**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-KSB**
| **x**                                                | **ANNUAL REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934**      |
|------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| **For the Fiscal Year Ended December 31, 2004** |
| **o**                                                | **TRANSITION  REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITES EXCHANGE  ACT OF 1934** |

 

**Forthe Transition Period From ***            * to *           *

**CommissionFile Number 000-29367**

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VantageMed Corporation

(Exact name of Registrantas specified in its charter)
| **Delaware**                                                     | **68-0383530**                        |
|------------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | (I.R.S. Employer  Identification No.) |

 

**11060 White Rock Road, Suite 210,Rancho Cordova, California 95670(916) 638-4744**

(Address, including zipcode, and telephone number, includingarea code, of Registrant’s principalexecutive offices)

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

Securities registeredpursuant to Section 12(g) of the Act: Common Stock

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Check whether the issuer (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theExchange Act during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes þNo o

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-Bin this form and if no disclosure will be contained, to the best of issuer’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB. o

Issuer’s revenues for theyear ended December 31, 2004 were $22,120,000.

As of March 23, 2005,the aggregate market value of the voting and non-voting common equity held bynon-affiliates was approximately $6.4 million, based upon the last reportedsales price of our common equity as reported by the Over-The-Counter BulletinBoard on that date of $0.89 per share. Determination of affiliate status forthis purpose is not a determination of affiliate status for any other purpose. Wehad 13,656,267 common shares outstanding at March 23, 2005.

Part IIIincorporates by reference information from our proxy statement for our annualmeeting of stockholders to be held on May 25, 2005.

 

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**VantageMedCorporation**

**Index**
| Item  Number | ** ** | ** **                                                                                   | ** ** | **Page** |
|--------------|------------|----------------------------------------------------------------------------------------------|------------|----------|
|         |       | **PART I**                                                                              |       |     |
| Item 1       |       | Business                                                                                     |       | 1        |
| Item 2       |       | Properties                                                                                   |       | 9        |
| Item 3       |       | Legal Proceedings                                                                            |       | 10       |
| Item  4      |       | Submission  of Matters to a Vote of Securities Holders                                       |       | 10       |
|         |       | **PART II**                                                                             |       |     |
| Item  5      |       | Market  for Registrant’s Common Equity and Related Stockholders Matters                 |       | 11       |
| Item  6      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations  |       | 12       |
|         |       | Forward-Looking  Statements and Risk Factors                                                 |       | 23       |
| Item 7       |       | Financial Statements                                                                         |       | 31       |
| Item  8      |       | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure        |       | 52       |
| Item 8A      |       | Controls and  Procedures                                                                     |       | 52       |
|         |       | **PART III**                                                                            |       |     |
| Item  9      |       | Directors  and Executive Officers of VantageMed (incorporated by reference)                  |       | 53       |
| Item 10      |       | Executive Compensation  (incorporated by reference)                                          |       | 53       |
| Item  11     |       | Security  Ownership of Certain Beneficial Owners and Management (incorporated by  reference) |       | 53       |
| Item  12     |       | Certain  Relationships and Related Transactions (incorporated by reference)                  |       | 53       |
| Item  13     |       | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K                       |       | 53       |
| Item 14      |       | Principal  Accountant Fees and Services (incorporated by reference)                          |       | 55       |
|         |       | Signatures                                                                                   |       | 56       |

 

 

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*This report contains forward-looking statements withinthe meaning of Section 21E of the Securities and Exchange Act of 1934 and Section 27Aof the Securities Act of 1933. These forward-looking statements involve anumber of risks and uncertainties, including those identified in the section ofthis Form 10-KSB entitled “Risk Factors,” that may cause actual results todiffer materially from those discussed in, or implied by, such forward-lookingstatements. Forward-looking statements within this Form 10-KSB areidentified by words such as “believes,” “anticipates,” “expects,” “intends,” “may,”“will” and other similar expressions. However, these words are not the onlymeans of identifying 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.*

**PART I**

**Item 1. Business**

**The Company**

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

Although over 95% of physician practices today utilizea Practice Management Solution (PMS), the majority of those practices utilizeoutdated legacy technology (e.g., DOS, SCO Unix, flat-file databases, etc.)systems that are expensive to support and develop and may not continue to meetthe privacy, Electronic Data Interchange (EDI) transactions and securitystandards introduced by the Federal Health Insurance Portability andAccountability Act of 1996 (HIPAA) HIPAA legislation. Given that the EDIstandards for transactions other than claims (i.e., eligibility, electronicremittance advice and claim status) are finally being adopted in large numbersby insurance companies, the rate of obsolescence of legacy systems is increasing.As a result of our acquisitions, we havecontinued to support numerous legacy technology systems. Throughout 2003 and2004, however, we announced support discontinuance, or sunset, programs tothese legacy customers. As a result, we expect to reduce the number of legacytechnology systems supported to five by April 1, 2005 (a reduction from 12at December 31, 2004). 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 decreased as aresult of our decision to discontinue support of these costly products as wemigrate customers to our core products and we expect these revenues willcontinue to decrease throughout 2005 until our support of these products hasceased. Some 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 have received an accelerated number of ordersto purchase our RidgeMark system. We do not expect that migration orderswill continue at significant volumes after 2005. In addition there is noassurance that we will be able to generate significant orders from newcustomers.

This process of migrating customers from our legacysystems to our core Windows-based products represented a significantsales and marketing opportunity over the last two years. In 2005 and beyond,our growth and success will come largely from our ability to either migratephysician practices that use competitors’ systems to one of our core productsor install and interface our ChartKeeper Computerized 

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Medical Records product ontop of their existing system. We believe that the adoption of our coreWindows-based products will increase the customers’ access to clinical andadministrative information while also increasing their ability to communicatewith numerous healthcare participants, such as third-party insurancepayers.

Our recurring revenueswere approximately 64% of total revenues in 2004 and 69% of total revenues in2003. We define recurring revenues as any revenues derived from softwaremaintenance and hardware support contracts as well as revenues derived frombilling and electronic services. Please refer to the Introduction portion ofItem 6, Management’s Discussion and Analysis of Financial Condition and Resultsof Operations for additional details and a reconciliation to our GAAP revenues.In an attempt to retain and increase recurring revenues, we are expanding ourservice offerings and migrating existing customers to our core Windows-basedproducts and services, and expanding our electronic services. With theincreasing penetration of our SecureConnect electronic transaction services wehave improved our ability to deliver these EDI services. In addition toincreasing adoption of traditional claims and patient statement services, wehave added new HIPAA compliant EDI transactions, including electronicremittance advice and eligibility.

**The VantageMed Solution**

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 toaccess and process information more efficiently and reliably, reduce stafftime, and collect money from patients and insurance payers faster and easier.With a network of  sales representativeslocated throughout the United States, we feel that we are well positioned totake advantage of the opportunities that result from the increasingly complexneeds of the healthcare industry.

Our objective is toexpand our market share, retain and then increase our recurring revenues inorder to strengthen our position as one of the leading suppliers of informationsystems and services to healthcare providers. We intend to increase ourrevenues and market share through growth strategies that focus on:

·        *Offering our Core Windows-based Products and Services*   Theseproducts and services are designed to meet the changing and expanding needs ofour customers and to enable them to meet the increasingly complex demands ofthe healthcare market. Given that the vast majority of providers in our overallindustry utilize legacy technology today (for example, DOS, SCO Unix, flat-filedatabases, etc.), migrating both new and existing customers to ourWindows-based products is a key growth strategy.

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

·        *Cross-Selling our SecureConnect EDI Products and Services*   Withover 18,000 providers using our products, we have the ability to generatesignificant growth by cross-selling additional EDI products and servicesto our installed customer base. These EDI products currently include claims,claim scrubbing, eligibility, electronic remittance advice and patientstatement services. Given the HIPAA laws, providers and insurance payers arerapidly expanding the volume and types of electronic transactions that areexchanged. These additional EDI transactions and services are important sourcesof our recurring revenues.

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·        *Strengthening our National and Local Presence*   Throughsales and marketing programs as well as training and information systems, wecontinue to strengthen our processes and systems on a national level providinga consistent framework with which to provide support within our local markets.

**Principal Products**

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

Wehave designed our products to enable our customers to transition from theirlegacy systems to Windows-based products and services. The features,functions and primary customers of our core Windows-based products andservices are described below.
| **Core Windows-based**Products  and Services | ** ** | **Features and Functions**                                                                                                                                                                                                                                                                                  | ** ** | **Primary Customer  or** Type of  Practice                   |
|----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|
| RidgeMark®                              |       | Practice  management—scheduling, billing, patient registration, collections, reporting,  claim scrubbing and EDI transactions (claims, eligibility, electronic  remittance advice and patient statements)                                                                                              |       | Primary and specialty  medical practices                          |
| Northern Health  Anesthesia®            |       | Practice management—scheduling,  billing, patient registration, collections, reporting and EDI transactions  (claims, electronic remittance advice and patient statements)                                                                                                                             |       | Anesthesia practices                                              |
| Therapist Helper®                       |       | Patient registration,  scheduling, billing, managed care tracking, reporting and EDI transactions  (claims, patient credit card payments and patient statements); also includes  a Palm Pilot enabled application and automated credit card processing for  patient billing                                 |       | Psychologists,  psychiatrists and behavioral health practitioners |
| ChartKeeper®                            |       | Computerized Medical  Record system for electronic storage and tracking of patient charts,  transcription notes, document imaging, lab results, security, authentication  and electronic chart distribution                                                                                                 |       | Primary and specialty medical  practices                          |
| SecureConnectTM                          |       | Electronic Data  Interchange (EDI) transaction service including hosted servers that exchange,  translate and manage HIPAA compliant (e.g., claims, electronic remittance  advice and eligibility) and other (e.g., patient statements) EDI transactions  with our core practice management system products |       | Healthcare providers  submitting electronic transactions          |

 

**Electronic Services**

Our products enableElectronic Data Interchange (EDI) functions, through our SecureConnectservices. EDI improves a healthcare practice’s cash flow and operations byconverting costly paper and telephone-based communications into cost-efficientelectronic transaction processing. Our centralized 

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SecureConnectservices, some or all of which are available 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 thirdparty clearinghouse partners. In addition, claim submission reports aredelivered back to provider practices.

·        *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 postsinsurance payment information automatically into the practice management systemthus eliminating costly and error-prone manual data entry.

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

·        *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, 2004, our customer service and support groups consistedof 112 employees, or approximately 64% of our employee base.

**Hardware and Supplies**

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

**Product Development**

As of December 31,2004, our Windows-based product development and quality testing organizationconsisted of 18 employees. Our development teams are organized by product. Eachproduct team has a 

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productmanager and various developers. In certain cases, we have contracted withthird-party development or quality testing and assurance groups to assist uswith the development of our products. Our quality assurance and testing teamsfollow established guidelines and subject matter experts and analystscontribute to work flow design, content and business rule development. Aformalized 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 and Security Issues**

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

·        userID and password access to all of our software;

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

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

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

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

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

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

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

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

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

·        requiringall employees to sign confidentiality agreements.

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

**Sales and Marketing Strategy**

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 

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softwaremodules and EDI services. As of December 31, 2004, we had 22 sales andmarketing personnel, including sales and marketing management, telemarketing,telesales  and field salesrepresentatives.

**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.

We believe that our principal competitive advantagestems from our focus on quality customer support and training programs,offerings of feature-rich Windows-based products, our substantial installedcustomer base, our highly experienced staff and management and ourSecureConnect HIPAA-compliant transaction solutions available to all customers.

Our principal competitorsinclude organizations such as WebMD Practice Services/Medical Manager,Cerner/VitalWorks, Inc., 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 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. Thesecompetitors may be able to respond more rapidly to new or emerging technologiesand regulations and changes in customer requirements than we can. In addition,as the market for our products develops, additional competitors may enter themarket and competition may intensify, requiring us to lower the prices of ourproducts and services.

**Acquisitions**

Prior to our initialpublic offering in February 2000, we completed 26 acquisitions. Due to thevolatility of the financial markets and the uncertainty in the healthcareindustry, we have not pursued any acquisitions since 1999; however, we maypursue additional acquisitions in the future as opportunities arise.  As part ofour integration process, we integrated all accounting, administrative and salesfunctions within our corporate infrastructure. Customer support for legacyproducts is managed through a combination of local and national supportresources.

**Intellectual Property**

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

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us maynot be adequate to prevent misappropriation of our technology and confidentialinformation. In addition, these protections do not prevent independent third-partydevelopment of competitive products or services. We believe that ourproprietary rights do not infringe upon the proprietary rights of thirdparties. However, third parties may assert infringement claims against us inthe future and any such assertion may require us to enter into a licenseagreement or royalty arrangement with the party asserting the claim. Litigationmay be necessary in the future to enforce our intellectual property rights, toprotect our confidential information or trade secrets, or to determine thevalidity or scope of the rights of others. Litigation could result insubstantial costs and diversion of management and other resources and could seriouslyharm our business.

**Government Regulation**

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

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

·       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.

*Transaction Standards.  *TheTransaction Standards became effective in October 2003; however, manycovered entities, including many providers and insurance payers were not fully compliant as of that date. In responseto concerns communicated to the Centers for Medicare and Medicaid Services(CMS) regarding the readiness of a significant portion of the covered entitiesfor the October 2003 deadline and the consequences to the healthcareindustry if significant claim processing problems occur at that time, CMSreleased its “Guidance on Compliance with HIPAA Transactions and Code SetsAfter the October 2003 Implementation Deadline” (which we refer to as theCMS Guidance). Under CMS’s contingency plan for Medicare, it announced that itwill continue to accept claims in both HIPAA standard and legacy formats, withthe legacy formats to be accepted for a period to be determined by CMS basedupon a regular reassessment of the readiness of its electronic “tradingpartners.”  However, effective in July 2004,only claims that are compliant with the Transaction Standards were to bereported as electronic media claims (EMC), which may be paid no earlier thanafter a 13 day waiting period. All other claims (including both electronicclaims that are not compliant with the Transaction Standards, as well as paperclaims) may be paid no earlier than after a 26 day waiting period. OurSecureConnect clearninghouse has been processing HIPAA compliant transactions since August 2003.

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CMS has made clear that it expected each party toevery transaction to be accountable for compliance with the new standards as ofOctober 2003. However, the CMS Guidance provided for a flexible,complaint-driven enforcement strategy. CMS indicated that it will respond tocomplaints regarding non-compliant transactions submitted to it in writing andthat, upon receipt of a complaint, CMS will notify the entity that a complainthas been filed and provide an opportunity for the entity to demonstratecompliance or to document its good faith effort to comply with the standards. Inevaluating good faith efforts, CMS stated that it will consider not only theentity’s efforts on behalf of itself, but its efforts—through outreach andtesting—to ensure that its trading partners are also in compliance. CMS alsonoted that its expectations regarding compliance efforts will vary with thesize and type of covered entity. We understand that CMS expects that largerorganizations will have more sophisticated compliance efforts and outreach totheir smaller trading partners.

