UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-KSB

|ý                                                             | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934    
|------------------------------------------------------------- | ---------------------------------------------------------------------------------------
|For the Fiscal Year Ended December 31, 2003                  
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934
|For the Transition Period
From                             to

Commission File Number 000-29367

---

VantageMed Corporation(Exact name of Registrant as specified in its charter)

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

3017 Kilgore Road, Suite 180, Rancho Cordova, California 95670
(916) 638-4744(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)

Securities
registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock

---

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B in this form and if no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. o

Issuer's revenues for the year ended December 31, 2003 were $21,855,000.

As
of February 29, 2004, the aggregate market value of the voting and non-voting common equity held by non-affiliates was approximately
$9.5 million, based upon the last reported sales price of our common equity as reported by the Over-The-Counter Bulletin Board on that date of $1.35 per share.
Determination of affiliate status for this purpose is not a determination of affiliate status for any other purpose. We had 8,351,780 common shares outstanding at February 29, 2004.

Part III
incorporates by reference information from our proxy statement for our annual meeting of stockholders to be held on May 26, 2004.



---



VantageMed Corporation  Index

|Item
Number |  |                                                                                            |  | Page
|----------- |  | ------------------------------------------------------------------------------------------ |  | ----
|PART I     
|Item 1      |  | Business                                                                                   |  | 3   
|Item 2      |  | Properties                                                                                 |  | 11  
|Item 3      |  | Legal Proceedings                                                                          |  | 12  
|Item 4      |  | Submission of Matters to a Vote of Securities Holders                                      |  | 12  
|PART II    
|Item 5      |  | Market for Registrant's Common Equity and Related Stockholders Matters                     |  | 12  
|Item 6      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations      |  | 13  
|            |  | Forward-Looking Statements and Risk Factors                                                |  | 24  
|Item 7      |  | Financial Statements                                                                       |  | 31  
|Item 8      |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure       |  | 52  
|Item 8A     |  | Controls and Procedures                                                                    |  | 53  
|PART III   
|Item 9      |  | Directors and Executive Officers of VantageMed (incorporated by reference)                 |  | 54  
|Item 10     |  | Executive Compensation (incorporated by reference)                                         |  | 54  
|Item 11     |  | Security Ownership of Certain Beneficial Owners and Management (incorporated by reference) |  | 54  
|Item 12     |  | Certain Relationships and Related Transactions (incorporated by reference)                 |  | 54  
|Item 13     |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                           |  | 54  
|Item 14     |  | Principal Accountant Fees and Services (incorporated by reference)                         |  | 56  
|            |  | Signatures                                                                                 |  | 57  

2

---



This report contains forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. These forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this Form 10-KSB entitled "Risk
Factors," that may cause actual results to differ materially from those discussed in, or implied by, such forward-looking statements. Forward-looking statements within this
Form 10-KSB are identified by words such as "believes," "anticipates," "expects," "intends," "may," "will" and other similar expressions. However, these words are not the only means
of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We are
not obligated and expressly disclaim any obligation to publicly release any update to any forward-looking statement. Our actual results could differ materially from those anticipated in, or implied
by, forward-looking statements as a result of various factors, including the risks outlined elsewhere in this report. Readers are urged to carefully review and consider the various disclosures made by
VantageMed Corporation in this report and in our other reports filed with the SEC, and available on their website at www.sec.gov, that attempt to advise interested parties of the risks and factors
that may affect our business.

PART I

Item 1. Business

The Company

VantageMed Corporation is a national provider of healthcare information systems and services distributed to over 12,000 customer sites through a network of
offices throughout the United States. Our suite of software products and services automates administrative, financial, clinical and management functions for physicians, behavioral health
professionals, and other healthcare providers. Although over 95% of physician practices today utilize a Practice Management Solution (PMS), over 75% of those installations utilize legacy technology
(e.g., DOS, SCO Unix, flat-file
databases, etc.) that is expensive to support and develop. As a result of our acquisitions, we currently support 14 legacy technology systems. These systems generally lack the current
state-of-the-art technology of our Windows-based products, but provide similar functionality. We derive significant ongoing revenues from supporting these legacy
systems; however, these ongoing revenues are threatened as the rising cost of supporting these legacy systems, including the cost of developing Federal Health Insurance Portability and Accountability
Act of 1996 (HIPAA) compliant transactions, privacy and security capabilities into the products.

We
are in the process of migrating customers from our legacy systems to our Windows-based products and believe this represents a significant sales and marketing opportunity and a key
strategy to our growth and success. We believe that the migration to our Windows-based product will increase our customers' access to clinical and administrative information while also increasing
their ability to communicate with numerous healthcare participants, such as third-party insurance payers.

Our
recurring revenues were approximately 69% of total revenues in 2003 and 70% of total revenues in 2002. We define recurring revenues as any revenues derived from software maintenance
and hardware support contracts as well as revenues derived from billing and electronic services. In an attempt to increase recurring revenues, we are expanding our service offerings and migrating
existing customers to our Windows-based products and services, and expanding our electronic services. With the release of our SecureConnect electronic transaction services we have improved our ability
to deliver these Electronic Data Interchange (EDI) services. In addition to increasing adoption of traditional claims and patient statement services, we expect to add new HIPAA compliant EDI
transactions, including electronic remittance advice, eligibility and claim status.

3

---

The VantageMed Solution

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

We
offer Windows-based healthcare information systems that reduce the growing impact of economic pressures, administrative burdens and increased information requirements now faced by
healthcare providers. Our products enable our customers to access and process information more efficiently and reliably, reduce staff time, and collect money from patients and insurance payers. We
have several sales offices throughout the United States and feel that we are well positioned to take advantage of the opportunities that result from the increasingly complex needs of the healthcare
industry.

Our
objective is to expand our market share and increase our recurring revenues in order to strengthen our position as one of the leading suppliers of information systems and services to
healthcare providers. We intend to increase our revenues and market share through growth strategies that focus on:



Principal Products

We classify our software products as "Windows-based" or "legacy". Our Windows-based products are the primary products currently offered to our new customers and
are the primary focus of our ongoing product development efforts. Our Windows-based products provide our customers with software designed to automate administrative, financial, practice management and
clinical requirements of a practice. These products offer advanced functionality and are compatible with the latest generation of operating systems and hardware platforms and can accommodate from one
to hundreds of healthcare providers and users.

4

---

We
have designed our products to enable our customers to transition from their legacy systems to Windows-based products and services. The features, functions and primary customers of our
Windows-based products and services are described below.

|Windows-based
Products and Services |  | Features and Functions                                                                                                                                                                                              |  | Primary Customer or
Type of Practice                            
|----------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------
|RidgeMark®                          |  | Practice managementscheduling, billing, patient registration, collections, reporting and electronic transactions (claims and patient statements), reporting; Palm Pilot enabled                                    |  | Primary and specialty medical practices                         
|Northern Health Anesthesia®         |  | Practice managementscheduling, billing, patient registration, collections, reporting and electronic transactions                                                                                                   |  | Anesthesia practices                                            
|Therapist Helper®                   |  | Patient registration, scheduling, billing, managed care tracking, reporting and electronic transactions; 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, electronic lab results, security, authentication and electronic chart distribution |  | Primary and specialty medical practices                         
|SecureConnect                      |  | Electronic Data Interchange (EDI) transaction service for exchanging and managing translation and communication of HIPAA compliant and other electronic transactions                                                |  | Healthcare providers submitting electronic transactions         

Electronic Services

Our products enable electronic data interchange, or EDI functions, through our SecureConnect services. EDI improves a healthcare practice's cash flow and
operations by converting costly paper and telephone-based communications into cost-efficient electronic transaction processing. Our centralized SecureConnect services, some or all of which
are available for each of our products, currently include the following:



5

---



We
generate revenues by providing these SecureConnect services on a per transaction or flat monthly fee basis. We expect that the HIPAA mandate requiring third-party payers to support
standardized electronic transaction sets will increase physician adoption of electronic services. As new HIPAA transactions are defined and payers begin support of these new transactions,
SecureConnect will expand on these service offerings to include all HIPAA-supported transactions. The continued development of our SecureConnect services will add further differentiation for all of
our product offerings.

Support Services

We believe that customer satisfaction with support and services is critical to our success. Our support services include software and hardware installation,
training, software maintenance, electronic claims setup and support, data conversion, network support and hardware maintenance. To achieve a higher level of customer satisfaction, some of these
services are performed at the customer's site. In addition to providing on-site training for many of our product lines, we perform classroom-based training and offer on-line
Web-based training options. We publish periodic newsletters and sponsor user group conferences. These forums provide the user with current information and offer us an opportunity to
demonstrate our new products and services.

We
provide our customers with ongoing software support and services under monthly, quarterly and annual maintenance agreements. These agreements provide for help desk support, software
maintenance, upgrades (when and if available) and remote diagnostics. As of December 31, 2003, our customer service and support groups consisted of 101 employees, or approximately 59% of our
employee base.

Hardware and Supplies

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

Product Development

In June 2002, we implemented a restructuring plan that included a re-evaluation of all product development initiatives and that focused our
efforts on improving the functionality and performance of our Windows-based products and on developing new products that operate on a common architecture. As of December 31, 2003, our
Windows-based product development and quality testing organization consisted of 34 employees. Our development teams are organized by product. Each product team has a product manager and various
developers. In certain cases, we have contracted with third-party development groups to assist us with the development of our products. Our quality assurance and testing teams follow established
guidelines. Subject matter experts and analysts contribute to work flow design, content and business rule development. A formalized process for software enhancement requests provides feedback from
customers and our sales teams. Project management tools, project schedules and distribution of technical and training notes are managed through our corporate Intranet.

6

---



Privacy and Security Issues

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



We
intend to comply with or support our clients in complying with all HIPAA privacy, transaction and security rules and timeframes. We help each of our customers to implement their own
privacy and security measures including training programs and firewall solutions to protect the confidentiality of information being transferred into and out of their computer network.

Internally,
we work to ensure the safe handling of PHI by:



We
monitor proposed regulations that might affect our software products and services in order to ensure that we comply with such regulations when and if they are adopted. We are also
evaluating the physical layout and access controls of our operating facilities to minimize the risk of incidental disclosure of PHI to individuals not directly required to view such data.

Sales and Marketing Strategy

We manage our sales and marketing efforts to serve our customers on both a local and a national basis. This allows us to meet the unique needs and expectations of
each customer. Organized by customer type and product line, the members of our sales force focus on maintaining strong customer relationships within local markets to gain market share and build
recurring revenues. Within our existing customer base, we promote and sell hardware upgrades, maintenance services, add-on software modules and electronic data interchange services. Our
sales force
focuses on cross-selling and migrating our legacy customers to our Windows-based products as well as attracting new customers.

As
of December 31, 2003, we had 20 sales and marketing personnel, including sales management and sales representatives.

7

---

Competition

The healthcare information systems market is highly competitive on both a local and a national level. We believe that the primary competitive factors in this
market are:



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

Our
principal competitors include organizations such as WebMD/Medical Manager, VitalWorks, Inc., Misys Physician Systems, McKesson HBOC, Quality Systems, Inc. and
Millbrook/Centricity from GE Medical Systems. Additionally, within each local market there are several smaller competitors who have developed niche products offered at varying price points. Finally,
with the integration of clinical information systems into practice management systems, several well-funded pharmaceutical, medical supply and biotech companies have entered the practice
management systems market. Many of our competitors have greater financial, development, technical, marketing and sales resources than we do. These competitors may be able to respond more rapidly to
new or emerging technologies and regulations and changes in customer requirements than we can. In addition, as the market for our products develops, additional competitors may enter the market and
competition may intensify, requiring us to lower the prices of our products and services.

Acquisitions

Prior to our initial public offering in February 2000, we completed 26 acquisitions. Due to the volatility of the financial markets and the uncertainty in
the healthcare industry, we have not pursued any acquisitions since 2000; however, we may pursue additional acquisitions in the future as opportunities arise. As part of our integration process, we
integrated all accounting, administrative and sales functions within our corporate infrastructure. Customer support for legacy products is managed through a combination of local and national support
resources.

Intellectual Property

Our success is dependent, in part, on our ability to protect our proprietary software and confidential information from unauthorized use and disclosure. We rely
on a combination of trade secrets, common law intellectual property rights, license agreements, nondisclosure and other contractual provisions and technical measures to establish and protect our
proprietary rights in our intellectual property and confidential information. We do not own any patents on our products. Employees, technical consultants and contractors are required to execute
agreements with us providing for the confidentiality of information and the assignment to us of all proprietary rights. The legal protections afforded to us or the steps taken by us may not be
adequate to prevent misappropriation of our technology and confidential information. In addition, these protections do not prevent independent third-party development of competitive products or
services. We believe that our proprietary rights do not infringe upon the proprietary rights of third parties. However, third parties may assert infringement

8

---

claims
against us in the future and any such assertion may require us to enter into a license agreement or royalty arrangement with the party asserting the claim. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our confidential information or trade secrets, or to determine the validity or scope of the rights of others. Litigation could result in
substantial costs and diversion of management and other resources and could seriously harm our business.

Government Regulation

Health Insurance Portability and Accountability Act of 1996 (HIPAA)

HIPAA was enacted in 1996 and required the Department of Health and Human Services, or HHS, to adopt national standards for the electronic transmission of
healthcare transactions, and to adopt standards to ensure the privacy and security of such information. The confidentiality of protected health information (PHI) and the circumstances under which such
information may be used or released are subject to substantial regulation by state and federal laws. Regulations governing the electronic transmission of, privacy and security of PHI are covered by
HIPAA guidelines which are often vague and open to interpretation. There are three primary sets of standards included within the HIPAA regulations:



Failure
to comply with these standards may subject us to civil monetary penalties and, in certain cases, criminal penalties. Covered entities, including our SecureConnect clearinghouse,
may be subject to civil monetary penalties in the amount of $100 per violation and the U.S. Department of Justice may seek to impose criminal penalties for certain violations. Criminal penalties under
the statute vary depending on the nature of the violation but could include fines of up to $250,000 and/or imprisonment.

