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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, DC 20549****FORM 10-Q**   þ **Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934****For the quarterly period ended **December 31, 2006******OR**   o **Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934****For the transition period from                      to                     ****Commission file number 0-16569****CAM COMMERCE SOLUTIONS, INC.****(Exact name of registrant as specified in its Charter)**   **Delaware** **95-3866450**(State or other jurisdiction (IRS Employerof incorporation or organization) Identification No.)   **17075 Newhope Street** **92708****Fountain Valley, California**  (Address of principal (Zip code)Executive offices)  **(714) 241-9241**(Registrant’s telephone number, including area code)Indicate by check mark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.Yes þ      No oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” inRule 12b-2 of the Exchange Act (Check one):LargeAccelerated Filer o      Accelerated Filer o      Non-accelerated Filer þIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes o      No þAs of January 31, 2007, there were 4,020,000 shares of common stock outstanding.  
 

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**CAM COMMERCE SOLUTIONS, INC.****INDEX**                   Page Number PART I — Financial Information                 Item 1 Financial Statements:                   a) Condensed Balance Sheets at December 31, 2006 (Unaudited) and September 30, 2006  3                b) Unaudited Condensed Statements of Income for the three months ended December 31, 2006 and 2005  4                c) Unaudited Condensed Statements of Cash Flows for the three months ended December 31, 2006 and 2005  5                d) Notes to Unaudited Condensed Financial Statements  6-11              Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations  12-19              Item 3 Quantitative and Qualitative Disclosures About Market Risk  20              Item 4 Controls and Procedures  20            PART II — Other Information                 Item 1 Legal Proceedings  21              Item 1A Risk Factors  21              Item 2 Unregistered Sales of Equity Securities and Use of Proceeds  21              Item 3 Defaults Upon Senior Securities  21              Item 4 Submission of Matters to a Vote of Security Holders  21              Item 5 Other Information  21              Item 6 Exhibits  21-22            Signatures  23  EXHIBIT 31(A) EXHIBIT 31(B) EXHIBIT 32
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**PART I. FINANCIAL INFORMATION****Item 1. Financial Statements****CAM COMMERCE SOLUTIONS, INC.****CONDENSED BALANCE SHEETS****(In thousands, except share and per share data)**           DECEMBER 31, 2006  SEPTEMBER 30, 2006   (Unaudited)     **ASSETS**        Current assets:        Cash and cash equivalents $16,369  $15,196 Marketable available-for-sale securities  8,101   8,457 Accounts receivable, net  2,183   1,936 Inventories  351   391 Deferred income taxes  1,000   991 Other current assets  187   138        Total current assets  28,191   27,109          Deferred income taxes  49   56 Property and equipment, net  424   484 Intangible assets, net  453   445 Other assets  70   51        Total assets $29,187  $28,145                 **LIABILITIES AND STOCKHOLDERS’ EQUITY**        Current liabilities:        Accounts payable $207  $301 Accrued compensation and related expenses  1,008   1,255 Deferred service revenue and customer deposits  1,866   1,499 Cash dividends payable  643   594 Other accrued liabilities  83   103        Total current liabilities  3,807   3,752 Commitments        Stockholders’ equity:        Common stock, $0.001 par value; 12,000,000shares authorized, 4,013,000 shares issuedand outstanding at December 31, 2006 and3,961,000 at September 30, 2006  4   4 Capital in excess of par value  22,290   21,634 Accumulated other comprehensive loss  —   (6)Retained earnings  3,086   2,761        Total stockholders’ equity  25,380   24,393        Total liabilities and stockholders’ equity $29,187  $28,145        See accompanying notes.