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

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

*Privacy Standards.  *Theserules became effective in April 2001 and the compliance date for mostentities was April 2003. The Privacy Standards apply to the portions ofour business that process healthcare transactions or provide certain technicalservices to other participants in the healthcare industry, and certain of ourportal services may be affected through contractual relationships. This rule requiresus, our customers and our partners to use health information in a highlyrestricted manner, to establish policies and procedures to safeguard theinformation, to obtain individual authorizations for some activities, and toprovide certain access rights to individuals. This rule has required us toincur product development and 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.  *These rules become effective in April 2005and establish detailed requirements for safeguarding patient information thatis electronically transmitted or electronically stored. The rule establishes42 implementation specifications, 20 of which are “required,” meaning they mustbe implemented as specified in the rule. Twenty-two are “addressable.”  Complying with addressable implementationspecifications requires a business to assess whether they constitute areasonable and appropriate safeguard for the particular business; if not, analternative approach must be designed and implemented to achieve the particularstandard. The Security Standards apply to the portions of our business thatprocess healthcare transactions, that provide certain technical services toother participants in the healthcare industry, or that enable electroniccommunications of patient information among healthcare industry participants,and certain of our portal services may be affected through contractualrelationships. Some of the Security Standards are technical in nature, whileothers may be addressed through policies 

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and procedures forusing information systems. In 2005 we are deploying enhancements to our coreproducts that allow a practice to more easily comply with the SecurityStandards.   We are unable to predictwhat changes might be made to the Security Standards immediately prior to orafter the April 2005 implementation deadline or how those changes mighthelp or hinder our business. The effect of the Security Standards on ourbusiness is difficult to predict and there can be no assurances that we willadequately address the risks created by the Security Standards and theirimplementation or that we will be able to take advantage of any resultingopportunities.

**Other Government Regulations**

The U.S. Food and Drug Administration (the FDA) hasjurisdiction under the 1976 Medical Device Amendments to the Federal Food,Drug, and Cosmetic Act to regulate computer products and software as medicaldevices if they are intended for use in the diagnosis, cure, mitigation,treatment or prevention of 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 Drug Enforcement Agency has promulgatedregulations that may prohibit a pharmacy from the initial dispensing and/orrefilling of certain controlled substances through an electronicallytransmitted prescription. A violation of these regulations may result in civiland criminal penalties. Such regulations may limit the scope of our plannedprescription ordering and refill functions.

*ChartKeeper,Northern Health Anesthesia, RidgeMark, SecureConnect and Therapist Helper areeither registered trademarks or trademarks of VantageMed Corporation. Any othertrademarks used in this Report are the property of their respective owners*.

**Employees**

As of December 31, 2004, we employed 174 persons,including 22 in sales and marketing, 112 in customer support services, 18 inproduct development and 22 in administration, finance and management. In orderto augment our hiring of ready-to-work skilled individuals, we utilize severalprograms to educate and train our work force. Our employees are not representedby a labor union and we have not experienced any work stoppages andconsider relations with our employees to be good.

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

**Item 2. Properties**

We currently leaseapproximately 8,500 square feet at our principal executive and corporateheadquarters at 11060 White Rock Road, Suite 210, Rancho Cordova,California, that expires in September 2007. We also lease space at severallocations throughout the United States, with lease terms expiring at variousdates through 2007. We believe that these facilities are adequate for ourcurrent operations, and additional leased space can be obtained as needed. Wehave subleased some space in our facilities in Boulder, Colorado and Honolulu,Hawaii. These leases expire in July 2007 and November 2005,respectively.

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**Item 3. Legal Proceedings**

On October 15, 2003, the Securities and ExchangeCommission (the SEC) instituted administrative cease and desist proceedingsagainst VantageMed and certain former members of company management, followingits inquiry into VantageMed’s accounting for the sale of the dental businessthat was attempted in September 2001. The findings in the administrativeproceeding instituted against the company state that VantageMed, under thedirection of certain former members of senior management, materially misstatedits financial results in the third quarter ended September 30, 2001. TheSEC did not charge VantageMed with fraud or levy any monetary damages againstthe Company. However, as part of a settlement agreement, the SEC orderedVantageMed to cease and desist from committing or causing any violation of theperiodic reporting and books and records provisions of the federal securitieslaws. VantageMed agreed to the order, without admitting or denying any findings.In acceptance of the settlement, the Commission considered remedial actspromptly undertaken by VantageMed and cooperation afforded to the Commissionstaff. This settlement is not associated with VantageMed’s reporting of thesale of the DentalMate business in September 2003.

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

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

In June 2004, a former employee filed a claimagainst the Company alleging fraud and discrimination. The Company respondedand has not received any additional communications since that time.

In February 2005, a former VantageMed customerfiled a complaint against the Company alleging that the Company breeched itssupport and maintenance contract with the customer by failing to makemodifications to the plaintiff’s software to make that software HIPAA compliant.The Company believes that the plaintiff’s allegations are without merit andwill file a response to the complaint in April 2005.

We are party to variouslegal actions arising in the normal course of business. Matters that areprobable of unfavorable outcome and which can be reasonably estimated areaccrued. Such accruals were $129,000 at December 31, 2004, and are basedon information known about the matters, our estimates of the outcomes of suchmatters, and our experience contesting, litigating and settling similar matters.This amount is included in accrued liabilities in the accompanying condensedconsolidated balance sheet. None of the actions are believed by management toinvolve amounts that would be material to our consolidated financial position,operations, or liquidity after consideration of recorded accruals.

**Item4. Submission of Matters to a Vote of Securities Holders**

None.

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**PART II**

**Item5. Market for Registrant’s Common Stock and Related Stockholders Matters**

VantageMed’scommon stock was listed on the NASDAQ National Market under the symbol “VMDC”from February 15, 2000 (the date of our initial public offering) through April 17,2002.  On April 18, 2002, inconnection with the late filing of our Annual Report on Form 10-K for theyear ended December 31, 2001, the ticker symbol for the Company’s commonstock changed to “VMDCE” and on September 24, 2002, our securities weredelisted for failure to comply with the minimum bid price per share ($1.00)requirement. Our securities currently trade on the OTC Bulletin Board under thesymbol “VMDC.OB”. The following table shows the high and low closing prices forour common stock as reported by the exchanges listed above:
| ** **     | ** ** | **2004**   | ** ** | **2003** | ** ** |
|----------------|------------|------------|------------|----------|------------|
| **Period**     | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $          | 1.73       |     | $          | 1.00 |   | $ | 0.37 |   | $ | 0.15 |   |
| Second Quarter |       | $          | 1.54       |     | $          | 0.55 |   | $ | 0.70 |   | $ | 0.28 |   |
| Third Quarter  |       | $          | 0.86       |     | $          | 0.54 |   | $ | 0.35 |   | $ | 0.20 |   |
| Fourth Quarter |       | $          | 0.95       |     | $          | 0.54 |   | $ | 1.00 |   | $ | 0.27 |   |
|                |            |            |            |          |            |  |  |  |  |  |  |  |  |  |  |

 

As of March 23, 2005, we had 159 registeredowners of our common stock and a substantially greater number of beneficialowners.

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

In March 2005, we completed a $5.0 millionprivate placement of 5,376,344 shares of common stock priced at $0.93 per share(see Note 14 to consolidated financial statements). Institutional investorspurchased 90 percent of the shares, with members of our management team and amember of our Board of Directors combining for the purchase of 10 percent. Theinvestors in the transaction also received warrants to purchase an additional1,075,269 shares of common stock priced at $1.30 per share, and warrants topurchase 1,075,269 shares of common stock priced at $1.55 per share. Inconnection with this transaction, we paid a fee to our broker equal to 7.0% ofthe total amount of capital we received, or $350,000. Our broker also receivedan additional 451,613 warrants to purchase common stock as part of this feearrangement. After broker commissions and legal expenses, the net proceeds toVantageMed were approximately $4.6 million. VantageMed will file a registrationstatement with the Securities and Exchange Commission covering the resale ofthe shares. We plan to invest these funds in growing our business with a focuson delivering higher quality service to our customers and expanding the marketscope of our products.

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**Item6. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

*This report contains forward-looking statements withinthe meaning of Section 21E of the Securities and Exchange Act of 1934 and Section 27Aof the Securities Act of 1933. These forward-looking statements involve anumber of risks and uncertainties, including those identified in the section ofthis Form 10-KSB entitled “Risk Factors,” that may cause actual results todiffer materially from those discussed in, or implied by, such forward-lookingstatements. Forward-looking statements within this Form 10-KSB areidentified by words such as “believes,” “anticipates,” “expects,” “intends,” “may,”“will” and other similar expressions. However, these words are not the onlymeans of identifying 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 are designed toprovide an understanding of our results of operations, financial condition andchanges in financial condition. Our MD&A is comprised of:

·       *Introduction*.   This section provides a generaldescription of our business and summarizes any acquisitions and/orrestructuring plans we have undertaken over the last two years. This sectionalso includes a table of selected financial data for the most recent five years.

·       *Results of Operations*.   This section provides ouranalysis of the significant line items on our consolidated statements ofoperations.

·       *Critical Accounting Policies*.   This section discussesthe accounting 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*.   Thissection provides an analysis of our liquidity and cash flows as well as adiscussion of our outstanding debt and commitments as of December 31,2004.

·       *Forward Looking Statements and Risk Factors*.   Thissection describes circumstances or events that could have a negative effect onour financial results or operations that could change, for the worse, existingtrends in our business. The factors discussed in this section are divided intotwo categories—risks associated with our business and risks associated with ourindustry.

**Introduction**

VantageMed Corporation was incorporated in Californiaon June 1, 1995, and on April 9, 1997, we reincorporated in Delaware.In February 2000, we completed our initial public offering (IPO) of 3 millionshares of our common stock, the gross proceeds of which aggregatedapproximately $36 million. VantageMed is a diversified healthcareinformation systems supplier headquartered in Rancho Cordova, California withsupport personnel and sales representatives in various locations throughout theUnited States. We develop, sell, install and support software products andservices that assist physicians, 

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behavioral healthprofessionals, and other healthcare providers in the operation of theirpractices and organizations. We have built a national distribution network byacquiring established regional healthcare practice management systems companiesto sell and support our new Windows-based software and services. We have notcompleted any acquisitions since 1999.

We have developed a customer base of approximately18,000 physician and behavioral health providers nationwide through bothacquisitions and internal growth. In 2003 and 2004, we focused on migrating ourcustomers that were using our Legacy technology products (products that we weresupporting in 2004 and earlier but not actively selling or marketing)  to our Windows-based products and services. Weexpect that the process of discontinuing support of, or sunsetting, theseLegacy technology products will be substantially completed during the firsthalf of 2005. We expect our focus during 2005 and beyond will be on marketingand selling products to new customers as well as the expansion of ourelectronic transaction service offerings.

Throughout 2003 and 2004, we have initiated variousrestructuring plans that included an evaluation of our product developmentinitiatives, consolidation of certain operating facilities and a reduction ofour workforce. See Note 3 to our Consolidated Financial Statements included inthis Form 10-KSB.

We derive revenuesfrom three primary sources:

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

·       *Customer support*.   These revenues are derived fromsoftware and hardware maintenance contracts, installation, training, dataconversion and billing services. Revenues from software and hardwaremaintenance contracts and billing services are considered to be recurring innature. Revenues from installation, training and data conversion services arenon-recurring.

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

Overtime, we believe that recurring revenues will continue to represent asignificant portion of our overall revenues. Recurring revenue is not ameasurement defined by US GAAP and should not be considered an alternative to,or more meaningful than, revenues as defined by US GAAP. Not all companiescalculate recurring revenues in the same manner as we do or at all.Accordingly, our recurring revenue data may not be comparable with that ofother companies. We have included the following information concerningrecurring revenues because we believe recurring revenues provide usefulinformation regarding our overall revenue mix.
| ** **     | ** ** | **Years Ended  December 31,** | ** ** |
|----------------|------------|-----------------------------------------|------------|
| ** **     | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| Recurring      |       | $                                       | 14,090     |   | $ | 14,897 |   |
| Non-recurring  |       | 8,030                                   |       | 6,958 |   |
| Total revenues |       | $                                       | 22,120     |   | $ | 21,855 |   |

 

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Theselected consolidated financial data set forth below are derived from ouraudited financial statements and should be read in connection with ourconsolidated financial statements and related notes included in this Form 10-KSB.

**SelectedConsolidated Financial Data**(In thousands, except per share amounts)
| ** **                                         | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | **(As restated,  see Note 2 to  Consolidated  Financial  Statements)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Consolidated Statement  of Operations Data:        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Revenues:                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Software and systems                               |       | $                                           | 5,870      |   | $ | 5,495 |   |   | $ | 5,153 |   |   | $ | 6,958 |   | $ | 7,736 |   |
| Customer support                                   |       | 11,496                                      |       | 11,576 |   |   | 11,978 |   |   | 12,441 |   | 12,713 |   |
| Electronic services                                |       | 4,754                                       |       | 4,784 |   |   | 4,613 |   |   | 4,536 |   | 3,458 |   |
| Total revenues                                     |       | 22,120                                      |       | 21,855 |   |   | 21,744 |   |   | 23,935 |   | 23,907 |   |
| Cost of revenues:                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Software and systems                               |       | 2,971                                       |       | 2,494 |   |   | 1,854 |   |   | 2,420 |   | 2,899 |   |
| Customer support                                   |       | 7,347                                       |       | 6,893 |   |   | 7,469 |   |   | 7,289 |   | 8,007 |   |
| Electronic services                                |       | 2,791                                       |       | 2,925 |   |   | 3,176 |   |   | 3,012 |   | 2,115 |   |
| Total cost of revenues                             |       | 13,109                                      |       | 12,312 |   |   | 12,499 |   |   | 12,721 |   | 13,021 |   |
| Total gross  margin                                |       | 9,011                                       |       | 9,543 |   |   | 9,245 |   |   | 11,214 |   | 10,886 |   |
| Operating expenses:                                |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative                |       | 8,699                                       |       | 8,510 |   |   | 11,391 |   |   | 12,283 |   | 15,496 |   |
| Product development                                |       | 2,519                                       |       | 2,637 |   |   | 2,975 |   |   | 5,129 |   | 5,572 |   |
| Depreciation and amortization                      |       | 477                                         |       | 769 |   |   | 1,184 |   |   | 3,286 |   | 5,656 |   |
| Stock-based compensation                           |       | 113                                         |       | 27 |   |   | — |   |   | — |   | — |   |
| Restructuring, impairment and other charges        |       | 1,052                                       |       | 1,318 |   |   | 1,748 |   |   | 5,792 |   | 12,899 |   |
| Gain on sale of DentalMate business                |       | (41                                         | )          | (571 | ) |   | — |   |   | — |   | — |   |
| Total operating expenses                           |       | 12,819                                      |       | 12,690 |   |   | 17,298 |   |   | 26,490 |   | 39,623 |   |
| Loss from  operations                              |       | (3,808                                      | )          | (3,147 | ) |   | (8,053 | ) |   | (15,276 | ) | (28,737 | ) |
| Shareholder  litigation settlement                 |       | —                                      |       | — |   |   | — |   |   | (1,300 | ) | — |   |
| Interest and  other income (expense), net          |       | (97                                         | )          | 10 |   |   | (7 | ) |   | 614 |   | 2,282 |   |
| Loss before  income taxes                          |       | (3,905                                      | )          | (3,137 | ) |   | (8,046 | ) |   | (15,962 | ) | (31,019 | ) |
| Income tax  provision                              |       | —                                      |       | — |   |   | — |   |   | (15 | ) | (18 | ) |
| Net Loss                                           |       | $                                           | (3,905     | ) | $ | (3,137 | ) |   | $ | (8,046 | ) |   | $ | (15,977 | ) | $ | (31,037 | ) |
| Basic and diluted  loss per share(1)               |       | $                                           | (0.47      | ) | $ | (0.37 | ) |   | $ | (0.95 | ) |   | $ | (1.86 | ) | $ | (3.84 | ) |
| Weighted-average  shares—basic and diluted(1) |       | 8,285                                       |       | 8,400 |   |   | 8,493 |   |   | 8,596 |   | 8,086 |   |

