, 2007, and (ii) 137,778shares underlying warrants issued to Mr. Curd.

(9)          Includes(i) 140,626 shares underlying options granted to Mr. Altinger, whichare exercisable within 60 days of February 28, 2007; (ii) 46,415shares underlying warrants issued to Altinger Family, LLC for whom Mr. Altingeris a control person; and (iii) 137,527 shares held by the Altinger Family,LLC.

59

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(10) Includes (i) 134,373 shares underlyingoptions granted to Mr. Cameron, which are exercisable within 60 days of February 28,2007, and (ii) 28,283 shares underlying warrants issued to Mr. Cameron.

(11) Includes (i) 118,750 shares underlyingoptions granted to Mr. Philipp, which are exercisable within 60 days of February 28,2007, and (ii) 23,208 shares underlying warrants issued to Mr. Philipp.An additional 1,250 shares underlying options will be exercisable by Mr. Philippimmediately prior to the merger.

(12) Includes 99,166 shares each underlying optionsgranted to Mr. Simpson and Mr. Zabrowski, which are exercisablewithin 60 days of February 28, 2007. An additional 834 shares underlyingoptions will be exercisable by each of Messrs. Simpson and Zabrowskiimmediately prior to the merger.

(13) Includes 51,548 shares underlying optionsgranted to Ms. Loesch, which are exercisable within 60 days of February 28,2007.

(14) Mr. Ranger was our Chief Financial Officerfrom May 20, 2003 until April 25, 2006 when he resigned.

**Item 12. CertainRelationships and Related Transactions**

In March 2005, we completed a $5.0 millionprivate placement of 5,376,344 shares of common stock priced at $0.93 per share.Special Situations Fund, the lead investor, and S Squared Technology purchased90 percent of the shares, with members of our management team, including namedexecutive officers Steven Curd, Richard Altinger, Mark Cameron and Philip D.Ranger, and director David Philipp, purchasing an aggregate of 8 percent of theshares. The investors in the transaction also received warrants to purchase anaggregate of 1,155,247 shares of common stock priced at $1.21 per share, andwarrants to purchase an aggregate of 1,165,498 shares of common stock priced at$1.43 per share.

In June 2006, wecompleted a $500,000 private placement of 1,111,112 shares of common stockpriced at $0.45 per share. Institutional investors purchased 97 percent of theshares, with members of our management team, including named executive officersSteven Curd and Mark Cameron, combining for the purchase of 3 percent. Theinvestors in the transaction received warrants to purchase an additional1,111,112 shares of common stock priced at $0.55 per share, and an additional555,556 shares of common stock priced at $0.90 per share. After legal expenses,the net proceeds were approximately $492,000. This issuance triggered anadjustment to the purchase price and number of warrants that were issued in theMarch 2005 transaction described above. The information in this documenthas been updated to reflect the adjusted strike price and number of warrantsfollowing this adjustment.

**Item13. Exhibits**

| 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) |
| 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)                                                        |

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| 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).                |
| 10.15* |   | Purchase Agreement dated June 9, 2006 between  VantageMed Corporation and Investors (previously filed as Exhibit 10.1  to the Form 8-K filed by VantageMed Corporation on June 16,  2006).                          |
| 10.16* |   | Registration Rights Agreement dated June 9,  2006 between VantageMed Corporation and Investors (previously filed as  Exhibit 10.2 to the Form 8-K filed by VantageMed Corporation  on June 16, 2006).               |
| 10.17* |   | Form of VantageMed Corporation Series C  Warrant dated June 9, 2006 to Investors (previously filed as  Exhibit 10.3 to the Form 8-K filed by VantageMed Corporation  on June 16, 2006).                   |
| 10.18* |   | Form of VantageMed Corporation Series D  Warrant dated June 9, 2006 to Investors (previously filed as  Exhibit 10.4 to the Form 8-K filed by VantageMed Corporation  on June 16, 2006).                   |

