**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-QSB**

 

**(MarkOne)**

 

| **ý**                                                                                                                                                                                                 | ** ** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                 | ** ** | ** **                                                                                       |
| **For the  quarterly period ended June 30, 2005.**                                                                                                                                                    |
|                                                                                                                                                                                                       |       |                                                                                             |
| **o**                                                                                                                                                                                                      | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE EXCHANGE ACT**                   |
| ** **                                                                                                                                                                                                 | ** ** | ** **                                                                                       |
| **For the  transition period from                              to** |

 
| **Commission file number 0-12551**                                 |
|--------------------------------------------------------------------|
|                                                               |   |   |
| **CREATIVE COMPUTER APPLICATIONS,  INC.**                          |
| (Exact name of small business issuer as specified in  its charter) |
|                                                               |   |   |
| **California**                                                     | ** ** | **95-3353465** |
| (State or other jurisdiction of                                    |   | (I.R.S. Employer |
| incorporation or organization)                                     |   | Identification No.) |
|                                                               |   |   |
| **26115-A Mureau Road, Calabasas, California 91302**               |
| (Address of principal executive offices)                           |
|                                                               |   |   |
| **(818) 880-6700**                                                 |
| (Issuer’s telephone number, including area code):             |

 

**Check whether the Issuer (1) filed all reports requiredto be filed by Section 13 or 15(d) of the Exchange Act during thepast 12 months (or for such shorter period that the Issuer was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.**

| **Yes** | ** ** | **ý** | ** ** | **No** | ** ** | **o** |
|---------|------------|------------|------------|--------|------------|-------|

 

**State thenumber of shares outstanding of each of the issuer’s classes of common equity,as of the latest practicable date: 3,483,900 common shares as of August 10, 2005.**

 

**TransitionalSmall Business Disclosure Format (check one):**

| **Yes** | ** ** | **o** | ** ** | **No** | ** ** | **ý** |
|---------|------------|-------|------------|--------|------------|------------|

 

 

----

 

**CREATIVE COMPUTER APPLICATIONS,INC.**

 

**FORM 10-QSB**

 

### **I N D E X**

 
| **PART I - Financial Information:**                                                                               |   |
|------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                   |   |
| **Item 1.  Financial Statements (unaudited)**                                                                     |   |
|                                                                                                                   |   |
| Condensed Consolidated  Balance Sheets, as at June 30, 2005 and December 31, 2004                            |   |
|                                                                                                                   |   |
| Condensed Consolidated  Statements of Operations for the three months ended June 30, 2005 and June 30,  2004 |   |
|                                                                                                                   |   |
| Condensed  Consolidated Statements of Operations for the six months ended June 30,  2005 and June 30, 2004   |   |
|                                                                                                                   |   |
| Condensed Consolidated  Statements of Cash Flows for the six months ended June 30, 2005 and June 30,  2004   |   |
|                                                                                                                   |   |
| Notes to Condensed  Consolidated Financial Statements                                                                  |   |
|                                                                                                                   |   |
| **Item 2.  Management’s Discussion and Analysis or  Plan of Operation**                                      |   |
| ** **                                                                                                             |   |
| **Item 3.  Controls and Procedures**                                                                              |   |
| ** **                                                                                                             |   |
| **PART II - Other Information:**                                                                                  |   |
|                                                                                                                   |   |
| **Item 6.  Exhibits**                                                                                             |   |
| ** **                                                                                                             |   |
| **Signatures**                                                                                                         |   |
| ** **                                                                                                             |   |
| **Exhibit Index**                                                                                                 |   |

 

2

----

 

**CREATIVE COMPUTER APPLICATIONS,INC.**

 

**PART 1 - FINANCIALINFORMATION**

 

#### **Item1.  Financial Statements**

#### ** **

#### **CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| ** **                                                                                                        | ** ** | **(Unaudited)**   | ** ** | **(Unaudited)**       | ** ** |
| **ASSETS**                                                                                                        |       |              |       |                  |       |
|                                                                                                              |       |              |       |                  |       |
| CURRENT ASSETS:                                                                                                   |       |              |       |                  |       |
| Cash                                                                                                              |       | $                 | 1,354,505  |                  | $          | 1,655,063 |   |
| Receivables, net                                                                                                  |       | 710,560           |       | 1,736,768             |       |
| Inventory                                                                                                         |       | 104,101           |       | 86,298                |       |
| Prepaid expenses and other assets                                                                                 |       | 314,806           |       | 256,289               |       |
| Deferred tax asset                                                                                                |       | 539,420           |       | 539,420               |       |
|                                                                                                              |       |              |       |                  |       |
| TOTAL CURRENT ASSETS                                                                                              |       | 3,023,392         |       | 4,273,838             |       |
|                                                                                                              |       |              |       |                  |       |
| PROPERTY AND EQUIPMENT, net                                                                                       |       | 447,503           |       | 345,004               |       |
| INVENTORY OF COMPONENT PARTS                                                                                      |       | 209,135           |       | 186,599               |       |
| CAPITALIZED SOFTWARE COSTS, net of accumulated  amortization of $1,056,657 and $878,021                      |       | 1,693,358         |       | 1,531,573             |       |
| DEFERRED MERGER COSTS                                                                                             |       | 199,790           |       | —                |       |
| DEFERRED TAX ASSET                                                                                                |       | 254,457           |       | 254,457               |       |
|                                                                                                              |       |              |       |                  |       |
|                                                                                                              |       | $                 | 5,827,635  |                  | $          | 6,591,471 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                     |       |              |       |                  |       |
|                                                                                                              |       |              |       |                  |       |
| CURRENT LIABILITIES:                                                                                              |       |              |       |                  |       |
| Notes payable to bank (Note 4)                                                                                    |       | 200,000           |       | 300,000               |       |
| Accounts payable                                                                                                  |       | 309,419           |       | 377,768               |       |
| Accrued liabilities:                                                                                              |       |              |       |                  |       |
| Vacation pay                                                                                                      |       | 247,371           |       | 243,060               |       |
| Accrued payroll                                                                                                   |       | 104,491           |       | 128,227               |       |
| Other                                                                                                             |       | 183,748           |       | 173,808               |       |
| Deferred service contract income                                                                                  |       | 838,747           |       | 1,235,032             |       |
| Deferred revenue on system sales                                                                                  |       | 369,896           |       | 226,111               |       |
|                                                                                                              |       |              |       |                  |       |
| TOTAL CURRENT LIABILITIES                                                                                         |       | 2,253,672         |       | 2,684,006             |       |
|                                                                                                              |       |              |       |                  |       |
| SHAREHOLDERS’ EQUITY:                                                                                        |       |              |       |                  |       |
| Common shares, no par value; 20,000,000 shares  authorized; 3,409,900 and 3,321,900 shares issued and outstanding |       | 6,287,692         |       | 6,195,692             |       |
| Accumulated deficit                                                                                               |       | (2,713,729        | )          | (2,288,227            | )          |
|                                                                                                              |       |              |       |                  |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                   |       | 3,573,963         |       | 3,907,465             |       |
|                                                                                                              |       |              |       |                  |       |
|                                                                                                              |       | $                 | 5,827,635  |                  | $          | 6,591,471 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

3

----

 

**CREATIVE COMPUTER APPLICATIONS,INC.**

 

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

 
| ** **                                      | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                      | ** ** |
|                                            |       |                                 |       |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE:           |       |                                 |       |   |   |
| System sales                                    |       | $                                    | 296,600    |   | $ | 723,087 |   |
| Service revenue                                 |       | 1,259,407                            |       | 1,071,907 |   |
|                                            |       | 1,556,007                            |       | 1,794,994 |   |
|                                            |       |                                 |       |   |   |
| COSTS OF PRODUCTS AND SERVICES SOLD:            |       |                                 |       |   |   |
| System sales                                    |       | 371,218                              |       | 530,905 |   |
| Service revenue                                 |       | 409,831                              |       | 398,777 |   |
|                                            |       | 781,049                              |       | 929,682 |   |
|                                            |       |                                 |       |   |   |
| Gross profit                                    |       | 774,958                              |       | 865,312 |   |
|                                            |       |                                 |       |   |   |
| OPERATING EXPENSES                              |       |                                 |       |   |   |
| Selling, general and administrative             |       | 771,245                              |       | 596,678 |   |
|                                            |       |                                 |       |   |   |
| Research and development                        |       | 244,097                              |       | 258,534 |   |
|                                            |       |                                 |       |   |   |
| Total operating expenses                        |       | 1,015,342                            |       | 855,212 |   |
|                                            |       |                                 |       |   |   |
| Operating income (loss)                         |       | (240,384                             | )          | 10,100 |   |
|                                            |       |                                 |       |   |   |
| INTEREST AND OTHER INCOME                       |       | 4,415                                |       | 584 |   |
|                                            |       |                                 |       |   |   |
| INTEREST EXPENSE                                |       | (2,569                               | )          | (570 | ) |
|                                            |       |                                 |       |   |   |
| Income (Loss) before provision for income taxes |       | (238,538                             | )          | 10,114 |   |
|                                            |       |                                 |       |   |   |
| PROVISION FOR INCOME TAXES                      |       | —                               |       | — |   |
|                                            |       |                                 |       |   |   |
| NET INCOME (LOSS)                               |       | $                                    | (238,538   | ) | $ | 10,114 |   |
|                                            |       |                                 |       |   |   |
| EARNINGS (LOSS) PER SHARE (Note 3):             |       |                                 |       |   |   |
|                                            |       |                                 |       |   |   |
| Basic                                           |       | $                                    | (.07       | ) | $ | .00 |   |
| Diluted                                         |       | (.07                                 | )          | .00 |   |
|                                            |       |                                 |       |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:  |       |                                 |       |   |   |
| Basic                                           |       | 3,383,233                            |       | 3,318,900 |   |
| Diluted                                         |       | 3,383,233                            |       | 3,418,109 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