 

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| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **2004**                              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                         | ** ** | ** **                            | ** ** | ** ** | ** ** | **(As restated,  see 2002  Form 10-KSB)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Consolidated Balance  Sheet Data:                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net working  capital                               |       | $                                     | (4,900     | ) | $ | (2,187 | ) |   | $ | (769 | ) |   | $ | 4,131 |   | $ | 13,001 |   |
| Cash, cash  equivalents and short-term investments |       | 946                                   |       | 2,359 |   |   | 2,682 |   |   | 5,456 |   | 16,295 |   |
| Long-term  investments                             |       | —                                |       | — |   |   | 804 |   |   | 2,583 |   | 1,001 |   |
| Total assets                                       |       | 3,219                                 |       | 7,638 |   |   | 9,964 |   |   | 17,806 |   | 34,189 |   |
| Long-term debt,  net of current portion            |       | —                                |       | 195 |   |   | 555 |   |   | 924 |   | 1,155 |   |
| Accumulated  deficit                               |       | (76,895                               | )          | (72,990 | ) |   | (69,853 | ) |   | (61,807 | ) | (45,830 | ) |
| Total stockholders’  equity (deficit)         |       | $                                     | (4,262     | ) | $ | (483 | ) |   | $ | 2,694 |   |   | $ | 10,791 |   | $ | 26,798 |   |

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

**Results of Operations**

Thefollowing table sets forth certain data expressed as a percentage of totalrevenues for the periods indicated.
| ** **                                  | ** ** | **Years Ended  December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| Revenues:                                   |       |                                    |       |   |   |
| Software and systems                        |       | 26.5                                    | %          | 25.1 | % |
| Customer support                            |       | 52.0                                    |       | 53.0 |   |
| Electronic services                         |       | 21.5                                    |       | 21.9 |   |
| Total revenues                              |       | 100.0                                   |       | 100.0 |   |
| Cost of revenues:                           |       |                                    |       |   |   |
| Software and systems                        |       | 13.5                                    |       | 11.4 |   |
| Customer support                            |       | 33.2                                    |       | 31.5 |   |
| Electronic services                         |       | 12.6                                    |       | 13.4 |   |
| Total cost of revenues                      |       | 59.3                                    |       | 56.3 |   |
| Total gross  margin                         |       | 40.7                                    |       | 43.7 |   |
| Operating expenses:                         |       |                                    |       |   |   |
| Selling, general and administrative         |       | 39.3                                    |       | 38.9 |   |
| Product development                         |       | 11.4                                    |       | 12.1 |   |
| Depreciation and amortization               |       | 2.2                                     |       | 3.5 |   |
| Stock-based compensation                    |       | 0.5                                     |       | 0.1 |   |
| Restructuring, impairment and other charges |       | 4.8                                     |       | 6.0 |   |
| Gain on sale of DentalMate business         |       | (0.2                                    | )          | (2.6 | ) |
| Total operating expenses                    |       | 58.0                                    |       | 58.0 |   |
| Loss from  operations                       |       | (17.3                                   | )          | (14.3 | ) |
| Interest and  other income (expense), net   |       | (0.4                                    | )          | 0.0 |   |
| Net loss                                    |       | (17.7                                   | )%         | (14.3 | )% |

 

*Results ofOperations for the year ended December 31, 2004 compared to the year endedDecember 31, 2003*

*Revenues.  *Total revenuesincreased $265,000, or 1.2%, from $21.9 million for the year ended December 31,2003 to $22.1 million for the year ended December 31, 2004. This increaseincluded a 

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$1.1 million, or15.4%, increase in non-recurring revenues (revenues generated from sales ofsoftware and systems and related training, data conversion and installationservices) due to an increase in the sale of our RidgeMark solution forsoftware, systems and related services. This increase was partially offset byan $807,000, or 5.4%, decrease in recurring revenues (revenues derived fromsoftware and hardware maintenance, billing and electronic services) primarilythe result of a decrease in hardware and software maintenance revenues on ourLegacy products as well as a decrease in our billing services revenues.

*Software and Systems.  *Softwareand systems revenues increased $375,000, or 6.8%, from $5.5 million in2003 to $5.9 million in 2004. This increase in software and systemsrevenues was primarily due to an increase in sales of our Windows-basedpractice management product, RidgeMark, and the hardware and supplies thatoften accompany these sales and to a lesser extent, sales of ourTherapistHelper product. This increase in sales was primarily the result of ourGreat Exchange marketing campaign and efforts to migrate our Legacy customerbase to our Windows-based product.

Approximately 8.8% of our 2004 software sales wereLegacy products  compared to 20.3% in2003. We have discontinued enhancements and regulatory updates for most of ourLegacy products and as such we expect the percentage of Legacy software salesto continue to decrease as we migrate our Legacy customer base to our coreWindows-based products.

*Customer Support.  *Customersupport revenues are derived from software maintenance and customer service,network and computer hardware support, billing services, training, dataconversion and system installation. A significant portion of our customersupport revenues are considered to be recurring in nature and have not fluctuatedsignificantly from period to period. The $80,000, or 0.7%, decrease from $11.6million in 2003 to $11.5 million in 2004 is primarily due to a decrease inrevenues derived from our DentalMate product which was sold in September 2003as well as a decrease from hardware maintenance services on our Legacy productsthat can be expected as equipment ages and becomes cheaper to replace than tomaintain. In addition, a decrease in billing services revenues due to a declinein customers contributed to the decrease in customer support revenues. Thesedecreases were partially offset by an increase in training and installationrevenues as we converted a number of our Legacy product customers to our coreproducts. In addition, in 2004 approximately 49% of our customer supportrevenues were derived from sales and support of our core products compared to25% in 2003. We expect the percentage of customer support revenues from Legacysoftware products to decrease significantly in connection with our Legacysunset process.

*Electronic Services.  *Electronicservices revenues are derived primarily from electronic patient statementprinting and mailing and electronic claims processing  services. Electronic statement servicesrevenues decreased $402,000, or 11.9%, from 2003 to 2004 primarily in connectionwith our Legacy product sunset process while revenues from electronic claimsincreased $383,000, or 33.2% primarily due to an increase in the number ofcustomers using our electronic claims services. Total revenues from electronicservices decreased $30,000, or 0.6%, due to these factors and were $4.8 millionin 2003 and 2004.

*Cost of Revenues*.   Totalcost of revenues increased $797,000, or 6.5%, from $12.3 million in 2003 to$13.1 million in 2004. Gross margin percent (total revenues less cost ofrevenues divided by total revenues) decreased from 43.7% in 2003 to 40.7% in2004. This reduction in gross margin percent was primarily the result of anincrease in the volume of transactions associated with our Great Exchangemarketing campaign whereby our Legacy customers receive a significant discountoff of the sales price of our RidgeMark Practice Management Software. Ourtransition to using a third party vendor to perform hardware installations forRidgeMark customers during the second quarter of 2004 to address the increasedorder volumes we experienced during the fourth quarter of 2003 and the firsthalf of 2004 as well 

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as expand our geographiccoverage. The costs related to our decision to retain existing staff levelsthrough 2004 to ensure an effective transition to this third party also had anegative impact on our gross margins.

*Software and Systems.  *Softwareand systems cost of revenues include software licensing costs and costs ofcomputer hardware and supplies. Software and systems cost of revenues increased$477,000, or 19.1%, from $2.6 million in 2003 to $3.0 million in 2004 and ourgross margin percent on software and systems decreased from 54.6% in 2003 to49.4% in 2004 primarily due to an increase in thevolume of transactions associated with our Great Exchange marketingcampaign whereby our legacy customers receive a significant discount off of thesales price of our RidgeMark Practice Management Software.

*Customer Support.  *Costsfor customer support include salary and benefits for employees responsible forcustomer support as well as costs for support provided by third-parties. Customersupport cost of revenues increased $454,000, or 6.6%, from 2003 to 2004. Grossmargin on customer support decreased from 40.5% to 36.1% in 2004 primarily due to an increase in costs associated withinstalling systems at our customer sites. VantageMed began using a nationalthird party vendor to perform hardware installations for RidgeMark customersduring the second quarter of 2004 to address the increased order volumes weexperienced during the first half of 2004 and expand our geographic coverage.The decrease in margins was partially due to the decision to retain existingstaff levels through 2004 to ensure an effective transition to this thirdparty.

*Electronic Services.  *Costsfor electronic services consist of third-party costs and salaries and benefitsof staff for electronic patient statement printing and mailing as well aselectronic claim processing . Customer support and electronic services cost ofrevenue decreased $134,000, or 4.6%, from 2003 to 2004. Gross margin oncustomer support and electronic services improved from 38.9% in 2003 to 41.3%in 2004. This improvement was primarily due to a reduction in third-party costsassociated with processing electronic transactions as well as sales of ourHIPAA related products (which have higher gross margins) that we began todeploy in the third quarter of 2003.

*Selling, General and Administrative.  *SG&A expenses consist primarily ofsalaries, commissions and benefits of sales staff, executive andadministrative personnel, advertising and promotional materials,  travel, communications, facility costs andinsurance. SG&A expenses increased $189,000, or 2.2%, from $8.5 million, or38.9% of revenues, in 2003 to $8.7 million, or 39.3% of revenues, in 2004. Severalfactors contributed to the change in SG&A expense including increased baddebt expense resulting from our legacy sunset process, higher commissionexpenses due to utilizing some commission only sales contractors and separationpay for the former CEO were partially offset by reduced employee salaryexpenses during 2004 as compared to 2003.

*Product Development.  *Productdevelopment expenses consist primarily of compensation and related costs foremployees and fees for independent contractors and relate primarily to thedevelopment of our Windows-based products. Product development expensesdecreased $75,000, or 10.8%, from $693,000, or 12.3% of revenues for the yearended December 31, 2003, to $618,000, or 10.5% of revenues, for the yearended December 31, 2004, respectively. This decrease in productdevelopment expense was primarily due to a decrease in contract laborassociated with HIPAA related development activities as well as lowerdevelopment costs in 2004 for our TherapistHelper product that had completed amajor upgrade in 2003. Product development expenses decreased $118,000, or4.5%, from $2.6 million, or 12.1% of revenues, in 2003 to $2.5 million, or11.4% of revenues in 2004.  This decreasein product development expense was primarily due to a decrease in contractlabor associated with HIPAA related development activities as well asdevelopment of our TherapistHelper product.

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*Depreciation and Amortization.  *Depreciationexpense is recognized on a straight-line basis over the estimated useful livesof our fixed assets and decreased $143,000, or 32.6% from 2003 to 2004primarily due to certain fixed assets that became fully depreciated during 2003and 2004 and lower investment in new fixed assets. Amortization expense isrecognized on a straight-line basis over the estimated useful lives of ournon-goodwill related intangible assets and decreased $149,000, or 45.4%, from2003 to 2004. This decrease was primarily due to the asset impairment chargerecorded in the fourth quarter of 2003 that reduced the gross asset values thatare subject to amortization.

*Stock-based compensation.  *EffectiveJanuary 1, 2003, we began to account for stock options using a fair valuemethod, as allowed under SFAS No. 123, as amended. We have elected to usethe prospective method of transition, resulting in the recognition ofstock-based compensation expense of $113,000 for the year ended December 31,2004 and $27,000 for the year ended December 31, 2003. This expense isassociated with options we have granted to employees, directors and executivesduring 2003 and 2004 and is based on an estimate of fair market value using theBlack-Scholes option pricing model.

*Restructuring and Impairment Charges*.   Inthe second quarter of 2004, we entered into an agreement to terminate andbuyout the lease for one of our two facilities in Boulder, Colorado. Inconnection with the signing of this agreement, we recognized a benefit of$147,000 representing the difference between the payments that will be madeunder the termination agreement and the amounts previously reserved for throughour restructuring reserve. The termination agreement required us to payapproximately $22,000 upon signing and requires us to make monthly payments ofapproximately $4,000 for 36 months. In the fourth quarter of 2004, werecognized a net expense of approximately $21,000 representing an increase inour reserve on one property as a result of our inability to sublease thatproperty which was partially offset by a cost reduction as a result of ournegotiation of the early closure of a second facility.

In 2003, we recognized a net restructuring expense of$135,000 which was primarily due to our estimate of the expected loss on aleased facility that was vacated in the fourth quarter of 2003. In addition, inthe first and third quarters of 2003, we made adjustments to our 2002 leasereserve estimate that included adjustments in connection with the errorcorrection described in Note 2 to our Consolidated Financial Statements. Theimpact of these lease reserve adjustments was not significant to our 2003results of operations.

Thecomponents of our restructuring provisions and activity in the related reservefor the two years ended December 31, 2004 are as follows (in thousands, asrestated, see Note 1):
| ** **                      | ** ** | **Severance** | ** ** | **Leased Facilities** | ** ** | **Total** | ** ** |
|---------------------------------|------------|---------------|------------|----------------------------|------------|-----------|------------|
| December 31,  2002 balance |       |          | $          | 4                          |       |      |       | $ | 806 |   |   | $ | 810 |   |
| 2003 provision                  |       |          | —     |                       |       |      | 135        |   |   | 135 |   |
| Cash payments                   |       |          | (4         | )                          |       |      | (240       | ) |   | (244 | ) |
| December 31,  2003 balance |       |          | —     |                       |       |      | 701        |   |   | 701 |   |
| 2004 net benefit                |       |          | —     |                       |       |      | (126       | ) |   | (126 | ) |
| Cash payments                   |       |          | —     |                       |       |      | (331       | ) |   | (331 | ) |
| December 31, 2004  balance |       |          | $          | —                     |       |      |       | $ | 244 |   |   | $ | 244 |   |

 

The December 31, 2002 balance presented above hasbeen restated as described in detail in our December 2003 Form 10-KSB.Lease payments will be made through the end of the lease term (December 2007).

In the fourth quarter of 2004 we performed ourimpairment review of goodwill required by SFAS 142 and determined that thevalue of the intangible assets associated with our Legacy products wassignificantly impaired due to our implementation of an accelerated supportsunset program for these Legacy products. In addition, continued poorperformance and declining number of customers for one of our billing services 

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units resulted in animpairment charge in 2004 of $1,176,000. Approximately $477,000 of this chargewas related to the impairment of goodwill associated with one of our billingservices business units.

In the fourth quarter of 2003 we determined that dueto the poor performance of one of our billing services units as well as changesmade to our Legacy system migration strategy including a formal plan todiscontinue support of certain systems at future dates, components of ourgoodwill and intangible assets were impaired. As a result of this analysis, werecorded an impairment charge of $1,183,000. Approximately $803,000 of thischarge was related to an impairment of goodwill primarily associated with ourbilling services business units.