Transaction Standards.The Transaction Standards became effective on October 16, 2003; however, many covered entities,
including some of our customers, many insurance payers and our SecureConnect clearinghouse were not fully compliant as of this date. In response to concerns communicated to the Centers for Medicare
and Medicaid Services (CMS) regarding the readiness of a significant portion of the covered entities for the October 16thdeadline and the consequences to the healthcare industry
if significant claim processing problems occur at that time, CMS released its "Guidance on Compliance with HIPAA Transactions and Code Sets After the October 16, 2003 Implementation Deadline"
(which we refer to as the CMS Guidance). Under CMS's contingency plan for Medicare, it announced that it will continue to accept claims in both HIPAA standard and legacy formats, with the legacy
formats to be accepted for a period to be determined by CMS based upon a regular reassessment of the readiness of its electronic "trading partners." However, effective July 1, 2004, only claims
that are compliant with the Transaction Standards are to be reported as electronic media claims (EMC), which may be paid no earlier than after a 13 day waiting period. All other claims
(including both electronic claims that are not compliant with the Transaction Standards, as well as paper claims) may be paid no earlier than after a 26 day waiting period.

CMS
has made clear that it expects each party to every transaction to be accountable for compliance with the new standards as of October 16, 2003. However, the CMS Guidance
provides for a flexible, complaint-driven enforcement strategy. CMS indicated that it will respond to complaints

9

---

regarding
non-compliant transactions submitted to it in writing and that, upon receipt of a complaint, CMS will notify the entity that a complaint has been filed and provide an opportunity
for the entity to demonstrate compliance or to document its good faith effort to comply with the standards. In evaluating good faith efforts, CMS stated that it will consider not only the entity's
efforts on behalf of itself, but its effortsthrough outreach and testingto ensure that its trading partners are also in compliance. CMS also noted that its expectations
regarding compliance efforts will vary with the size and type of covered entity. We understand that CMS expects that larger organizations will have more sophisticated compliance efforts and outreach
to their smaller trading partners.

We
cannot provide assurance regarding how CMS will regulate clearinghouses in general, in particular our SecureConnect clearinghouse. In addition, even though major disruptions in the
flow of electronic transactions may be less likely in light of CMS's current approach to enforcement of the Transaction Standards, we have experienced isolated disruptions and some delays and we
expect there will continue to be some problems for a period of time.

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

Privacy Standards.These rules became effective on April 14, 2001 and the compliance date for most entities was
April 14, 2003. The Privacy Standards apply to the portions of our business that process healthcare transactions or provide certain technical services to other participants in the healthcare
industry, and certain of our portal services may be affected through contractual relationships. This rule requires us, our customers and our partners to use health information in a highly restricted
manner, to establish policies and procedures to safeguard the information, to obtain individual authorizations for some activities, and to provide certain access rights to individuals. This rule has
required us to incur product development and costs and we may continue to incur additional costs to comply. The rules restrict the manner in which we transmit and use the information, and may
adversely affect our ability to generate revenue from the provision of de-identified information to third parties. The effect of the Privacy Standards on our business is difficult to
predict and there can be no assurances that we will adequately address the risks created by the Privacy Standards and their implementation or that we will be able to take advantage of any resulting
opportunities. In addition, we are unable to predict what changes to the Privacy Standards might be made in the future or how those changes could affect our business.

Security Standards.These rules become effective in April 2005 and establish detailed requirements for safeguarding
patient information that is electronically transmitted or electronically stored. The rule establishes 42 implementation specifications, 20 of which are "required," meaning they must be implemented as
specified in the rule. Twenty-two are "addressable." Complying with addressable implementation specifications requires a business to assess whether they constitute a reasonable and
appropriate safeguard for the particular business; if not, an alternative approach must be designed and implemented to achieve the particular standard. The Security Standards apply to the portions of
our business that process healthcare transactions, that provide certain technical services to other participants in the healthcare industry, or that enable electronic communications of patient
information among healthcare industry participants, and certain of our portal services may be affected through contractual relationships. Some of the Security Standards are technical in nature, while
others may be addressed through policies and procedures for using information systems. The Security Standards may require us to incur significant costs in evaluating our products and services to
ensure appropriate compliance with the Security Standards. We are unable to predict what changes might be made to the

10

---

Security
Standards prior to the 2005 implementation deadline or how those changes might help or hinder our business. The effect of the Security Standards on our business is difficult to predict and
there can be no assurances that we will adequately address the risks created by the Security Standards and their implementation or that we will be able to take advantage of any resulting
opportunities.



The U.S. Food and Drug Administration (the FDA) has jurisdiction under the 1976 Medical Device Amendments to the Federal Food, Drug, and Cosmetic Act to regulate
computer products and software as medical devices if they are intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease in humans. We believe that our healthcare
information systems products are not medical devices currently subject to FDA regulation. However, FDA regulations are constantly changing and the FDA may promulgate regulations, or interpret current
regulations in a way that would cover our products. In addition, we may develop products that subject us to FDA regulation. Compliance with FDA regulations could substantially increase our cost of
doing business and may limit the extent of our planned product development.

The
Federal Drug Enforcement Agency has promulgated regulations that may prohibit a pharmacy from the initial dispensing and/or refilling of certain controlled substances through an
electronically transmitted prescription. A violation of these regulations may result in civil and criminal penalties. Such regulations may limit the scope of our planned prescription ordering and
refill functions.

BillAdvantage, ChartKeeper, Northern Health Anesthesia, RidgeMark, SecureConnect and Therapist Helper are either registered trademarks or trademarks of VantageMed Corporation.
All other trademarks are the property of their respective owners.

Employees

As of December 31, 2003, we employed 173 persons, including 20 in sales and marketing, 101 in customer support services, 34 in product development and 18
in administration, finance and management. In order to augment our hiring of ready-to-work skilled individuals, we utilize several programs to educate and train our work force.
Our employees are not represented by a labor union and we have not experienced any work stoppages and consider 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 and amendments 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 file electronically with the SEC, including us.

Item 2. Properties

We currently lease approximately 8,800 square feet at our principal executive and corporate headquarters at 3017 Kilgore Road, Rancho Cordova, California, that
expires in December 2004. We also lease space at several locations throughout the United States, with lease terms expiring at various dates through 2007. We believe that these facilities are
adequate for our current operations, and additional leased space can be obtained as needed. We have subleased some space in our facility in Boulder, Colorado and are actively seeking to sublease
additional space in this facility. This lease expires in July 2007 and the property was vacated by us in June 2002. We are also seeking to sublease space in our facility in Milford,
Michigan. This lease expires in July 2005 and the property was vacated by us in December 2003.

11

---



Item 3. Legal Proceedings

On October 15, 2003, the Securities and Exchange Commission (the SEC) instituted administrative cease and desist proceedings against VantageMed and certain
former members of company management, following its inquiry into VantageMed's accounting for the sale of the dental business that was attempted in September 2001. The findings in the
administrative proceeding instituted against the company state that VantageMed, under the direction of certain former members of senior management, materially misstated its financial results in the
third quarter ended September 30, 2001. The SEC did not charge VantageMed with fraud or levy any monetary damages against the Company. However, as part of a settlement agreement, the SEC
ordered VantageMed to cease and desist from committing or causing any violation of the periodic reporting and books and records provisions of the federal securities laws. VantageMed agreed to the
order, without admitting or denying any findings. In acceptance of the settlement, the Commission considered remedial acts promptly undertaken by VantageMed and cooperation afforded to the Commission
staff. This settlement is not associated with VantageMed's reporting of the sale of the DentalMate business in September 2003.

We
are party to various legal actions arising in the normal course of business. Matters that are probable of unfavorable outcome and which can be reasonably estimated are accrued. Such
accruals amounted to $266,000 at December 31, 2003, and are based on information known about the matters, our estimates of the outcomes of such matters and our experience contesting, litigating
and settling similar matters. This amount is included in accrued liabilities in the accompanying consolidated balance sheet. None of the actions are believed by management to involve amounts that
would be material to our consolidated financial position, operations, or liquidity after consideration of recorded accruals.

Item 4. Submission of Matters to a Vote of Securities Holders

None.

PART II

Item 5. Market for Registrant's Common Stock and Related Stockholders Matters

VantageMed's common 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, in connection with the late filing of our Annual Report on Form 10-K for the year ended December 31, 2001, the ticker
symbol for the Company's common stock changed to "VMDCE" and on September 24, 2002, our securities were delisted for failure to comply with the minimum bid price per share ($1.00) requirement.
Our securities currently trade on the OTC Bulletin Board. The following table shows the high and low closing prices for our common stock as reported by the exchanges listed above:

2003

2002PeriodHigh

Low

High

LowFirst Quarter

$
0.37

$
0.15

$
1.29

$
0.58Second Quarter

$
0.70

$
0.28

$
0.75

$
0.30Third Quarter

$
0.35

$
0.20

$
0.54

$
0.12Fourth Quarter

$
1.00

$
0.27

$
0.36

$
0.10


As
of March 26, 2004, we had 140 registered owners of our common stock and a substantially greater number of beneficial owners.

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

12

---

Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 and
Section 27A of the Securities Act of 1933. These forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this
Form 10-KSB entitled "Risk Factors," that may cause actual results to differ materially from those discussed in, or implied by, such forward-looking statements. Forward-looking
statements within this Form 10-KSB are identified by words such as "believes," "anticipates," "expects," "intends," "may," "will" and other similar expressions. However, these words
are not the only means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are
forward-looking statements. We are not obligated and expressly disclaim any obligation to publicly release any update to any forward-looking statement. Our actual results could differ materially from
those anticipated in, or implied by, forward-looking statements as a result of various factors, including the risks outlined elsewhere in this report. Readers are urged to carefully review and
consider the various disclosures made by VantageMed Corporation in this report and in our other reports filed with the SEC, and available on its website at www.sec.gov, that attempt to advise
interested parties of the risks and factors that may affect our business.

Overview

VantageMed is a national provider of healthcare information systems and services headquartered in Sacramento, California with support personnel and sales
representatives in various locations throughout the United States. We develop, sell, install and support software products and services that assist physicians, behavioral health professionals and
other healthcare providers in the operation of their practices. We have assembled sales offices throughout the United States by acquiring established regional healthcare practice management systems
companies to sell and support our new Windows-based software and services.

The
practice management software products we offer provide physicians and other healthcare professionals with comprehensive office management software designed to automate the
administrative, financial, practice management and clinical requirements of a practice. These systems range in capacity from one to approximately one hundred users. We also provide software, network
and hardware support, training, electronic claims processing, electronic statement printing and mailing, and electronic remittance advices.

Our
strategy is to continue to expand our customer base primarily through internal growth and possibly through additional acquisitions of established regional healthcare products
companies who will sell and support our new software products and services to an existing and expanding customer base. We plan to grow our recurring revenues by increasing our electronic services
product offerings and we expect to generate non-recurring revenues through the migration of our current customers from legacy systems to our Windows-based software products and electronic
services, while at the same time continuing to expand both our market penetration and product offerings.

We
derive revenues from three sources. Software and systems revenues result from the licensing of our proprietary software, as well as the sale of third-party software (primarily desktop
operating systems and standard communication/security software), computer hardware and supplies. Customer support revenues are derived from software maintenance and customer service, network and
computer hardware support, billing services, training, data conversion and system installation services. Electronic services revenues are generated by electronic insurance claims processing,
electronic patient statement printing and mailing.

Our
revenues include both recurring and non-recurring revenue streams. We define recurring revenues as any revenues derived from software maintenance and hardware support
contracts as well as revenues derived from billing and electronic services. We consider our non-recurring revenues to be

13

---

revenues
generated from sales of software and systems and related training, data conversion and installation services that can vary significantly from period to period depending on market conditions
and our ability to sell our products. Over time, we believe that recurring revenues will continue to represent a significant portion of our overall revenues. Recurring revenue is not a measurement
defined by US GAAP and should not be considered an alternative to, or more meaningful than, revenues as defined by US GAAP. Not all companies calculate recurring revenues in the same manner as we do
or at all. Accordingly, our recurring revenue data may not be comparable with that of other companies. We have included the following information concerning recurring revenues because we believe
recurring revenues provide useful information regarding our overall revenue mix.

Years Ended December 31,2003

2002Recurring

$
14,897

$
15,304Non-recurring


6,958


6,440Total revenues

$
21,855

$
21,744


Cost
of revenues consists primarily of the costs of software and computer hardware products sold to customers and associated shipping costs, third-party costs for supplies and electronic
services and salary and benefit costs for employees performing customer support. Selling, general and administrative expenses include the salaries, commissions and benefits of sales staff, executive
and administrative personnel costs, advertising and promotional materials costs and travel, communications, facilities, insurance and other administrative expenses. Product development expenses
consist primarily of compensation and related costs for employees and fees for independent contractors and relate primarily to the development of our Windows-based products.

Since
our inception, we have invested approximately $22.9 million in product development. These amounts have been primarily invested in our Windows-based products and have been
expensed as they have been incurred.

As
of December 31, 2003, we had post-acquisition federal and state net operating loss carryforward benefits of approximately $43 million and
$4.5 million, respectively, available to offset future taxable income, if any. These benefits will begin to expire incrementally at various dates ending in 2023 and as of December 31,
2003, have been fully reserved on our balance sheet.

We
have acquired companies with technology that enhances our overall product offerings or that contributed to our customer base. Our acquisitions have produced an established
distribution channel of local sales offices nationwide and provided us access to an existing customer base and new product offerings. We have not completed any acquisitions since 1999. In
June 2002, we initiated a comprehensive restructuring plan that included a re-evaluation of our product development initiatives, consolidation of certain operating facilities and a
reduction of approximately 30% of our total workforce at that time. In July 2003, we took additional restructuring actions. See Note 3 to our Consolidated Financial Statements included
in this Form 10-KSB.

Since
July 1997, we have developed a customer base of over 12,000 sites through both acquisitions and internal growth. We expect our revenues to increase primarily through
internal growth and potentially through acquisitions. We believe that the migration of existing customers to our Windows-based products, the marketing of these products to new customers, increasing
our electronic services revenues through expanded service offerings and increased customer penetration are the keys to our internal growth strategy. Our growth model is therefore focused on increasing
revenues from software licensing, support services and electronic transaction services, as well as maintaining recurring support revenues from our legacy customer base.