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**CAM COMMERCE SOLUTIONS, INC.****UNAUDITED CONDENSED STATEMENTS OF INCOME****(In thousands, except per share data)**           THREE MONTHS ENDED   DECEMBER 31, 2006  DECEMBER 31, 2005 **REVENUES**        Net payment processing revenues $3,465  $2,578 Net hardware, software and installation revenues  2,285   3,064 Net service revenues  1,422   1,344        Total net revenues  7,172   6,986 **COSTS AND EXPENSES**        Cost of payment processing revenues  130   118 Cost of hardware, software and installationrevenues (1)  1,184   1,665 Cost of service revenues (1)  637   594        Total cost of revenues  1,951   2,377 Selling, general and administrative expenses(1) (2)  3,663   3,272 Research and development expenses (1)  383   363 Interest income  (305)  (206)       Total costs and expenses  5,692   5,806        Income before provisions for income taxes  1,480   1,180 Provisions for income taxes  512   438        Net income $968  $742                 Basic net income per share $0.24  $0.19                 Diluted net income per share $0.23  $0.18                 Shares used in computing basic net income per share  3,980   3,849          Shares used in computing diluted net income pershare  4,191   4,096          Cash dividends declared per common share $0.16  $0.14  (1) Includes stock-based employeecompensation expense as follows:         Cost of hardware, software and installation revenues $3  $4 Cost of service revenues  5   5 Selling, general and administrative expenses  23   25 Research and development expenses  7   8  (2) Includes $42 and $40 for the three months ended December 31, 2006 and 2005,respectively, for building rent to a related party, Geoff Knapp, officer and director of CAMCommerce.See accompanying notes.
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**CAM COMMERCE SOLUTIONS, INC.****UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS****(In thousands)**           THREE MONTHS ENDED   DECEMBER 31, 2006  DECEMBER 31, 2005 Operating activities:        Net income $968  $742 Adjustments to reconcile net income to netcash provided by operating activities:        Depreciation and amortization  162   182 Provision for doubtful accounts  —   (23)Change in deferred income taxes  512   341 Share-based compensation  38   42 Excess tax benefits from share-based paymentarrangements  (374)  (57)Changes in operating assets and liabilities:        Accounts receivable  (247)  (530)Inventories  40   16 Other assets  (68)  (40)Accounts payable  (94)  30 Accrued compensation and related expenses  (247)  (145)Deferred service revenue and customerdeposits  367   125 Other accrued liabilities  (160)  (51)       Cash provided by operating activities  897   632        Cash flows from investing activities:        Purchase of property and equipment  (35)  (66)Capitalized software development costs  (75)  (73)Purchase of marketable securities  (1,008)  (954)Proceeds from maturity of marketable securities  1,370   285        Cash provided by (used in) investing activities  252   (808)       Cash flows from financing activities:        Proceeds from exercise of stock options  244   121 Excess tax benefits from share-based paymentarrangements  374   57 Dividends paid on common stock  (594)  (385)       Cash provided by (used in) financing activities  24   (207)       Net increase (decrease) in cash and cashequivalents  1,173   (383)Cash and cash equivalents at beginning of period  15,196   15,763        Cash and cash equivalents at end of period $16,369  $15,380        See accompanying notes.