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

*Gain on Sale of DentalMate Business.  *InSeptember 2003 we sold our DentalMate business in exchange for $500,000 incash, notes receivable totaling $100,000 and other consideration of $60,000. Wedeferred the gain associated with the $100,000 in notes until the payment isreceived. In connection with this sale we recognized a gain on the sale of thisbusiness totaling $571,000 in 2003 and $41,000 in 2004.

*Interest and Other Income (Expense), Net.  *Interestincome decreased $52,000, or 56.5%, from 2003 to 2004 primarily due to a $1.4million, or 59.9%, decrease in our cash and investment balances from December 31,2003 to December 31, 2004. To a lesser extent, a decrease in interestrates contributed to the decrease in interest income. Interest expense andother expenses increased $55,000, or 67.1%, from 2003 to 2004 in connectionwith the resolution and settlement of two legal matters in 2004.

*Income Taxes.  *Wedid not record a provision for income taxes in 2003 or 2004, as we did notgenerate book or taxable income. At December 31, 2004, we had netoperating loss carryforwards for federal and state income tax purposes ofapproximately $45.2 million and $6.7 million, respectively, that expire invarious years through 2023. These future tax benefits have not been recognizedas an asset on our balance sheet due to uncertainties surrounding our abilityto generate sufficient taxable income in future periods to realize the benefits.The extent to which these loss carryforwards can be used to offset futuretaxable income may be limited.

**Critical Accounting Policies**

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

*Revenue Recognition*.   Weenter into license agreements with customers that allow for the use of ourproducts, usually restricted by the number of employees, the number of users, orthe license term. Fees from licenses are recognized as revenue in accordancewith AICPA Statement 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 been met,fees are fixed and determinable, collection of the sale proceeds is deemedprobable and persuasive evidence of an arrangement exists. Multiple elementarrangements generally include a proprietary software license, third-partysoftware, hardware, and implementation, training and other specified services.The fee for multiple element arrangements is allocated to the various elementsbased on vendor-specific objective evidence (VSOE) of fair market valueestablished by the price of the elements sold separately, or renewal rates, if 

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an element is not yetbeing 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.In accordance with SOP 97-2, software subscription license fees and revenuefrom annual support agreements are recognized ratably over the contract term. Revenuesfrom the sale of computer hardware and supplies are recognized as products areshipped and revenues from other services, including training, data conversion,electronic services and billing services are recognized as services arerendered. Provisions for product returns and product warranties are estimatedbased on historical experience and are evaluated regularly.

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

*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 are fully reserved and the relatedcharge is recorded as cost of 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 carrying value on ourbalance sheet. Our estimate of fair value is based on the net present value ofexpected future cash flows attributable to the asset. Predicting future cashflows attributable to a particular asset is difficult, and requires the use ofsignificant judgment.

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

*Income taxes.  *We 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.  This determination is based upon our limitedoperating history, history of losses and the possibility that we may neverachieve profitability. As of December 31, 2004, we had net operating losscarryforwards for federal and state income tax purposes of approximately $45.2million and $6.7 million, respectively, that were fully reserved and thereforeare not recorded on the balance sheet as an asset.

**Recent Accounting Pronouncements**

In November 2004, the FASB issued SFAS No. 151“Inventory Costs—an amendment of Accounting Research Bulletin No. 43,Chapter 4”. SFAS 151 amends the guidance in ARB No. 43,Chapter 4, “Inventory Pricing,”, to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material,or spoilage. Paragraph 5 of ARB 43, previously stated that under somecircumstances, items such as idle facility expense, excessive spoilage, doublefreight, and re-handling costs may be so abnormal as to require treatment ascurrent period charges. SFAS 151 requires that such items be recognized ascurrent period charges regardless of whether they meet the criterion of “so 

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abnormal”. In addition,SFAS 151 requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities. SFAS 151 is effective for fiscal periods beginning after June 15,2005. We are currently evaluating the effect that the adoption of SFAS 151will have on our consolidated statement of operations and financial conditionfor fiscal periods beginning after June 15, 2005.

In December 2004, theFASB issued Statement of Financial Accounting Standards (SFAS) No. 123(Revised) (SFAS 123-R), “Share-Based Payment”. This standard requires expensingof stock options and other share-based payments and supersedes SFAS No. 123which had allowed companies to choose between expensing stock options orshowing pro forma disclosure only. This standard is effective for the Companyas of July 1, 2005 and will apply to all awards granted, modified,cancelled or repurchased after that date. We will adopt FAS 123R in the thirdquarter of 2005, using the prospective method of adoption which requires thatcompensation expense be recorded for all unvested stock options and restrictedstock at the beginning of the first quarter of adoption of FAS 123R. We do notexpect the adoption of FAS 123R to have an impact on our statements ofoperations as we already expense all unvested option and restricted stockawards in connection with our adoption of SFAS 148 effective January 1,2003.

**Liquidity and Capital Resources**

Since 1996, we have financed our operations primarilythrough a combination of indebtedness, capital leases, private equity financingand an IPO. Approximately 82% of the consideration paid for our acquisitionswas paid with our stock or stock options. The balance of the consideration waspromissory notes and cash.

Net cash used for operating activities was $747,000 in2004 compared to $815,000 in 2003. In 2004, our net loss of $3.9 millionexcluding non-cash charges of $477,000 for depreciation and amortization, and$1.2 million for asset impairment charges was $2.3 million. This use of cashwas partially offset by cash provided by a decrease in accounts receivable of$319,000 and an increase in deferred revenue and customer deposits of $374,000.In 2003, our net loss of $3.1 million excluding non-cash charges of $769,000for depreciation and amortization, and $1.2 million for asset impairmentcharges was $1.2 million which accounts for substantially all of this use ofcash. This use of cash was partially offset by an increase in deferred revenueand customer deposits of $864,000 and an increase in accounts payable andaccrued liabilities of $430,000. In addition, an increase in accounts receivable used cash of $473,000.

Investing activities provided $670,000 in cash in 2004and $1.6 million in cash in 2003. In both years, net proceeds from the sale ofinvestments provided substantially all of the cash. In 2003, $547,000 of cashwas provided in connection with the sale of our DentalMate business. Thesesources of cash were partially offset by capital expenditures of $131,000 and$294,000 in 2004 and 2003, respectively.

Net cash used in financing activities was $562,000 and$603,000 in 2004 and 2003, respectively. In both years, payments on debtaccounted for substantially all of this use of cash.

At December 31, 2004, we had $946,000 of cash andcash equivalents and had negative working capital, and had negative cash flowduring the year. We also had a deficit in stockholder’s equity. Throughout 2003and 2004 we implemented plans aimed at reducing our monthly cash usage thatincluded an evaluation of all product development initiatives, consolidation ofcertain operating facilities and the reduction of personnel. While we expect tomake additional expense reductions in certain areas, we also determined that itwould be necessary for us to raise additional funds to cover these losses andto fund expansion, additional marketing activities and to enhance our operatinginfrastructure.

In March 2005, we completed a $5.0 millionprivate placement of 5,376,344 shares of common stock priced at $0.93 per share(see Note 14 to consolidated financial statements). Institutional investorspurchased 90 percent of the shares, with members of our management team and amember of our Board of 

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Directors combining forthe purchase of 10 percent. The investors in the transaction also receivedwarrants to purchase an additional 1,075,269 shares of common stock priced at$1.30 per share, and warrants to purchase 1,075,269 shares of common stockpriced at $1.55 per share. In connection with this transaction, we paid a feeto our broker equal to 7.0% of the total amount of capital we received, or$350,000. Our broker also received an additional 451,613 warrants to purchasecommon stock as part of this fee arrangement. After broker commissions andlegal expenses, the net proceeds to VantageMed were approximately $4.6 million.We plan to invest these funds in growing our business with a focus ondelivering higher quality service to our customers and expanding the marketscope of our products.

Based on our current salesforecast and planned operating expenditures, we believe that our cash andshort-term investments will be sufficient to meet our cash flow needs throughat least December 2005. However, we may seek to raise additional funds forworking capital purposes, to fund expansion, fund additional marketingexpenditures, enhance our operating infrastructure, respond to competitivepressures, or acquire or develop complementary businesses or necessarytechnologies. Additional financing may not be available on terms favorable tous, or at all. If adequate funds are not available on acceptable terms, ourability to fund our operations, take advantage of opportunities, developproducts or services or otherwise respond to competitive pressure could belimited. Capital expenditures for equipment, furniture and software areexpected to be limited during the next 12 months.

**Debt and Lease Obligations**

At December 31, 2004, we had $320,000 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 5.0% to 5.95%. In addition, we lease certain computersand office equipment under lease agreements accounted for as capital leases. AtDecember 31, 2004, we had $55,000 in capital leases that mature from January 2005to December 2005. Many of these leases include end of lease bargainpurchase options, which we intend to exercise. Our obligations under theselease arrangements are secured by the leased equipment. At December 31,2003, we had $486,000 in assumed debt or promissory notes primarily issued inconnection with acquisitions and $170,000 in capital leases.

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

Futureminimum payments under all debt and lease obligations at December 31, 2004are as follows (in thousands):
| **Year Ending December 31,**                              | ** ** | ** ** | ** ** | **Debt** | ** ** | **Capital**Leases | ** ** | **Operating**Leases | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|----------|------------|-------------------|------------|---------------------|------------|
| 2005                                                                     |       | $          | 320        |     |       | $                 | 61         |                |       |   | $ | 591 |   |   |
| 2006                                                                     |       | —     |       |     | —     |              |       |                | 265        |   |   |
| 2007                                                                     |       | —     |       |     | —     |              |       |                | 99         |   |   |
| Total minimum  payments                                                  |       | 320        |       |     | 61         |              |       |                | $          | 955 |   |   |
| Less: interest on  capital lease obligations at rates of 8.62% to 18.93% |       | —     |       |     | (6         | )                 |       |                |       |   |   |
| Less: current  maturities                                                |       | (320       | )          |     | (55        | )                 |       |                |       |   |   |
| Long-term portion                                                        |       | $          | —     |     |       | $                 | —     |                |       |   |   |   |   |

 

The future minimum operating lease payments above havebeen reduced for estimated income from sublease arrangements of $64,000,$57,000 and $31,000 in 2005, 2006 and 2007, respectively.

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**Forward-LookingStatements and Risk Factors**

**SpecialCautionary Notice Regarding Forward-Looking Statements and Risk Factors**

*This Annual Reporton Form 10-KSB contains certain forward-looking statements withinthe meaning of Section 27A of the Securities Act and Section 21 ofthe Securities Exchange Act of 1934, as amended (the Exchange Act), which areintended to be covered by the safe harbors created thereby. Investors arecautioned that forward-looking statements involve risks and uncertainties. Althoughwe believe that the assumptions underlying the forward-looking statementscontained herein are reasonable, any of the assumptions could be inaccurate andtherefore, there can be no assurance that the forward-looking statements willprove to be accurate. In light of the significant uncertainties inherent in theforward-looking statements included herein, the inclusion of such informationshould not be regarded as a representation by us or any other person that ourobjectives and plans will be achieved. We are not obligated and expresslydisclaim any obligation, to update any forward-looking statements.*

*We are subject to various risk factors, many of whichare outside of our control, that could cause our actual results to differ fromthose expressed in forward-looking statements made by us throughout thisreport and elsewhere. All statements which address operating performance,events or developments that we expect or anticipate will occur in the future,including statements relating to expected future operating results and futurefinancial conditions or statements expressing general optimism about futureoperating results, are forward-looking statements. The following are theimportant factors that may cause actual results to differ from those expressedin such forward-looking statements.*

***Risks Associated with our Business***

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

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

**OurCost Reduction Efforts**Have Strained Our Resources

Throughout 2003 and 2004,we experienced significant fluctuations in the volume of order activityreceived which has put a significant strain on our resources. In the event thatwe are unable to properly scale our client services and other groups to timelyinstall, implement and support our order activity and customer base in a costeffective manner, we may not be successful in our future operations.

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

We have incurred operatinglosses and have generated cash flow deficits since our inception in 1995 and asof December 31, 2004, our accumulated deficit was $76.9 million. Ourbusiness strategies may not be successful and we may not be able to achieve orsustain revenue growth or profitability.

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

At December 31, 2004, we had $946,000 of cash andcash equivalents and had negative working capital and on March 15, 2005,we completed a $5.0 million private placement of 5,376,344 shares of commonstock priced at $0.93 per share After broker commissions and legal expenses,the net proceeds to VantageMed were approximately $4.6 million. Based on ourcurrent sales forecast, cash management practices and projected operatingexpenses, we believe that our cash and short-term investments will besufficient to meet our cash flow needs through at least December 2005. However,we may need to raise additional funds to respond to business contingencieswhich may include the need to: cover any losses; fund expansion; fundadditional marketing expenditures; enhance our operating infrastructure;respond to competitive pressures; or acquire or develop complementarybusinesses or necessary technologies. Order activity for the second half  of 2004 was lighter than anticipated due inpart to longer sales cycles at several larger customers as well as a delay inour efforts to identify and sell our products to new customers. We may notachieve the level of order activity that we have planned for and additionalfinancing may not be available on terms favorable to us, or at all. Further,even if no unexpected contingencies arise, we can offer no assurances that ourcurrent resources will sustain us beyond December 2005.

Additional financing maynot be available on terms favorable to us, or at all. In the event that suchfinancing requires the issuance of additional shares of our capital stock, ashareholder will experience dilution in their ownership. If adequate funds arenot available or are not available on acceptable terms, our ability to fund ouroperations, take advantage of opportunities, develop products or services,expand sales and marketing efforts or otherwise respond to competitive pressurecould be significantly limited.

**If WeFail To Properly Manage Our Revenues and Expenses, We May Be Unable ToAchieve Or Sustain Profitability**

In the last two years wehave experienced significant changes in the volumes of our order activity andin the number of customers we are supporting on our core products, which hasplaced, and may continue to place, a significant strain on our resources. Toaddress this issue, we have made a number of changes to our policies andprocedures and have expanded our overall software development, marketing,sales, client management and training capacity. In the event that we are unableto timely and adequately modify our policies and procedures to support these changesin our volumes  or that we are unable toidentify, hire, train and retain qualified individuals in such capacitieswithin a reasonable timeframe, our operations could be adversely affected. Inaddition, many of the changes we have made and that we may need to  make have or will require a cash investment. Ourability to effectively implement these changes has been and will continue tobe  limited by our financial resources.

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

Our financial successdepends upon our ability to migrate a portion of our remaining legacy productcustomers to our Windows-based products and to generate new sales of ourWindows-based products. Loss of our existing customers to competition, the lossof the associated recurring revenues and the cost of supporting our remaininglegacy technology products as well as the failure to generate new system saleswould have a significant impact on our ability to achieve profitability in thenear term or at all.

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

Federal regulations underHIPAA governing the confidentiality and integrity of PHI are complex and areevolving rapidly. As these regulations mature and become better defined, weanticipate that they will 

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continueto directly affect certain of our products and services, but we cannot fullypredict the impact at this time. We have taken steps to modify our products,services and internal practices, as necessary, to facilitate our and ourcustomer’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. Achievingcompliance with these regulations could be costly and distract management’sattention from our operations. Any failure on our part to comply with currentor future regulations could subject us to severe legal and financial liability,including civil and criminal penalties. In addition, development of relatedfederal and state regulations and policies regarding the confidentiality ofhealth information or other matters could positively or negatively affect ourbusiness.