14

---

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

Selected Consolidated Financial Data  (In thousands, except per share amounts)

|                                             |                                             | Years Ended December 31, |       
|-------------------------------------------- | ------------------------------------------- | ------------------------ | ------
|
|
|Consolidated Statement of Operations Data:   |                                             |                          |       
|Revenues:                                    |                                             |                          |       
|                                             | Software and systems                        |                          | $     
|                                             | Customer support                            |                          |       
|                                             | Electronic services                         |                          |       
|                                             |                                             |                          |       
|                                             |                                             | Total revenues           |       
|Cost of revenues:                            |                                             |                          |       
|                                             | Software and systems                        |                          |       
|                                             | Customer support                            |                          |       
|                                             | Electronic services                         |                          |       
|                                             |                                             |                          |       
|                                             |                                             | Total cost of revenues   |       
|                                             |                                             |                          |       
|Total gross margin                           |                                             |                          | 9,543 
|Operating expenses:                          |                                             |                          |       
|                                             | Selling, general and administrative         |                          |       
|                                             | Product development                         |                          |       
|                                             | Depreciation and amortization               |                          |       
|                                             | Stock-based compensation                    |                          |       
|                                             | Restructuring, impairment and other charges |                          |       
|                                             | Gain on sale of DentalMate business         |                          |       
|                                             |                                             |                          |       
|                                             |                                             | Total operating expenses |       
|                                             |                                             |                          |       
|Loss from operations                         |                                             |                          | (3,147
|Shareholder litigation settlement            |                                             |                          |      
|Interest and other income (expense), net     |                                             |                          | 10    
|                                             |                                             |                          |       
|Loss before income taxes                     |                                             |                          | (3,137
|Income tax provision                         |                                             |                          |      
|                                             |                                             |                          |       
|                                             | Net Loss                                    |                          | $     
|                                             |                                             |                          |       
|Basic and diluted loss per share(1)          |                                             | $                        | (0.37 
|Weighted-average shares-basic and diluted(1) |                                             |                          | 8,400 

|                                                  |  | As of December 31, |        
|------------------------------------------------- |  | ------------------ | -------
|
|
|Consolidated Balance Sheet Data:                  |  |                    |        
|Net working capital                               |  | $                  | (2,187 
|Cash, cash equivalents and short-term investments |  |                    | 2,359  
|Long-term investments                             |  |                    |       
|Total assets                                      |  |                    | 7,638  
|Long-term debt, net of current portion            |  |                    | 195    
|Accumulated deficit                               |  |                    | (72,990
|Total stockholders' equity (deficit)              |  | $                  | (483   

---

15

---

Results of Operations

The following table sets forth certain data expressed as a percentage of total revenues for the periods indicated.

Years Ended
December 31,2003

2002(As restated,
see Note 2)Revenues:Software and systems

25.1
%
23.7
%Customer support

53.0

55.1Electronic services

21.9

21.2Total revenues

100.0

100.0Cost of revenues:Software and systems

11.4

8.5Customer support

31.5

34.4Electronic services

13.4

14.6Total cost of revenues

56.3

57.5Total gross margin

43.7

42.5Operating expenses:Selling, general and administrative

38.9

52.4Product development

12.1

13.7Depreciation and amortization

3.5

5.4Stock-based compensation

0.1

0.0Restructuring, impairment and other charges

6.0

8.0Gain on sale of DentalMate business

(2.6
)
0.0Total operating expenses

58.0

79.6Loss from operations

(14.3
)
(37.0
)Interest and other income (expense), net

0.0

0.0Net loss

(14.3
)%
(37.0
)%


Results of Operations for the year ended December 31, 2003 compared to the year ended December 31, 2002

Revenues.Total revenues increased $111,000, or 0.5%, from $21.7 million for the year ended December 31, 2002
to $21.9 million for the year ended December 31, 2003. This increase included a
$518,000 increase in non-recurring revenues that was partially offset by a $407,000 decrease in recurring revenues. Non-recurring revenues (revenues generated from sales of
software and systems and related training, data conversion and installation services) increased $518,000, or 8.0%, from $6.4 million in 2002 to $7.0 million in 2003. Recurring revenues
(revenues derived from software and hardware maintenance, billing and electronic services) decreased $407,000, or 2.6%, from $15.3 million in 2002 to $14.9 million in 2003 primarily due
to a decrease in hardware maintenance services on our legacy products and a decrease in our billing services revenues.



16

---



Cost of Revenues.Total cost of revenues decreased $187,000, or 1.5%, from $12.5 million in 2002 to
$12.3 million in 2003. Gross margin (total revenues less cost of revenues divided by total revenues) improved from 42.5% in 2002 to 43.7% in 2003. This improvement was primarily due to our cost
reduction efforts as well as the re-deployment of certain customer support personnel to product development activities associated with HIPAA.



17

---



Selling, General and Administrative.SG&A expenses consist primarily of salaries, commissions and benefits of sales staff,
executive and administrative personnel, advertising and promotional materials and travel, communications, facility costs and insurance. SG&A expenses decreased $2.9 million, or 25.3%, from
$11.4 million, or 52.4% of revenues, in 2002 to $8.5 million, or 38.9% of revenues, in 2003. The reduction in SG&A expense was primarily due to a reduction in related headcount from
56 at December 31, 2002 to 38 at December 31, 2003 in connection with our June 2002 restructuring plan, a reduction in legal expenses and professional fees associated with
the inquiry conducted by the Securities and Exchange Commission and the closure of several operating facilities as a result of our June 2002 restructuring.

Product Development.Product development expenses consist primarily of compensation and related costs for employees and fees
for independent contractors and relate primarily to the development of our Windows-based products as well as development of certain legacy products to address HIPAA compliance. In June 2002, we
implemented a restructuring plan that included a re-evaluation of all product development initiatives and that focused our efforts on improving the functionality and performance of our
Windows-based products and on developing new products that operate on a common architecture. As a result, product development expenses decreased $338,000, or 11.4%, from $3.0 million, or 13.7%
of revenues, in 2002 to $2.6 million, or 12.1% of revenues in 2003.

Stock-based compensation.Effective January 1, 2003, we began to account for stock options using a fair value method,
as allowed under SFAS No. 148. We have elected to use the prospective method of transition, resulting in the recognition of stock-based compensation expense of $27,000 for the year ended
December 31, 2003. This expense is associated with options we have granted to employees, directors and executives during 2003 and is based on an estimate of fair market value using the Black-
Scholes option pricing model.

Restructuring, Impairment and Other Charges.In June 2002, we implemented a restructuring plan that was aimed at
substantially reducing our monthly cash usage while refocusing on the delivery of superior customer service and federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) compliant
products. The restructuring plan included a re-evaluation of all product development initiatives, consolidating certain operating facilities and a reduction in personnel by approximately
30% of our workforce including 20 sales and administrative employees, 27 product development employees and 27 customer service personnel. As of December 31, 2002, all but one of these employees
had been terminated. We recorded a restructuring expense of $1.7 million in connection with this restructuring program representing severance payments, an expected loss on leased facilities
that were being vacated as well as write-downs of property and equipment that would no longer be used.

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

18

---

The
components of our 2002 and 2003 restructuring provisions and activity in the related reserve are as follows (in thousands):

|                          |  | Severance |      | Leased
Facilities |   | Fixed
Assets |   | Total |    
|------------------------- |  | --------- | ---- | ----------------- | - | ------------ | - | ----- | ---
|2002 provision            |  | $         | 733  |                   | $ | 917          |   | $     | 98 
|Non-cash charges          |  |           |     |                   |   |             |   |       | (98
|Cash payments             |  |           | (729 | )                 |   | (111         | ) |       |   
|                          |  |           |      |                   |   |              |   |       |    
|December 31, 2002 balance |  |           | 4    |                   |   | 806          |   |       |   
|2003 provision            |  |           |     |                   |   | 135          |   |       |   
|Cash payments             |  |           | (4   | )                 |   | (240         | ) |       |   
|                          |  |           |      |                   |   |              |   |       |    
|December 31, 2003 balance |  | $         |     |                   | $ | 701          |   |       |   
|                          |  |           |      |                   |   |              |   |       |    

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

In
the fourth quarter of 2003 we performed the annual impairment review of goodwill required by SFAS 142 and determined that due to the performance of our billing services units
as well as changes made to our legacy system migration strategy including a formal plan to discontinue support of certain systems at future dates, components of our goodwill and intangible assets were
impaired. To determine the amount of the impairment charge and implied fair value of goodwill, we performed an allocation of the estimated fair value of each reporting unit to the identifiable
tangible and intangible assets and non-goodwill intangible assets and liabilities. As a result of this analysis, we recorded an impairment charge of $1.2 million. Approximately
$803,000 of this charge was related to an impairment of goodwill primarily associated with our billing services business units.

Depreciation and Amortization.Depreciation expense is recognized on a straight-line basis over the estimated
useful lives of our fixed assets and decreased $303,000, or 41.0% from 2002 to 2003 primarily due to certain fixed assets that became fully depreciated during 2003. To a lesser extent, the fixed
assets written off in connection with our June 2002 restructuring accounted for part of the decrease. Amortization expense is recognized on a straight-line basis over the estimated
useful lives of our non-goodwill related intangible assets and decreased $111,000, or 25.0%, from 2002 to 2003. The decrease was primarily due to certain intangible assets that became
fully amortized during 2003.

Gain on sale of DentalMate business.In September 2003, we sold our DentalMate business in exchange for $500,000 in
cash, notes receivable totaling $100,000 and other consideration of $60,000. We recognized a gain on the sale of this business totaling $524,000 in the third quarter of 2003 and deferred recognition
of the gain associated with the $100,000 in notes receivable until actual receipt of cash. An additional $47,000 of gain was recognized in the fourth quarter of 2003 when one of the installment
payments was received. The balance of the gain will be recognized when the final installment payment is received.

Interest and Other Income (Expense), Net.Interest income decreased $99,000, or 51.8% from 2002 to 2003 primarily due to a
$1.1 million, or 32.9%, decrease in our cash and investment balances from December 31, 2002 to December 31, 2003. To a lesser extent, a decrease in interest rates contributed to
the decrease in interest income. Interest expense also decreased in connection with a decrease in our debt and capital leases.

Income Taxes.We did not record a provision for income taxes in 2002 or 2003, as we did not generate book or taxable income.
At December 31, 2003, we had net operating loss carryforwards for federal and state income tax purposes of approximately $43 million and $4.5 million, respectively, that expire in
various years through 2023. These future tax benefits have not been recognized as an asset on our balance sheet due to uncertainties surrounding our ability to generate sufficient taxable income in

19

---

future
periods to realize the benefits. The extent to which these loss carryforwards can be used to offset future taxable income may be limited.

Critical Accounting Policies

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

Revenue Recognition.We enter into license agreements with customers, that allow for the use of our products, usually
restricted by the number of employees, the number of users, or the license term. Fees from licenses are recognized as revenue in accordance with AICPA Statement of Position 97-2, (SOP
97-2) "Software Revenue Recognition," 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 deemed probable and persuasive evidence of an arrangement exists. Multiple element arrangements generally include a
proprietary software license, third-party software, hardware, and implementation, training and other specified services. The fee for multiple element arrangements is allocated to the various elements
based on vendor-specific objective evidence (VSOE) of fair market value established by the price of the elements sold separately, or renewal rates, if an element is not yet being sold separately. The
residual method is used when VSOE exists for the undelivered elements, primarily post-contract support and training. In accordance with SOP 97-2, software subscription license
fees and revenue from annual support agreements are recognized ratably over the contract term. Revenues from the sale of computer hardware and supplies are recognized as products are shipped and
revenues from other services, including training, data conversion, electronic services and billing services are recognized as services are rendered. Provisions for product returns and product
warranties are estimated based on historical experience and are evaluated regularly.

Allowance for doubtful accounts.We review accounts receivable and provide a reserve for amounts we estimate will not be
collectible. During our review, we consider our historical experience, the age of the receivable balance, the credit-worthiness of the customer and the reason for the delinquency.

Inventory reserves.Reserves are provided for excess or obsolete inventory, which are estimated based on the age 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 related charge is recorded as cost of revenue.

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

Accrued liabilities.Certain of our accrued liabilities are based largely on estimates. For instance, we record a liability
on our balance sheet each period for the estimated cost of goods and services

20

---

rendered
to us, for which we have not received an invoice. Additionally, our restructuring reserve includes an estimate for the loss we expect to incur for excess leased facility space. This estimate
is based on numerous assumptions and estimates, such as the market value of the space and the time it will take to sublease the space. Our estimates are based on historical experience, input from
sources outside the Company, and other relevant facts and circumstances.

Income taxes.We use the asset and liability method of accounting for income taxes under which deferred income taxes are
provided based upon the applicable enacted tax laws and rates. A valuation allowance is provided against the future benefits of deferred tax assets if it is determined that it is more likely than not
that the future tax benefits associated with the deferred tax asset will not be realized. This determination is based upon our limited operating history, history of losses and the possibility that we
may never achieve profitability. As of December 31, 2003, we had net operating loss carryforwards for federal and state income tax purposes of approximately $43 million and
$4.5 million, respectively, that were fully reserved and therefore are not recorded on the balance sheet as an asset.

Liquidity and Capital Resources

Since 1996, we have financed our operations primarily through a combination of indebtedness, capital leases, private equity financing and an IPO. Approximately
82% of the consideration paid for our acquisitions was paid with our stock or stock options. The balance of the consideration was promissory notes and cash.

Net
cash used for operating activities was $815,000 in 2003 compared to $5.4 million 2002. In 2003, our net loss of $3.1 million excluding non-cash charges of
$769,000 for depreciation and amortization, and $1.2 million for asset impairment charges was $1.2 million which accounts for substantially all of this loss. This loss was partially
offset by increases in deferred revenue and customer deposits and accounts payable and accrued liabilities of $864,000 and $430,000, respectively, while an increase in accounts receivable used cash of
$473,000. In 2002, our net loss of $8.0 million excluding
non-cash charges of $1.2 million for depreciation and amortization was $6.9 million which accounts for substantially all of the $5.4 million of cash used for operating
activities in 2002.

Investing
activities provided $1.6 million in cash in 2003 and $4.5 million in cash in 2002. In both years, net proceeds from the sale of investments provided substantially
all of the cash. In 2003, $547,000 of cash was provided in connection with the sale of our DentalMate business. These sources of cash were partially offset by capital expenditures of $294,000 and
$171,000 in 2003 and 2002, respectively.

Net
cash used in financing activities was $603,000 and $496,000 in 2003 and 2002, respectively. In both years, payments on debt accounted for the use of cash.

At
December 31, 2003, we had negative working capital, and had negative cash flow during the quarter and during the year. We also had a deficit in stockholder's equity for the
first time. We implemented a restructuring plan in June 2002 aimed at substantially reducing monthly cash usage while refocusing on the delivery of superior customer service and quality HIPAA
compliant products. This plan included re-evaluating all product development initiatives, consolidating certain operating facilities and the reduction of personnel by approximately 30% of
our workforce, at that time. The restructuring efforts are substantially complete. These actions have substantially reduced our monthly cash usage and we expect to make additional expense reductions
that will further decrease our monthly cash usage. During the first six months of 2002, cash used for operations totaled $4.4 million. Subsequent to our restructuring, cash used for operations
was reduced to $978,000 in the last six months of 2002. Cash used for operations totaled $815,000 for the twelve months ended December 31, 2003.

