Health Systems Solutions 10QSB 2006 Q3 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

FORM 10-QSB

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, 2006

	OR

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-24681

HEALTH SYSTEMS SOLUTIONS, INC.

(Exact name of small business issuer as specified in its charter)

NEVADA	82-1513245
(State or other jurisdiction	(IRS Employer
of incorporation or organization)	Identification No.)

405 North Reo Street, Suite 300, Tampa, Florida	33609
(Address of principal executive offices)	(Zip Code)

Issuer’s telephone number, including area code: (813) 282-3303

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

Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 6,270,907 shares of Common Stock as of October 31, 2006.

Transitional Small Business Disclosure Form (check one): Yes [ ] No [X]

HEALTH SYSTEMS SOLUTIONS, INC.

FORM 10-QSB

INDEX

PART I	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheet	F-1
	Consolidated Statements of Operations	F-2
	Consolidated Statements of Cash Flows	F-3
	Notes to Consolidated Financial Statements	F-4
Item 2.	Management's Discussion and Analysis or Plan of Operation	2
Item 3.	Controls and Procedures	28

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Submission of Matters to a Vote of Security Holders	29
Item 5.	Other Information	30
Item 6.	Exhibits	30

SIGNATURES		31

HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2006
(Unaudited)


ASSETS

Current assets:
Cash	$	314,947
Accounts receivable, net of allowance for doubtful accounts
of $206,658		1,230,774
Prepaids and other current assets		213,534

Total current assets		1,759,255

Property and equipment, net of accumulated depreciation
and amortization of $509,083		284,061

Software development costs, net of accumulated amortization
of $2,273,614		3,741,259

Security deposits		23,484

Long term receivable from stockholder		71,177

Total assets	$	5,879,236


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of capital lease obligation	$	13,852
Accounts payable		308,691
Accrued expenses		249,461
Deferred revenue		708,897
Customer deposits		116,641
Note payable - bank		229,000
Current portion of loans payable		52,000
Reserve for customer refunds		312,782

Total current liabilities		1,991,324

Loans payable, net of current portion		289,447

Total liabilities		2,280,771

Stockholders' equity
Preferred Stock; 15,000,000 shares authorized;
Series C $2.00 Convertible; 4,625,000 authorized,
2,575,000 shares issued and outstanding		5,150,000
Common Stock; $.001 par value; 150,000,000 shares authorized;
6,075,907 shares issued and outstanding		6,076
Additional paid-in capital		13,106,020
Accumulated deficit		(14,663,631	)

Total stockholders' equity		3,598,465

Total liabilities and stockholders' equity	$	5,879,236

See the accompany notes to the consolidated financial statements.

F-1

HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2006			September 30, 2005			September 30, 2006			September 30, 2005

Net sales	$	1,848,188		$	1,074,744		$	4,953,118		$	3,031,004
Cost of sales		1,146,681			493,314			2,699,172			1,380,096

Gross profit		701,507			581,430			2,253,946			1,650,908

Operating expenses
Selling and marketing		559,205			161,008			1,154,985			527,554
Research and development		363,915			148,860			821,524			476,218
General and administrative		564,634			287,744			1,391,659			882,259
Depreciation and amortization		34,721			44,486			104,424			130,096
Interest		17,914			25,228			26,402			70,373

Total operating expenses		1,540,389			667,326			3,498,994			2,086,500

Net loss		(838,882	)		(85,896	)		(1,245,048	)		(435,592	)

Deemed preferred stock dividend		200,111			-			406,308			-

Net loss applicable to common shareholders	$	(1,038,993	)	$	(85,896	)	$	(1,651,356	)	$	(435,592	)

Basic and diluted net loss per share	$	(0.17	)	$	(0.02	)	$	(0.28	)	$	(0.08	)

Basic and diluted weighted average shares outstanding		6,075,907			5,398,390			5,850,690			5,457,456

See the accompany notes to the consolidated financial statements.

F-2

HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Unaudited)


	Nine Months Ended
	September 30, 2006			September 30, 2005

Cash flows from operating activities:

Net loss	$	(1,245,048	)	$	(435,592	)

Adjustments to reconcile net loss to net cash used in
operating activities:
Stock based compensation expense		25,614			-
Depreciation and amortization of property and equipment		104,424			130,096
Amortization of software development costs		682,784			426,253
(Gain) or loss on fixed assets disposals		-			479
Changes in operating assets and liabilities:
Accounts receivable		(444,204	)		(44,736	)
Allowance for doubtful accounts		89,886			-
Royalties and referral fees receivable		(6,965	)		450
Prepaid expenses and other current assets		(99,357	)		(20,272	)
Security deposits		-			(500	)
Accounts payable		(326,613	)		16,774
Accrued expenses		14,487			(9,261	)
Deferred revenue		(249,818	)		(139,876	)
Reserve for customer refunds		(287,218	)		-
Customer deposits		(5,153	)		-

Net cash used in operating activities		(1,747,181	)		(76,185	)

Cash flow from investing activities:
Purchase of VantaHealth Technologies, LLC.		(1,034,973	)		-
Purchase of CareKeeper Software, Inc.		(25,003	)		-
Acquisition of cash		26,420			-
Purchase of property and equipment		(101,059	)		(89,020	)
Increase in software development costs		(604,395	)		(138,079	)

Net cash used in investing activities		(1,739,010	)		(227,099	)

Cash flow from financing activities:
Repayment of capital lease obligation		(12,424	)		(10,009	)
Repayment of loans payable		(261,088	)		-
Proceeds from loans payable		-			200,000
Proceeds from the issuance of Common Stock		35,720			-
Proceeds from the issuance of Series C Preferred Stock		3,700,000			-

Net cash provided by financing activities		3,462,208			189,991

Decrease in cash		(23,983	)		(113,293	)

Cash, beginning of period		338,930			300,221

Cash, end of period	$	314,947		$	186,928

Supplemental cash flow data:
Cash paid during the period for interest expense	$	26,402		$	70,373

See the accompany notes to the consolidated financial statements.

F-3

HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

(Unaudited)

NOTE 1 - NATURE OF BUSINESS

Health Systems Solutions, Inc. (the “Company”), through its wholly owned subsidiaries, Healthcare Quality Solutions, Inc. (“HQS”) and CareKeeper Solutions, Inc. (“CKS”), designs, develops, markets, sells and supports web-based, management information and business intelligence services that assist home health care companies effectively manage the clinical, operational and financial aspects of their business.

NOTE 2 - BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying unaudited consolidated financial statements and related notes have been prepared using accounting principles generally accepted in the United States of America for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, read the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005. The results of operations for the nine-months ended September 30, 2006 are not necessarily indicative of the operating results that may be expected for the fiscal year ending December 31, 2006.

The consolidated financial statements include the accounts of the Company and its subsidiary. All material inter-company transactions and balances have been eliminated in consolidation.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Stock Based Compensation: As of September 30, 2006, 436,125 options were issued leaving an unmissed stock option balance of 63,875.

F-4

HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

(Unaudited)

Effective January 1, 2006, the Company began recording compensation expense associated with stock-based awards and other forms of equity compensation in accordance with FASB Statement No. 123-R, Share-Based Payment (“SFAS 123R”) as interpreted by SEC Staff Accounting Bulletin No. 107. The Company adopted the modified prospective transition method provided under SFAS 123R, and consequently has not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock-based awards recognized in the third quarter of 2006 includes 1) quarterly amortization related to the remaining unvested portion of stock-based awards granted prior to January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of FASB No. 123, Accounting for Stock-Based Compensation (“SFAS 123”); and 2) quarterly amortization related to stock-based awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior to January 1, 2006, the Company accounted for stock-based awards using the “disclosure only” alternative described in SFAS 123 and FASB Statement No. 148, Accounting for Stock-Based Compensation.