**If WeFail to Develop New Products and Product Enhancements In A Timely Manner, We May BeUnable To Achieve Or Sustain Revenue Growth And Profitability**

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

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

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

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

The performance of ourproducts depends upon the efficient operation and timely installation ofInternet and telephone connections, web browsers and Internet service providersand upon the reliability of our software, including third-party softwareincorporated into our software. The Internet and telecommunication relatedequipment could experience operational problems, delays or outages. Inaddition, software errors that we fail to detect may result in softwareperformance problems. The occurrence of any of these problems could cause customersto experience system delays, failures and loss of data. Such problems coulddelay market acceptance, lead to customer dissatisfaction, a loss of revenue,an increase in expense or injure our business reputation.

**We May BeSubject To State or Local Taxes That Could Harm Our Business**

In the past, we have not consistently collected salesor local taxes on revenues from customers located in states other than thestate where the sale originated. We are monitoring our state-by-stateobligations to collect sales tax and have made provisions, where considerednecessary, in the event one or more states seek to impose sales tax collectionobligations on out-of-state companies similar to ours. We have also enteredinto agreements, or intend to enter into agreements, with tax reportingjurisdictions and have revised our tax collection procedures. However, based onthe nature of our operations and the acquisitions we have made, thedetermination of our obligation to collect taxes in certain jurisdictions iscomplex and 

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requires significantjudgment. A successful assertion by states where we have not made provisionsfor sales and local taxes could seriously harm our business.

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

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

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

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

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

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

We rely on thirdparties to provide services that are critical to our business. For example, weuse national clearinghouses for the processing of insurance claims and theprinting and delivery of patient billings for our customers. We also outsourcesome of our product testing, installation and hardware maintenance services. Ourreliance on these third parties involves a number of risks, including, but notlimited 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.

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

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

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We base our expense levelsin part upon our expectations concerning future revenues, and these expenselevels are relatively fixed in the short term. If we have lower revenues, wemay not be able to make corresponding reductions in our spending in the shortterm. Any shortfall in revenues would have a direct impact on our results ofoperations. Fluctuations in our quarterly results or the failure to meetanalysts’ expectations could affect the market price of our common stock in amanner unrelated to our long-term operating performance.

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

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

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

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

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

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

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

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andestablishing advance notice requirements for nominations for election to theboard of directors or for proposing matters that can be acted on bystockholders at stockholder meetings.

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

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

***Risks Associated with our Industry***

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

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

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

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

Our competitors vary insize, geographic coverage and scope of products and services offered. Themarket demand for certain products varies across geographic territories. Ourprincipal competitors include practice management systems and clinical softwarecompanies. Industry competitors include organizations such as WebMD PracticeServices/Medical Manger, Cerner/VitalWorks, Inc., Misys Physician  Systems, QSI/NextGen and GECentricity/Millbrook. Additionally, within each local market there are severalsmaller competitors who have developed technologically advanced niche productsoffered at lower prices. Finally, with the integration of clinical informationsystems into practice management systems, several well-funded pharmaceutical,medical supply and biotech companies have entered the practice managementsystems market. Many of our competitors have greater financial, development,technical, marketing and sales resources than we do. These competitors may beable to respond more rapidly to new or emerging technologies and regulationsand changes in customer requirements than we can. In addition, as the marketfor our products develops, additional competitors may enter the market andcompetition may intensify, requiring us to lower the prices of our products andservices. In addition to these factors, our 

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currentfinancial condition and SEC reporting and disclosure requirements may be usedagainst us by our competitors.

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

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

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

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

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

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

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

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

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

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

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concerningthe development or marketing of healthcare information systems may cause ourproducts to be subject to FDA regulation, which could increase our costs ordelay the marketing of new or existing products.

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

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

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

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

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

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**Item 7. Financial Statements**

The Company’s Consolidated Financial Statements arelocated on the pages indicated below:

**INDEX TO FINANCIALSTATEMENTSVANTAGEMED CORPORATION**
| ** **                                                                                                                             | ** ** | **Page** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Financial Statements:                                                                                                                  |       |     |
| Report  of Independent Registered Public Accounting Firm—Hurley & Company                                                     |       | 32       |
| Report  of Independent Registered Public Accounting Firm—Grant Thornton LLP                                                       |       | 33       |
| Consolidated  Statements of Operations for the two years ended December 31, 2004                                                  |       | 34       |
| Consolidated  Balance Sheets as of December 31, 2004 and 2003                                                                     |       | 35       |
| Consolidated  Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss for the  two years ended December 31, 2004 |       | 36       |
| Consolidated  Statements of Cash Flows for the two years ended December 31, 2004                                                  |       | 37       |
| Notes  to Consolidated Financial Statements                                                                                            |       | 38       |

 

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

We have audited the accompanying consolidated balancesheet of VantageMed Corporation (a Delaware corporation) as of December 31,2004, and the related consolidated statements of operations and comprehensiveincome, stockholders’ equity (deficit), and cash flows for the year then ended.These consolidated financial statements are the responsibility of VantageMedCorporation’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit 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 financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of VantageMedCorporation as of December 31, 2004, and the results of its operations andits cash flows for the year then ended, in conformity with accountingprinciples generally accepted in the United States of America.

Hurley & CompanyGranada Hills, CaliforniaMarch 1, 2005, except for Note 14 which is as of March 16, 2005

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**Reportof Independent Registered Public Accounting Firm**

**To the Board of Directors and Shareholders ofVantageMed Corporation**

We have audited the accompanying consolidated balancesheets of VantageMed Corporation (a Delaware corporation) and subsidiaries asof December 31, 2003 and 2002, and the related consolidated statements ofoperations, stockholders’ equity (deficit) and comprehensive loss, and cashflows for each of the two years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of VantageMed Corporation and subsidiaries as of December 31,2003 and 2002, and the consolidated results of their operations and their cashflows for each of the two years then ended in conformity with accountingprinciples generally accepted in the United States of America.

As discussed in Note 1 to consolidated financialstatements, effective January 1, 2003, the Company changed its method ofaccounting for stock-based compensation arrangements in accordance withStatement of Financial Accounting Standards (SFAS) No. 148, Accounting forStock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.

The accompanying consolidated financial statements forthe year ended December 31, 2002 have been restated as discussed inNote 2.

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note 1, the Companysustained recurring losses from operations and had an accumulated deficit andstockholders deficit of $73 million and $483,000, respectively as of December 31,2003. These factors, among others, raise substantial doubt about the Company’sability to continue as a going concern. Management’s plans in regard to thesematters are also described in Note 1. The consolidated financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

**Grant Thornton LLPSan Francisco, CaliforniaMarch 1, 2004**

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**VANTAGEMEDCORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS**(In thousands, except per share amounts)
| ** **                                      | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| Revenues:                                       |       |                                   |       |   |   |
| Software and systems                            |       | $                                      | 5,870      |   | $ | 5,495 |   |
| Customer support                                |       | 11,496                                 |       | 11,576 |   |
| Electronic services                             |       | 4,754                                  |       | 4,784 |   |
| Total revenues                                  |       | 22,120                                 |       | 21,855 |   |
| Cost of revenues:                               |       |                                   |       |   |   |
| Software and systems                            |       | 2,971                                  |       | 2,494 |   |
| Customer support                                |       | 7,347                                  |       | 6,893 |   |
| Electronic services                             |       | 2,791                                  |       | 2,925 |   |
| Total cost of revenues                          |       | 13,109                                 |       | 12,312 |   |
| Total gross  margin                             |       | 9,011                                  |       | 9,543 |   |
| Operating  expenses:                            |       |                                   |       |   |   |
| Selling, general and administrative             |       | 8,699                                  |       | 8,510 |   |
| Product development                             |       | 2,519                                  |       | 2,637 |   |
| Depreciation and amortization                   |       | 477                                    |       | 769 |   |
| Stock-based compensation                        |       | 113                                    |       | 27 |   |
| Restructuring and impairment                    |       | 1,052                                  |       | 1,318 |   |
| Gain on sale of DentalMate business             |       | (41                                    | )          | (571 | ) |
| Total operating expenses                        |       | 12,819                                 |       | 12,690 |   |
| Loss from  operations                           |       | (3,808                                 | )          | (3,147 | ) |
| Other income  (expense):                        |       |                                   |       |   |   |
| Interest income                                 |       | 40                                     |       | 92 |   |
| Interest expense and other, net                 |       | (137                                   | )          | (82 | ) |
| Total other  income (expense)                   |       | (97                                    | )          | 10 |   |
| Net loss                                        |       | $                                      | (3,905     | ) | $ | (3,137 | ) |
| Basic and diluted  net loss per share           |       | $                                      | (0.47      | ) | $ | (0.37 | ) |
| Weighted-average  shares—basic and diluted |       | 8,285                                  |       | 8,400 |   |

 

 

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)
| ** **                                                                                                                                           | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                      |       |       |       |       |       |
| Cash and cash  equivalents                                                                                                                           |       | $          | 946        |       | $          | 1,585 |   |
| Short-term  investments                                                                                                                              |       | —     |       | 774        |       |
| Accounts  receivable, net of allowance of $413 and $129, respectively                                                                                |       | 1,761      |       | 2,373      |       |
| Inventories, net  of reserve of $21 and $24, respectively                                                                                            |       | 116        |       | 269        |       |
| Prepaid expenses  and other                                                                                                                          |       | 396        |       | 366        |       |
| Total current assets                                                                                                                                 |       | 3,219      |       | 5,367      |       |
| Other assets, net  of current portion                                                                                                                |       | 6          |       | 17         |       |
| Property and  equipment, net                                                                                                                         |       | 333        |       | 506        |       |
| Intangibles, net                                                                                                                                     |       | 392        |       | 1,748      |       |
| Total assets                                                                                                                                         |       | $          | 3,950      |       | $          | 7,638 |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                 |       |       |       |       |       |
| Current portion  of long-term debt                                                                                                                   |       | $          | 375        |       | $          | 461 |   |
| Accounts payable                                                                                                                                     |       | 1,754      |       | 1,162      |       |
| Accrued  liabilities                                                                                                                                 |       | 2,071      |       | 2,386      |       |
| Customer deposits  and deferred revenue                                                                                                              |       | 3,919      |       | 3,545      |       |
| Total current liabilities                                                                                                                            |       | 8,119      |       | 7,554      |       |
| Long-term portion  of restructuring reserve, net of current portion                                                                                  |       | 93         |       | 372        |       |
| Long-term debt,  net of current portion                                                                                                              |       | —     |       | 195        |       |
| Total liabilities                                                                                                                                    |       | 8,212      |       | 8,121      |       |
| Commitments and contingencies (Notes 8 and 12)                                                                                                       |       | —     |       | —     |       |
| Stockholders’  deficit:                                                                                                                         |       |       |       |       |       |
| Preferred stock,  $0.001 par value, 5,000,000 shares authorized; no shares issued or  outstanding 2004 and 2003                                      |       | —     |       | —     |       |
| Common stock,  $0.001 par value, 20,000,000 shares authorized; 8,279,323 and 8,343,770  shares issued and outstanding in 2004 and 2003, respectively |       | 8          |       | 8          |       |
| Additional paid-in  capital                                                                                                                          |       | 72,625     |       | 72,483     |       |
| Accumulated other  comprehensive income                                                                                                              |       | -          |       | 16         |       |
| Accumulated  deficit                                                                                                                                 |       | (76,895    | )          | (72,990    | )          |
| Total  stockholders’ deficit                                                                                                                    |       | (4,262     | )          | (483       | )          |
| Total liabilities and  stockholders’ deficit                                                                                                    |       | $          | 3,950      |       | $          | 7,638 |   |

 

 

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

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**VANTAGEMEDCORPORATION**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(DEFICIT)**AND COMPREHENSIVE LOSS

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

**(As restated, see Note 2)**
| ** **                                                          | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Unrealized Gain  (Loss) On  Available-For-** | ** ** | **Accumulated**          | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|----------------------------------------------------------|------------|--------------------------|------------|-------------|------------|
| ** **                                                          | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Paid-In Capital**                                 | ** ** | **Sale Securities** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance, December 31, 2002                                     |       | 8,473,999             |       |           | $          | 8                                                        |       |                     |       | $           | 72,511     |   |   |   | $ | 28 |   |   |   | $ | (69,853 | ) |   | $ | 2,694 |   |
| Repayment of notes receivable with common stock held  as collateral |       | (130,519              | )          |           | —     |                                                     |       |                     | (87        | )           |       |   | — |   |   |   | — |   |   | (87 | ) |
| Shares issued in exchange for options exercised                     |       | 290                   |       |           | —     |                                                     |       |                     | —     |        |       |   | — |   |   |   | — |   |   | — |   |
| Stock-based compensation expense                                    |       | —                |       |           | —     |                                                     |       |                     | 27         |        |       |   | — |   |   |   | — |   |   | 27 |   |
| Issuance of warrants to purchase common stock                       |       | —                |       |           | —     |                                                     |       |                     | 32         |        |       |   | — |   |   |   | — |   |   | 32 |   |
| Subtotal                                                            |       | 8,343,770             |       |           | 8          |                                                     |       |                     | 72,483     |        |       |   | 28 |   |   |   | (69,853 | ) |   | 2,666 |   |
| Unrealized loss on investments                                      |       | —                |       |           | —     |                                                     |       |                     | —     |        |       |   | (12 | ) |   |   | — |   |   | (12 | ) |
| Net loss                                                            |       | —                |       |           | —     |                                                     |       |                     | —     |        |       |   | — |   |   |   | (3,137 | ) |   | (3,137 | ) |
| Comprehensive loss                                                  |       |                  |       |           |       |                                                     |       |                     |       |        |       |   |   |   |   |   |   |   |   | (3,149 | ) |
| Balance, December 31, 2003                                     |       | 8,343,770             |       |           | 8          |                                                     |       |                     | 72,483     |        |       |   | 16 |   |   |   | (72,990 | ) |   | (483 | ) |
| Repayment of notes receivable with common stock held  as collateral |       | (128,779              | )          |           | —     |                                                     |       |                     | —     |        |       |   | — |   |   |   | — |   |   | — |   |
| Shares issued in exchange for options exercised                     |       | 64,332                |       |           | —     |                                                     |       |                     | 29         |        |       |   | — |   |   |   | — |   |   | 29 |   |
| Stock-based compensation expense                                    |       | —                |       |           | —     |                                                     |       |                     | 113        |        |       |   | — |   |   |   | — |   |   | 113 |   |
| Subtotal                                                            |       | 8,279,323             |       |           | 8          |                                                     |       |                     | 72,625     |        |       |   | 16 |   |   |   | (72,990 | ) |   | (341 | ) |
| Unrealized loss on investments                                      |       | —                |       |           | —     |                                                     |       |                     | —     |        |       |   | (16 | ) |   |   | — |   |   | (16 | ) |
| Net loss                                                            |       | —                |       |           | —     |                                                     |       |                     | —     |        |       |   | — |   |   |   | (3,905 | ) |   | (3,905 | ) |
| Comprehensive loss                                                  |       |                  |       |           |       |                                                     |       |                     |       |        |       |   |   |   |   |   |   |   |   | (3,921 | ) |
| Balance,  December 31, 2004                                    |       | 8,279,323             |       |           | $          | 8                                                        |       |                     |       | $           | 72,625     |   |   |   | $ | — |   |   |   | $ | (76,895 | ) |   | $ | (4,262 | ) |