4

----

 

**CREATIVE COMPUTER APPLICATIONS,INC.**

 

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

 
| ** **                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                    | ** ** |
|                                            |       |                               |       |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE:           |       |                               |       |   |   |
| System sales                                    |       | $                                  | 883,707    |   | $ | 1,617,851 |   |
| Service revenue                                 |       | 2,497,588                          |       | 2,135,843 |   |
|                                            |       | 3,381,295                          |       | 3,753,694 |   |
|                                            |       |                               |       |   |   |
| COSTS OF PRODUCTS AND SERVICES SOLD:            |       |                               |       |   |   |
| System sales                                    |       | 824,568                            |       | 976,539 |   |
| Service revenue                                 |       | 824,693                            |       | 806,563 |   |
|                                            |       | 1,649,261                          |       | 1,783,102 |   |
|                                            |       |                               |       |   |   |
| Gross profit                                    |       | 1,732,034                          |       | 1,970,592 |   |
|                                            |       |                               |       |   |   |
| OPERATING EXPENSES                              |       |                               |       |   |   |
| Selling, general and administrative             |       | 1,599,977                          |       | 1,319,074 |   |
|                                            |       |                               |       |   |   |
| Research and development                        |       | 558,940                            |       | 514,880 |   |
|                                            |       |                               |       |   |   |
| Total operating expenses                        |       | 2,158,917                          |       | 1,833,954 |   |
|                                            |       |                               |       |   |   |
| Operating income (loss)                         |       | (426,883                           | )          | 136,638 |   |
|                                            |       |                               |       |   |   |
| INTEREST AND OTHER INCOME                       |       | 9,142                              |       | 1,858 |   |
|                                            |       |                               |       |   |   |
| INTEREST EXPENSE                                |       | (7,761                             | )          | (1,685 | ) |
|                                            |       |                               |       |   |   |
| Income (Loss) before provision for income taxes |       | (425,502                           | )          | 136,811 |   |
|                                            |       |                               |       |   |   |
| PROVISION FOR INCOME TAXES                      |       | —                             |       | — |   |
|                                            |       |                               |       |   |   |
| NET INCOME (LOSS)                               |       | $                                  | (425,502   | ) | $ | 136,811 |   |
|                                            |       |                               |       |   |   |
| EARNINGS (LOSS) PER SHARE (Note 3):             |       |                               |       |   |   |
|                                            |       |                               |       |   |   |
| Basic                                           |       | $                                  | (.13       | ) | $ | .04 |   |
| Diluted                                         |       | (.13                               | )          | .04 |   |
|                                            |       |                               |       |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:  |       |                               |       |   |   |
| Basic                                           |       | 3,368,567                          |       | 3,318,900 |   |
| Diluted                                         |       | 3,368,567                          |       | 3,423,240 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

5

----

 

**CREATIVE COMPUTER APPLICATIONS,INC.**

 

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 

**Increase (Decrease) in Cash**

 
| ** **                                                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                                                                | ** ** | **(Unaudited)**                    | ** ** |
|                                                                                      |       |                               |       |   |   |
| OPERATING ACTIVITIES                                                                      |       |                               |       |   |   |
| Net Income (loss)                                                                         |       | $                                  | (425,502   | ) | $ | 136,811 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                               |       |   |   |
| Depreciation and amortization                                                             |       | 67,260                             |       | 54,959 |   |
| Provision for doubtful accounts                                                           |       | 21,528                             |       | — |   |
| Amortization of capitalized software costs                                                |       | 178,636                            |       | 220,080 |   |
| Increase (decrease) from changes in:                                                      |       |                               |       |   |   |
| Receivables                                                                               |       | 1,004,680                          |       | (253,517 | ) |
| Inventories                                                                               |       | (40,339                            | )          | 4,692 |   |
| Prepaid expenses and other assets                                                         |       | (58,517                            | )          | (47,210 | ) |
| Accounts payable                                                                          |       | (68,349                            | )          | 75,044 |   |
| Accrued liabilities                                                                       |       | (9,485                             | )          | 59,816 |   |
| Deferred service contract income                                                          |       | (396,285                           | )          | 80,581 |   |
| Deferred revenue on system sales                                                          |       | 143,785                            |       | 487,909 |   |
|                                                                                      |       |                               |       |   |   |
| Net cash provided by operating activities                                                 |       | 417,412                            |       | 819,165 |   |
|                                                                                      |       |                               |       |   |   |
| INVESTING ACTIVITIES                                                                      |       |                               |       |   |   |
| Additions to property and equipment                                                       |       | (169,759                           | )          | (46,701 | ) |
| Additions to capitalized acquisition costs                                                |       | (199,790                           | )          | — |   |
| Additions to capitalized software costs                                                   |       | (340,421                           | )          | (280,624 | ) |
|                                                                                      |       |                               |       |   |   |
| Net cash used in investing activities                                                     |       | (709,970                           | )          | (327,325 | ) |
|                                                                                      |       |                               |       |   |   |
| FINANCING ACTIVITIES                                                                      |       |                               |       |   |   |
| Payments on notes payable                                                                 |       | (100,000                           | )          | — |   |
| Exercise of stock options                                                                 |       | 92,000                             |       | — |   |
|                                                                                      |       |                               |       |   |   |
| Net cash used in financing activities                                                     |       | (8,000                             | )          | — |   |
|                                                                                      |       |                               |       |   |   |
| NET INCREASE (DECREASE) IN CASH                                                           |       | (300,558                           | )          | 491,840 |   |
|                                                                                      |       |                               |       |   |   |
| CASH, beginning of period                                                                 |       | 1,655,063                          |       | 889,521 |   |
|                                                                                      |       |                               |       |   |   |
| CASH, end of period                                                                       |       | $                                  | 1,354,505  |   | $ | 1,381,361 |   |

 

**See notes to Condensed Consolidated FinancialStatements.**

 

6

----

 

**CREATIVE COMPUTER APPLICATIONS,INC.**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(unaudited)**

 

**Note1-Presentation of Financial Statements**

 

In the opinion of management ofCreative Computer Applications, Inc. (the “Company” or “CCA”), theaccompanying unaudited condensed consolidated financial statements reflect alladjustments (which include only normal recurring accruals) necessary to presentfairly the Company’s financial position as of June 30, 2005, the resultsof its operations for the three and six month periods ended June 30, 2005and 2004, and cash flows for the six months ended June 30, 2005 and2004.  These results have been determinedon the basis of accounting principles generally accepted in the United Statesof America and practices applied consistently with those used in preparation ofthe Company’s Annual Report on Form 10-KSB for the fiscal year ended August 31,2004 and the Transitional Report on Form 10-QSBT for the period ended December 31,2004.

 

The results of operations for thethree and six months ended June 30, 2005 are not necessarily indicative ofthe results expected for any other period or for the entire year.

 

**Note2- Inventories**

 

Inventories consist primarily of computer hardwareheld for resale and are stated at the lower of cost or market (net realizablevalue).  Cost is determined using thefirst-in, first-out method. Supplies are charged to expense as incurred.

 

TheCompany also maintains an inventory pool of component parts to service systemspreviously sold, which is classified as non-current in the accompanying balancesheets.  Such inventory is carried at thelower of cost or market and is charged to cost of sales based on usage.  Allowances are made for quantities on hand inexcess of estimated future usage.  At June 30,2005 and 2004 the inventory allowance was $180,073 and $126,273.

 

**Note 3-Earnings per Share**

 

The Company accounts for its earnings per share inaccordance with SFAS No.128, which requires presentation of basic and dilutedearnings per share.  Basic earnings pershare is computed by dividing income or loss available to common shareholdersby the weighted average number of common shares outstanding for the reportingperiod.  Diluted earnings per sharereflect the potential dilution that could occur if securities or othercontracts, such as stock options, to issue common stock were exercised orconverted into common stock.

 

Earnings per share has been computed as follows:

 
| ** **                                                    | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** | **Three Months  Ended  June 30, 2004** | ** ** | **Six Months  Ended  June 30, 2004** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
|                                                          |       |                                        |       |                                      |       |                                        |       |                                      |       |
| NET INCOME (LOSS)                                             |       | $                                           | (238,538   | )                                         | $          | (425,502                                    | )          | $                                         | 10,114     |   | $ | 136,811 |   |
| Basic weighted average number of common shares outstanding    |       | 3,383,233                                   |       | 3,368,567                                 |       | 3,318,900                                   |       | 3,318,900                                 |       |
| Dilutive effect of stock options                              |       | —                                      |       | —                                    |       | 99,209                                      |       | 104,340                                   |       |
| Diluted weighted average number of common shares  outstanding |       | 3,383,233                                   |       | 3,368,567                                 |       | 3,418,109                                   |       | 3,423,240                                 |       |
| Basic earnings (loss) per share                               |       | $                                           | (.07       | )                                         | $          | (.13                                        | )          | $                                         | .00        |   | $ | .04 |   |
| Diluted earnings (loss) per share                             |       | $                                           | (.07       | )                                         | $          | (.13                                        | )          | $                                         | .00        |   | $ | .04 |   |

 

7

----

 

For the three and six months ended June 30, 2005and 2004, options to purchase 314,000 and 100,000 shares of common stock at pershare prices ranging from $.72 to $1.76 were not included in the computation ofdiluted earnings (loss) per share because inclusion would have beenanti-dilutive.

 

**Note 4-Debt Obligations**

 

The Company’s line of credit with its bank providesfor $1,000,000 on a revolving basis through February 1, 2006.  On June 30, 2005, the total amount dueto the bank was $200,000.