The Company utilizes the Black-Scholes option-pricing model to calculate the fair value of each individual issuance of options. The following assumptions were used for grants during the three months ended September 30, 2006 and 2005:

	2006			2005

Expected dividend yield		0.0	%		0.0	%
Risk-free interest rate		5.0	%		5.0	%
Expected volatility		163.3	%		68.2	%

The Company recorded $10,212 and $25,614 of stock-based compensation expense relative to stock options for the three and nine months ended September 30, 2006, respectively, in accordance with SFAS 123R. A summary of stock option activity for the nine months ended September 30, 2006 is presented as follows:

F-5

HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

(Unaudited)

	Number of Options			Weighted Average Exercise Price

Balance at December 31, 2005		371,250		$	2.299
Granted		162,875			0.493
Exercised		-			-
Forfeited		(98,000	)		2.194
Balance at September 30, 2006		436,125		$	1.648

Options exercisable at September 30, 2006		143,477		$	1.791

Weighted average fair value of options granted during the year				$	0.48

The following table summarizes information about employee stock options outstanding at September 30, 2006:

Options Outstanding							Options Exercisable
			Weighted
	Number		Average		Weighted		Number		Weighted
Range of	Outstanding at		Remaining		Average		Exercisable at		Average
Exercise	September 30,		Contractual		Exercise		June 30,		Exercise
Price	2006		Life		Price		2006		Price

$ 2.00		217,000		2.7 years	$	2.00		101,750	$	2.00
3.50		37,500		3.7 years		3.50		9,375		3.50
3.90		18,750		3.7 years		3.90		2,812		3.90
0.33		123,750		4.7 years		0.33		29,540		0.33
1.01		39,125		4.6 years		1.01		-		1.01
		436,125			$	1.648		143,477	$	1.791

F-6

HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

(Unaudited)

The table below sets out the pro forma amounts of net income and earnings per share that would have resulted for the nine months ended September 30, 2005, if the Company had accounted for its stock options under the fair value recognition provisions of SFAS 123:

	Nine Months Ended
	September 30, 2005

Net loss (as reported)	$	(435,592	)

Deduct: Total stock based compensation expense determined under the fair value based method for all awards granted modified or settled during the period, net of related taxes		14,078


Pro forma net loss	$	(449,670	)

Basic, as reported	$	(.08	)

Basic, pro forma	$	(.08	)

Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

Allowance for Doubtful Accounts: The allowance for doubtful accounts is based on the Company’s assessment of the collectibilty of customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than the Company’s historical experience, the Company’s estimates of the recoverability of amounts due it could be adversely affected. The Company regularly reviews the adequacy of the Company’s allowance for doubtful accounts through identification of specific receivables where it is expected that payments will not be received. The Company also establishes an unallocated reserve that is applied to all amounts that are not specifically identified. In determining specific receivables where collections may not be received, the Company reviews past due receivables and gives consideration to prior collection history and changes in the customer’s overall business condition. The allowance for doubtful accounts reflects the Company’s best estimate as of the reporting dates. Changes may occur in the future, which may require the Company to reassess the collectibility of amounts, at which time the Company may need to provide additional allowances in excess of that currently provided.

F-7

HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

(Unaudited)

Recent Accounting Pronouncements: In June 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a tax position in accordance with this interpretation is a two step process. The first step is recognition : The enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement : A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of FIN 48 to materially effect the Company’s financial position or results of operations.

In September, 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principals (GAAP), and expands disclosures about fair value measurements. The definition of fair value retains the exchange price notion in earlier definitions of fair value. The exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market would use in pricing the asset or liability. This Statement expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. The disclosures focus on the inputs used to measure the fair value and the effect of the measurements on earnings. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 to materially effect the Company’s financial position or results of operations.

F-8

HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

(Unaudited)

In September, 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an Amendment of FASB Statements No. 87, 88, 106, and 132(R). This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in the unrestricted net assets of a not-for-profit organization. This Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit post-retirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. As the Company does not currently have a defined benefit post-retirement plan, it does not expect to be impacted by the adoption of FAS 158.

Management does not believe that any recently issued, but not yet effective accounting pronouncements if currently adopted would have a material effect on the accompanying consolidated financial statements.

NOTE 4 - PREFERRED STOCK PURCHASE AGREEMENT

On November 8, 2005, the Company entered into a Preferred Stock Purchase Agreement with its principal stockholder, Stanford International Bank Ltd. The Company agreed to issue to Stanford its Series C Convertible Preferred Stock at a price of $2.00 per share together with warrants to purchase 3/10 of a share of common stock for each share of Series C Preferred Stock purchased. Each share of Preferred Stock is convertible into one half share of Common Stock and is entitled to one half vote per share. In the event of liquidation, holders of the Series C Preferred Stock shall be entitled to receive, prior and before any distribution of assets shall be made to the holders of any Common Stock, an amount equal to the Stated Value per share. The Warrants are exercisable at a price of $0.002 per share. At September 30, 2006, the Company has an availability of $500,000 to draw down under the Preferred Stock Purchase Agreement on two week’s notice and the agreement calls for an additional $3.6 million that may be sold to Stanford to provide it with funds to complete acquisitions or additional working capital uses that may be approved by Stanford in its sole discretion.

F-9

HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

(Unaudited)

NOTE 5 - EQUITY TRANSACTIONS

From July 2006 through September 2006, the Company issued a total of 650,000 shares of its Series C Preferred Stock to its principal stockholder, Stanford International Bank Ltd. As required under the Preferred Stock Purchase Agreement, warrants to purchase an aggregate of 195,000 shares of the Company’s Common Stock were issued. Of the Series C Preferred Stock purchases, $200,111 has been attributed to the fair value of the warrants and included in additional paid in capital.

All 195,000 of the warrants were unexercised at September 30, 2006.

NOTE 6 - ACQUISITIONS

On April 6, 2006, VHT Acquisition Company (“VHT”), a wholly owned subsidiary of Healthcare Quality Solutions, Inc., consummated an Asset Purchase Agreement (the “Purchase Agreement”) with VantaHealth Technologies, LLC (“Vanta”) and the members of Vanta. Under the Purchase Agreement, VHT acquired substantially all of the assets of Vanta in consideration for: (a) $850,000 in cash, (b) the assumption of certain liabilities of Vanta in the approximate amount of $70,000, and (c) the issuance, to the members of Vanta, of an aggregate of 100,000 shares of the Company’s common stock.

In connection with the issuance of the Company’s Common Stock, the Company entered into a Lock Up Agreement with the members of Vanta. Under the Lock Up Agreement, the members of Vanta are prohibited from transferring the shares of the Company’s common stock for a period of three years expiring on April 1, 2009.

In connection with the acquisition of the assets of Vanta, VHT entered into a Transition Services Agreement with ZAC Capital Partners, LLC (“ZAC”). ZAC is a member of Vanta. Under the Transition Services Agreement, ZAC agreed to provide to VHT certain transition services for a period of 150 days after the closing including transition assistance with respect to existing clients, assistance with access to books and records, introduction to Vanta’s existing sales leads, assistance in connection with the collection of existing accounts receivable, and other services that VHT may reasonably request. In consideration of these services, VHT paid ZAC $100,000 on April 19, 2006.