21

---

At December 31, 2003, we had $2.4 million of cash and short term investments. Based on our current sales forecast and planned operating expenditures, we believe that our
cash and short-term investments will be sufficient to meet our cash flow needs through at least December 2004. However, we may seek to raise additional funds to cover unexpected
losses, fund expansion, fund additional marketing expenditures, enhance our operating infrastructure, respond to competitive pressures, or acquire or develop complementary businesses or necessary
technologies. Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available on acceptable terms, our ability to fund our operations, take advantage
of opportunities, develop products or services or otherwise respond to competitive pressure could be significantly limited. Capital expenditures for equipment, furniture and software are expected to
be limited during the next 12 months.

Debt and Lease Obligations

At December 31, 2003, we had $486,000 in debt primarily issued in connection with our acquisitions. Interest rates on these notes range from 5.5% to 6.95%.
In addition, we lease certain computers and office equipment under lease agreements accounted for as capital leases. At December 31, 2003, we had $170,000 in capital leases that mature from
February 2004 to December 2005. Many of these leases include end of lease bargain purchase options, which we intend to exercise. Our obligations under these lease arrangements are
secured by the leased equipment. At December 31, 2002, we had $726,000 in assumed debt or promissory notes primarily issued in connection with acquisitions and $328,000 in capital leases.

We
lease space at our principal executive and corporate headquarters and at several locations throughout the United States, with lease terms expiring at various dates through 2007. We
have subleased some space in our facility in Boulder, Colorado and are actively seeking to sublease additional space. This lease expires in July 2007 and the property was vacated by us in
June 2002.

Future
minimum payments under all debt and lease obligations at December 31, 2003 are as follows (in thousands):

|Year Ending December 31, |                                                                         | Debt                   |   | Capital
Leases |     | Operating
Leases
|------------------------ | ----------------------------------------------------------------------- | ---------------------- | - | -------------- | --- | ----------------
|                         | 2004                                                                    |                        | $ | 351            |     | $               
|                         | 2005                                                                    |                        |   | 135            |     |                 
|                         | 2006                                                                    |                        |   |               |     |                 
|                         | 2007                                                                    |                        |   |               |     |                 
|                         |                                                                         | Total minimum payments |   |                | 486 |                 
|                         |                                                                         |                        |   |                |     |                 
|                         | Less: interest on capital lease obligations at rates of 8.62% to 18.93% |                        |   |               |     |                 
|                         | Less: current maturities                                                |                        |   | (351           | )   |                 
|                         |                                                                         |                        |   |                |     |                 
|                         |                                                                         | Long-term portion      |   | $              | 135 |                 
|                         |                                                                         |                        |   |                |     |                 

The
future minimum operating lease payments above have been reduced for estimated income from sublease arrangements of $48,000, $69,000, $57,000 and $31,000 in 2004, 2005, 2006 and 2007,
respectively.

Recent Accounting Pronouncements

In June 2002, the FASB issued Statement No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal Activities," which
addresses issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted
for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a

22

---

Restructuring)."
The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits received by employees who are involuntarily terminated
under the terms of a one-time benefit arrangement. SFAS 146 requires that an expense associated with an exit or disposal activity be recognized when the liability is incurred, and
that fair value is the objective for initial measurement of the liability. Under EITF 94-3, an expense was recognized at the date of an entity's commitment to an exit plan. SFAS 146
is effective for all exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 did not have a material impact on our results of operations or
financial condition.

In
November 2002, the Emerging Issues Task Force (EITF) issued EITF 00-21 "Revenue Arrangements with Multiple Deliverables." EITF 00-21 prescribes a method
to account for contracts that have multiple elements or deliverables. It provides guidance on how to allocate the value of a contract to its different deliverables, as well as guidance on when to
recognize revenue allocated to each deliverable over its performance period. The provisions of EITF 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after
June 15, 2003. The adoption of EITF No. 00-21 did not have a material impact on our financial statements.

In
May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 requires that
certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable
stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares
of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 in the quarter ended June 30, 2003 did not have a material impact on our financial position or results of operations.

In
January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning
after June 15, 2003. In addition, FIN 46 requires that the company make disclosures in its consolidated financial statements for the year ended December 31, 2002 when the company
believes it is reasonably possible that it will consolidate or disclose information about variable interest entities after FIN 46 becomes effective. In December 2003, FASB issued a revised FIN
46. The FASB deferred the effective date for VIEs that are non-special purpose entities created before February 1, 2003, to the first interim or annual reporting period that ends
after March 15, 2004. At this time, we do not believe it is reasonably possible that we will consolidate or disclose information about VIEs. However, we will continue to assess the impact of
FIN 46 on our consolidated financial statements.

23

---

Forward-Looking Statements and Risk Factors

Special Cautionary Notice Regarding Forward-Looking Statements and Risk Factors

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

We are subject to various risk factors, many of which are outside of our control, that could cause our actual results to differ from those
expressed in forward-looking statements made by us throughout this report 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 future financial conditions or statements expressing general optimism about future operating results, are
forward-looking statements. The following are the important factors that may cause actual results to differ from those expressed in such forward-looking statements.

Risks Associated with our Business

Our Stock Has Been Delisted From The NASDAQ National Market

On September 24, 2002, our stock was delisted from the NASDAQ Stock Market for failing to meet the minimum bid price requirement of $1.00. As a result, our
stock now trades on the OTC Bulletin Board. Stockholders may have difficulty buying and selling our stock on the OTC. Since the OTC is broker driven marketplace, we are dependent on professional
market makers to facilitate trading of our stock on the OTC. If market makers do not register to trade our stock on the OTC, stockholders may not have a public market for the purchase and sale of our
securities. In addition, because the market price for our stock has been below $1.00, the stock may be deemed a penny stock, which would subject the stock to additional sales practice rules on
broker-dealers who sell the Company's securities. As a result of these additional obligations, some brokers may not effect transactions in our stock, which could adversely affect the liquidity and
pricing of our stock.

Our Restructuring Plan and Cost Reduction Efforts May Not Be Successful

During the second quarter of 2002, we developed and implemented a restructuring plan aimed at substantially reducing our monthly cash usage while refocusing on
the delivery of superior customer service and quality HIPAA compliant products. The restructuring plan included reevaluating all product development initiatives, consolidating certain operating
facilities and reducing personnel by approximately 30% of the Company's total workforce. In subsequent periods we have made additional efforts to reduce our operating costs and we have reorganized the
reporting structure of the Company along functional reporting lines. There can be no assurances that our reduction in force or cost reduction efforts will not restrict our ability to increase sales,
execute our product development and customer support strategies or achieve profitability.

24

---

We Have A History Of Losses And We May Never Achieve Profitability

We have incurred operating losses and have generated cash flow deficits since our inception in 1995 and as of December 31, 2003, our accumulated deficit
was $73.0 million. Our business strategies may not be successful and we may not be able to achieve or sustain revenue growth or profitability.

Our Need For Additional Financing Is Uncertain, As Is Our Ability To Raise Further Financing If Required

At December 31, 2003, we had $2.4 million of cash, short and long-term investments and had negative working capital. Based on our
current sales forecast and planned operating expenditures, we believe that our cash, short-term and long-term investments will be sufficient to meet our cash flow needs through
at least December 2004. However, we may need to raise additional funds to respond to business contingencies which may include the need to: cover unexpected losses; fund expansion; fund
additional marketing expenditures; enhance our operating infrastructure; respond to competitive pressures; or acquire or develop complementary businesses or necessary technologies. Further, even if no
unexpected contingencies arise, we can offer no assurances that our current resources will sustain us beyond December 2004.

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

If We Fail To Properly Manage Our Growth, We May Be Unable To Achieve Or Sustain Profitability

We have experienced a recent period of growth in unit sales, which has placed, and may continue to place, a significant strain on our resources. To address this
issue, we have made a number of changes to our policies and procedures and expect to expand our overall software development, marketing, sales, client management and training capacity. In the event
that we are unable to timely and adequately modify our policies and procedures to support this increase in growth or that we are unable to identify, hire, train and retain qualified individuals in
such capacities within a reasonable timeframe our operations could be adversely affected. In addition, many of the changes we expect to make will require us a cash investment. Our ability to
effectively implement these changes could be limited by our financial resources.

If We Fail To Migrate Our Existing Customer Base Or Generate New Sales Of Our Windows-Based Products, We May Not Be Able To Sustain Our Recurring Revenues And We May Be Unable
To Achieve Or Sustain Revenue Growth And Profitability

Our financial success depends upon our ability to migrate our existing legacy product customers to our Windows-based products and to generate new sales of our
Windows-based products. Loss of our existing customers to competition, the loss of the associated recurring revenues and the cost of supporting numerous legacy products as well as the failure to
generate new system sales would have a significant impact on our ability to achieve profitability in the near term or at all.

If The Definition And Adoption Of Electronic Transactions In The Healthcare Information Technology Industry Sector Grows At A Slow Pace, We May Be Unable To Achieve Or Sustain
Revenue Growth And Profitability From Electronic Services

Our current services and anticipated future services are dependent on the use and growth of electronic transaction processing. To the extent that the HIPAA
standard transactions are not adopted

25

---

or
are modified by individual payers, or do not further penetrate the healthcare information technology industry, our ability to realize revenue from electronic services will be limited and we may not
be able to increase our revenues.

Internet Or Telecommunication Service Or Performance Problems Or Software Errors Arising After The Installation Of Our Software At Customer Sites Could Delay Market Acceptance
Of Our Products, Lead To Customer Dissatisfaction, Loss Of Revenue Or Increase in Expense And Injure Our Business Reputation

The performance of our products depends upon the efficient operation and timely installation of Internet and telephone connections, web browsers and Internet
service providers and upon the reliability of our software, including third-party software incorporated into our software. The Internet and telecommunication related equipment could experience
operational problems, delays or outages. In addition, software errors that we fail to detect may result in software performance problems. The occurrence of any of these problems could cause customers
to experience system delays, failures and loss of data. Such problems could delay market acceptance, lead to customer dissatisfaction, a loss of revenue, an increase in expense or injure our business
reputation.

We May Be Subject To State or Local Taxes That Could Harm Our Business

In the past, we have not consistently collected sales or local taxes on revenues from customers located in states other than the state where the sale originated.
We are monitoring our state-by-state obligations to collect sales tax and have made provisions, where considered necessary, in the event one or more states seek to impose sales
tax collection obligations on out-of-state companies similar to ours. We have also entered into agreements, or intend to enter into agreements, with tax reporting jurisdictions
and have revised our tax collection procedures. However, based on the nature of our operations and the acquisitions we have made, the determination of our obligation to collect taxes in certain
jurisdictions is complex and requires significant judgment. A successful assertion by states where we have not made provisions for sales and local taxes could seriously harm our business.

If Security And Legal Liability Concerns Make Customers Unwilling To Utilize Our Products And Services To Transmit Medical Information Electronically, The Demand For Our
Products May Diminish And We May Be Unable To Achieve Or Sustain Profitability

Potential customers may choose not to utilize our software products because of concerns related to the electronic transfer and management of protected health
information (PHI), including: security of PHI being transferred; errors in the transmission of PHI; legal liability for data security failures or transmission errors; and regulatory burdens imposed on
healthcare participants who transfer PHI electronically.

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

Breaches Of Network Security Could Damage Our Business Reputation, Lead To Customer Dissatisfaction, Delay Market Acceptance Of Our Products And Result In Legal And Financial
Liability And A Loss Of Revenue

Our electronic transaction services involve the storage and transmission of PHI through our network data centers over the Internet and over dedicated private data
lines. Despite the implementation of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses or similar disruptive problems. In the event of such a
security breach, proprietary and confidential information could be misappropriated or our operations could be interrupted. These problems could damage our business reputation, lead to customer
dissatisfaction and delay market

26

---

acceptance
of our products. We may also incur legal and financial liability and a loss of revenue as a result of such problems.

We Rely on Third Parties To Provide Services That Are Critical To Our Business Which Reduces Our Control Over Pricing and Quality Assurance

We rely on third parties to provide services that are critical to our business. For example, we use national clearinghouses for the processing of insurance claims
and the printing and delivery of patient billings for our customers. We also outsource some of our hardware maintenance services. Our reliance on these third parties involves a number of risks,
including, but not limited to:



Fluctuations In Our Quarterly Operating Results May Cause Volatility Or Decline In The Market Price Of Our Common Stock

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

We
base our expense levels in part upon our expectations concerning future revenues, and these expense levels are relatively fixed in the short term. If we have lower revenues, we may
not be able to make corresponding reductions in our spending in the short term. Any shortfall in revenues would have a direct impact on our results of operations. Fluctuations in our quarterly results
or the failure to meet analysts' expectations could affect the market price of our common stock in a manner unrelated to our long-term operating performance.

We Are Currently Engaged in Intellectual Property Litigation That is Time-Consuming and Expensive to Prosecute; If We Are Unable To Protect Our Intellectual
Property We May Lose Assets Or Continue 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 our intellectual property. We currently
have no patents and limited registered copyrights covering technology related to our products. We have no plans to seek such legal protection and, if we do, protection may not be granted.

Despite
our efforts to protect our intellectual property, we have experienced and may continue to experience instances where a third party or a former employee could attempt to copy,
reverse engineer or otherwise obtain and use our intellectual property, customer lists or trade secrets without authorization or could develop software competitive to ours. We are aggressively
pursuing these matters as they arise.

In
addition, our intellectual property may be misappropriated or infringed upon or may infringe upon the rights of others. Consequently, litigation may be necessary in the future to
enforce our intellectual property rights, to protect our confidential information or trade secrets, or to determine the validity or scope of the rights of others. Litigation could result in
substantial costs and diversion of

27

---

management
and other resources and may not successfully protect our intellectual property. Additionally, we may deem it advisable to enter into royalty or licensing agreements to resolve such claims.
Such agreements, if required, may not be available on commercially reasonable or desirable terms or at all. In addition, we indemnify our customers in the event that infringement occurs.

The Loss Of Experienced Personnel To Competitors Or Our Inability To Attract And Retain Qualified Personnel Could Significantly Interrupt Our Business Operations

Our future success will depend, to a significant extent, on the ability of our management to operate effectively, both individually and as a group. The loss of
the services of any of our senior management could negatively impact our ability to carry out our business plan. We are dependent on our ability to attract, retain and motivate high caliber key
personnel. Competition for qualified personnel in our industry is intense, and we may not be successful in attracting and retaining such personnel. There are a limited number of persons with the
requisite skills available to serve in these key positions and it may become increasingly difficult to hire such persons. Our business will suffer if we encounter delays in hiring these additional
personnel. Competitors and others have in the past and may in the future attempt to recruit our employees.