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| 10.19* |   | Agreement and Plan of Merger, dated as of  February 16, 2007 by and among Nightingale Informatix Corporation, a  corporation existing under the laws of the Province of Ontario, Viper Acquisition  Corporation, a Delaware corporation, and VantageMed Corporation, a Delaware  corporation (previously filed as Exhibit 2.1 to the Form 8-K  filed by VantageMed Corporation on February 20, 2007).                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20* |   | Form of Voting Agreement, dated  February 16, 2007, by and among Nightingale Informatix Corporation, a  corporation existing under the laws of the Province of Ontario, and the  following persons: Steven Curd, Mark Cameron, Rick Altinger, Altinger Family  LLC, David Philipp and Liesel Loesch (previously filed as Exhibit 99.1  to the Form 8-K filed by VantageMed Corporation on  February 20, 2007).                                         |
| 10.21* |   | Form of Voting Agreement, dated  February 16, 2007, by and among Nightingale Informatix Corporation, a  corporation existing under the laws of the Province of Ontario, and the  following entities: Special Situations Private Equity Fund, LP, Leaf  Investment Partners, LP, Leaf Offshore Investment Fund, LP and Quadramed  Corporation (previously filed as Exhibit 99.2 to the Form 8-K  filed by VantageMed Corporation on February 20, 2007). |
| 10.22  |   | Form of Amendment to Series A, B, C and D  Warrants dated February 16, 2007                                                                                                                                                                                                                                                                                                                                                                                      |
| 23.1   |   | Consent of Independent Registered Public Accounting  Firm                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 23.2   |   | 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 April 2, 2007. 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 April 2, 2007. 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

**Item 14. PrincipalAccountant Fees and Services**

Feesrelated to all professional services rendered by Farber Hass Hurley &McEwen LLP for the fiscal years ended December 31, 2006 and 2005, were asfollows:

| ** **             | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Audit fees(1)          |       | $        | 73,000     |     | $          | 74,000 |   |
| Audit related  fees(2) |       | —   |       | —   |       |
| Tax fees(3)            |       | —   |       | —   |       |
| Total fees             |       | $        | 73,000     |     | $          | 74,000 |   |

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(1)          Audit fees consist offees billed for professional services rendered for the audit of ourconsolidated annual financial statements and review of the interim consolidatedfinancial statements included in quarterly reports and services in connectionwith statutory and regulatory filings 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 our consolidated financialstatements and are not reported under “audit fees”. This category primarily includesfees related to the audit of our employee benefit plan.

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(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 Farber Hass Hurley & McEwen LLP and the relatedfees and has determined that the non-audit services provided were compatiblewith maintaining the independent accountant’s independence. During 2006, 100%of audit and audit-related fees were approved by the Audit Committee prior toservices being rendered.

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**SIGNATURES**

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, in the City of Rancho Cordova, State of California, on the 2nd day of April 2007.

 

|        |   | VANTAGEMED CORPORATION |
|--------|--------|------------------------|
|   |   |                   |   |   |
|   |   |                   |   |   |
|   |   | By:                    | /s/ LIESEL LOESCH |   |
|   |   |                   | Liesel Loesch |   |
|   |   |                   | Chief Financial  Officer |   |

Pursuant to the requirements ofthe Securities Act of 1934, this report has been signed by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 

|                    | **Signature** | ** **                             | ** ** | ** **         | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|--------------------|---------------|----------------------------------------|------------|--------------------|-----------|------------|------------|------------|----------|------------|
|               |          |                                   |       |               |
| /s/ STEVE CURD     |          | President  and Chief Executive Officer |       | April 2, 2007 |
| Steve  Curd        |          | (Principal  Executive Officer)         |       |               |
|               |          |                                   |       |               |
| /s/ DAVID  PHILIPP |          | Director                               |       | April 2, 2007 |
| David  Philipp     |          |                                   |       |               |
|               |          |                                   |       |               |
| /s/ STEVE SIMPSON  |          | Director                               |       | April 2, 2007 |
| Steve  Simpson     |          |                                   |       |               |
|               |          |                                   |       |               |
| /s/ DAVE ZABROWSKI |          | Director                               |       | April 2, 2007 |
| Dave Zabrowski     |          |                                   |       |               |

 

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