 

**Note 5-Stock-Based Compensation**

 

As allowed by Statement of FinancialAccounting Standards No. 123 (“SFAS 123”), the Company has adoptedthe intrinsic value method of accounting for employee stock options under theprinciples of APB Opinion No. 25, Accounting for Stock Issued to Employees(“APB 25”) and discloses the pro forma effect on net income (loss) and income(loss) per share as if the fair value based method had been applied.  For equity instruments, including stockoptions, issued to non-employees, the fair value of the equity instruments orthe fair value of the consideration received, whichever is more readilydeterminable, is used to determine the value of services or goods received andthe corresponding charge to operations.

 

The following table illustrates the effect on netincome (loss) and income (loss) per share as if the Company had applied thefair value recognition provision of SFAS No. 123 to stock-based employeecompensation:

 
| ** **                                                                                                     | ** ** | **Three Months  Ended****June 30, 2005** | ** ** | **Six Months  Ended****June 30, 2005** | ** ** | **Three Months  Ended****June 30, 2004** | ** ** | **Six Months  Ended****June 30, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                     | ** ** | ** **                                    | ** ** | ** **                                  | ** ** | ** **                                    | ** ** | ** **                                  | ** ** |
| Net income (loss), as reported                                                                                 | ** ** | $                                             | (238,538   | )                                           | $          | (425,502                                      | )          | $                                           | 10,114     |   | $ | 136,811 |   |
|                                                                                                           | ** ** |                                          |       |                                        |       |                                          |       |                                        |       |
| Add: Stock-based compensation expense included in  reported net income, net of related tax effects             | ** ** | —                                        |       | —                                      |       | —                                        |       | —                                      |       |
|                                                                                                           | ** ** |                                          |       |                                        |       |                                          |       |                                        |       |
| Less: total stock based employee compensation  expense determined under fair value based method for all awards | ** ** | (11,011                                       | )          | (22,021                                     | )          | (19,513                                       | )          | (39,027                                     | )          |
|                                                                                                           | ** ** |                                          |       |                                        |       |                                          |       |                                        |       |
| Net loss, pro forma                                                                                            |       | $                                             | (249,549   | )                                           | $          | (447,523                                      | )          | $                                           | (9,399     | ) | $ | 97,784 |   |
|                                                                                                           |       |                                          |       |                                        |       |                                          |       |                                        |       |
| Basic net earnings (loss) per share, as reported                                                               |       | $                                             | (.07       | )                                           | $          | (.13                                          | )          | $                                           | .00        |   | $ | .04 |   |
| Basic net earnings (loss) per share, pro forma                                                                 |       | $                                             | (.07       | )                                           | $          | (.13                                          | )          | $                                           | .00        |   | $ | .03 |   |
| Diluted net earnings (loss) per share, as reported                                                             |       | $                                             | (.07       | )                                           | $          | (.13                                          | )          | $                                           | 00         |   | $ | 04 |   |
| Diluted net earnings (loss) per share, pro forma                                                               |       | $                                             | (.07       | )                                           | $          | (.13                                          | )          | $                                           | .00        |   | $ | .03 |   |

 

The Company issues all of its options at fair market value at the timeof grant; therefore, no expense has been recorded under the intrinsic valuemethod for the three and six months ended June 30, 2005 and 2004.  As required by SFAS 123, the Company providesthe following disclosure of estimated values for these awards:  The fair value of each option was estimatedon the date of grant using a Black-Scholes option-pricing model with the

 

8

----

 

following weighted average assumptions for 2004: risk free interestrates ranging from 3.4% to 6.1%, expected lives of 5 years; volatility rangingfrom 67% to 126% and no assumed dividends. The weighted-average grant-date fair value of options granted during2004 was estimated to be $.93.  Therewere no options granted in the six months ended June 30, 2005.

 

**Note 6-Commitments and Contingencies**

 

Inaccordance with the bylaws of the Company, officers and directors areindemnified for certain events or occurrences arising as a result of theofficer or director’s serving in such capacity. The term of the indemnification period is for the lifetime of theofficer or director.  The maximumpotential amount of future payments the Company could be required to make underthe indemnification provisions of its bylaws is unlimited.  However, the Company has a director andofficer liability insurance policy that reduces its exposure and enables it torecover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes theestimated exposure for the indemnification provisions of its bylaws is minimaland, therefore, the Company has not recorded any related liabilities.

 

The Company enters into indemnification provisionsunder agreements with various parties in the normal course of business,typically with customers and landlords. Under these provisions, the Company generally indemnifies and holdsharmless the indemnified party for losses suffered or incurred by theindemnified party as a result of the Company’s activities or, in some cases, asa result of the indemnified party’s activities under the agreement.  These indemnification provisions ofteninclude indemnifications relating to representations made by the Company withregard to intellectual property rights. These indemnification provisions generally survive termination of theunderlying agreement.  The maximumpotential amount of future payments the Company could be required to make underthese indemnification provisions cannot be estimated.  The Company maintains general liability,errors and omissions, and professional liability insurance in order to mitigatesuch risks.  The Company has not incurredmaterial costs to defend lawsuits or settle claims related to these indemnificationagreements.  As a result, the Companybelieves the estimated exposure under these agreements is minimal.  Accordingly, the Company has not recorded anyrelated liabilities.

 

**Note 7-New Accounting Pronouncements**

 

In December 2004the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 123 (revised 2004), *Share-Based Payment (SFAS No. 123(R))*. SFAS No. 123(R)requires compensation cost relating to unvested share-based paymenttransactions that are outstanding as of the effective date and newly issuedtransactions to be recognized in the financial statements. That cost will bemeasured based on the fair value of the equity or liability instruments issued.SFAS No. 123(R) covers a wide range of share-based compensationarrangements including share options, restricted share plans, performance-basedawards, share appreciation rights and employee share purchase plans. SFAS No. 123(R)replaces SFAS No. 123 and supersedes APB 25*.*SFAS No. 123, as originally issued in 1995,established fair-value-based method of accounting for share-based paymenttransactions with employees. However, SFAS No. 123 permitted entities theoption of continuing to apply the guidance in APB 25, as long as the footnotesto financial statements disclosed what net income would have been had thefair-value-based method been used. As disclosed in footnote 5, the Companyelected the option of disclosure only under SFAS No. 123. Public companieswill be required to apply SFAS No. 123(R) as of the first annual reportingperiod that begins after June 15, 2005, or December 15, 2005 forsmall business issuers.  In April 2005,the SEC issued a Final Rule Release, “Amendment to Rule 4-01(a) ofRegulation S-X regarding the compliance date for Statement of FinancialAccounting Standards No. 123 (revised 2004), Share-Based Payment.”  This rule extends the date forcompliance with SFAS No. 123R until the beginning of the public companies’next fiscal year, instead of the next reporting period, that begins after June 15,2005, or December 15, 2005 for small business issuers.  The Company is currently evaluating theimpact of this statement.

 

In March 2005,the SEC staff issued a Staff Accounting Bulletin (“SAB 107”) which expressedviews of the staff regarding the interaction between SFAS No. 123R andcertain SEC rules and regulations and provide the staff’s views regardingthe valuation of share-based payment arrangements for public companies. Inparticular, SAB 107 provides guidance related to share-based paymenttransactions with non-employees, the transition from nonpublic to public entitystatus, valuation methods (including assumptions such as expected volatilityand expected term), the accounting for certain redeemable financial instrumentsissued under share-based payment

 

9

----

 

arrangements,the classification of compensation expense, non-GAAP financial measures,first-time adoption of SFAS No. 123R in an interim period, capitalizationof compensation cost related to share-based payment arrangements, theaccounting for income tax effects of share-based payment arrangements uponadoption of SFAS No. 123R, the modification of employee share optionsprior to adoption of SFAS No. 123R and disclosures in Management’sDiscussion and Analysis subsequent to adoption of SFAS No. 123R.

 

In December 2004,the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43,Chapter 4,” which requires that abnormal amounts of idle facility expense,freight, handling costs and wasted material (spoilage) be recognized ascurrent-period charges. In addition, the statement requires that allocation offixed production overheads to the costs of conversion be based on the normalcapacity of the production facilities. SFAS No. 151 is effective forfiscal years beginning after June 15, 2005. The Company will adopt thisstatement as required, and the Company does not believe the adoption will havea material effect on the Company’s results of operations or financial condition.

 

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, anamendment of APB Opinion No. 29,” which eliminates the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. The statement defines a nonmonetary exchange withcommercial substance as one in which the future cash flows of an entity areexpected to change significantly as a result of the exchange. SFAS No. 153is effective for fiscal years beginning after June 15, 2005. The Companywill adopt this statement as required, and it does not believe the adoptionwill have a material effect on the Company’s results of operation or financialcondition.

 

In May 2005,the Financial Accounting Standards Board issued Statement No. 154, “AccountingChanges and Error Corrections, a replacement of APB Opinion No. 20,Accounting Changes, and Statement No. 3, Reporting Accounting Changes inInterim Financial Statements,” or SFAS No.154. SFAS No. 154 changes therequirements for the accounting for, and reporting of, a change in accountingprinciple. Previously, most voluntary changes in accounting principles wererequired to be recognized by way of a cumulative effect adjustment within netincome during the period of the change. SFAS No. 154 generally requiresretrospective application to prior periods’ financial statements of voluntarychanges in accounting principles. SFAS No. 154 is effective for accountingchanges made in fiscal years beginning after December 15, 2005; however,SFAS No. 154 does not change the transition provisions of any existingaccounting pronouncements. We do not believe adoption of SFAS No. 154 willhave a material effect on our consolidated results of operations or financialposition.