 

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,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                    | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| Cash flows from  operating activities:                                        |       |                                   |       |   |   |
| Net loss                                                                      |       | $                                      | (3,905     | ) | $ | (3,137 | ) |
| Adjustments to  reconcile net loss to net cash used for operating activities: |       |                                   |       |   |   |
| Depreciation and amortization                                                 |       | 477                                    |       | 769 |   |
| Loss (gain) on sale or disposal of assets                                     |       | (34                                    | )          | (571 | ) |
| Bad debt expense                                                              |       | 451                                    |       | 52 |   |
| Impairment of intangibles                                                     |       | 1,176                                  |       | 1,183 |   |
| Stock-based compensation                                                      |       | 113                                    |       | 27 |   |
| Changes in assets and liabilities:                                            |       |                                   |       |   |   |
| Accounts receivable                                                           |       | 152                                    |       | (525 | ) |
| Inventories                                                                   |       | 153                                    |       | (64 | ) |
| Prepaid expenses and other                                                    |       | 298                                    |       | 157 |   |
| Accounts payable and accrued liabilities                                      |       | (2                                     | )          | 430 |   |
| Customer deposits and deferred revenue                                        |       | 374                                    |       | 864 |   |
| Net cash used for operating activities                                        |       | (747                                   | )          | (815 | ) |
| Cash flows from  investing activities:                                        |       |                                   |       |   |   |
| Purchases of property and equipment                                           |       | (131                                   | )          | (294 | ) |
| Purchase of investments                                                       |       | 50                                     |       | — |   |
| Proceeds from maturities of investments                                       |       | 751                                    |       | 1,260 |   |
| Proceeds from sale of DentalMate business                                     |       | —                                 |       | 547 |   |
| Notes receivable payments received                                            |       | —                                 |       | 50 |   |
| Net cash provided by investing activities                                     |       | 670                                    |       | 1,563 |   |
| Cash flows from  financing activities:                                        |       |                                   |       |   |   |
| Payments on debt                                                              |       | (591                                   | )          | (603 | ) |
| Issuance of stock                                                             |       | 29                                     |       | — |   |
| Net cash used for financing activities                                        |       | (562                                   | )          | (603 | ) |
| Net increase (decrease) in cash and cash equivalents                          |       | (639                                   | )          | 145 |   |
| Cash and cash  equivalents, beginning of year                                 |       | 1,585                                  |       | 1,440 |   |
| Cash and cash  equivalents, end of year                                       |       | $                                      | 946        |   | $ | 1,585 |   |
| Supplemental cash  flow information:                                          |       |                                   |       |   |   |
| Cash payments for interest                                                    |       | $                                      | 36         |   | $ | 69 |   |
| Liquidation of  stock for payment on note receivable                          |       | $                                      | —     |   | $ | 87 |   |

 

 

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

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**VANTAGEMED CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

VantageMed Corporation wasincorporated in California on June 1, 1995, and on April 9, 1997, wereincorporated in Delaware. In February 2000, we completed our initialpublic offering (IPO) of 3 million shares of our common stock, the grossproceeds of which aggregated approximately $36 million. VantageMed is adiversified healthcare information systems supplier headquartered in RanchoCordova, California with support personnel and sales representatives in variouslocations throughout the United States. We develop, sell, install and supportsoftware products and services that assist physicians, behavioral healthprofessionals, and other healthcare providers in the operation of theirpractices and organizations. We have built a national distribution network byacquiring established regional healthcare practice management systems companiesto sell and support our new Windows-based software and services. We have notcompleted any acquisitions since 1999. We have developed a customer base ofapproximately 18,000 physician and behavioral health providers nationwidethrough both acquisitions and internal growth.

**Useof estimates  and basis of presentation**

The preparation of the consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. For instance, we record a liability on our balance sheet eachperiod for the estimated cost of goods and services rendered to us for which wehave not received an invoice. Additionally, our restructuring reserve includesan estimate for the loss we expect to incur for excess leased facility space. Thisestimate is based on certain assumptions, such as the market value of the spaceand the time it will take to sublease the space. Our estimates are based onhistorical experience, input from third parties, and other relevant facts andcircumstances. Actual results could differ from these estimates. Certain prioryear amounts have been reclassified to conform to the current yearpresentation.

**Risks and uncertainties**

We have suffered from recurring losses from operationssince our inception. These losses have resulted in negative operating cashflows and negative working capital. We may never be able to achieve positiveoperating cash flow, working capital or profitability. We are also subject to anumber of additional risks, including, but not limited to, risks associatedwith our Legacy product sunset process (successful integration, operation andtransition of products, technologies and businesses), uncertainties in thehealthcare industry, and dependence on the medical market.

We believe that we have taken many of the necessarysteps in order to succeed in our future operations. These steps have includedour restructuring programs implemented in 2002, our functional reorganizationimplemented in 2003, numerous management changes, fund raising, the enhancementof our sales and marketing functions as well as our results in converting ourLegacy system customers to our core Windows-based systems in order tostreamline support and development costs. As a result of the enhancement of oursales and marketing functions, we booked 189 RidgeMark migration orders in 2004compared to 155 orders in 2003. As our Legacy customer migration process issubstantially complete, we do not expect that migration orders will continue atsignificant volumes after 2005. There is no assurance that we will be able togenerate significant orders from new customers. In addition, in the event thatwe are unable to properly scale our client services operation to timelyinstall, implement and support RidgeMark orders in a cost effective manner, wemay not be successful in our future operations.

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In March 2005, we completed a $5.0 millionprivate placement of 5,376,344 shares of common stock priced at $0.93 per share(see Note 14 to consolidated financial statements). Institutional investorspurchased 90 percent of the shares, with members of our management team and amember of our Board of Directors purchasing 10 percent. The investors in thetransaction also received warrants to purchase an additional 1,075,269 sharesof common stock priced at $1.30 per share, and warrants to purchase 1,075,269shares of common stock priced at $1.55 per share. In connection with thistransaction, we paid a fee to our broker equal to 7.0% of the total amount ofcapital we received, or $350,000. Our broker also received an additional 451,613warrants to purchase common stock as part of this fee arrangement. After brokercommissions and legal expenses, the net proceeds to VantageMed wereapproximately $4.6 million. We plan to invest these funds in growing ourbusiness with a focus on delivering higher quality service to our customers andexpanding the market scope of our products.

We may never be able toachieve positive operating cash flow, working capital or profitability. We arealso subject to a number of additional risks, including, but not limited to,risks associated with our acquisitions (successful integration, operation andtransition of products, technologies and businesses), uncertainties in thehealthcare industry, and dependence on the medical market. Based on our currentsales forecast, cash management practices and projected operating expense, webelieve that our cash and investments are sufficient to meet our cash flowneeds through at least December 2005; however there can be no assurancethat our long-term plans will succeed.

**Revenue recognition**

Fees from licenses are recognized as revenue inaccordance with AICPA Statement 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 been met,fees are fixed and determinable, collection of the sale proceeds is deemedprobable and a contract has been signed. We generally charge a one-time licensefee for the right to use our proprietary software. The amount of the licensefee is fixed and based on a specific number of users specified at the inceptionof the license agreement and is generally part of a multiple elementarrangement. The license fee is not subject to adjustment based on future usageor an obligation to distribute further copies. Payment of the license fee isdue upon delivery and acceptance, generally 30 to 45 days from the date ofcontract execution. We do not offer cancellation provisions and in a limitednumber of cases, we have offered extended payment terms. We also license one ofour proprietary software products on a monthly subscription basis. No long-termcommitment is required and the customer can cancel the subscription agreementat any time. Under the subscription agreement, license fee revenue isrecognized ratably over the license period.

Multiple element arrangements generally include aproprietary software license, third-party software, hardware, andimplementation, training and other specified services. The fee for multiple elementarrangements is allocated to the various elements based on vendor-specificobjective evidence (VSOE) of fair market value established by the price of theelements sold separately or renewal rates if an element is not yet being soldseparately. The residual method is used when VSOE exists for the undeliveredelements, primarily post-contract support and training. Also, to the extentthat a discount exists on any of the elements, we follow the residual methodand attribute that discount entirely to the delivered elements. Upon contractexecution, we collect a deposit, which can vary from 0% to 50% based on thecustomer’s credit profile and previous relationship with us, if any. In theevent that a customer elects to finance their purchase, we obtain a 10% depositfrom the customer and we obtain a copy of the approved lease documents prior tomoving forward with the contract. Payments from leasing companies are eitherreceived upon contract execution or when the system has been delivered andaccepted by the customer.  Revenue isrecognized when all of the criteria of SOP 97-2 are met. Deposits received inadvance of revenue recognition are recorded as deferred revenue.

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

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

**Software development costs**

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

**Allowance for doubtful accounts**

We review accountsreceivable and provide a reserve for amounts we estimate will not becollectible. During our review we consider our historical experience, the ageof the receivable balance, the credit-worthiness of the customer and the reasonfor the delinquency. We consider a number of matters when granting credit tocustomers including our prior experience with them, their current cashresources, and ability to obtain lease financing.

**Inventories and related reserves**

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

**Long-lived assets**

For certain long-livedassets, primarily property and equipment and intangible assets, we estimate theuseful life of the asset and recognize its cost as an expense over theestimated useful life. We use the straight-line method to expense long-livedassets, which results in an equal amount of expense in each period.Additionally, pursuant to applicable accounting rules, we periodically assesswhether long-lived assets have been impaired. We deem an asset to be impairedif its estimated fair value is less than the net book value at which it isrecorded on our balance sheet. Our estimate of fair value is based on the netpresent value of expected future cash flows attributable to the asset.Predicting future cash flows attributable to a particular asset is difficult,and requires the use of significant judgment.

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**Property and Equipment**

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

**Goodwill**

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

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

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

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

Finite-lived intangible assets are presented at cost,net of accumulated amortization. Amortization is calculated using the straight-linemethod over estimated useful lives of the assets. An impairment charge will berecorded on finite-lived intangibles or long-lived assets when it is determinedthat the carrying value of the intangibles and long-lived assets may not berecoverable. There are several factors considered important which could triggeran impairment including changes in our use of the acquired assets or thestrategy for 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.

**Cash equivalents and investments**

We consider all highly liquid investments with anoriginal maturity of three months or less when purchased to be cash equivalents.We classify marketable securities as available-for-sale in accordance with theprovisions of Statement of Financial Accounting Standards No. 115, “Accountingfor Certain Investments in Debt and Equity Securities.”  These securities are carried at fair marketvalue, with unrealized gains and losses reported as a separate component ofstockholders’ equity. Gains or losses on securities sold are based on thespecific identification method.

As of December 31,2003, short and long-term investments were due within one year and wereclassified as available-for-sale securities and reported at fair value asfollows (in thousands):
| ** **                                      | ** ** | **December 31, 2003** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **Amortized  Cost**             | ** ** | **Unrealized  Gain** | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** |
| Cash equivalents                                |       |                            | $          | 208 |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 208 |   |
| Commercial paper                                |       |                            | 758        |   |   |   | 16 |   |   |   | — |   |   | 774 |   |
| Total available-for-sale  investment securities |       |                            | $          | 966 |   |   |   | $ | 16 |   |   |   | $ | — |   |   | $ | 982 |   |

 

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We had no short orlong-term investments at December 31, 2004.

**Financial instruments**

The fair values offinancial instruments are the amounts at which the instruments could beexchanged in a current transaction between willing parties. We estimate thatthe carrying amounts of the financial instruments included in the accompanyingcondensed consolidated balance sheets are not materially different from theirfair values.  The carrying amountsreported for cash and cash equivalents, accounts receivable and accountspayable are considered to approximate fair values based upon the shortmaturities of these financial instruments. The carrying amounts of short-termand long-term debt are also considered to approximate fair values based uponcurrent interest rates.

**Accrued liabilities**

Certain of our accruedliabilities are based on estimates. For instance, we record a liability on ourbalance sheet each period for the estimated cost of goods and services renderedto us for which we have not received an invoice. Additionally, ourrestructuring reserve includes an estimate for the loss we expect to incur forexcess leased facility space. This estimate is based on certain assumptions,such as the market value of the space and the time it will take to sublease thespace. Our estimates are based on historical experience, input from sourcesoutside the company, and other relevant facts and circumstances.

**Legal Costs**

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

**Warranty Costs**

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

**Income taxes**

We use the asset andliability method of accounting for income taxes under which deferred incometaxes are provided based upon currently enacted tax laws and rates. A valuationallowance is provided against the future benefits of deferred tax assets if itis determined that it is more likely than not that the future tax benefitsassociated with the deferred tax asset will not be realized.

**Net loss per share**

Basicnet loss per share is based on weighted average shares outstanding and dilutednet loss per share is based on weighted average common shares and dilutiveequivalents outstanding, if any. As a result of our net losses, all commonshare equivalents would have been anti-dilutive and have therefore beenexcluded from the diluted net loss per share calculation. The following tablesummarizes securities outstanding as of each period end, that wereanti-dilutive and not included in the calculation of diluted net loss per share(in thousands):
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Stock options                      |       | 2,002                 |       | 1,657 |   |
| Warrants to purchase  common stock |       | 100                   |       | 100 |   |

 

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**Comprehensive loss**

We report comprehensiveloss and its components in accordance with Statement of Financial AccountingStandards No. 130 (SFAS 130), “Reporting Comprehensive Income.”Comprehensive income includes all changes in equity (net assets) during aperiod from non-owner sources. During 2004 and 2003, other comprehensive incomeconsisted of unrealized holding gains and losses on available-for-saleinvestment securities.

**Stock-based compensation**

Effective January 1, 2003, we began to accountfor stock options using a fair value method, as allowed under SFAS No. 123,as amended. We have elected to use the prospective method of transition,resulting in the recognition of stock-based compensation expense of $113,000and $27,000 in the years ended December 31, 2004 and 2003, respectively.