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2006****(In thousands, except per share data)****ORGANIZATION AND BUSINESS**CAM Commerce Solutions, Inc. (the Company) was incorporated in California in 1983, andreincorporated in Delaware in 1987. The Company designs, develops, markets, installs and serviceshighly integrated retailing and payment processing solutions for small to medium size traditionaland eCommerce businesses based on its open architecture software. These integrated solutionsinclude credit and debit card processing, inventory management, point of sale, accounting, Internetsales, gift card and customer loyalty programs, and extensive management reporting. Paymentprocessing services are provided on a transaction based business model.**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES****Presentation of Condensed Financial Statements**The accompanying financial statements of the Company as of and for the three months ended December31, 2006 and 2005 are unaudited. They have been prepared pursuant to the rules and regulations ofthe United States Securities and Exchange Commission (SEC). Accordingly, they do not include allof the information and footnotes required by generally accepted accounting principles (GAAP) forcomplete financial statements. In the opinion of management, all adjustments necessary for a fairpresentation of such financial statements have been included. Such adjustments consisted only ofnormal recurring items. Interim results are not necessarily indicative of results for a full year.The condensed financial statements and notes are presented as permitted by Form 10-Q and,therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the yearended September 30, 2006.**Cash Equivalents**Cash equivalents represent highly liquid investments with original maturities of three months orless.**Marketable Securities**All investment securities are considered to be available-for-sale and are carried at fair value.Management determines the classification at the time of purchase and re-evaluates itsappropriateness at each balance sheet date. The Company’s marketable securities at December 31,2006 and September 30, 2006 consisted of debt instruments and certificates of deposit that bearinterest at various rates and mature in two years or less. The gross unrealized losses onsecurities available-for-sale at December 31, 2006 and September 30, 2006 were $0 and ($10),respectively. There were no realized gains (losses) for the three months ended December 31, 2006and 2005. Amortized cost of the Company’s marketable securities at December 31, 2006 and September2006 were $7,968 and $8,350, respectively.**Accounts Receivable and Allowance For Doubtful Accounts**The Company has accounts receivable from customers who were given extended payment terms for goodsand services rendered. Extended payment terms are generally provided only to establishedrelationship customers in good credit standing, and generally represent net 30 day terms. Paymentfor goods and services are typically due with an initial deposit payment upon signing the purchaseagreement, with the balance due upon the delivery.Management evaluates accounts receivables that are 30 days past due the payment terms on a regularbasis to charge off any accounts deemed uncollectible at the time. An allowance for doubtfulaccounts is maintained for estimated losses resulting from the inability of customers to makerequired payments.
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2006****(In thousands, except per share data)****Concentrations of Credit Risk**The Company sells its products primarily to small-to-medium size retailers. Credit is extendedbased on an evaluation of the customer’s financial condition, and collateral is generally notrequired. Credit losses have traditionally been minimal and such losses have been withinmanagement’s expectations.**Inventories**Inventories are stated at the lower of cost or market determined on a first-in, first-out basis, ornet realizable value. Inventories are composed of finished goods, which include electronicpoint-of-sale hardware and computer equipment used in the sale and service of the Company’sproducts.**Comprehensive Income**The following table presents the calculation of comprehensive income:           THREE MONTHS ENDED   DECEMBER 31, 2006  DECEMBER 31, 2005 Net income $968  $742 Unrealized gain on marketablesecuritiesavailable for sale, net of tax  6   1        Comprehensive income $974  $743        **Revenue Recognition Policy**The Company’s revenue recognition policy is significant because revenue is a key component ofresults of operations. In addition, revenue recognition determines the timing of certain expensessuch as commissions. Specific guidelines are followed to measure revenue, although certainjudgments affect the application of our revenue policy. The Company recognizes revenue inaccordance with Statement of Position 97-2 (SOP 97-2), “Software Revenue Recognition,” as amendedand interpreted by Statement of Position 98-9, “Modification of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions,” and Staff Accounting Bulletin No. 104 (SAB104), “Revenue Recognition.” SAB 104 provides further interpretive guidance for public companieson the recognition, presentation, and disclosure of revenue in financial statements.The Company derives revenue from the sale of computer hardware, licensing of computer software,post-contract