F-10

HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

(Unaudited)

On May 15, 2006, the Company executed and consummated a Stock Purchase Agreement (the “Purchase Agreement”) with all of the shareholders of Carekeeper Software, Inc. (“Carekeeper”). Under the Purchase Agreement, Carekeeper Solutions, Inc. (“CKS”), the Company’s wholly owned subsidiary, acquired all of the issued and outstanding capital stock of Carekeeper. In consideration for the stock of Carekeeper: (a) the Company will make available to Carekeeper an operating line of credit in an amount of up to $1,500,000 to be made available at such times and in such amounts as the Company shall pre-approve and will be used solely to pay Carekeeper’s accounts payable, certain amounts due to the former shareholders of Carekeeper up to $143,000 and to pay operating expenses pursuant to an annual budget pre-approved by us; (b) an earn out payment based on a percentage of Carekeeper’s operating revenues in 2006, 2007 and 2008; and (c) a contingent payment in the amount of up to 400,000 shares of the Company’s common stock based on Carekeeper achieving certain milestones with respect to its operating revenues during 2006, 2007 and 2008.

With respect to the earn out and contingent payments described above, the amounts of such payments will be based on the operating results of Carekeeper for the following periods: (i) May 15, 2006 through December 31, 2006, (ii) calendar year 2007 and (iii) calendar year 2008. The earn out amount will be based on a percentage of the gross operating revenues generated by Carekeeper from the sales of its products and services during these periods. With respect to the contingent payment of the Company’s shares of common stock described above, the former shareholders of Carekeeper will be entitled to receive up to a maximum of 400,000 shares in three installments over this period. The amount of each issuance of shares is based on Carekeeper achieving certain pre-approved milestones with respect to its operating revenues during these periods.

In connection with the possible issuance of the Company’s common stock under the terms of the Purchase Agreement, the Company entered into a Lock Up Agreement with each of the shareholders of Carekeeper. Under the Lock Up Agreement, the shareholders of Carekeeper are prohibited from transferring the shares of the Company’s common stock for a period of three years expiring on or about February 15, 2010.

In connection with this transaction, Carekeeper Solutions, Inc. entered into employment agreements with Jake C. Levy and Dorothy A. Levy. Pursuant to his employment agreement, Mr. Levy will serve as the chief executive officer of Carekeeper Solutions, Inc., for an initial term of three years. Pursuant to her employment agreement, Ms. Levy will serve as the director of quality assurance of Carekeeper Solutions, Inc., for an initial term of three years.

F-11

HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

(Unaudited)

The following table summarizes the estimated fair values of the assets and liabilities assumed at the date of acquisition:

	CKS			VHT
Purchase price	$	25,003		$	1,034,973
Total assets		($242,122	)		($129,965	)
Total liabilities	$	2,502,097		$	411,351
Identifiable intangible assets	$	2,284,978		$	1,316,359

The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Vanta and Carekeeper had occurred as of the following period:

	Nine months ended			Nine months ended
	September 30, 2005			September 30, 2006

Net revenues	$	5,741,179		$	5,990,101

Net loss applicable
to common shareholders	$	(1,366,179	)	$	(2,478,198	)

Basic and diluted
net loss per share	$	(0.25	)	$	(0.42	)

F-12

HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

(Unaudited)

NOTE 7 - SUBSEQUENT EVENTS

On October 16 and October 20, 2006, the 195,000 outstanding warrants were exercised, 195,000 shares of Common Stock were issued by the Company and the Company received $390.00 representing the exercise price.

On October 30, 2006, the Company issued 200,000 shares of its Series C Preferred Stock to its principal shareholder, Stanford International Bank Ltd. As required under the Preferred Stock Agreement, warrants to purchase an aggregate of 60,000 of the Company’s Common Stock were issued.

F-13

Item 2. Management’s Discussion and Analysis or Plan of Operation

The following information should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Form 10-QSB. Unless otherwise indicated the information below reflects our February 21, 2006 reverse stock split as if effectuated on January 1, 2005.

Forward-Looking Statements

This Management’s Discussion and Analysis contains statements that are forward-looking. These statements are based on current expectations, estimates, forecasts, projections and assumptions that are subject to risks and uncertainties. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual future results may differ materially and adversely from those expressed in any forward-looking statements. Readers are referred to risks and uncertainties identified below and in the documents filed by us with the Securities and Exchange Commission, specifically the most recent reports on Forms 10-KSB, 10-QSB, and 8-K, each as it may be amended from time to time. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Overview

Health Systems Solutions, Inc., through its two wholly owned subsidiaries, Healthcare Quality Solutions, Inc. (“HQS”) and Carekeeper Solutions, Inc. (“CKS”), designs, develops, markets, sells and supports both licensed and web-based, management information and business intelligence information technology systems and related services. These products are designed to assist home health care companies more effectively manage the clinical, operational and financial aspects of their business and compete effectively in the Prospective Payment System (PPS) and managed care environments. Our focus is to help home health care providers streamline their operations and better serve their patients. In this regard, we offer several comprehensive software solutions.

HQS delivers its services using the software as a service model (SaaS) where customers use their standard personal computers and Microsoft Internet Explorer and access to the Internet to utilize the Company’s software services that reside on HSS-owned servers. The HQS architecture and fee structure enables our customers to rapidly and cost-effectively implement our services for a modest transactional fee charged when a customer uses our programs to process patient clinical assessments and obtain management reports.

CKS delivers software using both: (i) a software license model where the CKS software is purchased up front and is installed on customer-owned servers under customer’s control, and (ii) a software as a service model (SaaS) or hosting model where customers use their standard personal computers and Microsoft Internet Explorer and access to the Internet to utilize CKS software residing on HSS-owned and managed servers. In the future we expect to reduce the number of customers using the software license model.

These services have been designed to assist our customers in or by:

•

Increasing revenue;

•

Reducing cost;

•

Improving the quality of patient outcomes;

•

Standardizing processes;

•

Minimizing regulatory compliance risk;

•

Identify drug, food and herb interactions; and

•

Provide patient and caregiver scheduling and clinical data management

In 2005, there were approximately 8,000 Medicare certified home health agencies nationally that provided short-term (60 days or less) primarily skilled services (registered nurse, physical therapy, occupational therapy, speech therapy, social counseling) to over 2.8 million patients. In addition, there were approximately 7,000 private duty home care companies delivering skilled and unskilled services to patients in the home paid by other reimbursement sources including Medicaid, commercial insurance and private citizens.

The Balanced Budget Act of 1997 included mandates to the Centers for Medicare and Medicaid Services (CMS) to establish a Prospective Payment System (PPS) to reduce the cost of the home health benefit and to measure the effectiveness of the care delivered. The regulations are being implemented in phases over time and include a requirement that home health agencies collect assessment data on each patient at start-of-care, recertification and at discharge (OASIS Data).

In late 2002, in response to expanded PPS regulations, HQS introduced a series of online process management and business intelligence services using transaction-based pricing. These products assist home health agencies on a daily basis to collect, edit and correct the OASIS Data and through daily and other periodic reports assist in the management of patient outcome analysis and regulatory compliance risk. We refer to individual patient assessments containing the OASIS Data as the “transactions” on which we base our charges for our business process management and business intelligence services.

We currently derive our revenues from per transaction charges applied to processing patient clinical assessments made by our customers during a month, monthly hosting service charges based on the size of data storage utilized, one-time sales of software licenses and software maintenance on licensed software. As of September 30, 2006, we had approximately 320 customers in 46 states using one or more of our services.