 

**Note 8-Merger**

 

On January10, 2005, the Company entered into a letter of intent to merge with StorCOMM,Inc. of Jacksonville, Florida, a private company providing Picture ArchiveCommunication Systems (PACS) and Clinical Image Management Systems for themedical imaging market (the “StorCOMM Merger”). CCA will be the surviving entity and StorCOMM shareholders will ownone-half of the merged entity.  Thetransaction is subject to the completion and execution of a definitive mergeragreement and shareholder approval.  Itis expected that the post-merger company will offer integrated applications andservices to a broad sector of the healthcare provider market.  The merger is expected to be completed beforethe end of the fiscal year.  For thesix-month period ended June 30, 2005, the Company deferred approximately$200,000 in merger costs primarily related to legal and third party duediligence expenses.

 

**Item 2.****                                   Management’sDiscussion and Analysis or Plan of Operation**

 

ThisQuarterly Report on Form 10-QSB contains forward-looking statements, whichreflect management’s current views about future events and financialresults.  Management makes thesestatements in reliance on the safe harbor created by the Private SecuritiesLitigation Reform Act of 1995. Forward-looking statements include views on future financial results,financing sources, product development, capital requirements, market growth andthe like, and are generally identified by phrases such as “anticipates,” “believes,”“estimates,” “expects,” “intends,” “plans” and similar words.  Forward-looking statements are merelypredictions and therefore inherently subject to uncertainties and other factorswhich could cause the actual results to differ materially from theforward-looking statement.  Theseuncertainties and other factors include, among other things:

 

10

----

 

•                  Unexpectedtechnical and marketing difficulties inherent in major product developmentefforts such as those described about CyberLAB 7.0.

•                  Thepotential need for changes in our long-term strategy in response to futuredevelopments.

•                  Futureadvances in clinical information technology and procedures, as well aspotential changes in government regulations and healthcare policies, both ofwhich could adversely affect the economics of the products offered by CCA.

•                  Rapidtechnological change in the microelectronics and software industries

•                  Increasingcompetition from current as well as future competitors, and

•                  Theability to complete the StorCOMM Merger and to integrate the operations of thetwo companies.

 

                        Setforth below are other significant uncertainties and factors affectingforward-looking statements. The readers should understand that uncertaintiesand other factors identified in this Quarterly Report on Form 10-QSB arenot a comprehensive list of all the uncertainties and other factors that mayaffect forward-looking statements.  We donot undertake any obligation to update or revise any forward-looking statementsor the list of uncertainties and other factors that could affect thosestatements.

 

**Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

**Overview**

 

CCAgenerates revenues primarily from the sale of its Clinical Information Systems(CIS), which includes the licensure of proprietary application software, thelicensure of third party software, and the sale of servers upon which theapplication software operates.  Inconnection with its sales of CIS products, the Company provides implementationservices for the installation, integration, and training of end users’personnel.  The Company generates salesof ancillary software and hardware, including its data acquisition products, toits CIS clients and to third parties. The Company also generates recurring revenues from the provision ofcomprehensive post-implementation services to its CIS clients, pursuant toextended service agreements.

 

Becauseof the nature of its business, CCA makes significant investments in researchand development for new products and enhancements to existing products.  Historically, CCA has funded its research anddevelopment programs through cash flow primarily generated from operations.  Management anticipates that future expendituresin research and development will either continue at current levels or mayincrease for the foreseeable future, and will be funded primarily out of theCompany’s cash flow.

 

CCA’sresults of operations for the second fiscal quarter and six-month period ended June 30,2005 were marked by a decrease in sales and operating income over thecomparable period of 2004.  The Company’sdecrease in revenues for the second fiscal quarter and six-month period was dueto a number of factors, the primary factor being the loss of members of oursales force.  During the second quarterof 2005, the Company experienced an unexpected significant turnover in itssales force, including the loss of its Vice President of Sales, which affectedits ability to close near term sales opportunities.  The Company has since hired a new VicePresident of Sales who began employment on July 1, 2005 and is in theprocess of restaffing its direct sales force. In addition, the Company has invested additional funds into marketingactivities to rebuild its sales pipeline. Despite the shortfall in our new system sales, there were positive areasin our business during the first half of 2005. For instance, services revenues increased for the quarter and six-monthperiod by $187,500 or 17.5% and $361,745 or 16.9%, respectively.  The Company also booked three new upgrades ofCyberLAB 7.0 during the period reflected in our system sales for the secondquarter of 2005 and had one new system sale and other ancillary orders inbacklog at the end of the quarter.  TheCompany anticipates that as more clients migrate to CyberLAB 7.0, these clientswill acquire additional hardware and professional services from the Company inorder to deploy the new software. Generally, sales cycles for CIS products are lengthy and on averageexceed one year from inception to closure. Because of the complexity of the sales process, a number of factors candelay the closing of transactions that are beyond the control of the Company.

 

**Resultsof Operations**

 

Thefollowing table sets forth certain line items in our condensed consolidatedstatement of operations as a percentage of total revenues for the periodsindicated:

 

11

----

 
| ** **                                      | ** ** | **Three Months  Ended****June 30, 2005** | ** ** | **Six Months  Ended****June 30, 2005** | ** ** | **Three Months  Ended****June 30, 2004** | ** ** | **Six Months  Ended****June 30, 2004** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| Revenues:                                       |       | 19.1                                          | %          | 26.1                                        | %          | 40.3                                          | %          | 43.1                                        | %          |
| System sales                                    |       |  80.9                                    |       | 73.9                                        |       | 59.7                                          |       | 56.9                                        |       |
| Service revenues                                |       |                                          |       |                                        |       |                                          |       |                                        |       |
| Total revenues                                  |       | 100.0                                         |       | 100.0                                       |       | 100.0                                         |       | 100.0                                       |       |
| Cost of products and services sold:             |       |                                          |       |                                        |       |                                          |       |                                        |       |
| System sales                                    |       | 23.9                                          |       | 24.4                                        |       | 29.6                                          |       | 26.0                                        |       |
| Service revenues                                |       | 26.3                                          |       |  24.4                                  |       | 22.2                                          |       |  21.5                                  |       |
|                                            |       |                                          |       |                                        |       |                                          |       |                                        |       |
| Total cost of products and services             |       | 50.2                                          |       | 48.8                                        |       | 51.8                                          |       | 47.5                                        |       |
| Gross profit                                    |       | 49.8                                          |       | 51.2                                        |       | 48.2                                          |       | 52.5                                        |       |
| Operating expenses:                             |       |                                          |       |                                        |       |                                          |       |                                        |       |
| Selling, general and administrative             |       | 49.6                                          |       | 47.3                                        |       | 33.2                                          |       | 35.2                                        |       |
| Research and development                        |       | 15.7                                          |       | 16.5                                        |       | 14.4                                          |       | 13.7                                        |       |
| Total operating expenses                        |       | 65.3                                          |       | 63.8                                        |       | 47.6                                          |       | 48.9                                        |       |
| Operating income (loss)                         |       | (15.5                                         | )          | (12.6                                       | )          | 0.6                                           |       | 3.6                                         |       |
|                                            |       |                                          |       |                                        |       |                                          |       |                                        |       |
| Income (loss) before provision for income taxes |       | (15.3                                         | )          | (12.6                                       | )          | 0.6                                           |       | 3.6                                         |       |
| Provision for income taxes                      |       | —                                        |       | —                                      |       | —                                        |       | —                                      |       |
|                                            |       |                                          |       |                                        |       |                                          |       |                                        |       |
| Net income (loss)                               |       | (15.3                                         | )          | (12.6                                       | )          | 0.6                                           |       | 3.6                                         |       |

 

*Revenues*

 

Salesfor the second fiscal quarter ended June 30, 2005 decreased to $1,556,007,as compared to $1,794,994 for the comparable quarter ended June 30, 2004,an overall decrease of approximately $238,987 or 13.3%.  For the six-month period ended June 30,2005, sales decreased $372,399 or 9.9% compared to the same period of2004.  When analyzed by product categoryfor the quarter, sales of CIS products decreased by $457,150, or 69.9% and adecrease in other revenues of $1,918 or 50.2%, partially offset by an increasein sales of data acquisition products of $32,581, or 49.4%, and an increase inservice revenues of $187,500, or 17.5% when compared to the same quarter offiscal 2004.  When analyzed by productcategory for the six-month period ended June 30, 2005, sales of CISproducts decreased by $805,917, or 55.9% and a decrease in other revenues of$1,500 or 23.5%, partially offset by an increase in sales of data acquisitionproducts of $73,273, or 43.0%, and an increase in service revenues of $361,745,or 16.9% when compared to the same period of fiscal 2004.  The decrease in sales of CIS products wasprimarily attributable to the turnover in the sales force as described aboveunder “Overview”.  The Company is in theprocess of rebuilding its direct sales force. The increase in service revenues is attributable to a greater number ofclient accounts under contract and an increase in the average fees charged forsuch contracts.  Service revenues areexpected to continue to increase as and when the Company’s installed base ofCIS installations increases.

 

Theincrease in the sales of data acquisition products is primarily attributable toa greater number of units shipped to OEM customers, however, managementbelieves that going forward, there will be reduced sales of data acquisitionproducts as there has been a technological shift to software-based clinicalinstrument interfaces.  Furthermore,fewer OEM customers remain active in the marketplace or no longer use CCA’sdata acquisition products.  Managementdoes not believe the data acquisition product business is a material part ofCCA’s business today and it will not be in the future, as the Company’semphasis is being placed on its CIS products and related services.

 

Althoughthe Company continues to invest in sales and marketing activities, managementis cautious about the near-term outlook for the continued sale of CIS productsduring the second half of the 2005 fiscal year as it focuses on rebuilding itsdirect sales force.  The Company’s futureoperating results will continue to be subject to quarterly variations basedupon a wide variety of factors, including the volume mix and timing of ordersreceived during any quarter, and the temporary delays in the closing of new CISsales.  In addition, the Company’srevenues associated with CIS sales may be

 

12

----

 

delayed due to clientrelated issues such as client staff availability for training, ITinfrastructure readiness, and the performance of third party contractors, allof which are issues outside of the control of CCA.