support (PCS), installation and training services, and payment processing services.The Company recognizes payment processing revenues in the period the service is performed.Revenues are estimated based on the accumulation of sufficient historical information required toanalyze trends and formulate a reasonable estimate. The significant historical informationrequired to formulate a reliable estimate are the total dollar volume of credit card transactionsprocessed and the related revenue for these credit card transactions.System revenue from hardware sales and software licensing is recognized when a system purchaseagreement has been signed, the hardware and software has been shipped, there are no uncertaintiessurrounding product acceptance, the pricing is fixed and determinable, and collection is consideredprobable. If a sales transaction contains an undelivered element, the vendor-specific objectiveevidence (VSOE) of fair value of the undelivered element is deferred and the revenue recognizedonce the element is delivered. The undelivered elements are primarily installation and trainingservices. Revenue related to these services are deferred and recognized when the services have beenprovided. VSOE of fair value for installation and training services are based upon standard ratescharged since those services are always sold
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2006****(In thousands, except per share data)**as a separate option and priced independently. Installation and training services are separatelypriced, are generally available from other suppliers and are not essential to the functionality ofthe software products. Payments for the Company’s hardware and software are typically due with aninitial deposit payment upon signing the system purchase agreement, with the balance due upondelivery, although established relationship customers in good credit standing receive thirty daypayment terms. VSOE of fair value for PCS is the price the customer is required to pay since it issold as a separate option and priced independently. PCS services are billed on a monthly basis andrecorded as revenue in the applicable month, or on an annual basis with the revenue being deferredand recognized ratably over the support period.**Segments**The Company separately discloses its principal operations in accordance with SFAS No. 131,“Disclosure about Segments of an Enterprise and Related Information. ” The Company classifies itsbusiness operations into three segments: 1) Payment processing; 2) Hardware, software andinstallation; and 3) Service. Net revenues and the related cost of revenues by segment are asdisclosed on the accompanying Statement of Income. The Company does not allocate selling, generaland administrative or research and development expenses, including depreciation and amortization,to segments nor are there any segment reconciling items between the amounts reported on theStatement of Income and income before taxes. In addition, the Company does not separately accountfor segment assets or liabilities.**Recently Issued Accounting Announcements**In June 2006, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No.48, *Accounting for Income Tax Uncertainties, an interpretation of FASB Statement No. 109*(“FIN48”). FIN 48 clarifies the accounting for income tax uncertainties and defines the minimumrecognition threshold a tax position is required to meet before being recognized in the financialstatements. FIN 48 also prescribes a two-step approach for evaluating tax positions and requiresexpanded disclosures at each interim and annual reporting period. FIN 48 is effective for fiscalyears beginning after December 15, 2006 and will require that differences between the amountsrecognized in the statements of financial position prior to the adoption of FIN 48 and the amountsreported after adoption are to be accounted for as cumulative-effect adjustments to beginningretained earnings. The Company plans to adopt FIN 48 in the first quarter of fiscal 2008 andmanagement is currently evaluating the impact on the financial statements.In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effectsof Prior Year Misstatement when Quantifying Misstatements in Current Year Financial Statements”(“SAB 108”). SAB 108 provides interpretative guidance on how the effects of the carryover orreversal of prior year misstatements should be considered in quantifying a current yearmisstatement. The SEC staff has stated that registrants should quantify errors using both a balancesheet and income statement approach and evaluate whether either approach results in quantifying amisstatement that, when all relevant quantitative and qualitative factors are considered, ismaterial. SAB 108 will be effective for fiscal years ending on or after November 15, 2006. TheCompany adopted SAB 108 in the first quarter of fiscal 2007. The Company does not expect that SAB108 will have a material impact on its financial condition, results of operations, or cash flows.In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS 157”), whichdefines fair value, establishes a framework for measuring fair value and expands disclosures aboutassets and liabilities measured at fair value. The Company will be required to adopt SFAS 157 inthe first quarter of fiscal 2009. Management is currently evaluating the requirements of SFAS 157and has not yet determined the impact on the consolidated financial statements.