We believe that we achieve best results with larger, multi-site customers who tend to have more sophisticated management. The majority of our current HHA is expanding both organically and through acquisition. We believe that our results of operations are best enhanced by the addition of site(s) to a current customer than it is to bring on a single site new customer.

Our executive offices are located at 405 N. Reo Street, Suite 300, Tampa, Florida 33609 and our telephone number is 813-282-3303. Our website is located at www.HQSonline.com. Information on our website is not a part of this report.

References throughout this annual report to “Health Systems Solutions,” “HSS,” “the Company,” “we,” “us” and “our” refer to Health Systems Solutions, Inc., a Nevada corporation, and our operating subsidiaries, Healthcare Quality Solutions, Inc., Vanta Acquisition Company , and Carekeeper Solutions, Inc.

Growth Strategy

We believe that the baby boomers entering their post-65 years will place unprecedented demands on the healthcare system of our country. Current public demand for accountability in balancing the quality and cost of healthcare will increase as healthcare costs for the baby boomers consume an increasing portion of the Gross Domestic Product. These demands will require that improved and standardized processes be implemented and managed at all points of patient contact. Identifying and eliminating duplication of clinical services, waste and paper in administrative systems will force the adoption of business process management techniques already implemented in other industries. Increased dependency on information technology will be the norm.

As the baby boomers entering the healthcare system begin to have a greater financial impact on the cost of healthcare, we believe that a number of things will happen that will affect our business:

·	There will be public and political pressure to rationalize and consolidate many of the myriad of post acute healthcare delivery venues currently protected under Medicare and Medicaid regulations.

·	There will be consolidation within post acute verticals such as home care, nursing homes, rehabilitation facilities, hospices, etc. as well as consolidation or elimination of some of the types of providers.

·	Consolidation of providers will be preceded by an evolving introduction of data standards that enable the exchange of patient data and measurement of performance.

·	Ongoing changes will make obsolete proprietary, closed system designs and will require flexible, open source approaches.

·	There will be an increased need to devise automated patient plans of care to manage details of specific disease states that can be updated electronically.

We believe that most providers of services in post acute care do not have the resources to invest in or manage the technology required to meet this new environment. We believe the opportunity exists to consolidate information technology vendors in the post acute arena in advance of the rationalization of the healthcare providers themselves.

It is our objective to extend our position as a leading provider of management solutions for home care and enter the market for solutions to other post acute care industries both by developing new systems and by acquiring existing companies that currently provide services to these venues and possess broad domain expertise. Acquired businesses will have already made the investment to migrate their solutions to the web in order to minimize the complex task of integrating disparate systems into the HSS network.

Key elements of this strategy include:

Leverage Our Existing Customer Base.

We believe significant opportunities exist to leverage our existing customer base by selling more applications to customers that utilize less than the full suite of programs, as well as by expanding our suite of programs to provide our customers with enhanced functionality and increased transactional volumes. We intend to continue to develop our current service offerings and to introduce new solutions that assist in the management of specific disease states and complementary products. We may offer our services to other post acute providers.

Offer Our Services to Other Segments of The Post Acute Industry.

We believe that the interest in tools to assist in the management of patient care, performance improvement, risk and compliance and specific disease states and conditions will provide us with opportunities to further develop our platform to provide solutions to hospice, nursing homes, skilled nursing facilities and inpatient rehabilitation facilities.

Strategic Acquisitions Allowing Further Expansion of our Platform of Solutions and Customer Base.

We want to increase our platform of solutions to the home health agencies we serve. Management believes there may be opportunities to expand our product offerings and/or customer base through strategic acquisitions. As a result, we regularly evaluate such opportunities.

Evaluation of Company Performance and Financial Condition

Since our administrative staffing levels and fixed expenses are relatively stable, the principle factor our management analyzes in evaluating our performance is changes in our principal sources of revenue. Management therefore focuses primarily on the volume of transactions per site added and the type of transactions processed to evaluate our performance. To a lesser extent, management evaluates the efficiency of our operation and our staffing levels by reviewing changes in our revenue per employee (which is determined by dividing revenue during a period by the weighted average headcount). To evaluate the effectiveness of our finance department and the strength of our financial position, management reviews our days of sales outstanding for each period.

Operational Risks and Challenges

Management believes that as we grow and expand our hosted on line services, we may be increasingly encroaching on the market of larger, more established vendor’s software offerings. It is likely that one or more of these more financially capable companies will develop a competing service.

We also bear the cost and risks associated with meeting regulatory compliance. For example, meeting the demands of HIPAA relating to protection of Private Health Information will require modifications to existing software and the development of new software to meet the HIPAA regulations. We also assist our customers that must comply with Sarbanes-Oxley in demonstrating proper internal control processes. These are both complex issues requiring measured responses. In addition, they both expose us to legal challenges.

Risk Factors

You should carefully consider the risks described below before making an investment decision in us. This disclosure highlights all material risks regarding our business and this offering.

We may fail to realize the anticipated synergies, cost savings and other benefits expected from the VantaHealth Technologies, LLC and Carekeeper Software, Inc. acquisitions, and this could cause the value of our company and our Common Stock to decline.

We must successfully integrate CareKeeper and Vanta, two companies that have previously operated independently, into a combined organization with HQS. HQS and VantaHealth entered into the acquisition agreement with the expectation that the acquisition would create opportunities to achieve market leverage from the product synergies and other benefits from operating the combined businesses of both companies. HSS entered into its acquisition agreement with Carekeeper in order to leverage the Carekeeper scheduling and private pay processing capabilities. HSS made this decision knowing that the delivery of Carekeeper’s new software was months behind schedule and was struggling in its effort to add functionality that would enable its software to handle Medicare processing in addition to its other capabilities. Our results of operation and the value of our Common Stock may decline if we are unable to achieve the benefits expected to result from integration of these businesses.

Achieving the benefits of the acquisitions will depend in part upon meeting the challenges inherent in the successful integration of these two business enterprises and the possible resulting diversion of management attention for an extended period of time. We cannot assure that these challenges will be met or opportunities realized. Delays encountered in the integration process could cause lower than expected revenues and/or increased higher expenses.

We expect that changes to the pricing models for the products of the acquired companies will negatively affect the operating results of our new CKS and VHT divisions.

We are changing the pricing model for the products of CKS and VHT from an up front charge for the software license to a transaction pricing model. Management believes that this change may, for a period of two years, result in a decline in revenues from these divisions compared to the results that would have been attained under the historic licensing pricing model.

Certain Carekeeper customers have submitted notices of default to Carekeeper and may initiate legal action against Carekeeper and HSS.

During the due diligence of the Carekeeper business assets and operations, we determined that there were six Carekeeper customers that had submitted notices of default under their license agreements. We are currently attempting to negotiate appropriate settlements with these customers. Our success at negotiating settlements could be protracted and if not resolved by negotiation may result in arbitration. At September 30, 2006, it is unknown how long the negotiations may take, the legal fees to be incurred and the resulting financial impact on Carekeeper.

We may lose employees of the newly acquired businesses which would delay our product introductions and cause us to lose revenues we planned on receiving.

Our success in the integration of CareKeeper and Vanta will depend in part upon our ability to retain key CareKeeper and Vanta employees. Competition for qualified technical personnel can be very intense. In addition, key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with HSS or HQS following the acquisitions. Accordingly, we cannot assure you that HSS will be able to retain key employees to the same extent that , CareKeeper or Vanta were been able to in the past.

We have a history of losses and if these losses continue it will negatively impact the value of our company.