Hadcompensation cost for our option plan been determined based on the fair valueat the grant dates for the awards, calculated in accordance with the methodprescribed by SFAS 123 prior to January 1, 2003, our pro forma netloss would have been as follows (in thousands, except per share amounts):
| ** **                                                                                                                          | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| Net loss, as  reported                                                                                                              |       | $                                      | (3,905     | ) | $ | (3,137 | ) |
| Add stock-based  compensation expense included in reported net loss, net of related tax  effects                                    |       | 113                                    |       | 27 |   |
| Deduct total  stock-based compensation expense determined under fair value based method for  all awards, net of related tax effects |       | (279                                   | )          | (244 | ) |
| Pro forma net loss                                                                                                                  |       | $                                      | (4,071     | ) | $ | (3,354 | ) |
| Basic and diluted loss  per share:                                                                                                  |       |                                   |       |   |   |
| As reported                                                                                                                         |       | $                                      | (0.47      | ) | $ | (0.37 | ) |
| Pro forma                                                                                                                           |       | $                                      | (0.49      | ) | $ | (0.40 | ) |

 

Forpurposes of the pro forma disclosure above, the fair value of each option grantis estimated on the date of the grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions for2004 and 2003:
| ** **               | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|--------------------------|------------|-----------|------------|-----------|------------|
| Dividend yield           |       | 0%        |       | 0%        |       |
| Risk-free  interest rate |       | 3.3%      |       | 3.5%      |       |
| Stock price volatility   |       | 201%      |       | 222%      |       |
| Expected life            |       | 3.5 years |       | 3.5 years |       |

 

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

**NOTE 2—CORRECTION OF AN ERROR**

During the second quarterof 2002, we reserved for certain lease commitments in connection with arestructuring program. During the third quarter of 2003, we concluded that theoriginal restructuring reserve did not adequately provide for tax, insuranceand common area maintenance charges totaling approximately $245,000 that we areobligated to pay for under these lease arrangements. In addition, in the thirdquarter of 2003, we discovered a lease amendment that was signed in April 2000with minimum lease payments totaling $257,000 to be made starting in December 2004through July 2007. These minimum 

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leasepayments and the related charges as well as the associated estimated subleaseincome stream of approximately $119,000 were incorrectly omitted from therestructuring reserve that was provided for in the second quarter of 2002. Therestated adjustments below reflect an additional $383,000 of expense, recordedin the quarter ended June 30, 2002, associated with these lease relateditems. This Form 10KSB reflects a restated consolidated balances as of December 31,2002 in certain footnotes and disclosures.

Allrelated Notes and Management’s Discussion and Analysis of Financial Conditionand Results of Operations have been changed to reflect this adjustment. Theresults of the restatement are as follows (in thousands, except per sharedata):
| ** **                                  | ** ** | **As of December 31, 2002** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|
| **Balance Sheet Data**            | ** ** | ** **                                      | ** ** | **As Originally  Reported** | ** ** | **Restatement  Adjustments** | ** ** | **As Restated** | ** ** |
| Long-term portion  of restructuring reserve |       |                                            | $          | 324 |   |   |   | $ | 383 |   |   | $ | 707 |   |
| Total liabilities                           |       |                                            | 6,887      |   |   |   | 383 |   |   | 7,270 |   |
| Accumulated deficit                         |       |                                            | (69,470    | ) |   |   | (383 | ) |   | (69,853 | ) |
|                                             |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**NOTE 3—RESTRUCTURINGACTIVITIES**

In the second quarter of2004, we entered into an agreement to terminate and buyout the lease for one ofour two facilities in Boulder, Colorado. In connection with the signing of thisagreement, we recognized a benefit of $147,000 representing the differencebetween the payments that will be made under the revised arrangement and theamounts previously reserved for through our restructuring reserve. Thetermination agreement required us to pay approximately $22,000 upon signing andrequires us to make monthly payments of approximately $4,000 for 36 months. Inthe fourth quarter of 2004, we recognized a net expense of approximately$21,000 representing an increase in our reserve on one property as a result ofour inability to sublease that property which was partially offset by a benefitas a result of our negotiation of the early closure of a second facility.

In 2003, we recognized anet restructuring expense of $135,000 which was primarily due to our estimateof the expected loss on a leased facility that was vacated in the fourthquarter of 2003. In addition, in the first and third quarters of 2003, we madeadjustments to our 2002 lease reserve estimate that included adjustments inconnection with the error correction described in Note 2 to our ConsolidatedFinancial Statements. The impact of these lease reserve adjustments was notsignificant to our 2003 results of operations.

Thecomponents of our restructuring provisions and activity in the related reservefor the two years ended December 31, 2004 are as follows (in thousands, asrestated, see Note 2):
| ** **                      | ** ** | **Severance** | ** ** | **Leased Facilities** | ** ** | **Total** | ** ** |
|---------------------------------|------------|---------------|------------|----------------------------|------------|-----------|------------|
| December 31,  2002 balance |       |          | $          | 4                          |       |      |       | $ | 806 |   |   | $ | 810 |   |
| 2003 provision                  |       |          | —     |                       |       |      | 135        |   |   | 135 |   |
| Cash payments                   |       |          | (4         | )                          |       |      | (240       | ) |   | (244 | ) |
| December 31,  2003 balance |       |          | —     |                       |       |      | 701        |   |   | 701 |   |
| 2004 net benefit                |       |          | —     |                       |       |      | (126       | ) |   | (126 | ) |
| Cash payments                   |       |          | —     |                       |       |      | (331       | ) |   | (331 | ) |
| December 31, 2004  balance |       |          | $          | —                     |       |      |       | $ | 244 |   |   | $ | 244 |   |

 

Lease payments will bemade through the end of the lease term (December 2007).

**NOTE4—SALE OF DENTALMATE BUSINESS**

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

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**NOTE 5—NOTES RECEIVABLE**

In November 2000, we entered into a $200,000 notewith a former officer and director that was secured by 300,000 shares of ourcommon stock. Total principal and interest on this note, which bore interest atthe prime rate, became due and payable on November 3, 2002 and was indefault as of December 31, 2002. As of December 31, 2002, we hadforeclosed on 41,832 shares we held as collateral and had recorded a reserve of$141,000 against the remaining balance. We had not recognized interest incomeon this note since April 2002. In August 2003, this former officerfiled bankruptcy and we foreclosed on the balance of the shares outstanding. AtDecember 31, 2003, there are no recorded amounts due from this officer andall of the shares have been cancelled.

A note totaling $23,000with one of our former employees, was paid in full with shares we held ascollateral in June 2002.

**NOTE6—GOODWILL AND OTHER INTANGIBLE ASSETS**

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

In the fourth quarter of 2003 we determined that dueto the poor performance of one of our billing services units as well as changesmade to our Legacy system migration strategy including a formal plan todiscontinue support of certain systems at future dates, components of ourgoodwill and intangible assets were impaired. As a result of this analysis, werecorded an impairment charge of $1,183,000. Approximately $803,000 of thischarge was related to an impairment of goodwill primarily associated with ourbilling services business units.

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

Componentsof intangible assets were as follows (in thousands):
| ** **                                      | ** ** | **December 31,**       | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible assets  subject to amortization:     |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquired software                               |       |                        | $          | 4,276 |   |   |   | $ | (4,276 | ) |   |   | $ | 4,276 |   |   |   | $ | (4,276 | ) |   |
| Customer lists                                  |       |                        | 3,989      |   |   |   | (3,955 | ) |   |   | 4,688 |   |   |   | (3,775 | ) |   |
| Other                                           |       |                        | 297        |   |   |   | (297 | ) |   |   | 297 |   |   |   | (297 | ) |   |
|                                            |       |                        | $          | 8,562 |   |   |   | $ | (8,528 | ) |   |   | $ | 9,261 |   |   |   | $ | (8,348 | ) |   |
| Intangible assets not  subject to amortization: |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                                        |       |                        | $          | 358 |   |   |   |   |   |   |   | $ | 835 |   |   |   |   |   |   |

 

Amortization of intangibleassets was approximately $180,000 and $330,000 for the years ended December 31,2004 and 2003, respectively. We expect amortization expense to be approximately$11,000 for each of the three years ended December 31, 2007.

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**NOTE 7—BALANCE SHEET COMPONENTS**

Propertyand equipment net, consisted of the following (in thousands):
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Office and  computer equipment                   |       | $                     | 2,022      |   | $ | 2,380 |   |
| Furniture and  fixtures                          |       | 201                   |       | 211 |   |
| Vehicles                                         |       | 20                    |       | 20 |   |
| Leasehold  improvements                          |       | 176                   |       | 182 |   |
|                                             |       | 2,419                 |       | 2,793 |   |
| Less: accumulated  amortization and depreciation |       | (2,086                | )          | (2,287 | ) |
|                                             |       | $                     | 333        |   | $ | 506 |   |

 

Depreciation expense was approximately $297,000 and$441,000 for the years ended December 31, 2004 and 2003, respectively.

Accruedliabilities consisted of the following (in thousands):
| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Accrued payroll and  related expenses        |       | $                     | 626        |   | $ | 424 |   |
| State and Local  taxes payable               |       | 482                   |       | 524 |   |
| Restructuring,  current portion (see Note 3) |       | 151                   |       | 329 |   |
| Accrued Purchases                            |       | 352                   |       | 467 |   |
| Accrued Legal  Matters                       |       | 129                   |       | 266 |   |
| Other                                        |       | 331                   |       | 376 |   |
|                                         |       | $                     | 2,071      |   | $ | 2,386 |   |

 

**NOTE 8—DEBT AND LEASE OBLIGATIONS**

At December 31, 2004, we had $320,000 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 5.0% to 5.95%. In addition, we lease certain computersand office equipment under lease agreements accounted for as capital leases. AtDecember 31, 2004, we had $55,000 in capital leases that mature from January 2005to December 2005. Many of these leases include end of lease bargainpurchase options, which we intend to exercise. Our obligations under theselease arrangements are secured by the leased equipment. At December 31,2003, we had $486,000 in assumed debt or promissory notes primarily issued inconnection with acquisitions and $170,000 in capital leases.

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

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Futureminimum payments under all debt and lease obligations at December 31, 2004are as follows (in thousands):
| **Year Ending December 31,**                               | ** ** | ** ** | ** ** | **Debt** | ** ** | **Capital**Leases | ** ** | **Operating**Leases | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|----------|------------|-------------------|------------|---------------------|------------|
| 2005                                                                      |       | $          | 320        |     |       | $                 | 61         |                |       |   | $ | 591 |   |   |
| 2006                                                                      |       | —     |       |     | —     |              |       |                | 265        |   |   |
| 2007                                                                      |       | —     |       |     | —     |              |       |                | 99         |   |   |
| Total minimum  payments                                                   |       | 320        |       |     | 61         |              |       |                | $          | 955 |   |   |
| Less: interest on  capital lease obligations at rates  of 8.62% to 18.93% |       | —     |       |     | (6         | )                 |       |                |       |   |   |
| Less: current  maturities                                                 |       | (320       | )          |     | (55        | )                 |       |                |       |   |   |
| Long-term portion                                                         |       | $          | —     |     |       | $                 | —     |                |       |   |   |   |   |

 

The future minimumoperating lease payments above have been reduced for estimated income fromsublease arrangements of $64,000, $57,000 and $31,000 in 2005, 2006 and 2007,respectively.

**NOTE 9—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 31,2004 or 2003. Each share has the same voting rights as the number of shares ofcommon stock to which it would be converted.

**Warrants**

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 to be$33,000 using a Black-Scholes option pricing model and is being amortized toexpense over the three-year term of the arrangement. In August 1999, inconnection with an acquisition, we issued warrants to purchase 30,000 shares ofour common stock at an exercise price of $11.10 per share that expired on August 1,2003. The fair value of these warrants was recorded as additional purchaseprice.

**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 1998Plan is divided into two programs: the Option Grant Program under whicheligible persons may be granted options to purchase shares of common stock andthe Stock Issuance Program under which eligible persons may be issued shares ofcommon stock directly, either through the immediate purchase of shares or as abonus for services rendered to VantageMed. The stock options generally vest 25%in the first year and ratably over the following three-year period and expireten years from the date of grant. At December 31, 2004, there wereapproximately 707,000 shares available for issuance under the 1998 Plan. Thenumber of shares reserved for issuance under the 1998 Plan will be increasedautomatically on January 1 of each year by an amount equal to 5% of our totaloutstanding common shares as of the proceeding December 31.

47

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Asummary of stock option activity and related information is as follows (inthousands except per share amounts):
| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
| ** **                    | ** ** | **Number  of Options**                | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Balance,  beginning of period |       |                                       | 1,657      |   |   |   | $ | 0.75 |   |   |   | 1,648 |   |   |   | $ | 1.07 |   |   |
| Granted                       |       |                                       | 682        |   |   |   | 0.86 |   |   |   | 549 |   |   |   | 0.36 |   |   |
| Exercises                     |       |                                       | (64        | ) |   |   | 0.47 |   |   |   | — |   |   |   | — |   |   |
| Cancelled                     |       |                                       | (273       | ) |   |   | 1.19 |   |   |   | (540 | ) |   |   | 1.36 |   |   |
| Balance, end of period        |       |                                       | 2,002      |   |   |   | $ | 0.67 |   |   |   | 1,657 |   |   |   | $ | 0.75 |   |   |

 

Thefollowing table summarizes information about our outstanding stock options at December 31,2004 (in thousands, except per share amounts):
| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**    | ** ** |
|---------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **# Options  Outstanding** | ** ** | **Wtd. Avg.  Contractual Life  Remaining (Years)** | ** ** | **Wtd. Avg.  Exercise Price** | ** ** | **Vested** | ** ** | **Wtd. Avg.  Exercise Price** | ** ** |
| $0.12 -  $0.35                              |       |                         | 414        |                            |       |   | 8.35 |   |   |   | $ | 0.24 |   |   | 230 |   |   | $ | 0.23 |   |   |
| $0.40 -  $0.47                              |       |                         | 736        |                            |       |   | 7.74 |   |   |   | 0.43 |   |   | 537 |   |   | 0.43 |   |   |
| $0.55 -  $1.00                              |       |                         | 647        |                            |       |   | 9.22 |   |   |   | 0.79 |   |   | 157 |   |   | 0.74 |   |   |
| $1.18 - $1.30                               |       |                         | 134        |                            |       |   | 9.14 |   |   |   | 1.24 |   |   | 12 |   |   | 1.18 |   |   |
| $1.56 -  $2.88                              |       |                         | 61         |                            |       |   | 5.44 |   |   |   | 2.67 |   |   | 61 |   |   | 2.67 |   |   |
| $7.50 - $9.60                               |       |                         | 10         |                            |       |   | 4.07 |   |   |   | 8.37 |   |   | 10 |   |   | 8.37 |   |   |
| Total                                       |       |                         | 2,002      |                            |       |   | 8.35 |   |   |   | $ | 0.67 |   |   | 1,007 |   |   | $ | 0.65 |   |   |
|                                             |            |                              |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The weighted-average grantdate fair value of options granted was $0.82 and $0.34  per option during 2004 and 2003,respectively.

**NOTE 10—401K SAVINGS PLAN**

We maintain a 401(k) SavingsPlan (the Plan) under which employees may elect to contribute up to 15% oftheir pre-tax compensation to the Plan. All employees are eligible toparticipate in the Plan upon performing 90 consecutive days of service. Employeecontributions are 100% vested at all times. We may make discretionary contributionsto the Plan, which vest annually over a six-year period. We made a $10,000discretionary contribution for the Plan year 2003.