 

*Costsof products and services sold*

 

Costof sales for the second quarter and six-month period ended June 30, 2005decreased by $148,632 or 16.0% and $133,841 or 7.5%, respectively, as comparedto the same periods of fiscal 2004.  Forthe quarter and six-month period, the decrease in cost of sales was primarilyattributable to a decrease in material costs of $118,201 or 68.1% and $105,446or 40.3%, respectively, and a decrease in other costs of $45,768 or 14.3% and$48,763 or 7.8%, respectively.  Suchdecreases were partially offset by an increase in labor costs, for the quarterand six-month period, of $15,338 or 3.5% and $20,369 or 2.3%,respectively.  The decrease in materialcosts was attributable to the decrease in sales of CIS products discussedabove.  The increase in labor costs wasattributable to additions of personnel to the Company’s support andimplementation departments.  The decreasein other costs of sales was attributable to decreased expenses related totelephone costs as a result of better rates negotiated under a new contract fortelephone and data services.  For thecurrent quarter and six-month period, cost of sales as a percentage of saleswas 50% and 49%, respectively, as compared to 52% and 48%, respectively, forthe comparable periods of 2004.  Theoverall percentage decrease in cost of sales, as a percentage of sales, in thesix-month period was attributable to a reduced number of sales of CIS productsrequiring hardware.  The Company couldpotentially experience quarterly variations in gross margin as a result of thefactors discussed above.

 

*Selling, general and administrative expenses*

 

Selling,general and administrative expenses increased by $174,567 or 29.3% and $280,903or 21.3%, respectively, for the current fiscal quarter and six-month periodended June 30, 2005 as compared to the same periods of fiscal 2004.  The increase in selling, general andadministrative expenses were primarily attributable to consultant expensesrelated to Sarbanes-Oxley Act of 2002 Section 404 compliance requirements,additional expenses for legal and accounting fees as a result of the Companychanging its fiscal year-end, expenses related to the StorCOMM merger, expensesrelated to the implementation of a new customer relationship management systemto replace its aged help desk application, and the addition of a new productconsultant and radiology product manager. Management anticipates that it will incur increases in auditing andconsultant expenses in the second half of fiscal 2005 that are related toSarbanes-Oxley Act of 2002 Section 404 compliance requirements.  It is also likely that the Company will incursignificant additional expenses in the second half of fiscal 2005 related tothe StorCOMM Merger that will be expensed when incurred.  Management also anticipates an increase ininsurance costs in the current fiscal year.

 

*Research and development expenses*

 

Researchand development expenses decreased by $14,437, or 5.6%, during the secondfiscal quarter of 2005 as compared to the same quarter of fiscal 2004.  For the six-month period ended June 30,2005, research and development expenses increased by $44,060, or 8.6%, ascompared to the same period of fiscal 2004. The increase for the six-month period is attributable to increases insalaries, other personnel related expenses, and the addition of new personnelin product engineering.  In the currentquarter, the product engineers were focused on completing applicationenhancements thereby increasing the capitalized software.  For the comparable second quarters of 2005and 2004, the Company capitalized software costs of $214,421 and $131,999,respectively, which are generally amortized over the estimated useful life, notto exceed five years.  Such costs wereattributable to enhancements and new modules for the Company’s CIS products,and new applications under development, as well as the completion of newsoftware that integrates the Company’s radiology product CyberRAD with theStorCOMM PACS system.

 

*Incometaxes*

 

For the second quarterand six-month period ended June 30, 2005, the Company did not record a taxprovision due to the pretax net loss.  In2004, the Company was operating under a different fiscal year-end and at thetime, the Company was in a pretax net loss position and therefore the Companydid not record a tax provision.

 

The Company evaluates therealization of the net deferred tax asset, taking into consideration priorearnings history, projected operating results, and the reversal of temporarytax differences.  At June 30, 2005,the Company evaluated the net deferred tax asset, taking into considerationoperating results, and determined that its current valuation allowance

 

13

----

 

should bemaintained.  The Company believes it ismore likely than not that the net deferred tax asset of $793,877 will berealized in future periods.  The Companywill continue to assess the realizability of the deferred tax asset quarterly.

 

*Netincome (loss)*

 

As aresult of the factors discussed above, the Company incurred a net loss of$238,538 or basic and diluted loss per share of $.07 in the second fiscalquarter of 2005 as compared to net income of $10,114 or basic and dilutedearning per share of $.00 for the second fiscal quarter of 2004.  For the six-month period ended June 30,2005, the Company incurred a net loss of $425,502 or basic and diluted loss pershare of $.13 as compared to net income of $136,811 or basic and dilutedearning per share of $.04 for the same period of 2004.

 

### **Capital Resources andLiquidity**

 

TheCompany’s primary need for capital has been to invest in software development,and in computers and related equipment for its internal use.  The Company invested $340,421 and $280,624 insoftware development during the six-month periods ended June 30, 2005 and2004, respectively.  These expendituresrelated to the new browser version of the Company’s LIS product, CyberLAB 7.0,and new software that integrates the Company’s radiology product CyberRAD withthe StorCOMM PACS system.

 

TheCompany anticipates expending additional sums during the remainder of fiscal2005 on product enhancements to all its products and the further enhancementsof the new browser version of the Company’s CyberLAB 7.0 product.  During the six-month period ended June 30,2005, the Company invested an aggregate of $169,759 in additions to fixedassets, primarily consisting of computers and software related to the newcustomer relationship management system, which is replacing its aged help deskapplication, as compared to an investment of $46,701 in the comparable periodof 2004.  Furthermore, the Companydeferred approximately $200,000 in merger costs primarily related to legal andthird party due diligence expenses.

 

As of June 30, 2005, the Company’s working capitalamounted to $769,720, compared to $1,589,832 as of December 31, 2004.  The Company’s current ratio was 1.3 at June30, 2005 compared to 1.6 at December 31, 2004. At June 30, 2005, the Company’s credit facilities with its bankconsisted of a revolving line of credit of $1,000,000, of which there was$200,000 outstanding.  The bank creditagreement expires on February 1, 2006. In addition, the Company is in negotiations with a small group ofinvestors for the issuance of $3,000,000 in common stock and warrantscontingent upon the completion of the StorCOMM Merger.  

 

Cashflows from operating activities were $417,412 for the six-month period ended June 30,2005 compared to cash flows of $819,165 for the comparable period of fiscal2004.  The decrease in cash flow fromoperating activities was primarily attributable to the net change in accruedreceivables, inventories, payables, and deferred revenues offset by thereduction in income from operations in the six-month period ended June 30,2005 compared to the same period of fiscal 2004.

 

Netcash used in investing activities totaled $709,970 for the six-month periodended June 30, 2005, compared to $327,325 used in investing activitiesduring the comparable period of 2004. The increase in cash used in investing activities was due to increasedinvestment in property and equipment related to the new customer relationshipmanagement system, additional investment in capitalized software, and additionsto capitalized acquisition costs.

 

Netcash used in financing activities amounted to $8,000 during the six-monthperiod ended June 30, 2005.  Therewere no financing activities during the comparable period of fiscal 2004.  The change from fiscal 2004 to fiscal 2005resulted primarily from payments on its revolving line of credit with the bankoffset by cash flows from exercises of stock options.

 

TheCompany’s primary source of working capital has been generated from earnings,and from borrowings on its line of credit. The Company produced cash flows amounting to $417,412 to fund its operationsin six-month period ended June 30, 2005. Management believes that its projected cash flow from operations, togetherwith its bank credit facilities, should be sufficient to fund its workingcapital requirements for its 2005 fiscal year. However, an unanticipated decline in sales or continued delays inclosing new transactions, delays in implementations where payments are tied todelivery and/or performance of services, or cancellations of contracts couldhave a negative effect on cash flow from operations

 

14

----

 

and could in turn createshort-term liquidity problems.  If suchevents were to occur, the Company may have to seek alternative financing.

 

### **Seasonality, Inflation andIndustry Trends**

 

TheCompany’s sales are generally higher in the winter and spring due to budgetarycycles of its clients.  Inflation has nothad a material effect on the Company’s business since the Company has been ableto adjust the prices of its products and services in response to inflationarypressures.  Management believes that mostphases of the healthcare segment of the computer industry will continue to behighly competitive, and that potential healthcare reforms including those promulgatedby Health Insurance Portability and Accountability Act (“HIPAA”) may have along-term positive impact on its business. With respect to the compliance issues brought about by HIPAA, theCompany has invested heavily in new application modules to assist its clientsin meeting their regulatory goals. Management believes that the new modules will be key selling points andwill provide a competitive advantage.  Inaddition, management believes that the healthcare information technologyindustry will be marked with more significant technological advances, whichwill improve the quality of service and reduce costs.  The Company is poised to meet thesechallenges by continuing to employ new technologies when they become available,diversifying its product offerings, improving and expanding its services, andby constantly enhancing its software applications.

 

### **Critical Accounting Policies and Estimates**

 

Management’sdiscussion and analysis of CCA’s financial condition and results of operationsare based upon the condensed consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States.  The preparation of thesefinancial statements requires management to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosures of contingent assets and liabilities.  On an on-going basis, management evaluatesestimates, including those related to the valuation of inventory and theallowance for uncollectible accounts receivable. We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions. We believe the following critical accountingpolicies affect our more significant judgments and estimates used in thepreparation of our consolidated financial statements:

 

*Inventory*

 

TheCompany’s inventory is comprised of a current inventory account that consistsof items that are held for resale and a long-term inventory account thatconsists of items that are held for repairs and replacement of hardwarecomponents that are serviced by the Company under long-term Extended ServiceAgreements with its clients.  Currentinventory is valued at the lower of cost to purchase or the current estimatedmarket value of the inventory items. Inventory is evaluated on a continual basis and adjustments to recordedcosts are made based on management’s estimate of future sales value, or in thecase of the long-term component inventory, on managements estimation of theusage of specific inventory items and net realizable value.  Management reviews inventory quantities onhand and makes determination of the excess or obsolete items in the inventory,which, are specifically reserved.  Inaddition, adjustments are made for the difference between the cost of theinventory and the estimated market value and charged to operations in theperiod in which the facts that give rise to the adjustments become known.  At June 30, 2005, the inventory reservewas approximately $180,000.