We have incurred significant net losses since our inception. For the fiscal year ended December 31, 2005, we incurred net losses of $489,595. For the nine months ended September 30, 2006, we incurred net losses of $1,245,048. At September 30, 2006, we had an accumulated deficit of $14,663,631. Our continued operating losses have contributed to the deterioration of our cash position. We expect that cash on hand together with funds available to us under our Preferred Stock Purchase Agreement with our principal stockholder will permit us to fund our operations for the next twelve months. Unexpected increases in negative cash flow from operations or the unavailability of funds under Preferred Stock Purchase would cause us to require additional external funding before that time. If we are unable to secure additional external financing on a timely basis, we will not have sufficient cash to fund our working capital and capital expenditure requirements and we will be forced to cease operations.

One of our customers accounts for approximately 37% of our business and the loss of this significant customer would materially decrease our revenues and could result in more operating losses.

We had one customer, Amedisys, Inc., who accounted for approximately 37% of our revenue for the nine months ended September 30, 2006 and 45% of our revenues for the year ended December 31, 2005. The loss of this customer would materially decrease our revenues and could result in more operating losses.

Amedisys has developed a proprietary Windows-based clinical software system to collect assessment data, schedule and log patient visits, generate medical orders and monitor treatments and outcomes in accordance with established medical standards. The system integrates billing and collections functionality as well as accounting, human resource, payroll and employee benefits programs provided by third parties. This product has similar functionality to our Advantage product that Amedisys is currently utilizing. Amedisys has notified us that they will be distributing hand held computers to their full time nursing staff which will eliminate the need for verification services on the assessments processed on the hand held computer, a service for which Amedisys currently utilizes us. Amedisys will continue to use the verification services for contract and part time staff that are not issued the hand held computers. Amedisys will also continue to use our state transmission product and CMS reporting. We anticipate that revenue generated by Amedisys will decrease by approximately 80%, by the end of the third quarter of 2007. We will experience a partial offset in expense due to a decrease in verification staff. Amedisys expects to complete the roll out of their system by the end of the third quarter of 2007.

We have a long sales cycle and may not be able to increase revenues as quickly as we must increase staffing to support additional activity. If we increase our staffing in anticipation of additional revenues that are delayed, we may incur losses which could result in you losing your investment in our company.

Though most home health care agencies use some form of management information system to enhance their financial and clinical performance, selling our web-based solutions requires us to educate potential customers on our solutions’ uses and benefits and to educate them on giving up on-site control of their computer servers. As a result, selling our services requires a long sales cycle, which can take up to eight months. Consequently, we face difficulty predicting the quarter in which revenues from expected customers may be realized. The sale of our services is also subject to delays from the lengthy budgeting, approval and competitive evaluation processes of our customers that typically accompany significant information technology commitments. If we increase our staffing in anticipation of additional revenues and those revenues are delayed, we may suffer losses.

Over the last two years the services delivered by us have become increasingly important to our customers. A loss or deterioration of our service availability could result in significant damage to our customers and may result in customers initiating legal proceedings against us.

HQS has installed its customer-facing computing and communications control equipment at a Qwest CyberCenter in Tampa, Florida. CKS has a similar installation at a Qwest facility in Sterling, Virginia. Notwithstanding the history of high availability associated with the Qwest CyberCenters it is possible that a catastrophic event could damage either of these sites rendering the HQS and CKS services unavailable for an extended period. Should this occur HQS, CKS and HSS could be subject to lawsuits by our customers which would be expensive and time-consuming to defend.

If we fail to properly manage our growth, we may lose customers and our revenues would decrease.

We expanded our computer operations infrastructure in anticipation of our current and potential customer growth potential. Additionally, we must continue to develop and expand our services and operations infrastructure as the number of individual users accessing our services increases. The pace of our anticipated expansion demands an unusual amount of focus on the transaction processing needs of our current and future customers for quality, on-line response time and reliability, as well as timely delivery of information and support. This development and expansion has placed, and we expect it to continue to place, strain on our managerial, operational and financial resources. Any failure on our part to develop and maintain our service levels could significantly adversely affect our reputation and brand name which could reduce demand for our services and adversely affect our business, financial condition and operating results.

Healthcare providers are highly regulated. If we fail to properly implement regulatory requirements in an effective and timely manner, we will lose customers, our reputation will be damaged and our revenues will decrease.

Ensuring our services are compliant with changes in Medicare Conditions of Participation (CoPs), provisions of the Health Insurance Portability and Accountability Act (HIPAA) and other regulatory requirements is challenging and expensive. However, if we do not maintain an appropriate level of regulatory compliance or we incorrectly implement a required regulatory change, we may experience negative publicity, the loss of customers, the slowing down of sales cycles which would decrease our revenues.

Technology changes rapidly. If we are unable to respond in an effective and timely manner to technological change, our products may become obsolete we will lose customers and our revenues would decrease any or all of which would greatly reduce the value of our company.

The market for management information tools is characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards and government regulation. The introduction of products embodying new technologies, changes in applicable government regulation and the emergence of new industry standards can render existing products obsolete and unmarketable. Our future success will depend upon our ability to continue to enhance our current products while developing and introducing new products on a timely basis that keep pace with technological developments and government regulations and satisfy increasingly sophisticated customer requirements. If we experience material delays in introducing new products and enhancements, our prospects for growth will be impaired and our reputation with our customers may be damaged.

Competition in the healthcare information systems industry is intense and if we are unable to compete we will lose significant customers or be unable to attract customers and our revenues could decrease.

The market for healthcare information systems is intensely competitive, rapidly changing and undergoing consolidation. Our competitors in the field include: McKesson Corporation, Cerner Corporation, Mysis PLL, Patient Care Technology (PCTC), Siemens A G, Eclipsys Technologies Corporation and Keane, Inc., among others. Many of these competitors have substantially greater resources and more experience than us. We anticipate increased competition in the future as new companies enter the market in response to recent HIPAA regulations. If we are unable to compete we will lose significant customers or be unable to attract customers and our revenues could decrease.

If our customers lose confidence in the security of data on the Internet, they will be less inclined to purchase our products and our revenues could decrease.

Maintaining the security of computers and computer networks is an issue of critical importance for our customers. Our customers may be exposed to claims by federal healthcare regulators if they use our Internet based services and we do not protect sensitive patient data from penetration by hackers. In response, our customers may pursue claims against us which would be expensive and time-consuming to defend.

We have limited protection over our intellectual property rights. As a result, we may not be able to protect against misappropriation of our intellectual property, which could result in loss of revenues.

We rely upon a combination of service agreements, confidentiality procedures, employee and customer nondisclosure agreements and technical measures to maintain the confidentiality and trade secrecy of our proprietary information. We also rely on trademark and copyright laws to protect our intellectual property. We have not initiated a patent program. As a result, we may not be able to protect against misappropriation of our intellectual property.

Our future success is dependent on the services of our key management and personnel, whose knowledge of our business and technical expertise would be difficult to replace.

All of the members of key management and personnel are employees “at will” and can resign at any time. The loss of the services of one or more of these key employees could slow product development processes or sales and marketing efforts or otherwise harm our business. The market for these highly skilled employees is characterized by intense competition, which is heightened by their high level of mobility. These factors make it particularly difficult to attract and retain the qualified technical personnel required. We have experienced, and expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate technical qualifications. If we fail to recruit and retain a significant number of qualified technical personnel, we may not be able to develop, introduce or enhance products on a timely basis. Even if we are able to expand our staff of qualified technical personnel, they may require greater than expected compensation packages that would increase operating expenses. If we are unable to retain or hire qualified employees, our business will fail and you may lose your entire investment.