Delaware Law And Our Charter Documents Contain Provisions That Could Have The Effect Of Delaying Or Preventing A Corporate Takeover, Even If Such A Transaction Would Be
Beneficial To Our Stockholders

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

If We Fail to Develop New Products and Product Enhancements In A Timely Manner, We May Be Unable To Achieve Or Sustain Revenue Growth And Profitability

There can be no assurance that we will be successful in our product development efforts, that the market will continue to accept our existing products, or that
new products or product enhancements will be developed and implemented in a timely manner, meet the requirements of healthcare providers, or achieve market acceptance. If new products or product
enhancements do not achieve market acceptance, our business, results of operations and financial condition could be materially adversely affected.

We May Not be Able to Realize the Benefits of Our Marketing Programs and Relationships

We have entered into certain marketing agreements intended to increase the awareness of our Company in the market and increase future revenues. The marketing
programs may not be successful nor generate the level of interest we expect and we may not be able to realize revenues from these programs.

28

---

Risks Associated with our Industry

Intense Competition In The Market For Healthcare Information Systems And Services Could Prevent Us From Increasing Or Sustaining Revenues And Prevent Us From Achieving Or
Sustaining Profitability

Our competitors vary in size, geographic coverage and scope of products and services offered. The market demand for certain products varies across geographic
territories. Our principal competitors include practice management systems and Internet companies. Industry competitors include organizations such as WebMD Corporation, VitalWorks, Inc.,
PracticeWorks, Inc., Misys Healthcare Systems, McKesson HBOC, Quality Systems, Inc., Millbrook Corporation and ProxyMed. Additionally, within each local market there are several smaller
competitors who have developed technologically advanced niche products offered at lower prices. Finally, with the integration of clinical information systems into practice management systems, several
well-funded pharmaceutical, medical supply and biotech companies have entered the practice management systems market. Many of our competitors have greater financial, development,
technical, marketing and sales resources than we do. These competitors may be able to respond more rapidly to new or emerging technologies and regulations and changes in customer requirements than we
can. In addition, as the market for our products develops, additional competitors may enter the market and competition may intensify, requiring us to lower the prices of our products and services.

Economic And Cost Reduction Pressures Faced By Healthcare Providers May Limit The Ability Of Our Customers To Buy Our Products And Services And Could Limit Our Profitability

Economic and cost reduction pressures may limit the ability of healthcare providers to make expenditures for new software systems or for upgrades to existing
software systems. A reluctance or inability on the part of healthcare providers to make such expenditures could result in fewer sales and could limit our ability to achieve or sustain profitability.

If There Is A Delay In The Release Of Our Products and If We Fail To Respond To The Rapidly Changing Technology That Characterizes Our Market, Our Products May Be Rendered
Obsolete, We May Lose Our Market Opportunity And Fail To Achieve Or Sustain Profitability

We can make no assurances that delays in product releases will not occur in the future. The market for our products is highly competitive and changes rapidly.
Therefore, timely development and introduction of new products, features and services to existing customers will significantly impact our future success. We will be required to meet rapidly changing
market demands, respond to market requirements, develop new proprietary solutions, and successfully market new products and enhancements to new customers and our existing customer base.

Any Failure To Comply With Regulations Governing The Confidentiality And Integrity Of PHI Could Result In Severe Legal And Financial Liability, Harm Our Business Reputation And
Result In A Significant Loss Of Customers

Federal regulations under HIPAA governing the confidentiality and integrity of PHI transmitted electronically are complex and are evolving rapidly. Any failure on
our part to comply with current or future regulations could subject us to severe legal and financial liability. Such failures could also cause harm to our business reputation and a significant loss of
customers.

Our Billing And Claims Services Are Subject To Federal And State Regulation And Any Non-Compliance With These Regulations Could Lead To Civil, Criminal And
Financial Liability

The performance of our billing and claims services are governed by numerous federal and state civil and criminal laws. Increased scrutiny has been placed on the
billing and collection practices of

29

---

healthcare
providers and related entities. Although we believe that we are in compliance with any such regulations that may relate to the provision of our billing and claims services, any
non-compliance could lead to civil monetary penalties, criminal fines, imprisonment or exclusion from participation in Medicare, Medicaid and other federally funded healthcare programs for
us and the customer involved in the non-compliance.

Regulations That Restrict The Ability To Dispense Or Refill Controlled Substances Through An Electronically Transmitted Prescription Could Limit The Functionality Of Our
Software Products And Could Diminish The Revenue Generated From These Products

The Federal Drug Enforcement Agency has promulgated regulations that may prohibit a pharmacy from dispensing and refilling controlled substances through an
electronically transmitted prescription. These regulations may limit the scope of the prescription ordering and refill functions in our current and future software products and may diminish the
revenues we obtain from the sale of these products.

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

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

Future Regulations Enacted By Congress Or By State Governments May Adversely Impact The Healthcare Industry In Ways That Could Damage Our Business Opportunities Or
Profitability

The healthcare industry is highly regulated and has been the subject of increasing levels of government regulation during the past several years. We cannot
predict with any certainty the types of regulations that might be imposed or the impact that those regulations might have on our business. The adoption of regulations currently unanticipated by us or
by the healthcare industry could impose burdensome requirements or restrictions on our products or on the activities of healthcare providers. These restrictions could decrease the demand for our
products and could prevent us from growing our business and attaining profitability.

30

---



Item 7. Financial Statements

The Company's Consolidated Financial Statements are located on the pages indicated below:

INDEX TO FINANCIAL STATEMENTS  VANTAGEMED CORPORATION

|                      |                                                                                                                            | Page
|--------------------- | -------------------------------------------------------------------------------------------------------------------------- | ----
|Financial Statements: |                                                                                                                            |     
|                      | Report of Independent Certified Public Accountants                                                                         |     
|                      | Consolidated Statements of Operations for the two years ended December 31, 2003                                            |     
|                      | Consolidated Balance Sheets as of December 31, 2003 and 2002                                                               |     
|                      | Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Loss for the two years ended December 31, 2003 |     
|                      | Consolidated Statements of Cash Flows for the two years ended December 31, 2003                                            |     
|                      | Notes to Consolidated Financial Statements                                                                                 |     

31

---

Report of Independent Certified Public Accountants

To the Board of Directors and Shareholders of
VantageMed Corporation

We have audited the accompanying consolidated balance sheets of VantageMed Corporation (a Delaware corporation) and subsidiaries as of December 31, 2003
and 2002, and the related consolidated statements of operations, stockholders' equity (deficit) and comprehensive loss, and cash flows for each of the two years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

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

As
discussed in Note 1 to consolidated financial statements, effective January 1, 2003, the Company changed its method of accounting for stock-based compensation
arrangements in accordance with Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean
amendment of SFAS No. 123.

The
accompanying consolidated financial statements for the year ended December 31, 2002 have been restated as discussed in Note 2.

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company sustained
recurring losses from operations and had an accumulated deficit and stockholders deficit of $73 million and $483,000, respectively as of December 31, 2003. These factors, among others,
raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/Grant Thornton LLP
San Francisco, California
March 1, 2004

32

---



VANTAGEMED CORPORATION  CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands, except per share amounts)

|                                          |                                     | Year Ended December 31,  |       
|----------------------------------------- | ----------------------------------- | ------------------------ | ------
|
|
|Revenues:                                 |                                     |                          |       
|                                          | Software and systems                |                          | $     
|                                          | Customer support                    |                          |       
|                                          | Electronic services                 |                          |       
|                                          |                                     |                          |       
|                                          |                                     | Total revenues           |       
|Cost of revenues:                         |                                     |                          |       
|                                          | Software and systems                |                          |       
|                                          | Customer support                    |                          |       
|                                          | Electronic services                 |                          |       
|                                          |                                     |                          |       
|                                          |                                     | Total cost of revenues   |       
|                                          |                                     |                          |       
|Total gross margin                        |                                     |                          | 9,543 
|                                          |                                     |                          |       
|Operating expenses:                       |                                     |                          |       
|                                          | Selling, general and administrative |                          |       
|                                          | Product development                 |                          |       
|                                          | Depreciation and amortization       |                          |       
|                                          | Stock-based compensation            |                          |       
|                                          | Restructuring and impairment        |                          |       
|                                          | Gain on sale of DentalMate business |                          |       
|                                          |                                     |                          |       
|                                          |                                     | Total operating expenses |       
|                                          |                                     |                          |       
|Loss from operations                      |                                     |                          | (3,147
|                                          |                                     |                          |       
|Other income (expense):                   |                                     |                          |       
|                                          | Interest income                     |                          |       
|                                          | Interest expense and other, net     |                          |       
|                                          |                                     |                          |       
|Total other income (expense)              |                                     |                          | 10    
|                                          |                                     |                          |       
|Net loss                                  |                                     | $                        | (3,137
|                                          |                                     |                          |       
|Basic and diluted net loss per share      |                                     | $                        | (0.37 
|                                          |                                     |                          |       
|Weighted-average sharesbasic and diluted |                                     |                          | 8,400 
|                                          |                                     |                          |       

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

33

---



VANTAGEMED CORPORATION  CONSOLIDATED BALANCE SHEETS  (In thousands, except share and per share amounts)

|                                                                   |                                                                                                                                                    | 2003                                                 |       | 2002    |      
|------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ----- | ------- | -----
|
|ASSETS                                                             |                                                                                                                                                    |                                                      |       |         |      
|Current assets:                                                    |                                                                                                                                                    |                                                      |       |         |      
|                                                                   | Cash and cash equivalents                                                                                                                          |                                                      | $     | 1,585   |      
|                                                                   | Short-term investments                                                                                                                             |                                                      |       | 774     |      
|                                                                   | Accounts receivable, net of allowance of $129 and $109, respectively                                                                               |                                                      |       | 2,373   |      
|                                                                   | Current portion of notes receivable                                                                                                                |                                                      |       |        |      
|                                                                   | Inventories, net of reserve of $24 and $50, respectively                                                                                           |                                                      |       | 269     |      
|                                                                   | Prepaid expenses and other                                                                                                                         |                                                      |       | 366     |      
|                                                                   |                                                                                                                                                    |                                                      |       |         |      
|                                                                   |                                                                                                                                                    | Total current assets                                 |       |         | 5,367
|Long-term investments                                              |                                                                                                                                                    |                                                      |      |         |      
|Other assets, net of current portion                               |                                                                                                                                                    |                                                      | 17    |         |      
|Property and equipment, net                                        |                                                                                                                                                    |                                                      | 506   |         |      
|Intangibles, net                                                   |                                                                                                                                                    |                                                      | 1,748 |         |      
|                                                                   |                                                                                                                                                    |                                                      |       |         |      
|                                                                   |                                                                                                                                                    | Total assets                                         |       | $       | 7,638
|                                                                   |                                                                                                                                                    |                                                      |       |         |      
|LIABILITIES AND STOCKHOLDERS' EQUITY                               |                                                                                                                                                    |                                                      |       |         |      
|Current liabilities:                                               |                                                                                                                                                    |                                                      |       |         |      
|                                                                   | Current portion of long-term debt                                                                                                                  |                                                      | $     | 461     |      
|                                                                   | Accounts payable                                                                                                                                   |                                                      |       | 1,162   |      
|                                                                   | Accrued liabilities                                                                                                                                |                                                      |       | 2,386   |      
|                                                                   | Customer deposits and deferred revenue                                                                                                             |                                                      |       | 3,545   |      
|                                                                   |                                                                                                                                                    |                                                      |       |         |      
|                                                                   |                                                                                                                                                    | Total current liabilities                            |       |         | 7,554
|Long-term portion of restructuring reserve, net of current portion |                                                                                                                                                    |                                                      | 372   |         |      
|Long-term debt, net of current portion                             |                                                                                                                                                    |                                                      | 195   |         |      
|                                                                   |                                                                                                                                                    |                                                      |       |         |      
|                                                                   |                                                                                                                                                    | Total liabilities                                    |       |         | 8,121
|                                                                   |                                                                                                                                                    |                                                      |       |         |      
|Commitments and contingencies (Notes 8 and 12)                     |                                                                                                                                                    |                                                      |      |         |      
|Stockholders' equity (deficit):                                    |                                                                                                                                                    |                                                      |       |         |      
|                                                                   | Common stock, $0.001 par value, 20,000,000 shares authorized; 8,343,770 and 8,473,999 shares issued and outstanding in 2003 and 2002, respectively |                                                      |       | 8       |      
|                                                                   | Additional paid-in capital                                                                                                                         |                                                      |       | 72,483  |      
|                                                                   | Accumulated other comprehensive income                                                                                                             |                                                      |       | 16      |      
|                                                                   | Accumulated deficit                                                                                                                                |                                                      |       | (72,990 | )    
|                                                                   |                                                                                                                                                    |                                                      |       |         |      
|                                                                   |                                                                                                                                                    | Total stockholders' equity (deficit)                 |       |         | (483 
|                                                                   |                                                                                                                                                    |                                                      |       |         |      
|                                                                   |                                                                                                                                                    | Total liabilities and stockholders' equity (deficit) |       | $       | 7,638
|                                                                   |                                                                                                                                                    |                                                      |       |         |      