 

*Accounts Receivable*

 

Accountsreceivable balances are evaluated on a continual basis and allowances areprovided for potentially uncollectible accounts based on management’s estimateof the collectability of customer accounts. If the financial condition of acustomer were to deteriorate, resulting in an impairment of their ability tomake payments, an additional allowance may be required. Allowance adjustmentsare charged to operations in the period in which the facts that give rise tothe adjustments become known.  Theaccounts receivable balance at June 30, 2005 was $710,560, net of anallowance for doubtful accounts of approximately $48,000.

 

15

----

 

*RevenueRecognition*

 

Revenuesare derived primarily from the sale of CIS products and the provision ofservices.  The components of the systemsales revenues are the licensing of computer software, installation, and thesale of computer hardware and sublicensed software. The components of servicerevenues are software support and hardware maintenance, training, andimplementation services.  The Companyrecognizes revenue in accordance with the provisions of Statement of Position(SOP) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4,SOP 98-9 and clarified by Staff Accounting Bulletin (SAB) 104 “RevenueRecognition in Financial Statements.” SOP No 97-2, as amended, generallyrequires revenue earned on software arrangements involving multiple-elements tobe allocated to each element based on the relative fair values of thoseelements.  The Company allocates revenueto each element in a multiple-element arrangement based on the element’srespective fair value, with the fair value determined by the price charged whenthat element is sold and specifically defined in a quotation or contract.  The Company determines the fair value of themaintenance portion of the arrangement based on the renewal price of themaintenance charged to clients, professional services portion of thearrangement, other than installation services, based on hourly rates which theCompany charges for these services when sold apart from a software license, andthe hardware and sublicense of software based on the prices for these elementswhen they are sold separately from the software.  At June 30, 2005, deferred revenue onsystem sales was $369,896.

 

PostImplementation software and hardware maintenance services are marketed undermonthly and annual arrangements and are recognized as revenue ratably over thecontracted maintenance term as services are provided.  Deferred revenue related to CIS sales iscomprised of deferrals for license fees, hardware, and other services for whichthe implementation has not yet been completed and revenues have not been recognized.  During the second fiscal quarter, the Companyimplemented a new customer relationship management system.  The new system replaced the Company’s agedhelp desk system and was integrated with the Company’s accounting system.  The integration of these systems necessitateda change in the Company’s billing procedures, which resulted in a partialreduction of accounts receivable and a concurrent decrease in deferredrevenues.  At June 30, 2005,deferred service contract income was $838,747.

 

*SoftwareDevelopment Costs*

 

Costsincurred internally in creating computer software products are expensed untiltechnological feasibility has been established upon completion of a programdesign. Thereafter, applicable software development costs are capitalized andsubsequently reported at the lower of amortized cost or net realizablevalue.  Capitalized costs are amortizedbased on current and expected future revenue for each product with minimumannual amortization equal to the straight-line amortization over the estimatedeconomic life of the product, not to exceed five years.  For the six-month periods ended June 30,2005 and 2004, the Company capitalized $340,421 and $280,624,respectively.  At June 30, 2005, thebalance of capitalized software costs was $1,693,358, net of accumulatedamortization of $1,056,657.

 

*IncomeTaxes*

 

TheCompany accounts for income taxes in accordance with SFAS No. 109 “Accountingfor Income Taxes,” which requires recognition of deferred tax liabilities andassets for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns.  Under this method, deferred tax liabilitiesand assets are determined based on the differences between the financialstatements and the tax bases of assets and liabilities using enacted tax ratesin effect for the year in which the differences are expected to reverse.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to be realized.  Income tax expense represents the tax payablefor the period and the change during the period in deferred tax assets andliabilities.

 

### **RiskFactors**

 

Inevaluating the Company, various risk factors and other information should becarefully considered. The risks and uncertainties described below are not theonly ones that impact the Company. Additional risks and uncertainties notpresently known to us or that we currently deem immaterial may also have anadverse impact on us. Among other things, this discussion containsforward-looking statements that are based on certain assumptions about futurerisks and uncertainties. We believe that our assumptions are reasonable.Nonetheless, it is likely that at least some of these assumptions will not cometrue.

 

16

----

 

***CCA faces intense competition from both established entitiesand new entries in the market that may adversely affect our revenues andprofitability***

 

Ourmarkets are competitive. There are many companies with active research anddevelopment programs both in and outside of the healthcare informationtechnology industry.  Many of thesecompanies have considerable experience in areas of competing interest tous.  Additionally, we cannot determine ifother firms are conducting potentially competitive research, which could resultin the development and introduction of products that are either comparable orsuperior to the products we sell. Further, new product introductions, product enhancements and the use ofother technologies by our competitors could lead to a loss of market acceptanceand cause a decline in sales or gross margins.

 

If weare unable to anticipate or react to competition or if existing or newcompetitors gain market share, our sales may decline or be impaired and we mayexperience a decline in the prices we can charge for our products, which couldadversely affect our operating results. Our competitive position depends onseveral factors, including:

 

•                  ourability to adapt effectively to the continued development, acquisition orlicensing of technology or product rights by our competitors;

 

•                  ourability to enhance our products or develop new products;

 

•                  ourability to adapt to changing technological demands; and

 

•                  ourstrategic decisions regarding the best allocation of our limited resources.

 

Severalof our current and potential competitors have greater financial, technical,sales, marketing and other resources than we do and consequentially may have anability to influence customers to purchase their products that compete withours. Our future and existing competitors could introduce products withsuperior features, scalability and functionality at lower prices than ourproducts, and could also bundle existing or new products with other moreestablished products in order to compete with us. Our competitors could alsogain market share by acquiring or forming strategic alliances with our othercompetitors. If we do not adapt our business in the face of this competition,our business and operating results may be harmed.

 

***Any failure to successfully introduce future products intothe market could adversely affect our business***

 

Thecommercial success of future products depends upon their acceptance by themedical community.  Our future productplans include capital-intensive clinical information systems.  We believe that these products cansignificantly reduce labor costs, improve patient care and offer otherdistinctive benefits to the medical community. However, there is often market resistance to products that require significantcapital expenditures or which eliminate jobs through automation.  We can make no assurance that the market willaccept our future products and systems, or that sales of our future productsand systems will grow at the rates expected by our management.

 

***If CCA fails to meet changing demands of technology, we maynot continue to be able to compete successfully with competitors***

 

Themarket for our products is characterized by rapid technological advances,changes in customer requirements and frequent new product introductions andenhancements.  Our future success dependsupon our ability to introduce new products that keep pace with technologicaldevelopments, enhance current product lines and respond to evolving clientrequirements.  CCA has incurred, and wewill need to continue to incur, significant research and developmentexpenditures in future periods as we strive to remain competitive.  Our failure to meet these demands couldresult in a loss of our market share and competitiveness and could harm ourrevenues and results of operations.

 

***CCA’s success depends on its ability to attract, retain andmotivate management and other skilled employees***

 

Ourfuture success and growth depend on the continued services of our keymanagement and employees, including Steven M. Besbeck, Bruce M. Miller, andJames R. Helms. The loss of the services of any of these individuals or anyother key employee could materially affect our business. Our future successalso depends on our ability to identify, attract and retain additionalqualified personnel. Competition for employees in our industry is intense andwe may not be successful in attracting or retaining them.  There are a limited number of people withknowledge of, and experience in, our

 

17

----

 

industry.  We do not have employment agreements withmost of our key employees.  However, wegenerally enter into agreements with our employees regarding patents,confidentiality and related matters.  Wedo not maintain life insurance polices on our employees.  Our loss of key personnel, especially withoutadvance notice, or our inability to hire or retain qualified personnel, couldhave a material adverse effect on sales and our ability to maintain ourtechnological edge.  We cannot guaranteethat we will continue to retain our key management and skilled personnel, orthat we will be able to attract, assimilate and retain other highly qualifiedpersonnel in the future.

 

***If we do not protect our proprietary information and preventthird parties from making unauthorized use of out products and technology, ourfinancial results could be harmed***

 

Werely on a combination of confidentiality agreements and procedures andcopyright, patent, trademark and trade secret laws to protect our proprietaryinformation. However, all of these measures afford only limited protection andmay be challenged, invalidated, or circumvented by third parties. Third partiesmay copy aspects of our products or otherwise obtain and use our proprietaryinformation without authorization. Third parties may also develop similar orsuperior technology independently, including by designing around our patents.Furthermore, the laws of some foreign countries do not offer the same level ofprotection of our proprietary rights as the laws of the United States, and wemay be subject to unauthorized use of our products in those countries. Anylegal action that we may bring to protect proprietary information could beexpensive and may distract management from day-to-day operations. Unauthorizedcopying or use of our products or proprietary information could result inreduced sales of our products.

 

***Thirdparties claiming that we infringe their proprietary rights could cause us toincur significant legal expenses and prevent us from selling our products***

 

Wecould receive claims that we have infringed the intellectual property rights ofothers.  Any such claim, with or withoutmerit, could:

 

•                  betime consuming to defend;

 

•                  resultin costly litigation;

 

•                  divertmanagement’s time and attention from our business;

 

•                  requireus to stop selling, to delay shipping or to redesign our products; or

 

•                  requireus to pay monetary amounts as damages to our customers.