We depend upon software that we license from and products provided by third parties and the loss of these licenses or an increase in cost of these licenses would require us to suspend our operations until we obtain required software.

We rely upon certain software licensed from third parties. The loss of or inability to maintain any such software licenses could result in shipment delays or reductions until equivalent software could be developed, identified, licensed and integrated.

If we are subject to a claim that we infringe a third-party’s intellectual property, we may have to replace our current products, pay royalties to competitors or suspend operations, any of which could significantly increase our expenses.

Substantial litigation regarding intellectual property rights and brand names exists in the software industry. We expect that software product developers increasingly will be subject to infringement claims as the number of products and competitors in this industry segment grows and the functionality of products in related industry segments overlaps. However, third parties, some with far greater financial resources than ours, may claim infringement of their intellectual property rights by our products.

Any such claims, with or without merit, could:

·	Be time consuming to defend;

·	Result in costly litigation;

·	Divert management’s attention and resources;

·	Cause product shipment delays;

·	Require us to redesign products;

·	Require us to enter into royalty or licensing agreements; or

·	Cause others to seek indemnity from us.

A successful claim of product infringement against us, or failure or inability to either license the infringed or similar technology or develop alternative technology on a timely basis, could harm our operating results, financial condition or liquidity.

Our shares of Common Stock are thinly traded and you may find it difficult to dispose of your shares of our stock, which could cause you to lose all or a portion of your investment in our company.

Our shares of Common Stock are currently quoted on the OTC Bulletin Board. Trading in shares of our Common Stock has been limited and we expect to have only a limited trading market in the foreseeable future. As a result, you may find it difficult to dispose of shares of our Common Stock and you may suffer a loss of all or a substantial portion of your investment in our Common Stock.

Our Common Stock is covered by SEC “penny stock” rules which may make it more difficult for you to sell or dispose of our Common Stock, which could cause you to lose all or a portion of your investment in our company.

Our Common Stock is covered by an SEC rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors, which are generally institutions with assets in excess of $5,000,000, or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and transaction prior to the sale. Consequently, the rule may affect the ability of broker-dealers to sell our securities, and also may affect the ability of purchasers of our stock to sell their shares in the secondary market. It may also diminish the number of broker-dealers that may be willing to make a market in our Common Stock, and it may affect the level of news coverage we receive.

The interests of our controlling shareholders could conflict with those of our other shareholders resulting in the approval of corporate actions that are not in your interests.

Our principal shareholder, Stanford, owns or controls approximately 84% of our Common Stock. This shareholder is able to control the outcome of shareholder votes, including votes concerning amendments to our charter and by-laws and the approval of significant corporate transactions like a merger or sale of our assets. Although none of our Directors or Officers are affiliated with Stanford or have any relationships with Stanford, Stanford is able to control the election of the Board of Directors through its ownership of a majority of our Common Stock. In addition, Stanford has provided us with significant financing. This controlling influence could have the effect of delaying or preventing a change in control, even if our other shareholders believe it is in their best interest.

We may issue additional shares of Preferred Stock that could defer a change of control or dilute the interests of our common shareholders and our charter documents could defer a takeover effort, which could inhibit your ability to receive an acquisition premium for your shares or your ability to sell your shares of Common Stock.

Our articles of incorporation permit our Board of Directors to issue up to 15,000,000 shares of Preferred Stock without shareholder approval. Currently 2,575,000 shares of the Preferred Stock are issued and outstanding. Shares of Preferred Stock, if issued, could contain dividend, liquidation, conversion, voting or other rights which could adversely affect the rights of our common shareholders and which could also be utilized, under some circumstances, as a method of discouraging, delaying or preventing our change in control. Provisions of our articles of incorporation, bylaws and Nevada law could make it more difficult for a third party to acquire us, even if many of our shareholders believe it is in their best interest. These provisions may decrease your ability to sell your shares of our Common Stock.

Research and Development

In January 2006 the Centers for Medicare and Medicaid Services (CMS) announced that the Medicare rules for home healthcare would be modified to establish a Pay-For-Performance reimbursement model (reimbursement based on patient outcomes). In addition, the Congress and President Bush have introduced initiatives to establish a standardized and interchangeable patient medical record data to be used by all healthcare providers. In response to these initiatives we introduced a R&D project to define requirements to ensure our services to meet our customer’s needs under these emerging rules and regulations and to ensure our company maintains its competitive position in the market.

With the assistance of Magellan Business Partners, a management consulting firm, we selected the i-flex Solutions, Inc. as our outsource development partner to assist us with the design and development of a new database structure and application architecture to meet the emerging data base and data interchange requirements. We began documenting database and system requirements in February. i-flex Solutions is 60% owned by Oracle Corporation and is rated as one of the top 10 software development outsourcing companies in the world. i-flex Solutions operates in over 110 countries with over 7,000 employees.

The project will be developed in phases with the first delivery scheduled for December 2006. We expected this effort to continue into 2007 and 2008. The project was estimated to cost a total of $1,500,000. Of this amount approximately $165,000 was spent during Q3 on external resources. We anticipate spending on external resources approximately $175,000 in Q4 of 2006 and an additional $100,000 for each quarter of 2007. We do not anticipate spending the entire $1,500,000. Any additional amounts over those listed above, if any, will be spent in 2008.

The acquisition of CareKeeper Solutions included an on-going R&D project that CKS initiated in late 2002 that entailed redeveloping the CKS VividCare client server-based software system to a web-based system known as VividNet. VividNet is a large project having consumed over $4,100,000 since inception. The project is in the final stages of completion and is currently in use by approximately 40 CKS customers.

The acquisition of VantaHealth Technologies product Analyzer included a development project in partnership with Montefiore Home Health, a division of Montefiore Medical Center of New York City. This project provides initial effort to develop a predictive modeling technique that will enable Montefiore management to better negotiate authorizations for care with HMO’s. Phase 1 of the project is expected to commence beta testing in the fourth quarter of 2006.

HQS initiated internal development projects to produce new and enhanced products. The first such product, the HQS Medications Risk Manager, was introduced into beta test with one of our large customers in October 2005. General release is presently scheduled for the 4^th quarter of 2006. This product will not add material revenue during 2006. We expect that one other new service, enabling the use of an electronic tablet device to collect patient data at the point of care, will be introduced into beta test in the fourth quarter of 2006. This product is not expected to add material revenue during 2006. Development of the underlying software will be produced with existing staff. Other internal research and development expenses associated with these products is not material and will increase slightly to cover costs related to short term software development contractors or consultants that will be used in the development cycle.

Significant Accounting Policies

Revenue Recognition

Our corporate strategy is to provide our services on a recurring transaction pricing basis. We believe this is a value-based model that more directly relates to our customer’s recognition of revenue. The transaction pricing model differs from the typical licensed software model in that the implementation of transaction-priced services does not result in large up front software license fee revenues but results in a gradual recognition of revenue earned on a transaction by transaction basis over time. This is a similar model to that used by the mobile phone industry. The benefit occurs in the future years where leverage is obtained as a customer grows and continues to pay transaction fees year over year, whereas under the licensed sale model the only revenue realized in the future years is quarterly support and maintenance fees

We follow the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 104. We recognize revenue when persuasive evidence of an arrangement exists, the product or service has been delivered, fees are fixed or determinable, collection is reasonably assured and all other significant obligations have been fulfilled.

Our revenue is classified into two categories: recurring and non-recurring. For the nine months ended September 30, 2006, approximately 86% of our total revenue was recurring and 14% was non-recurring.