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

34

---



VANTAGEMED CORPORATION  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS  (In thousands, except share amounts)  (As restated, see Note 2)

|                                                                   |                    | Common Stock                   |           |   |    | Unrealized
Gain (Loss) On
Available-For-Sale
Securities |   |        |        |   |   
|------------------------------------------------------------------ | ------------------ | ------------------------------ | --------- | - | -- | ------------------------------------------------------- | - | ------ | ------ | - | --
|
|
|Balance, December 31, 2001                                         |                    | 8,535,831                      |           | $ | 9  |                                                         | $ | 72,549 |        | $ | 40
|Repayment of notes receivable with common stock held as collateral |                    | (61,832                        | )         |   | (1 | )                                                       |   | (38    | )      |   |  
|                                                                   |                    |                                |           |   |    |                                                         |   |        |        |   |   
|                                                                   | Subtotal           |                                | 8,473,999 |   |    | 8                                                       |   |        | 72,511 |   |   
|                                                                   |                    | Unrealized loss on investments |           |  |    |                                                         |  |        |        |  |   
|                                                                   |                    | Net loss                       |           |  |    |                                                         |  |        |        |  |   
|                                                                   |                    |                                |           |   |    |                                                         |   |        |        |   |   
|                                                                   | Comprehensive loss |                                |           |   |    |                                                         |   |        |        |   |   
|                                                                   |                    |                                |           |   |    |                                                         |   |        |        |   |   
|Balance, December 31, 2002                                         |                    | 8,473,999                      |           |   | 8  |                                                         |   | 72,511 |        |   | 28
|Repayment of notes receivable with common stock held as collateral |                    | (130,519                       | )         |   |   |                                                         |   | (87    | )      |   |  
|Shares issued in exchange for options exercised                    |                    | 290                            |           |   |   |                                                         |   |       |        |   |  
|Stock-based compensation expense                                   |                    |                               |           |   |   |                                                         |   | 27     |        |   |  
|Issuance of warrants to purchase common stock                      |                    |                               |           |   |   |                                                         |   | 32     |        |   |  
|                                                                   |                    |                                |           |   |    |                                                         |   |        |        |   |   
|                                                                   | Subtotal           |                                | 8,343,770 |   |    | 8                                                       |   |        | 72,483 |   |   
|                                                                   |                    | Unrealized loss on investments |           |  |    |                                                         |  |        |        |  |   
|                                                                   |                    | Net loss                       |           |  |    |                                                         |  |        |        |  |   
|                                                                   |                    |                                |           |   |    |                                                         |   |        |        |   |   
|                                                                   | Comprehensive loss |                                |           |   |    |                                                         |   |        |        |   |   
|                                                                   |                    |                                |           |   |    |                                                         |   |        |        |   |   
|Balance, December 31, 2003                                         |                    | 8,343,770                      |           | $ | 8  |                                                         | $ | 72,483 |        | $ | 16
|                                                                   |                    |                                |           |   |    |                                                         |   |        |        |   |   

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

35

---



VANTAGEMED CORPORATION  CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)

|                                                     |                                                                              | Year Ended
December 31,                   |      
|---------------------------------------------------- | ---------------------------------------------------------------------------- | ----------------------------------------- | -----
|
|
|Cash flows from operating activities:                |                                                                              |                                           |      
|                                                     | Net loss                                                                     |                                           | $    
|                                                     | Adjustments to reconcile net loss to net cash used for operating activities: |                                           |      
|                                                     | Depreciation and amortization                                                |                                           |      
|                                                     | Loss (gain) on disposal of assets                                            |                                           |      
|                                                     | Bad debt expense                                                             |                                           |      
|                                                     | Impairment of intangibles                                                    |                                           |      
|                                                     | Stock-based compensation                                                     |                                           |      
|Changes in assets and liabilities:                   |                                                                              |                                           |      
|                                                     | Accounts receivable                                                          |                                           |      
|                                                     | Inventories                                                                  |                                           |      
|                                                     | Prepaid expenses and other                                                   |                                           |      
|                                                     | Accounts payable and accrued liabilities                                     |                                           |      
|                                                     | Customer deposits and deferred revenue                                       |                                           |      
|                                                     |                                                                              |                                           |      
|                                                     |                                                                              | Net cash used for operating activities    |      
|                                                     |                                                                              |                                           |      
|Cash flows from investing activities:                |                                                                              |                                           |      
|                                                     | Purchases of property and equipment                                          |                                           |      
|                                                     | Purchase of investments                                                      |                                           |      
|                                                     | Proceeds from maturities of investments                                      |                                           |      
|                                                     | Proceeds from sale of DentalMate business                                    |                                           |      
|                                                     | Notes receivable payments received                                           |                                           |      
|                                                     |                                                                              |                                           |      
|                                                     |                                                                              | Net cash provided by investing activities |      
|                                                     |                                                                              |                                           |      
|Cash flows from financing activities:                |                                                                              |                                           |      
|                                                     | Payments on debt                                                             |                                           |      
|                                                     |                                                                              |                                           |      
|                                                     |                                                                              | Net cash used for financing activities    |      
|                                                     |                                                                              |                                           |      
|Net increase (decrease) in cash and cash equivalents |                                                                              |                                           | 145  
|Cash and cash equivalents, beginning of year         |                                                                              |                                           | 1,440
|                                                     |                                                                              |                                           |      
|Cash and cash equivalents, end of year               |                                                                              | $                                         | 1,585
|                                                     |                                                                              |                                           |      
|Supplemental cash flow information:                  |                                                                              |                                           |      
|                                                     | Cash payments for interest                                                   |                                           | $    
|                                                     |                                                                              |                                           |      
|                                                     | Liquidation of stock for payment on note receivable                          |                                           | $    
|                                                     |                                                                              |                                           |      
|                                                     | Acquisition of property and equipment under capital lease arrangements       |                                           | $    
|                                                     |                                                                              |                                           |      

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

36

---



VANTAGEMED CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

VantageMed Corporation was incorporated in California on June 1, 1995 and on April 9, 1997, we reincorporated in Delaware. In February 2000,
we completed our initial public offering (IPO) of 3 million shares of our common stock, the gross proceeds of which aggregated approximately $36 million. VantageMed is a diversified
healthcare information systems supplier headquartered in Sacramento, California with support personnel and sales representatives in various locations throughout the United States. We develop, sell,
install and support software products and services that assist physicians, behavioral health professionals, and other healthcare providers in the operation of their practices and organizations. We
have built a national distribution network by acquiring established regional healthcare practice management systems companies to sell and support our new Windows-based software and services.

The
practice management software products we offer provide physicians and other healthcare professionals with comprehensive office management software designed to automate the
administrative, financial, practice management and clinical requirements of a practice. These systems range in capacity from one to approximately one hundred users. We also provide software, network
and hardware support, training, electronic claims processing, electronic statement printing and mailing, and electronic remittance advices.

Basis of presentation

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us
to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial
statements include the accounts of VantageMed Corporation and the accounts of our subsidiaries after elimination of intercompany balances and
transactions. Certain prior year amounts have been reclassified to conform to the current year presentation.

Risks and uncertainties

The accompanying consolidated financial statements have been prepared assuming that VantageMed will continue as a going concern. However, we have incurred
recurring losses from operations since our inception. These losses have resulted in negative operating cash flows and negative working capital and we have an accumulated deficit and stockholders'
deficit of $74 million and $483,000, respectively, as of December 31, 2003. Recoverability of a portion of the recorded asset amounts shown in the accompanying consolidated financial
statements is dependent upon our continued operations, which is in turn dependent on our ability to succeed in our future operations and meet our financing requirements on a continuing basis. The
consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be
necessary should we be unable to continue in existence.

We
believe that we have taken many of the necessary steps in order to succeed in our future operations. These steps have included our restructuring program implemented in 2002, our
functional reorganization implemented in 2003, the enhancement of our sales and marketing functions as well as our strategy to convert our legacy system customers to our Windows-based systems in order
to streamline support and development costs. As a result of the enhancement of our sales and marketing functions we booked more RidgeMark orders in the fourth quarter of 2003 than we booked in the
last two years combined. In the event that we are unable to successfully scale our client services operation

37

---

to
timely install and implement these RidgeMark orders, we may not be successful in our future operations.

We
may never be able to achieve positive operating cash flow, working capital or profitability. We are also subject to a number of additional risks, including, but not limited to, risks
associated with our acquisitions (successful integration, operation and transition of products, technologies and businesses), uncertainties in the healthcare industry, and dependence on the medical
market. Based on our current sales forecast and planned operating expenditures we believe that our cash and short-term investments are sufficient to meet our cash flow needs through at
least December 2004; however there can be no assurance that our plans will succeed.

Revenue recognition

Fees from licenses are recognized as revenue in accordance with AICPA Statement of Position 97-2, (SOP 97-2) "Software
Revenue Recognition," 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 deemed probable and persuasive evidence of an arrangement exists. We generally charge a one-time license fee for the right to use
our proprietary software. The amount of the license fee is fixed and based on a specific number of users specified at the inception of the license agreement and is generally part of a multiple element
arrangement. The license fee is not subject to adjustment based on future usage or an obligation to distribute further copies. Payment of the license fee is due upon delivery and acceptance, generally
30 to 45 days from the date of contract execution. We do not offer extended payment terms or cancellation provisions. We also license one of our proprietary software products on a monthly
subscription basis. No long-term commitment is required and the customer can cancel the subscription agreement at any time. Under the subscription agreement, license fee revenue is
recognized ratably over the license period.

Multiple
element arrangements generally include a proprietary software license, third-party software, hardware, and implementation, training and other specified services. The fee for
multiple element arrangements is allocated to the various elements based on vendor-specific objective evidence (VSOE) of fair market value established by the price of the elements sold separately or
renewal rates if an element is not yet being sold separately. The residual method is used when VSOE exists for the undelivered elements, primarily post-contract support and training. Upon
contract execution, we collect a deposit, which can vary from 0% to 50% based on the customer's credit profile and previous relationship with us, if any. Revenue is recognized when all of the criteria
of SOP 97-2 are met. Deposits received in advance of revenue recognition are recorded as deferred revenue.

We
also provide post-contract support under annual maintenance and support agreements as well as other services including electronic claims processing, electronic statement
printing, mailing, data processing and other services provided independently from software licensing activities. Annual support agreements are billed either annually, quarterly or monthly and all
other services are billed as the services are rendered. In accordance with SOP 97-2, software subscription license fees and revenue from annual support agreements are recognized ratably
over the contract term. Subscription and support fees received in advance of revenue recognition are recorded as deferred revenue. Revenue from all other services is recognized as the services are
rendered.

We
offer a limited return provision for 60 days from the date of purchase, for one of our off-the-shelf software products. Based on historical information
available to us based on past sales and returns experience, we are able to reasonably estimate future product returns. Although not material, we make adequate provision for returns expected on sales
made within 60 days of each reporting period.

38

---

Software development costs

To date, all of our costs for research and development of software products have been expensed as incurred since the amount of software development costs incurred
subsequent to the establishment of technological feasibility, evidenced by establishment of a working model, has been immaterial. To the extent that we incur additional development costs after
technological feasibility has been established, we would capitalize those development costs in accordance with the Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed."

Allowance for doubtful accounts

We review accounts receivable and provide a reserve for amounts we estimate will not be collectible. During our review we consider our historical experience, the
age of the receivable balance, the credit-worthiness of the customer and the reason for the delinquency. We consider a number of matters when granting credit to customers including our prior
experience with them their current cash resources and ability to obtain lease financing.

Inventories and related reserves

Inventories are stated at the lower of cost (specific identification method) or market and consist primarily of supplies and new computer equipment purchased to
fill customer orders. Reserves are provided for excess or obsolete inventory, which are estimated based on the age of the items and our ability to utilize the items in future sales. Generally, items
that are greater than one year old are reserved and the related charge is recorded as cost of software and systems revenue.

Long-lived assets

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

Property and Equipment

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

Goodwill

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

Step
1Compare the fair value of each reporting unit to the carrying value, including goodwill, of each of the reporting units. For each reporting unit where the carrying
value, including goodwill, exceeds the unit's fair value, Step 2 is performed. If a unit's fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.

39

---

Step
2Perform an allocation of the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities. This derives
an implied fair value for the reporting unit's goodwill. Compare the implied fair value of the reporting unit's goodwill
with the carrying value of the reporting unit's goodwill. If the carrying value of the reporting unit's goodwill is greater than the implied fair value of its goodwill, an impairment charge would be
recognized for the excess.

Finite-lived Intangibles and Long-lived Assets

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

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

Cash equivalents and investments

We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We classify marketable
securities as available-for-sale in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." These securities are carried at fair market value, with unrealized gains and losses reported as a separate component of stockholders' equity. Gains or losses on securities sold
are based on the specific identification method.

Short
and long-term investments were classified as available-for-sale securities and are reported at fair value as follows (in thousands):

|                                               |  | December 31, 2003
|---------------------------------------------- |  | -----------------
|
|Cash equivalents                               |  | $                
|Commercial paper                               |  |                  
|                                               |  |                  
|Total available-for-sale investment securities |  | $                
|                                               |  |                  

|                                               |  | December 31, 2002
|---------------------------------------------- |  | -----------------
|
|Cash equivalents                               |  | $                
|Commercial paper                               |  |                  
|                                               |  |                  
|Total available-for-sale investment securities |  | $                
|                                               |  |                  

40

---

The
amortized cost and fair value of available-for-sale investment securities by contractual maturity, are as follows (in thousands):

December 31, 2003Amortized Cost

Fair ValueDue within one year

$
966

$
982


December 31, 2002Amortized Cost

Fair ValueDue within one year

$
1,384

$
1,376Due after one, but within 5 years


768


804Total available-for-sale investment securities

$
2,152

$
2,180


Financial instruments

The fair values of financial instruments are the amounts at which the instruments could be exchanged in a current transaction between willing parties. We estimate
that the carrying amounts of the financial instruments included in the accompanying consolidated balance sheets are not materially different from their fair values. The carrying amounts reported for
cash and cash equivalents, accounts receivable and accounts payable are considered to approximate fair values based upon the short maturities of these financial instruments. The carrying amounts of
short-term and long-term debt are also considered to approximate fair values based upon current interest rates.

Use of estimates

The preparation of the financial statements in conformity with accounting principles generally accepted within the United States of America requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. For instance, we record a liability on our balance sheet each period for the estimated cost of goods and services rendered to us for which
we have not received an invoice. Additionally, our restructuring reserve includes an estimate for the loss we expect to incur for excess 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 the space. Our estimates are based on historical experience, input from sources outside the company, and other
relevant facts and circumstances. Actual results could differ from these estimates.

Legal Costs

Legal costs incurred and arising in the normal course of business are expensed as incurred. Estimated future costs associated with loss contingencies will be
accrued when a liability is probable and the costs are reasonably estimable.

Income taxes

We use the asset and liability method of accounting for income taxes under which deferred income taxes are provided based upon the applicable enacted tax laws and
rates. A valuation allowance is provided against the future benefits of deferred tax assets if it is determined that it is more likely than not that the future tax benefits associated with the
deferred tax asset will not be realized.

41

---

Net loss per share

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

2003

2002Stock options

1,657

1,648Warrants to purchase common stock

100

30


Comprehensive loss

We report comprehensive loss and its components in accordance with Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income." Comprehensive income includes all changes in equity (net assets) during a period from non-owner sources. During 2003 and 2002, other comprehensive income consisted
of unrealized holding gains and losses on available-for-sale investment securities.

Stock-based compensation

Prior to January 1, 2003, we accounted for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related interpretations, and complied with the disclosure provisions of Statement of Financial Accounting Standard
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
CompensationTransition and Disclosurean amendment of SFAS No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based compensation and requires more prominent disclosures regarding the method of accounting chosen. The transition and disclosure provisions of SFAS
No. 148 were effective for our year ended December 31, 2002. The implementation of SFAS No. 148 did not have a material impact on our results of operations or financial condition.
Effective January 1, 2003, we began to account for stock options using a fair value method, as allowed under SFAS No. 148. We have elected to use the prospective method of transition,
resulting in the recognition of stock-based compensation expense of $27,000 in the year ended December 31, 2003.