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2006****(In thousands, except per share data)**In June 2006, the FASB ratified the consensus reached in EITF Issue No. 06-3, “How Taxes Collectedfrom Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement(That Is, Gross versus Net Presentation).” EITF 06-3 is effective in interim and annual periodsbeginning after December 15, 2006. The scope of this issue includes any tax assessed by agovernmental authority that is imposed concurrently on a specific revenue-producing transactionbetween seller and a customer. The Board requires the amount of those taxes that is recognized ona gross basis (included in revenues and cost) in interim and annual financial statements for eachperiod for which an income statement is presented to be disclosed if those amounts are significant.The Company currently presents and will continue to present sales taxes on a net basis (excludedfrom revenues) in its Statement of Income.Other recent accounting pronouncements issued by the FASB (including its Emerging Issues TaskForce), the American Institute of Certified Public Accountants and the SEC did not or are notbelieved by management to have a material impact on the Company’s present or future financialstatements.**Intangible Assets**The Company capitalizes costs incurred to develop new marketable software and enhance its existingsystems software. Costs incurred in creating the software are charged to expense when incurred asresearch and development until technological feasibility has been established through thedevelopment of a detailed program design. Once technological feasibility has been established,software production costs are capitalized and reported at the lower of amortized cost or netrealizable value.License agreements and capitalized software costs are amortized on the straight-line method overestimated useful lives ranging from three to five years. Amortization of capitalized softwarecosts commences when the products are available for general release to customers.Unamortized capitalized software costs at December 31, 2006 and at September 30, 2006 were $453 and$445, respectively.Amortization of capitalized software costs, charged to cost of hardware, software and installation,for the three months ended December 31, 2006 and 2005 were $68 and $81, respectively.**Use of Estimates**The preparation of financial statements in accordance with United States GAAP requires the Companyto make estimates and assumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and reported amounts of net revenue and expenses during thereporting period. The Company regularly evaluates estimates and assumptions related to revenuerecognition, receivables and inventory, capitalized software, allowances for doubtful accounts,intangible asset valuations, deferred income tax asset valuation allowances, accounting forshare-based compensation, and other contingencies. The estimates and assumptions are based onhistorical experience and on various other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources. To the extent there arematerial differences between the Company’s estimates and the actual results, the Company’s futureresults of operations will be affected.**Advertising**The Company expenses the costs of advertising as incurred. Advertising expenses for the threemonths ended December 31, 2006 and 2005 were $150 and $96, respectively.
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2006****(In thousands, except per share data)****Shipping and Handling**Shipping and handling fees and costs are included in the Statement of Income under the line itemstitled “Net hardware, software and installation revenues” and “Cost of hardware, software andinstallation revenues. ”**Net Income Per Share**Basic net income per share is based upon the weighted average number of common shares outstandingfor each period presented. Diluted net income per share is based upon the weighted average numberof common shares and common equivalent shares outstanding for each period presented. Commonequivalent shares include stock options assuming conversion under the treasury stock method. Commonequivalent shares are excluded from diluted net income per share if their effect is anti-dilutive.Options outstanding of 62 shares were excluded from the diluted net income per share computationfor the three months ended December 31, 2005 because their effectwas anti-dilutive. There were no anti-dilutive options excluded from the diluted net income pershare computation for the three months ended December 31, 2006.The computations of basic and diluted net income per share for the three months ended December 31,2006 and 2005 are as follows:           THREE MONTHS ENDED   DECEMBER 31, 2006  DECEMBER 31, 2005 **Numerator:**        Net income for basic and dilutednet income per share $968  $742        **Denominator:**        Weighted-average shares outstanding  3,980   3,849        Denominator for basic net incomeper share:        Weighted-average shares  3,980   3,849 Effect of dilutive securities:        Stock options  211   247        Denominator for diluted net incomeper share:        Weighted average shares andassumed conversions  4,191   4,096        Basic net income per share $0.24  $0.19        Diluted net income per share $0.23  $0.18        **Dividends Declared**The Company has a cash dividend policy, which pays stockholders a variable dividend quarterly basedon the quarterly results. During the three months ended December 31, 2006, the Board of Directorsdeclared a cash dividend of $0.16 per outstanding share based on the results of the fourth quarterended September 30, 2006. The dividend was paid on January 16, 2007 to shareholders of record onJanuary 5, 2007.