We generate recurring revenue from several sources, including the processing of clinical assessments which, as mandated by Medicare, require home health care agencies to collect assessment data on all patients requiring home health care at the start-of-care and at discharge, the provision of outsourcing services, such as software hosting and other business services, and the sale of maintenance and support for our proprietary software products. Recurring services revenue is typically billed and recognized monthly over the contract term, typically two to three years. Recurring software maintenance revenue is typically based on one-year renewable contracts. Software maintenance and support revenues are recognized ratably over the contract period. We record cash payments received in advance or at the beginning of a contract as deferred revenue.

We generate non-recurring revenue from the licensing of our software. Under SOP 97-2, software license revenue is recognized upon the execution of a license agreement, upon delivery of the software, when fees are fixed or determinable, when collectibility is probable and when all other significant obligations have been fulfilled. For software license agreements in which customer acceptance is a significant condition of earning the license fees, revenue is not recognized until acceptance occurs. For software license agreements that require significant customizations or modifications of the software, revenue is recognized as the customization services are performed. For multiple element arrangements, such as software license, consulting services, outsourcing services and maintenance, and where vendor-specific objective evidence (“VSOE”) of fair value exists for all undelivered elements, we account for the delivered elements in accordance with the “residual method.” Under the residual method, the total fair value of the undelivered elements, as indicated by VSOE, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. For arrangements in which VSOE does not exist for each undelivered element, including specified upgrades, revenue for the delivered element is deferred and not recognized until VSOE is available for the undelivered element or delivery of each element has occurred. When multiple products are sold within a discounted arrangement, a proportionate amount of the discount is applied to each product based on each product’s fair value or relative list price.

We also generate non-recurring revenue from implementation fees, consulting, training and customer support services and this non-recurring revenue is charged to customers on a fee basis usually based upon time spent. We recognize software licensing fees and implementation fees in the month that the customer goes live and we recognize training, consultation, advisory and support revenue in the month that the service is performed. Implementation costs consisting of payroll and travel are expensed in the same period implementation fees are recognized.

We currently recognize cancellations, allowances or discounts as they occur. This practice is based on factors that include, but are not limited to, historical cancellations and analysis of credit memo activities. Cancellations, allowances and discounts are not material.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is based on our assessment of the collectibility of customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due could be adversely affected. We regularly review the adequacy of our allowance for doubtful accounts through identification of specific receivables where it is expected that payment will not be received. We also establish an unallocated reserve that is applied to all amounts that are not specifically identified. In determining specific receivables where collections may not be received, we review past due receivables and give consideration to prior collection history and changes in the customer’s overall business condition. The allowance for doubtful accounts reflects our best estimate as of the reporting dates. Changes may occur in the future, which may require us to reassess the collectibility of amounts and at which time we may need to provide additional allowances in excess of that currently provided.

Litigation Accruals

Pending unsettled lawsuits involve complex questions of fact and law and may require expenditure of significant funds. From time to time, we may enter into confidential discussions regarding the potential settlement of such lawsuits; however, there can be no assurance that any such discussions will occur or will result in a settlement. Moreover, the settlement of any pending litigation could require us to incur settlement payments and costs. In the period in which a new legal case arises, an expense will be accrued if our liability to the other party is probable and can be reasonably estimated. On a quarterly basis, we review and analyze the adequacy of our accruals for each individual case for all pending litigations. Adjustments are recorded as needed to ensure appropriate levels of reserve. Our attorney fees and other defense costs related to litigation are expensed as incurred.

Stock Based Compensation

Effective January 1, 2006, we began recording compensation expense associated with stock-based awards and other forms of equity compensation in accordance with FASB Statement No. 123-R, Share-Based Payment (“SFAS 123R”) as interpreted by SEC Staff Accounting Bulletin No. 107. The Company adopted the modified prospective transition method provided under SFAS 123R, and consequently has not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock-based awards recognized in the third quarter of 2006 includes (1) quarterly amortization related to the remaining unvested portion of stock-based awards granted prior to January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of FASB No. 123, Accounting for Stock-Based Compensation (“SFAS 123”); and (2) quarterly amortization related to stock-based awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior to January 1, 2006, we accounted for stock-based awards using the “disclosure only” alternative described in SFAS 123 and FASB Statement No. 148, Accounting for Stock-Based Compensation.

Software Development Costs

We capitalize certain costs of software developed or obtained for internal use in accordance with AICPA SOP 98-1, Accounting for the Costs of Corporate Software Developed or Obtained for Internal Use (“SOP 98-1”). We capitalize software development costs when application development begins, it is probable that the project will be completed, and the software will be used as intended. Costs associated with preliminary project stage activities, training, maintenance and all other post implementation stage activities are expensed as incurred. Our policy provides for the capitalization of certain payroll and payroll-related costs for employees who are directly associated with developing or obtaining internal use software. Capitalizable personnel costs are limited to the time directly spent on such projects. Capitalized costs are ratably amortized using the straight-line method, over the estimated useful lives of the related applications of three years. We make on-going evaluations of the recoverability of our capitalized software by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, we write off the amount that the unamortized software development costs exceed net realizable value.

Recent Accounting Pronouncements

In June 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a tax position in accordance with this interpretation is a two step process. The first step is recognition: The enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of FIN 48 to materially effect the Company’s financial position or results of operations.

In September, 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R). This Statement improves financial reporting by requiring an employer to recognize the overfunded on underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in the unrestricted net assets of a not-for-profit organization. This Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit post-retirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. As the Company does not currently have a defined benefit post-retirement plan, it does not expect to be impacted by the adoption of FAS 158.

Results of Operations

The financial data presented for the three months and nine months of 2005 includes only HSS and HQS. The financial data presented for the same periods of 2006 includes HSS and HQS as well as data for VHT and CKS as of the acquisition dates of April 6, 2006 and May 16, 2006 respectively.

Statistical Data

The following tables set forth certain financial data expressed as a percentage of net sales for each of the periods indicated.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2006			2005			2006

Net sales		100	%		100	%		100	%		100	%
Cost of sales		46	%		62	%		46	%		54	%
Gross profit		54	%		38	%		54	%		46	%
Operating expenses:
Selling and marketing		15	%		30	%		17	%		23	%
Research and development		14	%		20	%		16	%		17	%
General and administrative		27	%		31	%		29	%		28	%
Depreciation and amortization		4	%		2	%		4	%		2	%
Interest		2	%		1	%		2	%		1	%
Total operating expenses		62	%		84	%		68	%		71	%
Deemed Preferred Stock dividend		0			11	%		0			8	%
Net income (loss)		-8	%		-57	%		-14	%		-33	%

	Three Months Ended September 30				Nine Months Ended September 30
	Three Months Ended September 30				Nine Months Ended September 30
	2005		2006		2005		2006
*Recurring Revenue*
Clinical Assessment Revenue	$	996,269	$	1,210,675	$	2,883,542	$	3,509,174
Hosting Revenue		0		38,385		0		67,160
Software Maintenance Revenue		0		289,854		0		505,000
Other		0		114,821		0		171,351
Total Recurring Revenue	$	996,269	$	1,653,736	$	2,883,542	$	4,252,684
*Non Recurring Revenue*
Licensed Software Sales	$	0	$	41,797	$	0	$	149,004
Training and Implementation		69,726		128,530		118,245		496,686
Other		8,749		24,125		29,217		54,744
Total Non Recurring Revenue	$	78,475	$	194,452	$	147,462	$	700,434
Total Revenue	$	1,074,744	$	1,848,188	$	3,031,004	$	4,953,118

The following tables set forth certain statistical data for each of the periods indicated.