 

Inaddition, we license and use software from third parties in our business. Thesethird party software licenses may not continue to be available to us onacceptable terms. Also, these third parties may from time to time receiveclaims that they have infringed the intellectual property rights of others,including patent and copyright infringement claims, which may affect ourability to continue licensing their software. Our inability to use any of thisthird party software could result in disruptions in our business, which couldmaterially and adversely affect our operating results.

 

***CCA operates in a consolidating industry which createsbarriers to market penetration***

 

Thehealthcare information technology industry in recent years has beencharacterized by consolidation by both healthcare providers who are our clientsand by those companies that we compete against. Large hospital chains and groups of affiliated hospitals prefer tonegotiate comprehensive contracts for all of their system needs with largervendors who offer broader product lines and services.  The convenience offered by these largevendors are administrative and financial incentives that we cannot offer ourclients.

 

***CCA’s products may be subject to government regulation inthe future that could impair our operations***

 

CCA’sproducts could be subject to stringent government regulation in the UnitedStates and other countries in the future. These regulatory processes can be lengthy, expensive and uncertain.  Additionally, securing necessary clearancesor approvals may require the submission of extensive data and other supportinginformation.  Failure to comply withapplicable requirements could result in fines, recall, total or partialsuspension of distribution, or withdrawal of existing product.  If any of these things occur, it could have amaterial adverse impact on our business.

 

18

----

 

***Changes in government regulation of the healthcare industrycould adversely affect CCA’s business***

 

Federaland state legislative proposals are periodically introduced or proposed thatwould affect major changes in the healthcare system, nationally, at the statelevel or both.  Future legislation,regulation or payment policies of Medicare, Medicaid, private health insuranceplans, health maintenance organizations and other third-party payors couldadversely affect the demand for our current or future products and our abilityto sell our products on a profitable basis. Moreover, healthcare legislation is an area of extensive and dynamicchange, and we cannot predict future legislative changes in the healthcarefield or their impact on our industry or our business.

 

*****We are subject to the Health Insurance Portabilityand Accountability Act (HIPAA) and the cost of complying with HIPAA maynegatively impact our net income*****

 

****Our business is substantially impacted by therequirements of HIPAA and our products must maintain the confidentiality of apatients medical records and information.  These requirements also applyto most of our clients.  We believe our products meet the standards ofHIPAA and may require our clients to upgrade their systems, but our clients’preoccupation with HIPAA may adversely impact sales of our products, and thecosts of compliance with HIPAA could have an impact on our product margins andselling, general and administrative expenses incurred by us and could negativelyimpact our net income.****

 

***Defective products or product failure may subject CCA toliability and could substantially increase our costs***

 

CCA’sproducts are used to gather information for professionals to make medicaldecisions, diagnosis, and treatment. Accordingly, the manufacture and sale of our products entails aninherent risk of product liability arising from an inaccurate, or allegedlyinaccurate, test or procedure result.  Wecurrently maintain product liability insurance coverage for up to $2.0 millionper incident and up to an aggregate of $4.0 million per year.  Although management believes this liabilitycoverage is sufficient protection against future claims, there can be noassurance of the sufficiency of these policies. We have not received any indication that our insurance carrier will notrenew our product liability insurance at or near current premiums; however, wecannot guarantee that this will continue to be the case.

 

*****System or network failures could reduce our sales,increase costs or result in a loss of customers*****

 

****We rely on our management information systems tooperate our business and to track our operating results.  Our management information systems willrequire modification and refinement as we grow and our business needs change.  If we experience a significant system failureor if we are unable to modify our management information systems to respond tochanges in our business needs, then our ability to properly run our businesscould be adversely affected and could lead to a reduction in our sales and aloss of customers.****

 

*****Our evaluation of internal controls andremediation of potential problems will be costly and time consuming and couldexpose weakness in our financial reporting*****

 

****While we believe that we currently have adequateinternal control procedures in place, we are still exposed to potential risksfrom recent legislation requiring companies to evaluate controls under Section 404of the Sarbanes-Oxley Act of 2002.  Weare evaluating our internal controls system in order to allow management toreport on, and our independent registered public accounting firm to attest to,our internal controls over financial reporting, beginning with our AnnualReport on Form 10-KSB for fiscal year 2006 as required in Section 404of the Sarbanes-Oxley Act of 2002.****

 

***We may be unable to complete the StorCOMMMerger***

 

Wehave entered into a Letter of Intent to merge with StorCOMM.  The transaction is subject to the completionand execution of a definitive merger agreement and shareholder approval.  The merger is risky and may be subject to alengthy process to close and it could divert management’s time and focus fromoperating our business.  We may seekadditional debt or equity financing in connection with the merger.  Additional financing may not be available tous on acceptable terms or at all.  We maynot be able to close the transaction on the timetable we anticipate, if atall.  If we are unable to complete themerger, we may incur significant non-recoverable expenses that may have amaterial adverse effect on our financial position.  If we do complete the transaction, it couldresult in unanticipated operating difficulties and expense in integrating ourtwo businesses and the anticipated benefits of the transaction may notmaterialize.

 

19

----

 

*****Future sales of our common stock couldadversely affect our stock price*****

 

****Futuresales of substantial amounts of shares of our common stock in the publicmarket, or the perception that these sales could occur, may cause the marketprice of our common stock to decline.  Inaddition, we may be required to issue additional shares upon exercise ofpreviously granted options that are currently outstanding.  Increased sales of our common stock in themarket after exercise of our currently outstanding stock options could exertsignificant downward pressure on our stock price.  These sales also might make it more difficultfor us to sell equity or equity-related securities in the future at a time andprice********we may deem appropriate.****

 

***Our stock price may be volatile in the future, and you couldlose the value of your investment***

 

Themarket prices of the common stock for CCA has experienced significantfluctuations and our stock price may continue to fluctuate significantly, andyou could lose the value of your investment. The market price of our commonstock may be affected by a number of factors, including:

 

•                  announcementsof quarterly operating results and revenue and earnings forecasts by us, ourcompetitors or our customers;

•                  failureto achieve financial forecasts, either because expected sales do not occur orbecause they occur at lower prices or on terms that are less favorable to us;

•                  rumors,announcements or press articles regarding changes in our management, organization,operations or prior financial statements;

•                  changesin revenue and earnings estimates by securities analysts;

•                  announcementsof planned acquisitions by us or by our competitors;

•                  announcementsof new or planned products by us, our competitors or our customers;

•                  gainor loss of a significant customer;

•                  inquiriesby the SEC, AMEX, law enforcement or other regulatory bodies; and

•                  actsof terrorism, the threat of war and economic slowdowns in general.

 

Thestock market has experienced extreme price volatility, which has adverselyaffected and may continue to adversely affect the market price of our commonstock for reasons unrelated to our business or operating results.

 

***Fluctuations in our quarterly financial results haveaffected the stock prices of CCA in the past and could affect our stock pricein the future***

 

Thequarterly financial results of CCA have fluctuated in the past.  A number of factors associated with theoperation of our business may cause our quarterly financial results to fluctuate,including our ability to:

 

•                  effectivelyalign sales resources to meet customer needs and address market opportunities;

•                  effectivelyrespond to competitive pressures;

•                  effectivelymanage our operating expense levels; and

•                  effectivelymanage and incentivize our selling organization.

 

Anumber of factors associated with our industry and the markets for ourproducts, many of which are outside our control, may cause our quarterlyfinancial results to fluctuate, including:

 

•                  reduceddemand for any of our products;

•                  timingand amount of orders by customers and seasonality in the buying patterns ofcustomers;

•                  cancellation,deferral or limitation of orders by customers; and

•                  weaknessor uncertainty in general economic or industry conditions.

 

If ourquarterly financial results or our predictions of future financial results failto meet the expectations of securities analysts and investors, our stock pricecould be negatively affected. Any volatility in our quarterly financial resultsmay make it more difficult for us to raise capital in the future or pursueacquisitions that involve issuances of our stock or securities convertible intoor exercisable for our stock. You should not rely on the results of priorperiods as predictors of our future performance.

 

20

----

 

***Changes to financial accounting standards and new exchange rules couldmake it more expensive to issue stock options to employees, which wouldincrease compensation costs and may cause us to change our business practices***

 

Weprepare our financial statements to conform with generally accepted accountingprinciples, or GAAP, in the United States. These accounting principles aresubject to interpretation by the Public Company Accounting Oversight Board, theSEC and various other bodies. A change in those policies could have asignificant effect on our reported results and may affect our reporting oftransactions completed before a change is announced.

 

Forexample, we have used stock options and other long-term equity incentives as afundamental component of our employee compensation packages. We believe thatstock options and other long-term equity incentives directly motivate ouremployees to maximize long-term shareholder value and, through the use of vesting,encourage employees to remain with our company. Several regulatory agencies andentities are considering regulatory changes that could make it more difficultor expensive for us to grant stock options to employees. For example, theFinancial Accounting Standards Board has announced that it will propose changesto GAAP that, if implemented, would require us to record a charge to earningsfor employee stock option grants. In addition, regulations implemented by theAmerican Stock Exchange generally require shareholder approval for all stockoption plans, which could make it more difficult or expensive for us to grantstock options to employees. We may, as a result of these changes, incurincreased compensation costs, change our equity compensation strategy or findit difficult to attract, retain and motivate employees, each of which couldmaterially and adversely affect our business, operating results and financialcondition.