**Share-Based Compensation**In 1993, the stockholders of the Company approved the Company’s 1993 Stock Option Plan (the “1993Plan”) under which nonstatutory options may be granted to key employees and individuals who provideservices to the Company, at an exercise price not less than the fair market value of the stock atthe date of grant, and expire ten years from the date of grant. The options are exercisable basedon vesting periods as determined by the Board of Directors. The 1993 Plan allowed for the issuanceof an aggregate of 1,200 shares of the Company’s common stock. The 1993 Plan had a term of tenyears. There have been 1,200
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2006****(In thousands, except per share data)**options granted under the 1993 Plan as of December 31, 2006. The Company currently has 166 sharesreserved for issuance related to the options that remain outstanding under the 1993 Plan.In April 2000, the Company’s Board of Directors approved the Company’s 2000 Stock Option Plan (the“2000 Plan”) under which nonstatutory options may be granted to key employees and individuals whoprovide services to the Company, at an exercise price not less than the fair market value of thestock at the date of grant, and expire ten years from the date of grant. The options areexercisable based on vesting periods as determined by the Board of Directors. The plan allows forthe issuance of an aggregate of 750 shares of the Company’s common stock. The term of the plan isunlimited in duration. There have been 538 options granted under the plan as of December 31, 2006.The Company has 497 shares reserved for issuance related to the options that remain outstandingunder the 2000 Plan.Statement of Financial Accounting Standards No. 123R, *Share Based Payments (*“SFAS 123R”) requiresshare-based payments, including grants of employee stock options, to be recognized in the Statementof Income as an expense, based on their grant date fair values with such fair values amortized overthe estimated service period. The Company elected to utilize the modified prospective method forthe transition to SFAS 123R. Under the modified prospective method, compensation expense will berecognized for all stock-based compensation awards granted prior to, but not yet vested as of theadoption of SFAS 123R, based on grant-date fair values estimated in accordance with the originalprovision of SFAS 123. The Company used 0% forfeitures for calculating its compensation expense.At December 31, 2006, there was $184 of total unrecognized compensation cost related to unvestedstock options. This cost is expected to be recognized over a weighted-average period ofapproximately 1.2 years.For options exercised during the three-month period ended December 31, 2006, newly issued shareswere issued.A summary of the stock option plans at December 31, 2006 is as follows:                           WEIGHTED        WEIGHTED AVERAGE        AVERAGE REMAINING AGGREGATE  NUMBER EXERCISE CONTRACTUAL INTRINSIC  OF OPTIONS PRICE TERM (IN YEARS) VALUE   Options outstandingat December 31,2006  452  $6.72   4.7  $8,185 Options expected tovest at December31, 2006  440  $6.60   4.6  $8,029 Options exercisableat December 31,2006  417  $6.35   4.4  $7,714 
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**Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations****(All dollar amounts in thousands)****CAUTIONARY STATEMENT**You should read the following discussion and analysis with our Unaudited Condensed FinancialStatements and related Notes thereto contained elsewhere in this report. We urge you to carefullyreview and consider the various disclosures made in this report and in our other reports filed withthe Securities and Exchange Commission (SEC).The section entitled “Forward Looking Statements” set forth below, the section entitled “RiskFactors” in our report on Form 10-K for the fiscal year ended September 30, 2006, and similardiscussions in our other SEC filings, discuss some of the important risk factors that may affectour business, results of operations and financial condition. You should carefully consider thoserisks, in addition to the other information in this report, our 10-K report, and in our otherfilings with the SEC, before deciding to purchase, hold or sell our common stock.**OVERVIEW**We design, develop, market, install and service highly integrated retailing and payment processingsolutions for small to medium size traditional and eCommerce businesses based on our openarchitecture software. These integrated solutions include credit and debit card processing,inventory management, point of sale, accounting, Internet sales, gift card and customer loyaltyprograms, and extensive management reporting. Payment processing services are provided on atransaction based business model.We provide integrated retailing and payment processing solutions to small to medium retailers bothon direct basis and through a growing network of resellers. We offer payment processing softwareprogram, called X-Charge, which can be integrated with our point-of-sale systems and our resellers’systems. This allows our customers to process a sale and credit