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**NOTE 11—INCOME TAXES**

Noprovision for income taxes was recorded in 2004 or 2003 since we generated bothbook and tax losses. Our provision for (benefit from) income taxes in 2004 and2003 consisted of (in thousands):
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Current:                       |       |                  |       |   |   |
| Federal                        |       | $                     | —     |   | $ | — |   |
| State                          |       | —                |       | — |   |
| Total current                  |       | $                     | —     |   | $ | — |   |
| Deferred:                      |       |                  |       |   |   |
| Federal                        |       | $                     | (643       | ) | $ | (82 | ) |
| State                          |       | (111                  | )          | 243 |   |
| Total deferred                 |       | (754                  | )          | 161 |   |
| Change in  valuation allowance |       | 754                   |       | (161 | ) |
| 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, 2004, we had netoperating loss carryforwards for federal and state income tax purposes ofapproximately $45.2 million and $6.7 million, respectively, that expirethrough 2023. The extent to which these loss carryforwards can be used tooffset future taxable income may be limited. The components of our deferredincome taxes were as follows (in thousands):
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Deferred tax  assets:                          |       |                  |       |   |   |
| Net operating loss carryforwards               |       | $                     | 15,769     |   | $ | 14,881 |   |
| Accruals and reserves not currently deductible |       | 2,106                 |       | 2,083 |   |
|                                           |       | 17,875                |       | 16,964 |   |
| Deferred tax  liabilities:                     |       |                  |       |   |   |
| Depreciation                                   |       | (361                  | )          | (203 | ) |
| Net deferred tax  asset before allowance       |       | 17,514                |       | 16,761 |   |
| Valuation allowance                            |       | (17,514               | )          | (16,761 | ) |
| Net deferred tax  asset                        |       | $                     | —     |   | $ | — |   |

 

Webelieve that available objective evidence creates sufficient uncertaintyregarding the realizability of deferred tax assets, and therefore we haverecorded a full valuation allowance to reduce the carrying value of such assetsto zero. We will continue to assess the realizability of deferred tax assetsbased on actual and forecasted operating results.  Our effective tax rate differs from thefederal statutory tax rate due to the following (in thousands):
| ** **                                         | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| Expected tax  benefit                              |       | $                                      | (1,328     | ) | $ | (1,067 | ) |
| Decrease in income taxes resulting from:           |       |                                   |       |   |   |
| State income benefit                               |       | (400                                   | )          | (114 | ) |
| Increase in deferred tax asset valuation allowance |       | 2,734                                  |       | 161 |   |
| Nondeductible expenses                             |       | (1,006                                 | )          | 1,020 |   |
| Net income tax  provision                          |       | $                                      | —     |   | $ | — |   |

 

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**NOTE12—LITIGATION AND CONTINGENCIES**

On October 15, 2003, the Securities and ExchangeCommission (the SEC) instituted administrative cease and desist proceedingsagainst VantageMed and certain former members of company management, followingits inquiry into VantageMed’s accounting for the sale of the dental businessthat was attempted in September 2001. The findings in the administrativeproceeding instituted against the company state that VantageMed, under thedirection of certain former members of senior management, materially misstatedits financial results in the third quarter ended September 30, 2001. TheSEC did not charge VantageMed with fraud or levy any monetary damages againstthe Company. However, as part of a settlement agreement, the SEC orderedVantageMed to cease and desist from committing or causing any violation of theperiodic reporting and books and records provisions of the federal securitieslaws. VantageMed agreed to the order, without admitting or denying any findings.In acceptance of the settlement, the Commission considered remedial actspromptly undertaken by VantageMed and cooperation afforded to the Commissionstaff. This settlement is not associated with VantageMed’s reporting of thesale of the DentalMate business in September 2003.

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

On March 16, 2004, we filed a notice ofarbitration with the American Arbitration Association in Sacramento, Californiato arbitrate claims against Robert S. Putnam and Duangchan Putnam arising outof their alleged use of trade secrets and other proprietary informationobtained while they were employees of VantageMed to unfairly compete withVantageMed after their employment terminated. The claim is for money damagesand injunctive relief for several causes of action related to misappropriationof trade secrets, unfair competition and breach of an asset purchase agreementand other contracts. Respondents answered the claim denying theallegations contained therein and asserting various affirmative defenses. Thematter was settled in January 2005 and in connection with the settlement,VantageMed agreed to pay the former employees’ legal expenses totaling $27,500.This settlement amount was accrued at December 31, 2004.

In June 2004, a former employee filed a claimagainst the Company alleging fraud and discrimination. The Company respondedand has not received any additional communications since that time.

In February 2005, a former VantageMed customerfiled a complaint against the Company alleging that the Company breeched itssupport and maintenance contract with the customer by failing to makemodifications to the plaintiff’s software to make that software HIPAA compliant.The Company believes that the plaintiff’s allegations are without merit andwill file a response to the complaint in March 2005.

We are party to variouslegal actions arising in the normal course of business. Matters that areprobable of unfavorable outcome and which can be reasonably estimated are accrued.Such accruals were $129,000 and $266,000 at December 31, 2004 and 2003,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.

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**NOTE 13—SEGMENT REPORTING**

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

The accounting policies ofthe segments are the same as those described in the summary of significantaccounting policies. We evaluate performance based on margin level beforeselling general and administrative and other operating costs and do not managecosts below gross margin by segment. Additionally, we do not track long-livedassets by segment and therefore asset disclosures are not relevant and are notpresented. Our reportable segments offer different products and services, whichare sold and serviced by the same selling and support personnel. Theaccompanying statements of operations disclose the financial information forthese reportable segments for 2004 and 2003.

**NOTE 14—SUBSEQUENT EVENTS**

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

**NOTE15—UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:**
| ** **                                     | ** ** | **Quarter**                                                           | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **First**                                                             | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **Fiscal  Year** | ** ** |
| ** **                                     | ** ** | **(In thousands, except per share amounts)** | ** ** |
| 2004:                                          |       |                                                                  |       |       |       |   |   |   |   |   |   |
| Total Revenues                                 |       | $                                                                     | 5,065      |       | $          | 6,125 |   | $ | 5,869 |   | $ | 5,061 |   | $ | 22,120 |   |
| Gross margin                                   |       | 2,209                                                                 |       | 2,632      |       | 2,449 |   | 1,721 |   | 9,011 |   |
| Net income (loss)(1)                           |       | (706                                                                  | )          | (28        | )          | (301 | ) | (2,870 | ) | (3,905 | ) |
| Basic and diluted net income (loss) per share  |       | $                                                                     | (0.08      | )          | $          | (0.00 | ) | $ | (0.04 | ) | $ | (0.35 | ) | $ | (0.47 | ) |
| 2003:                                          |       |                                                                  |       |       |       |   |   |   |   |   |   |
| Total Revenues                                 |       | $                                                                     | 5,338      |       | $          | 5,228 |   | $ | 5,628 |   | $ | 5,661 |   | $ | 21,855 |   |
| Gross margin                                   |       | 2,168                                                                 |       | 2,181      |       | 2,605 |   | 2,589 |   | 9,543 |   |
| Net income (loss)(2)                           |       | (965                                                                  | )          | (726       | )          | 298 |   | (1,744 | ) | (3,137 | ) |
| Basic and diluted  net income (loss) per share |       | $                                                                     | (0.11      | )          | $          | (0.09 | ) | $ | 0.04 |   | $ | (0.21 | ) | $ | (0.37 | ) |

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

(2)          Includes $1,183,000 forimpairment charges in the fourth quarter and a gain of $524,000 on the sale ofthe DentalMate business in the third quarter.

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**Item8. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

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

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

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

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

During our two most recentfiscal years and through November 8, 2004, we did not consult Hurleyregarding the application of accounting principles to a specific completed orcontemplated transaction, or the type of audit opinion that might be renderedon our financial statements.

**Item 8A. Controls and Procedures**

**Disclosure Controls and Procedures**

Under 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) promulgated underthe Securities Exchange Act of 1934, as amended. Based on that evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures were effective as of the end of the periodcovered by this annual report.

**Changesin Internal Controls and Procedures**

There has been no changein our internal control over financial reporting during the quarter ended December 31,2004 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

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**PART III**

Certain information required by Part III isomitted from this Report on Form 10-KSB in that the Registrant will fileits definitive Proxy Statement for its Annual Meeting of Stockholders to beheld in May of 2005 pursuant to Regulation 14A of the Securities ExchangeAct of 1934, as amended (the Proxy Statement), and certain information includedin the Proxy Statement is incorporated herein by reference.

**Item 9. Directors and Executive Officers of theRegistrant**

(a)          Executive Officers—Theinformation required by this Item is incorporated by reference to the sectionentitled “Election of Directors” in our 2005 Proxy Statement.

(b)         Directors—The informationrequired by this Item is incorporated by reference to the section entitled “Electionof Directors” in our 2005 Proxy Statement.

The disclosure required by Item 405 of Regulation S-Kis incorporated by reference to the section entitled “Section 16(a) BeneficialOwnership Reporting Compliance” in our 2005 Proxy Statement.

**Item 10. Executive Compensation**

The information required by this Item is incorporatedby reference to the sections entitled “Compensation of Executive Officers” inour 2005 Proxy Statement.

**Item 11. Security Ownership of Certain BeneficialOwners and Management**

The information required by this Item is incorporatedby reference to the sections entitled “Principal Share Ownership” and “SecurityOwnership of Management” in our 2005 Proxy Statement.

**Item 12. Certain Relationships and RelatedTransactions**

The information required by this Item is incorporatedby reference to the section entitled “Certain Transactions” in our 2005 ProxyStatement.

**Item 13. Exhibits, Financial Statement Schedules andReports on Form 8-K**

(a)           Our ConsolidatedFinancial Statements are included in Part II, Item 8 of this Report. Theexhibits below are filed as part of this Report on Form 10-KSB.
| Exhibit Number | ** ** | **Exhibit Title**                                                                                                                                                                                                                                         |
|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1*           |       | Form of Registrant’s Amended and Restated  Form of Certificate of Incorporation                                                                                                                                                                 |
| 3.2*           |       | Form of Registrant’s Amended and Restated  Bylaws                                                                                                                                                                                                    |
| 4.1*           |       | Form of Registrant’s Specimen Stock Certificate                                                                                                                                                                                                      |
| 10.1*          |       | Sublease Agreement dated November 19, 2004  between Electric Lightwave, LLC and the Registrant (previously filed as  Exhibit 10.1 to the Form 8-K filed by VantageMed Corporation on  January 6, 2005)                                     |
| 10.2*          |       | Lease Agreement between Registrant and Jun and  Noriko Hasegawa, as Trustees for the Hasegawa Family Trust dated  August 20, 1999 (previously filed as Exhibit 10.3 to the Form S-1  filed by VantageMed Corporation on November 24, 1999) |
| 10.3*          |       | VantageMed’s Amended and Restated 1998 Stock  Option/Stock Issuance Plan (previously filed as Exhibit 10.13 to the Form S-1/A  filed by VantageMed Corporation on January 13, 2000)                                                        |
| 10.4*          |       | Form of Indemnity Agreement entered into by  Registrant with each of its officers and directors (previously filed as  Exhibit 10.14 to the Form S-1 filed by VantageMed Corporation  on November 24, 1999)                                 |

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| 10.5*  |   | Employment Agreement dated August 7, 2002,  between VantageMed Corporation and Richard Brooks (previously filed as  Exhibit 10.1 to the Form 10-Q filed by VantageMed Corporation on  August 14, 2002)                        |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6*  |   | 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)                    |
| 10.7*  |   | 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)                        |
| 10.8*  |   | 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)                          |
| 10.9*  |   | 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)                  |
| 10.10* |   | Asset Purchase Agreement dated September 19,  2003, between VantageMed Corporation and MDC Systems and Services (previously  filed as Exhibit 10.28 to the Form 10-QSB filed by VantageMed  Corporation on November 14, 2003) |
| 10.11* |   | Purchase Agreement dated March 15, 2005 between  VantageMed Corporation and Investors (previously filed as Exhibit 10.1  to the Form 8-K filed by VantageMed Corporation on March 18, 2005)                                   |
| 10.12* |   | Registration Rights Agreement dated March 15,  2005 between VantageMed Corporation and Investors (previously filed as  Exhibit 10.2 to the Form 8-K filed by VantageMed Corporation on  March 18, 2005)                       |
| 10.13* |   | Form of VantageMed Corporation Series A  Warrant dated March 15, 2005 to Investors. previously filed as  Exhibit 10.3 to the Form 8-K filed by VantageMed Corporation on  March 18, 2005)                           |
| 10.14* |   | Form of VantageMed Corporation Series B  Warrant dated March 15, 2005 to Investors. previously filed as  Exhibit 10.4 to the Form 8-K filed by VantageMed Corporation on  March 18, 2005)                           |
| 23.1   |   | Consent of Independent Registered Public Accounting  Firm                                                                                                                                                                                         |
| 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 March 30, 2005. Filed herewith.                                                     |
| 31.2   |   | Certification of the Chief Financial Officer under  Exchange Act Rule 13a-14(a)/15d-14(a) (Section 302 of the  Sarbanes-Oxley Act), dated March 30, 2005. Filed herewith.                                                     |
| 32.1   |   | Certification of Principal Executive Officer  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                 |
| 32.2   |   | Certification of Principal Financial Officer  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                 |

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*                    Previouslyfiled

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(b)          Reports on Form 8-K:

On November 8, 2004, we filed a current report onForm 8-K (1) disclosing our employment agreement with SteveCurd, (2) with our press release reporting our results of operations forthe third quarter of 2004 and (3) reporting the dismissal of GrantThornton and appointment of Hurley and Company as the company’s independentaccountants. On December 10, 2004, we furnished a current report on Form 8-K/Aamending our November 8, 2004 report to clarify certain statements made inthat report regarding the changes in our certifying accountant.

On December 7, 2004, we filed a current report onForm 8-K with the separation agreement we entered into with RichardBrooks.

On January 7, 2005, we filed a current report on Form 8-Kdisclosing a sublease agreement we signed for office space for our corporateheadquarters in Rancho Cordova, California.

On January 28, 2005, we filed a current report onForm 8-K reporting the departure of Richard Brooks from our Board ofDirectors and the appointment of Steve Curd.

On February 14, 2005, we filed a current reporton Form 8-K with our press release announcing financial expectationsfor the fourth quarter and year ended December 31, 2004 as well as a copyof our offer of employment to Mark Cameron.

On March 17, 2005, we filed a current report on Form 8-Kwith our press release reporting our results of operations for the fourthquarter and fiscal year 2004.

On March 18, 2005, wefiled a current report on Form 8-K with our press release and otherdocuments supporting a $5.0 million private placement of 5,376,344 shares ofour common stock.

**Item14. Principal Accountant Fees and Services**

The information required by this Item is incorporatedby reference to the section entitled “Ratification of Appointment ofIndependent Accountants” in our 2005 Proxy Statement.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the City of RanchoCordova, State of California, on the 30th day of March 2005.
|        | VantageMed Corporation |
|--------|------------------------|
|   | By:                    | /s/ PHILIP D. RANGER |
|   |                   | Philip D. Ranger*Chief Financial Officer* |

 

Pursuantto the requirements of the Securities Act of 1934, this report has been signedby the following persons on behalf of the Registrant and in the capacities andon the dates indicated.
|                     | **Signature** | ** **                                                            | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|---------------------|---------------|-----------------------------------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/  STEVE CURD     |          | President  and Chief Executive Officer  (Principal Executive Officer) |       | March 30,  2005 |
| Steve Curd          |
| /s/  PETER FRIEDLI  |          | Director                                                              |       | March 30,  2005 |
| Peter Friedli       |          |
| /s/  DAVID PHILIPP  |          | Director                                                              |       | March 30,  2005 |
| David Philipp       |          |
| /s/  STEVE SIMPSON  |          | Director                                                              |       | March 30,  2005 |
| Steve Simpson       |
| /s/  DAVE ZABROWSKI |          | Director                                                              |       | March 30,  2005 |
| Dave Zabrowski      |

 

56

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