Had
compensation cost for our option plan been determined based on the fair value at the grant dates for the awards, calculated in accordance with the method prescribed by
SFAS 123 prior to

42

---

January 1,
2003, our pro forma net loss would have been as follows (in thousands, except per share amounts):

Year Ended December 31,2003

2002(As restated,
see Note 2)Net loss, as reported

$
(3,137
)
$
(8,046
)Add stock-based compensation expense included in reported net loss, net of related tax effects


27


Deduct total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects


(244
)

(592
)Pro forma net loss


(3,354
)

(8,638
)Basic and diluted loss per share:As reported

$
(0.37
)
$
(0.95
)Pro forma

$
(0.40
)
$
(1.02
)


For
purposes of the pro forma disclosure above, the fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:

2003

2002Dividend yield

0
%
0
%Risk-free interest rate

3.5
%
3.5
%Stock price volatility

222
%
223
%Expected life

3.5 years

3.5 years


The
resulting pro forma compensation cost may not be representative of that to be expected in future years.

Recent accounting pronouncements

In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses issues
regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of
SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits received by employees who are involuntarily terminated under the terms of
a one-time benefit arrangement. SFAS No. 146 requires that an expense associated with an exit or disposal activity be recognized when the liability is incurred, and that fair value
is the objective for initial measurement of the liability. Under EITF 94-3, an expense was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 is
effective for all exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on our results of operations or
financial condition.

In
November 2002, the Emerging Issues Task Force (EITF) issued EITF 00-21 "Revenue Arrangements with Multiple Deliverables." EITF 00-21 prescribes a method
to account for contracts that have multiple elements or deliverables. It provides guidance on how to allocate the value of a contract to its different deliverables, as well as guidance on when to
recognize revenue allocated to each deliverable over its performance period. The provisions of EITF 00-21 will apply to revenue

43

---

arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF No. 00-21 did not have a material impact on our financial statements.

In
May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 requires that
certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable
stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares
of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 in the quarter ended June 30, 2003 did not have a material impact on our financial position or results of operations.

In
January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must
be applied for the first interim or annual period beginning after June 15, 2003. In addition, FIN 46 requires that the company make disclosures in its consolidated financial statements for the
year ended December 31, 2002 when the company believes it is reasonably possible that it will consolidate or disclose information about variable interest entities after FIN 46 becomes
effective. In December 2003, FASB issued a revised FIN 46. The FASB deferred the effective date for VIEs that are non-special purpose entities created before
February 1, 2003, to the first interim or annual reporting period that ends after March 15, 2004. At this time, we do not believe it is reasonably possible that we will consolidate or
disclose information about VIEs. However, we will continue to assess the impact of FIN 46 on our consolidated financial statements.

NOTE 2CORRECTION OF AN ERROR

This Form 10KSB reflects a restated consolidated balance sheet as of December 31, 2002 and restated consolidated statements of operations,
stockholders equity and cash flows for the year ended December 31, 2002. During the second quarter of 2002, we reserved for certain lease commitments in connection with a restructuring program.
During the third quarter of 2003, we concluded that the original restructuring reserve did not adequately provide for tax, insurance and common area maintenance charges totaling approximately $245,000
that we are obligated to pay for under these lease arrangements. In addition, in the third quarter of 2003, we discovered a lease amendment that was signed in April 2000 with minimum lease
payments totaling $257,000 to be made starting in December 2004 through July 2007. These minimum lease payments and the related charges as well as the associated estimated sublease
income stream of approximately $119,000 were incorrectly omitted from the restructuring reserve that was provided for in the second quarter of 2002. The restated adjustments below reflect an
additional $383,000 of expense, recorded in the quarter ended June 30, 2002, associated with these lease related items.

All
related Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations have been changed to reflect this adjustment.

44

---

The
results of the restatement are as follows (in thousands, except per share data):

|                                   |  | Year Ended December 31, 2002 |       
|---------------------------------- |  | ---------------------------- | ------
|
|Restructuring charges              |  | $                            | 1,365 
|Total operating costs and expenses |  |                              | 16,915
|Loss from operations               |  |                              | (7,670
|Net loss                           |  |                              | (7,663

|                                           |  | As of December 31, 2002 |        
|------------------------------------------ |  | ----------------------- | -------
|
|Long-term portion of restructuring reserve |  | $                       | 324    
|Total liabilities                          |  |                         | 6,887  
|Accumulated deficit                        |  |                         | (69,470

|                                                   |  | Year Ended December 31, 2002 |       
|-------------------------------------------------- |  | ---------------------------- | ------
|
|Net loss                                           |  | $                            | (7,663
|Change in accounts payable and accrued liabilities |  |                              | 238   

NOTE 3RESTRUCTURING ACTIVITIES

In June 2002, we implemented a restructuring plan that was aimed at substantially reducing our monthly cash usage while refocusing on the delivery of
superior customer service and federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) compliant products. The restructuring plan included a re-evaluation of all product
development initiatives, consolidating certain operating facilities and a reduction in personnel by approximately 30% of our workforce including 20 sales and administrative employees, 27 product
development employees and 27 customer service personnel. As of December 31, 2002, all but one of these employees was terminated. In 2002, we recorded an expense of $1.7 million in
connection with this restructuring program representing severance payments, an expected loss on leased facilities that were being consolidated as well as write-downs of property and equipment that
would no longer be used.

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

The
components of our 2002 and 2003 restructuring provisions and activity in the related reserve are as follows (in thousands):

|                          |  | Severance |      | Leased
Facilities |   | Fixed
Assets |   | Total |    
|------------------------- |  | --------- | ---- | ----------------- | - | ------------ | - | ----- | ---
|2002 provision            |  | $         | 733  |                   | $ | 917          |   | $     | 98 
|Non-cash charges          |  |           |     |                   |   |             |   |       | (98
|Cash payments             |  |           | (729 | )                 |   | (111         | ) |       |   
|                          |  |           |      |                   |   |              |   |       |    
|December 31, 2002 balance |  |           | 4    |                   |   | 806          |   |       |   
|2003 provision            |  |           |     |                   |   | 135          |   |       |   
|Non-cash charges          |  |           |     |                   |   |             |   |       |   
|Cash payments             |  |           | (4   | )                 |   | (240         | ) |       |   
|                          |  |           |      |                   |   |              |   |       |    
|December 31, 2003 balance |  | $         |     |                   | $ | 701          |   |       |   
|                          |  |           |      |                   |   |              |   |       |    

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

45

---



NOTE 4SALE OF DENTALMATE BUSINESS

In September 2003, we sold our DentalMate business in exchange for $500,000 in cash, notes receivable totaling $100,000 and other consideration of $60,000.
We recognized a gain on the sale of this business totaling $524,000 in the third quarter of 2003 and deferred recognition of the gain associated with the $100,000 in notes receivable until actual
receipt of cash. An additional $47,000 of gain was recognized in the fourth quarter of 2003 when one of the installment payments was received. The balance of the gain will be recognized when the final
installment payment is received.

NOTE 5NOTES RECEIVABLE

We had four notes receivable at December 31, 2002. Two notes totaling $14,000 bore interest at 6 percent per annum and were paid in full in
March 2003. One note totaling $18,000 was with one of our employees. This note bore interest at 8 percent per annum, was unsecured and is being forgiven on a monthly basis through
April 2004 in exchange for services rendered. This employee was terminated in 2003 and the balance of the note was forgiven as part of the separation agreement.

Additionally,
we had a $200,000 note with a former officer and director that was secured by 300,000 shares of our common stock. Total principal and interest on this note, which bore
interest at the prime rate, became due and payable on November 3, 2002 and was in default as of December 31, 2002. As of December 31, 2002, we had foreclosed 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 income on this note since April 2002. In August 2003, this former
officer filed bankruptcy and we foreclosed on the balance of the shares outstanding. At December 31, 2003, there are no recorded amounts due from this officer and all of the shares have been
cancelled.

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

NOTE 6GOODWILL AND OTHER INTANGIBLE ASSETS

In the fourth quarter of 2003 we performed the annual impairment review of goodwill required by SFAS 142 and determined that due to the performance of our
billing services units as well as changes made to our legacy system migration strategy including a formal plan to discontinue enhancements and regulatory updates of certain systems at future dates,
components of our goodwill and intangible assets were impaired. To determine the amount of the impairment charge and implied fair value of goodwill, we performed an allocation of the estimated fair
value of each reporting unit to the identifiable tangible and non-goodwill intangible assets and liabilities. As a result of this analysis, we recorded an impairment charge of
$1.2 million. Approximately $803,000 of this charge was related to an impairment of goodwill primarily associated with our billing services business units.

46

---

Components
of intangible assets were as follows (in thousands):

|                                               |                   | December 31, |      
|---------------------------------------------- | ----------------- | ------------ | -----
|
|
|Intangible assets subject to amortization:     |                   |              |      
|                                               | Acquired software |              | $    
|                                               | Customer lists    |              |      
|                                               | Other             |              |      
|                                               |                   |              |      
|                                               |                   | $            | 9,261
|                                               |                   |              |      
|Intangible assets not subject to amortization: |                   |              |      
|                                               | Goodwill          |              | $    
|                                               |                   |              |      

Amortization
of intangible assets was approximately $330,000 and $440,000 for the years ended December 31, 2003 and 2002, respectively. We expect amortization expense to be
approximately $175,000 for the years ended December 31, 2004 and 2005, $160,000 for the years ended December 31, 2006 and 2007 and $150,000 for the year ended December 31, 2008.

NOTE 7BALANCE SHEET COMPONENTS

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

December 31,2003

2002Office and computer equipment

$
2,380

$
2,163Furniture and fixtures


211


239Vehicles


20


20Leasehold improvements


182


1762,793


2,598Less: accumulated amortization and depreciation


(2,287
)

(1,943
)$
506

$
655


Depreciation
expense was approximately $441,000 and $744,000 for the years ended December 31, 2003 and 2002, respectively.

Accrued
liabilities consisted of the following (in thousands):

December 31,2003

2002(As restated,
see Note 2)Accrued payroll and related expenses

$
424

$
504State and Local taxes payable


524


533Restructuring, current portion (see Note 3)


329


103Other


1,109


784$
2,386

$
1,924


47

---

NOTE 8DEBT AND LEASE OBLIGATIONS

At December 31, 2003, we had $486,000 in debt primarily issued in connection with our acquisitions. Interest rates on these notes range from 5.5% to 6.95%.
In addition, we lease certain computers and office equipment under lease agreements accounted for as capital leases. At December 31, 2003, we had $170,000 in capital leases that mature from
February 2004 to December 2005. Many of these leases include end of lease bargain purchase options, which we intend to exercise. Our obligations under these lease arrangements are
secured by the leased equipment. At December 31, 2002, we had $726,000 in assumed debt or promissory notes primarily issued in connection with acquisitions and $328,000 in capital leases.

We
lease space at our principal executive and corporate headquarters and at several locations throughout the United States, with lease terms expiring at various dates through 2007. We
have subleased some space in our facility in Boulder, Colorado and are actively seeking to sublease additional space. This lease expires in July 2007 and the property was vacated by us in
June 2002.

Future
minimum payments under all debt and lease obligations at December 31, 2003 are as follows (in thousands):

|Year Ending December 31,                                                |      | Debt                   |      | Capital
Leases |     | Operating
Leases
|----------------------------------------------------------------------- | ---- | ---------------------- | ---- | -------------- | --- | ----------------
|                                                                        | 2004 |                        | $    | 351            |     | $               
|                                                                        | 2005 |                        |      | 135            |     |                 
|                                                                        | 2006 |                        |      |               |     |                 
|                                                                        | 2007 |                        |      |               |     |                 
|                                                                        |      |                        |      |                |     |                 
|                                                                        |      | Total minimum payments |      |                | 486 |                 
|                                                                        |      |                        |      |                |     |                 
|Less: interest on capital lease obligations at rates of 8.62% to 18.93% |      |                        |     |                |     | (18             
|Less: current maturities                                                |      |                        | (351 | )              |     | (110            
|                                                                        |      |                        |      |                |     |                 
|Long-term portion                                                       |      | $                      | 135  |                | $   | 60              
|                                                                        |      |                        |      |                |     |                 

The
future minimum operating lease payments above have been reduced for estimated income from sublease arrangements of $48,000, $69,000, $57,000 and $31,000 in 2004, 2005, 2006 and 2007,
respectively.

NOTE 9STOCKHOLDERS' EQUITY

Warrants

In June 2003, we issued warrants to purchase 100,000 shares of our common stock in connection with 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 to expense over the three-year term of the arrangement.

In
August 1999, in connection with an acquisition, we issued warrants to purchase 30,000 shares of our 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 purchase price. In October 1999, in connection with the issuance of a convertible promissory note, we issued
warrants for 13,333 shares exercisable at $7.20 per share. These warrants expired unexercised on October 6, 2002. The fair value of these warrants of approximately $80,000 was calculated using
the Black-Scholes option pricing model and was amortized to interest expense over the term of the note.

48

---

Stock Option Plans

Under the Stock Option/Stock Issuance Plan (1998 Plan) the Board of Directors is authorized to grant options to purchase our common stock to employees, directors
and consultants at prices not less than the fair market value at date of grant for incentive stock options and not less than 85% of fair market value for non-statutory stock options. The
1998 Plan is divided into two programs: the Option Grant Program under which eligible persons may be granted options to purchase shares of common stock and the Stock Issuance Program under which
eligible persons may be issued shares of common stock directly, either through the immediate purchase of shares or as a bonus for services rendered to VantageMed. The stock options generally vest 25%
in the first year and ratably over the following three-year period and expire ten years from the date of grant. At December 31, 2003, there were approximately 698,000 shares
available for issuance under the 1998 Plan. A summary of stock option activity and related information is as follows (in thousands except per share amounts):

|                             |           | Year Ended December 31,
|---------------------------- | --------- | -----------------------
|
|
|Balance, beginning of period |           | 1,648                  
|                             | Granted   |                        
|                             | Cancelled |                        
|                             |           |                        
|Balance, end of period       |           | 1,657                  
|                             |           |                        

The
following table summarizes information about our outstanding stock options at December 31, 2003 (in thousands, except per share amounts):

|             |  | Options Outstanding |  | Options Exercisable
|------------ |  | ------------------- |  | -------------------
|
|$0.12-$0.35  |  | 414                 |  | 9.35               
|$0.40-$0.47  |  | 791                 |  | 8.58               
|$0.55-$1.00  |  | 283                 |  | 8.62               
|$1.56-$2.88  |  | 139                 |  | 5.94               
|$7.50-$52.32 |  | 30                  |  | 5.07               
|             |  |                     |  |                    
|Total        |  | 1,657               |  | 8.49               
|             |  |                     |  |                    

The
weighted-average grant date fair value of options granted was $0.34 and $0.44 per option during 2003 and 2002, respectively.