card payment in one transactionusing just the point-of-sale system, eliminating the need to separately process the credit card ona stand-alone credit card terminal. X-Charge is integrated with our five turn-key retailingsystems, consisting of: CAM32, which is designed for hard goods retailers whose inventory isre-orderable in nature; Profit$, which is designed for apparel and shoe retailers whose inventoryis seasonal in nature, and color and size oriented; Retail STAR, which is designed to incorporatemultiple functions of both the CAM32 and Profit$ systems; Retail ICE, which is a single-userderivative of Retail STAR; and Microbiz, which is designed for single-store, hard goods retailersthat are generally smaller in size than customers that utilize the CAM32 system. Our systems offerthe ability to obtain: (i) automated pricing of each item; (ii) billing for charge accountcustomers; (iii) printing of a customer invoice; (iv) tracking of inventory count on an item byitem basis; (v) computation of gross profit, dollars and/or percentage of each item; and (vi)tracking of sales by clerk and department by day and/or month. In addition, our systems providefull management reporting including zero sales reports, inventory ranking, overstock andunderstock, sales analysis, inventory valuation (last cost, average cost and retail) and otherreports. The systems can also provide integrated or interfaced accounting functions includingaccounts receivable, accounts payable, and general ledger.**OFF BALANCE SHEET ARRANGEMENTS**There are no off balance sheet items as of December 31, 2006.**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**The preparation of financial statements in accordance with United States generally acceptedaccounting principles requires us to make estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of our financial statements and reported amounts ofnet revenue and expenses during the reporting period. We regularly evaluate estimates andassumptions related to revenue recognition, receivables and inventory, capitalized software,allowances for doubtful accounts, intangible asset valuations, deferred income tax asset valuationallowances, accounting for share-based compensation related to SFAS 123R, and other contingencies.The estimates and assumptions are based on historical
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**CAM COMMERCE SOLUTIONS, INC.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATIONS****(All dollar amounts in thousands)**experience and on various other factors that we believe are reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. To the extent there are materialdifferences between our estimates and the actual results, our future results of operations will beaffected.We believe the following critical accounting policies require us to make significant judgments andestimates in the preparation of our financial statements:**Revenue Recognition**We derive revenue from the sale of computer hardware, licensing of computer software, post-contractcustomer support, installation and training services, and payment processing services. We recognizepayment processing revenues in the period the service is performed. Revenues are estimated based onthe accumulation of sufficient historical information required to analyze trends and formulate areasonable estimate. The significant historical information required to formulate a reliableestimate are the total dollar volume of credit card transactions processed and the related revenuefor these credit card transactions.System revenue from hardware sales and software licensing is recognized when a system purchaseagreement has been signed, the hardware and software has been shipped, there are no uncertaintiessurrounding product acceptance, the pricing is fixed and determinable, and collection is consideredprobable. If a sales transaction contains an undelivered element, the vendor-specific objectiveevidence (VSOE) of fair value of the undelivered element is deferred and the revenue recognizedonce the element is delivered. The undelivered elements are primarily installation and trainingservices. Revenue related to these services is deferred and recognized when the services have beenprovided. VSOE of fair value for installation and training services are based upon standard ratescharged since those services are always sold as a separate option and priced independently.Installation and training services are separately priced, are generally available from othersuppliers and are not essential to the functionality of the software products. Payments for ourhardware and software are typically due with an initial deposit payment upon signing the systempurchase agreement, with the balance due upon delivery, although established relationship customersin good credit standing receive thirty day payment terms. VSOE of fair value for post-contractsupport (PCS) is the price the customer is required to pay since it is sold as a separate optionand priced independently. PCS services are billed on a monthly basis and recorded as revenue inthe applicable month, or on an annual basis with the revenue being deferred and recognized ratablyover the support period.**Receivables**We have accounts receivable from customers who were given extended payment terms for goods andservices rendered. Extended payment terms are generally provided only to established relationshipcustomers in good credit standing, and generally represent net 30 day terms. Payment for goods andservices are typically due with an initial deposit payment upon signing the purchase agreement,with the balance due upon delivery.An allowance for doubtful accounts is maintained for estimated losses resulting from the inabilityof customers to make required payments. If the financial condition of our customers was todeteriorate, resulting in an impairment of their ability to make payments, additional allowancescould be required. Actual losses have traditionally been minimal and within our expectations.**Inventory**We write down inventory for estimated obsolescence equal to the difference between the cost ofinventory and the estimated realizable value based upon assumptions about future demand and marketconditions. If