 

***Factors outside of our control may adversely affect ouroperations and operating results***

 

Ouroperations and operating results may be adversely affected by many differentfactors which our outside of our control, including:

 

•                  deteriorationin economic conditions in any of the healthcare information technologyindustry, which could reduce customer demand and ability to pay for ourproducts and services;

•                  politicaland military instability, which could slow spending within our target markets,delay sales cycles and otherwise adversely affect our ability to generaterevenues and operate effectively;

•                  budgetaryconstraints of customers, which are influenced by corporate earnings andspending objectives;

•                  earthquakes,floods or other natural disasters affecting our headquarters located inCalabasas, California, an area known for seismic activity;

•                  actsof war or terrorism; and

•                  inadvertenterrors.

 

Any ofthese factors could result in a loss of revenues and/or higher expenses, whichcould adversely affect our financial results.

 

### **NewAccounting Pronouncements**

 

In December 2004the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 123 (revised 2004), *Share-Based Payment (SFAS No. 123(R))*. SFAS No. 123(R)requires compensation cost relating to unvested share-based paymenttransactions that are outstanding as of the effective date and newly issuedtransactions to be recognized in the financial statements. That cost will bemeasured based on the fair value of the equity or liability instruments issued.SFAS No. 123(R) covers a wide range of share-based compensationarrangements including share options, restricted share plans, performance-basedawards, share appreciation rights and employee share purchase plans. SFAS No. 123(R)replaces SFAS No. 123 and supersedes APB 25, *Accounting for Stock Issued to Employees*(Opinion 25)*.*SFAS No. 123, as originally issuedin 1995, established fair-value-based method of accounting for share-basedpayment transactions with employees. However, SFAS No. 123 permittedentities the option of continuing to apply the guidance in APB 25, as long asthe footnotes to financial statements disclosed what net income would have beenhad the fair-value-based method been used. As disclosed in footnote 2, theCompany elected the option of disclosure only under SFAS No. 123. Publiccompanies will be required to apply SFAS No. 123(R) as of the first annualreporting period that begins after June 15, 2005, or December 15,2005 for small business issuers.  In April 2005,the SEC issued a Final Rule Release, “Amendment to Rule 4-01(a) ofRegulation S-X regarding the compliance date for

 

21

----

 

Statement of FinancialAccounting Standards No. 123 (Revised 2004), Share-Based Payment.”  This rule extends the date forcompliance with SFAS No. 123R until the beginning of the public companies’next fiscal year, instead of the next reporting period, that begins after June 15,2005, or December 15, 2005 for small business issuers.  The Company is currently evaluating theimpact of this statement.

 

In March 2005, the SEC staff issued a StaffAccounting Bulletin (“SAB 107”) which express views of the staff regarding theinteraction between SFAS No. 123R and certain SEC rules andregulations and provide the staff’s views regarding the valuation of share-basedpayment arrangements for public companies. In particular, SAB 107 providesguidance related to share-based payment transactions with non-employees, thetransition from nonpublic to public entity status, valuation methods (includingassumptions such as expected volatility and expected term), the accounting forcertain redeemable financial instruments issued under share-based paymentarrangements, the classification of compensation expense, non-GAAP financialmeasures, first-time adoption of SFAS No. 123R in an interim period,capitalization of compensation cost related to share-based paymentarrangements, the accounting for income tax effects of share-based paymentarrangements upon adoption of SFAS No. 123R, the modification of employeeshare options prior to adoption of SFAS No. 123R and disclosures inManagement’s Discussion and Analysis subsequent to adoption of SFAS No. 123R.

 

 In December 2004, the FASB issued SFAS No. 151,“Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which requires thatabnormal amounts of idle facility expense, freight, handling costs and wastedmaterial (spoilage) be recognized as current-period charges. In addition, thestatement requires that allocation of fixed production overheads to the costsof conversion be based on the normal capacity of the production facilities.SFAS No. 151 is effective for fiscal years beginning after June 15,2005. The Company will adopt this statement as required, and the Company doesnot believe the adoption will have a material effect on the Company’s resultsof operations or financial condition.

 

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, anamendment of APB Opinion No. 29,” which eliminates the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. The statement defines a nonmonetary exchange withcommercial substance as one in which the future cash flows of an entity are expectedto change significantly as a result of the exchange. SFAS No. 153 iseffective for fiscal years beginning after June 15, 2005. The Company willadopt this statement as required, and it does not believe the adoption willhave a material effect on the Company’s results of operation or financialcondition.

 

In May 2005,the Financial Accounting Standards Board issued Statement No. 154, “AccountingChanges and Error Corrections, a replacement of APB Opinion No. 20,Accounting Changes, and Statement No. 3, Reporting Accounting Changes inInterim Financial Statements,” or SFAS No.154. SFAS No. 154 changes therequirements for the accounting for, and reporting of, a change in accountingprinciple. Previously, most voluntary changes in accounting principles wererequired to be recognized by way of a cumulative effect adjustment within netincome during the period of the change. SFAS No. 154 generally requiresretrospective application to prior periods’ financial statements of voluntarychanges in accounting principles. SFAS No. 154 is effective for accountingchanges made in fiscal years beginning after December 15, 2005; however,SFAS No. 154 does not change the transition provisions of any existingaccounting pronouncements. We do not believe adoption of SFAS No. 154 willhave a material effect on our consolidated results of operations or financialposition.

 

**Item 3.****                                   Controls andProcedures**

 

(a) Evaluation of Disclosure Controls and Procedures.  The Company’s management, with theparticipation of the Company’s Chief Executive Officer (principal executiveofficer) and its Chief Financial Officer (principal financial officer), carriedout an evaluation of the effectiveness of the Company’s disclosure controls andprocedures, as defined in Exchange Act Rule 13a-15(e), as of the end ofthe period covered by this Form 10-QSB. Based upon that evaluation, the Chief Executive Officer and the ChiefFinancial Officer concluded that as of the end of the period covered by this Form 10-QSB,the Company’s disclosure controls and procedures are effective in accumulatingand communicating to them in a timely manner material information relating tothe Company (including its consolidated subsidiary) required to be included inthe periodic reports filed with the Securities and Exchange Commission.

(b) Changesin Internal Control over Financial Reporting. There was no change in theCompany’s internal control over financial reporting during the six months endedJune 30, 2005 that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

22

----

 

TheCompany maintains a system of internal controls designed to provide reasonableassurance that transactions are executed in accordance with management’sgeneral or specific authorization; transactions are recorded as necessary (1) topermit preparation of financial statements in conformity with generallyaccepted accounting principles, (2) to maintain accountability for assets,and (3) to ensure that access to assets is permitted only in accordancewith management’s general or specific authorization; and the recordedaccountability for access is compared with the existing assets at reasonableintervals and appropriate action is taken with respect to any differences.

#### ** **

#### **PART II - OTHER INFORMATION**

 

**Item 6.****           Exhibits**

 

Exhibit 3.1                  RestatedArticles of Incorporation, as Amended (previously filed as an exhibit to theCompany’s Registration Statement on Form S-18 dated September 22, 1983,SEC File No. 2-85265).

 

Exhibit 3.2                  By-Laws,as amended (previously filed as an exhibit to the Company’s RegistrationStatement on Form S-18 dated September 22, 1983, SEC File No. 2-85265).

 

Exhibit 10.1            Form ofChange in Control Agreement dated February 7, 2005 (incorporated byreference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K,dated February 7, 2005).

 

Exhibit 11                     Statementre: computation of per share earnings.

 

Exhibit 31.1            Certificationof Chief Executive Officer pursuant to Rule 13a-14(a) of theSecurities Exchange Act of 1934.

 

Exhibit 31.2            Certificationof Chief Financial Officer pursuant to Rule 13a-14(a) of theSecurities Exchange Act of 1934.

 

Exhibit 32.1            Certificationof Chief Executive Officer pursuant to Rule 13a-14(b) of theSecurities Exchange Act of 1934.

 

Exhibit 32.2            Certificationof Chief Financial Officer pursuant to Rule 13a-14(b) of theSecurities Exchange Act of 1934.

 

 

### **SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| CREATIVE  COMPUTER APPLICATIONS, INC. |                  |
|---------------------------------------|-----------------------|
| (Registrant)                          |                  |   |
|                                  |                  |   |
| Date:                                 | August 15,  2005 |   |   | /S/ Steven M.  Besbeck |   |
|                                  |                  | Steven. M.  Besbeck, President and |
|                                  |                  | Chief Executive  Officer |
|                                  |                  |   |
|                                  |                  |   |
| Date:                                 | August 15,  2005 |   |   | /S/ Anahita  Villafane |   |
|                                  |                  | Anahita  Villafane, |
|                                  |                  | Chief Financial  Officer |
|                                       |                       |  |  |  |  |  |

 

 

23

----

#### ** **

#### **EXHIBIT INDEX**

 
| 3.1    |   | Restated  Articles of Incorporation, as Amended (previously filed as an exhibit to the  Company’s Registration Statement on Form S-18 dated September 22,  1983, SEC File No. 2-85265).           |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                  |
| 3.2    |   | By-Laws, as  amended (previously filed as an exhibit to the Company’s Registration  Statement on Form S-18 dated September 22, 1983, SEC File No. 2-85265).                                       |
|   |   |                                                                                                                                                                                                                  |
| 10.1   |   | Form of  Change in Control Agreement, dated February 7, 2005 (incorporated by  reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K,  dated February 7, 2005). |
|   |   |                                                                                                                                                                                                                  |
| 11     |   | Statement re:  computation of per share earnings.                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                  |
| 31.1   |   | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934.                                                                                               |
|   |   |                                                                                                                                                                                                                  |
| 31.2   |   | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934.                                                                                               |
|   |   |                                                                                                                                                                                                                  |
| 32.1   |   | Certification of  Chief Executive Officer pursuant to Rule 13a-14(b) of the  Securities Exchange Act of 1934.                                                                                               |
|   |   |                                                                                                                                                                                                                  |
| 32.2   |   | Certification of  Chief Financial Officer pursuant to Rule 13a-14(b) of the  Securities Exchange Act of 1934.                                                                                               |

 

24

----