NOTE 10401K SAVINGS PLAN

We maintain a 401(k) Savings Plan (the Plan) under which employees may elect to contribute up to 15% of their pre-tax compensation to the Plan. All
employees are eligible to participate in the Plan upon performing 90 consecutive days of service. Employee contributions are 100% vested at all times. We may make discretionary contributions to the
Plan, which vest annually over a six-year period. We made no discretionary contributions to the Plan in 2003 or 2002.

49

---

NOTE 11INCOME TAXES

No provision for income taxes was recorded in 2003 or 2002 since we generated both book and tax losses. Our provision for (benefit from) income taxes in 2003 and
2002 consisted of (in thousands):

December 31,2003

2002Current:Federal

$


$
State





Total current

$


$
Deferred:Federal

$
(82
)
$
(3,931
)State


243


628Total deferred


161


(3,303
)Change in valuation allowance


(161
)

(3,303
)Net income tax provision

$


$



Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. At December 31, 2003, we had net operating loss carryforwards for federal and state income tax purposes of approximately $43 million and $4.5 million,
respectively, that expire through 2023. The extent to which these loss carryforwards can be used to offset future taxable income may be limited. The components of our deferred income taxes were as
follows (in thousands):

December 31,2003

2002Deferred tax assets:Net operating loss carryforwards

$
14,881

$
15,071Accruals and reserves not currently deductible


2,083


2,06816,964


17,139Deferred tax liabilities:Depreciation


(203
)

(217
)Net deferred tax asset before allowance


16,761


16,922Valuation allowance


(16,761
)

(16,922
)Net deferred tax asset

$


$



We
believe that available objective evidence creates sufficient uncertainty regarding the realizability of deferred tax assets, and therefore we have recorded a full valuation allowance
to reduce the carrying value of such assets to zero. We will continue to assess the realizability of deferred tax assets based on

50

---

actual
and forecasted operating results. Our effective tax rate differs from the federal statutory tax rate due to the following (in thousands):

Year Ended December 31,2003

2002Expected tax benefit

$
(1,067
)
$
(2,605
)Decrease in income taxes resulting from:State income benefit


(114
)

(447
)Increase in deferred tax asset valuation allowance


161


2,883Nondeductible expenses


1,020


169Net income tax provision

$


$



NOTE 12LITIGATION AND CONTINGENCIES

On
October 15, 2003, the Securities and Exchange Commission (the SEC) instituted administrative cease and desist proceedings against VantageMed and certain former members of
company management, following its inquiry into VantageMed's accounting for the sale of the dental business that was attempted in September 2001. The findings in the administrative proceeding
instituted against the company state that VantageMed, under the direction of certain former members of senior management, materially misstated its financial results in the third quarter ended
September 30, 2001. The SEC did not charge VantageMed with fraud or levy any monetary damages against the Company. However, as part of a settlement agreement, the SEC ordered VantageMed to
cease and desist from committing or causing any violation of the periodic reporting and books and records provisions of the federal securities laws. VantageMed agreed to the order, without admitting
or denying any findings. In acceptance of the settlement, the Commission considered remedial acts promptly undertaken by VantageMed and cooperation afforded to the Commission staff. This settlement is
not associated with VantageMed's reporting of the sale of the DentalMate business in September 2003.

We
are party to various legal actions arising in the normal course of business. Matters that are probable of unfavorable outcome and which can be reasonably estimated are accrued. Such
accruals amounted to $266,000 at December 31, 2003, and are based on information known about the matters, our estimates of the outcomes of such matters and our experience contesting, litigating
and settling similar matters. This amount is included in accrued liabilities in the accompanying consolidated balance sheet. None of the actions are believed by management to involve amounts that
would be material to our consolidated financial position, operations, or liquidity after consideration of recorded accruals.

NOTE 13SEGMENT REPORTING

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

The
accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on margin level before selling
general and administrative and other operating costs and do not manage costs below gross margin by segment.

51

---

Additionally,
we do not track long-lived assets by segment and therefore asset disclosures are not relevant and are not presented. Our reportable segments offer different products and
services, which are sold and serviced by the same selling and support personnel. The accompanying statements of operations disclose the financial information for these reportable segments for 2003 and
2002.

NOTE 14UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:

|      |                                               | Quarter |   |        |  
|----- | --------------------------------------------- | ------- | - | ------ | -
|
|
|
|2003: |                                               |         |   |        |  
|      | Total Revenues                                |         | $ | 5,338  |  
|      | Gross margin                                  |         |   | 2,168  |  
|      | Net income (loss)(1)                          |         |   | (965   | )
|      | Basic and diluted net income (loss) per share |         | $ | (0.11  | )
|2002: |                                               |         |   |        |  
|      | Total Revenues                                |         | $ | 5,386  |  
|      | Gross margin                                  |         |   | 2,273  |  
|      | Net loss(2)                                   |         |   | (2,121 | )
|      | Basic and diluted net loss per share(3)       |         | $ | (0.25  | )

---

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

On February 8, 2002, Arthur Andersen LLP (Andersen) resigned as our independent auditors. The decision to accept the resignation of Andersen and to seek
new accountants was approved by both the Audit Committee and its Board of Directors.

Andersen
stated that the reason for its resignation was that it was unable to continue to rely on management's representations on certain issues concerning the financial statements
because of a disagreement between Andersen and us as to whether certain information concerning the funding of the sale of our dental care business had been timely provided to Andersen. We sold our
business to a third party in the quarter ended September 30, 2001. We had recognized $30,000 of revenue previously deferred and a $391,000 gain in connection with the sale of the dental
business, which was credited to selling, general and administrative expenses, in our third quarter Form 10-Q. The third party purchaser of our dental business subsequently defaulted
under the terms of the sale and we regained possession of the dental business assets and operations. Andersen advised our Audit Committee that the third quarter financial statements for the period
ending September 30, 2001 should be restated. In addition, Andersen stated that it believed we had a material weakness in internal controls related to our current lack of a chief financial
officer with the appropriate knowledge, experience, and background for a publicly traded entity.

Our
Audit Committee, with the assistance of outside counsel, has conducted and completed an internal investigation related to the issues raised by Andersen in its resignation as our
independent

52

---

auditors,
including the accounting treatment of the sale of our dental business. The investigation found no evidence of manipulation on the part of VantageMed or its management, but determined that
the issues raised by Andersen were the result of inadequate internal controls. As a result of the investigation, we have instituted certain measures to improve internal controls, and have reversed the
gain from the sale of our dental business and restated our financial statements for the third quarter period ending September 30, 2001.

On
April 3, 2002, VantageMed Corporation and Grant Thornton LLP entered into an engagement letter whereby Grant Thornton agreed to serve as our new independent auditors. Prior to
engaging Grant Thornton, neither we, nor anyone on our behalf, consulted Grant Thornton regarding the application of accounting principles to a specified transaction, either completed or proposed, or
the type of audit opinion that might be rendered by Grant Thornton on our financial statements. In addition, apart from the disclosure as to the mere fact of the resignation of Andersen, neither we,
nor anyone on our behalf, consulted Grant Thornton regarding our previous disagreement with Andersen or the resignation of Andersen.

Item 8A. Controls and Procedures

Disclosure Controls and Procedures

Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management,
including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-15b under the Securities Exchange Act of 1934. Based on their review of our disclosure controls and procedures, the President and Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be included in our
periodic SEC filings.

Internal Controls and Procedures

There were no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

53

---



PART III

Certain information required by Part III is omitted from this Report on Form 10-KSB in that the Registrant will file its definitive
Proxy Statement for its Annual Meeting of Stockholders to be held in May of 2004 pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the Proxy Statement), and certain
information included in the Proxy Statement is incorporated herein by reference.

Item 9. Directors and Executive Officers of the Registrant



The
disclosure required by Item 405 of Regulation S-K is incorporated by reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in our 2004 Proxy Statement.

Item 10. Executive Compensation

The information required by this Item is incorporated by reference to the sections entitled "Compensation of Executive Officers" in our 2004 Proxy Statement.

Item 11. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item is incorporated by reference to the sections entitled "Principal Share Ownership" and "Security Ownership of Management" in
our 2004 Proxy Statement.

Item 12. Certain Relationships and Related Transactions

The information required by this Item is incorporated by reference to the section entitled "Certain Transactions" in our 2004 Proxy Statement.

Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K



|Exhibit
Number |  | Exhibit Title                                                                                                                                                      
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1*           |  | Merger Agreement with Mariner Systems, Inc.                                                                                                                        
|2.2*           |  | Assignment and Assumption Agreement (Mariner Systems, Inc.) by and between VM1 Acquisition Corp. (Assignor) and VM4 Acquisition Corp. (Assignee).                  
|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*          |  | Lease Agreement, dated November 1, 1996 between Registrant and Dr. Jun Hasegawa and Noriko Hasegawa, as Trustees for the Hasegawa Family Trust, dated June 8, 1999.
|10.2*          |  | Lease Agreement between Registrant and Jun and Noriko Hasegawa, as Trustees for the Hasegawa Family Trust dated January 18, 1999.                                  
|10.3*          |  | Lease Agreement between Registrant and Jun and Noriko Hasegawa, as Trustees for the Hasegawa Family Trust dated August 20, 1999.                                   
|10.4*          |  | Employment Agreement dated August 6, 1999 entered into between Registrant and James Seiler.                                                                        
|               |  |                                                                                                                                                                    

54

---

|10.5*  |  | Secured Convertible Promissory Note, dated October 7, 1999, issued to Friedli Corporate Finance.                                                                                                                          
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.6*  |  | Convertible Promissory Note dated October 7, 1999 issued to Friedli Corporate Finance.                                                                                                                                    
|10.7*  |  | Secured Promissory Note, dated January 3, 2000 issued to Friedli Corporate Finance.                                                                                                                                       
|10.8*  |  | Warrant dated August 6, 1999, issued to Pine, Inc.                                                                                                                                                                        
|10.9*  |  | Warrant dated August 6, 1999, issued to Pine, Inc.                                                                                                                                                                        
|10.10* |  | Warrant dated October 7, 1999, issued to Peter Friedli.                                                                                                                                                                   
|10.11* |  | Promissory Note dated July 15, 1997, issued to Richard Pendleton.                                                                                                                                                         
|10.12* |  | Consulting Agreement dated July 27, 1998, entered into between Registrant and Peter Friedli.                                                                                                                              
|10.13* |  | VantageMed's Amended and Restated 1998 Stock Option/Stock Issuance Plan.                                                                                                                                                  
|10.14* |  | Form of Indemnity Agreement entered into by Registrant with each of its officers and directors.                                                                                                                           
|10.15* |  | Non-Exclusive Software License Agreement, dated December 31, 1998 between Registrant and QuadraMed Corporation.                                                                                                           
|10.16* |  | Change in Control Agreement dated July 23, 1998, between Registrant and with Thomas A. McCreery.                                                                                                                          
|10.17* |  | Employment Agreement dated April 30, 1998, between Registrant and with Gregory Vap.                                                                                                                                       
|10.18* |  | Management Employment Agreement dated July 31, 2000, between Registrant and with Joel Harris.                                                                                                                             
|10.19* |  | Secured Promissory Note, dated November 3, 2000 and Stock Pledge Agreement issued by Richard W. Pendleton to Registrant.                                                                                                  
|10.20* |  | Amendment 1 to the Management Employment Agreement with Joel Harris dated September 18, 2000.                                                                                                                             
|10.21* |  | Amendment 1 to the Management Employment Agreement with James Seiler dated September 18, 2000.                                                                                                                            
|10.22* |  | Separation Agreement and Release with James Seiler dated April 19, 2002                                                                                                                                                   
|10.23* |  | Separation Agreement and Mutual General Release of Claims with Joel Harris dated May 13, 2002                                                                                                                             
|10.24* |  | 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)                       
|10.25* |  | Employment Agreement dated August 7, 2002, between VantageMed Corporation and Gregory B. Hill (previously filed as Exhibit 10.2 to the Form 10-Q filed by VantageMed Corporation on August 14, 2002)                      
|10.26* |  | Employment Agreement dated February 18, 2003, between VantageMed Corporation and Rick Altinger                                                                                                                            
|10.27* |  | 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)                       
|10.28* |  | 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)
|21.1*  |  | Subsidiaries                                                                                                                                                                                                              
|23.1   |  | Consent of Certified Independent Public Accountants                                                                                                                                                                       
|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 November 14, 2003. 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 November 14, 2003. Filed herewith.                                                
|       |  |                                                                                                                                                                                                                           

55

---

|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

---

*
Previously filed

On
November 17, 2003, we furnished a current report on Form 8-K with our press release announcing the correction of an error in prior year financial statements.

On
February 5, 2004, we furnished a current report on Form 8-K reporting the resignation of Greg Vap, VantageMed's Vice President of Client Services.

On
March 29, 2004, we furnished a current report on Form 8-K with our press release reporting our results of operations for the fourth quarter and fiscal year
2003.

Item 14. Principal Accountant Fees and Services

The information required by this Item is incorporated by reference to the section entitled "Ratification of Appointment of Independent Accountants" in our 2004
Proxy Statement.

56

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rancho Cordova, State of California, on the 30th day of March 2004.

| |  | VantageMed Corporation
| |  | ----------------------
| |  | By:                   

Pursuant
to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.

|Signature                       |  | Title                                                               |  | Date          
|------------------------------- |  | ------------------------------------------------------------------- |  | --------------
|                                |  |                                                                     |  |               
|/s/RICHARD BROOKSRichard Brooks |  | President and Chief Executive Officer
(Principal Executive Officer) |  | March 30, 2004
|/s/PETER FRIEDLIPeter Friedli   |  | Director                                                            |  | March 30, 2004
|/s/DAVID PHILIPPDavid Philipp   |  | Director                                                            |  | March 30, 2004
|/s/STEVE SIMPSONSteve Simpson   |  | Director                                                            |  | March 30, 2004
|/s/DAVE ZABROWSKIDave Zabrowski |  | Director                                                            |  | March 30, 2004

57

---

QuickLinks