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**CAM COMMERCE SOLUTIONS, INC.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATIONS****(All dollar amounts in thousands)**actual market conditions are less favorable than those projected by us, additional inventorywrite-downs could be required. Historically inventory write-downs have been minimal and within ourexpectations.**Capitalized Software**We capitalize costs incurred to develop new marketable software and enhance our existing systemssoftware. Costs incurred in creating the software are expensed when incurred as research anddevelopment expense until technological feasibility has been established through the development ofa detailed program design. Once technological feasibility has been established, softwaredevelopment costs are capitalized and reported at the lower of amortized cost or net realizablevalue.**Impairment of Intangible Assets**The value of our intangible assets could be impacted by future adverse changes such as (i) anyfuture declines in our operating results, and (ii) any failure to meet our future performanceprojections. An annual impairment review will be performed during the fourth quarter of each fiscalyear or more frequently if indicators of impairment exist. In the process of the annual impairmentreview, we use the income approach methodology of valuation that includes both the undiscounted anddiscounted cash flow methods as well as other generally accepted valuation methodologies todetermine the fair value of our assets. Significant management judgment is required in the forecastof future operating results that are used in the discounted cash flow method of valuation. Theestimates used are consistent with the plans and estimates that we use to manage our business. Itis reasonably possible, however, that certain of our products will not gain or maintain marketacceptance, which could result in estimates of anticipated future net revenue differing materiallyfrom those used to assess the recoverability of these assets. In that event, revenue and costforecasts would not be achieved, and we could incur additional impairment charges.**Deferred Taxes**We utilize the liability method of accounting for income taxes as set forth in SFAS No. 109,“Accounting for Income Taxes.” We do not carry a valuation allowance for our deferred tax assets.In assessing the need for a valuation allowance, we consider all positive and negative evidence,including projected future taxable income, and recent financial performance.
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**CAM COMMERCE SOLUTIONS, INC.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATIONS****(All dollar amounts in thousands)****RESULTS OF OPERATIONS**The following tables summarize the results of our operations for the three months ended December31, 2006 compared to the three months ended December 31, 2005.                   Three months ended December 31,  Variance   2006  2005  Amount  %    Net payment processing revenues $3,465  $2,578  $887   34%Net hardware, software and installationrevenues  2,285   3,064   (779)  (25%)Net service revenues  1,422   1,344   78   6%               Total net revenues  7,172   6,986   186   3%Cost of payment processing revenues  130   118   12   10%Cost of hardware, software andinstallation revenues  1,184   1,665   (481)  (29%)Cost of service revenues  637   594   43   7%               Total cost of revenues  1,951   2,377   (426)  (18%)Selling, general and administrativeexpenses  3,663   3,272   391   12%Research and development expenses  383   363   20   6%Interest income  (305)  (206)  99   48%               Total costs and expenses  5,692   5,806   (114)  (2%)               Income before provision for income taxes  1,480   1,180   300   25%Provision for income taxes  512   438   74   17%               Net income $968  $742   226   30%                                Gross profit on payment processingrevenues $3,335  $2,460   875   36%Gross profit on hardware, software andinstallationrevenues  1,101   1,399   (298)  (21%)Gross profit on service revenues  785   750   35   5%               Total gross profit $5,221  $4,609   612   13%                                Gross margin on payment processingrevenues  96%  95%        Gross margin on hardware, software andinstallation revenues  48%  46%        Gross margin on service revenues  55%  56%        Gross margin on total net revenues  73%  66%        
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**CAM COMMERCE SOLUTIONS, INC.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATIONS****(All dollar amounts in thousands, except in reference to the number of X-Charge accounts and**