	Nine Months Ended September 30
	2005		2006
Total customers (weighted average)		88		324
Total customers (end of period)		84		320
Weighted average headcount		47		87
Days sales outstanding		41		71

Three Months Ended September 30, 2006 Compared to the Three Months Ended September 30, 2005

Net sales increased $773,444 or 72% for the three months ended September 30, 2006 to $1,848,188 compared to $1,074,744 during the same period in 2005. This increase resulted primarily from $158,493 of revenue from VHT, which we acquired on April 6, 2006, $384,333 of revenue from CKS, which we acquired on May 16, 2006, and an increase of $214,406 in revenue from patient clinical assessments, resulting primarily from price increases and increases in assessment transaction volume from existing and new customers.

Cost of sales for the three months ended September 30, 2006 was $1,146,681, or 62% of revenues, as compared to $493,314, or 46% of revenues, for the three months ended September 30, 2005. We include as part of our cost of sales the employee costs incurred from our customer service department, our data verification department, our implementation department and our training and education department. Other costs include travel for our customer service people, professional fees, accreditation fees, teleconferencing, rent, assessment forms, depreciation expense for our internally developed software, hosted data center expense and shipping. We also include amortization of internally developed software costs associated with acquisitions in our cost of sales. In connection with our acquisition of CareKeeper and Vanta Health we incurred $3.5 million in software development costs that will be amortized over three years resulting in quarterly charges of approximately $300,000. The acquisitions increased staffing in our customer service, training and education departments to support the increased customer volume resulting in an increase of $135,110 in salaries expense. The existing salary expense accounts, comparable to the 2005 accounts, increased by $107,849, primarily due to the need to service three new customers. Salaries and related expenses increased by a total of $242,959 for the three months ended September 30, 2006. Communications expenses increased $92,633 due to the addition of internet and hosting services used by CKS and VHT products. Professional services increased by $31,721, of which $12,988 was for contract employees handling training and implementation at CKS and VHT. The remaining $18,733 was due to contracted and temporary employees that were required to handle the training, implementation, and servicing of new customers for HQS. Travel expenses increased $21,072 and occupancy expense increased $27,587 were applied to cost of sales during the quarter ended September 30, 2006, whereas this amount was applied fully to general and administrative expenses during 2005.

Total operating expense was $1,540,389 for the three months ended September 30, 2006, compared to $667,326 for the three months ended September 30, 2005, an increase in operating expenses of $873,063 or 131%. Operating expenses were comprised of sales and marketing, research and development, general and administration, depreciation and amortization, and interest.

Selling and marketing expense totaled $559,205 for the three months ended September 30, 2006 compared to $161,008 for the three months ended September 30, 2005, resulting in an increase in selling and marketing expense of $398,197 or 247%. We include in our selling and marketing expense the employee costs incurred from our marketing, sales, sales administration and sales support employees. Other costs included are the travel for our sales people, trade shows, advertising, occupancy, telephone, teleconferencing, and office expense. Salaries increased by $144,848 for the quarter. Selling and marketing salaries from the acquisitions of VHT and CKS accounted for $126,365 of the increase. Outside services increased by $130,877, related to the management of our marketing and sales department and development of collateral materials and corporate web sites for the HQS products.. Marketing and promotion cost increased by $52,932, of which marketing of the HQS products accounted for $34,344, and the acquisitions of VHT and CKS accounted for $18,587. Travel costs increased by $33,458, of which $23,384 was related to the HQS products and $10,074 was from the VHT and CKS products. Commissions increased by $25,909, of which $16,964 related to the HQS products and $8,945 from the VHT and CKS products. Occupancy costs associated with selling and marketing increased by $8,314.

Research and development expense was $363,915 for the three months ended September 30, 2006, as compared to $148,860 for the three months ended September 30, 2005, resulting in an increase of $215,055 or 145%. Included in our research and development cost is the employee costs for our software developers, our data center and internal systems staff, professional fees for outside consultants and contractors, occupancy, communications and supplies. The principal reason for the increase in research and development expense is attributed to the VHT and CKS acquisitions which accounted for $153,243 of the increase. Salaries and benefits increased by $128,053. VHT and CKS product lines increased by $132,402, but was offset by a $4,349 decrease in the HQS product line. Outside services expense increased by $47,860; $30,732 was from the HQS product line and $17,128 was from the VHT and CKS products. Travel expenses increased by $19,412, primarily due to the increase in the travel associated with outside services for the HQS product line. Occupancy, communications, and other expenses increased by $13,957, $2,793, and $2,981, respectively.

General and administration expense was $564,635 for the three months ended September 30, 2006 and $287,743 for the three months ended September 30, 2005, representing an increase of $276,891 or 96%. Included in our general and administration expense are salaries and related expenses for our executive officers and administrative employees. Also included in general and administration are corporate costs such as legal and accounting, utilities, rent, office supplies and equipment, and bad debt. The principal reason for the increase in general and administration expense is attributed to the VHT and CKS acquisitions which accounted for $199,322 of the increase. The remaining increase is attributed to HSS and HQS. HSS and HQS salaries and benefits increased by $55,173 due to an increase in the finance and human resources department. Other expenses increased by $79,615, which consisted of a $39,041 increase from the acquisition of CKS and VHT, and a $40,574 increase in HSS and HQS. The increase to other expense was primarily due to an increase in the bad debt allowance.

Depreciation expense was $34,721 for the three months ended September 30, 2006 and $44,486 for the three months ended September 30, 2005, a decrease of $9,765 or 22%. The principal reason for the decrease in depreciation expense of $9,766 is due to the fixed assets that were acquired in October of 2002 became fully depreciated.

Interest expense was $17,914 for the three months ended September 30, 2006 and $25,228 for the three months ended September 30, 2005, representing a decrease of $7,314 or 29%. The principal reason for this decrease was the payoff of the loan and security agreement in November 2005.

Nine Months Ended September 30, 2006 Compared to the Nine Months Ended September 30, 2005

Net sales increased $1,922,114 or 63% for the nine months ended September 30, 2006 to $4,953,118 compared to $3,031,004 during the same period in 2005. The increase was primarily due to the combined affects of revenue from the acquisitions of VHT of $314,316 and CKS of $664,837, as well as an increase of $625,632 in revenue from patient clinical assessments, resulting primarily from price increases and increases in assessment transaction volume from existing and new customers.

Cost of sales for the nine months ended September 30, 2006 was $2,699,172 or 54% of revenues as compared to $1,380,097 or 46% of revenues for the nine months ended September 30, 2005 Of the increase in the cost of sales, $947,759 or 72% was attributed to the VHT and CKS acquisitions. The acquisitions increased staffing in our customer service, training and education departments to support the increased volume and products resulting in an increase of $206,064 in salaries and related expenses. The existing salary expense accounts, comparable to the 2005 accounts, increased by $415,965, primarily due to the need to service new customers. Salaries and related expenses increased by a total of $622,029. Professional services increased by $171,108 of which $35,916 was for contract employees handling training and implementation at CKS and VHT. The remaining $137,037 was due to contracted and temporary employees that were required to handle the training, implementation, and servicing of new customers for HQS. There was an increase in depreciation of $256,531. This increase was due to the amortization of internally developed software for CKS and VHT of approximately $553,073 offset by a decrease in existing depreciation accounts of $296,542 from assets becoming fully depreciated. There was an increase of $152,130 in communications due to the addition of internet and hosting services used by CKS and VHT products. There was an increase of $74,065 in occupancy costs. The occupancy expenses were applied to cost of sales during the nine months ended September 30, 2006, whereas this amount was applied fully to general and administrative expenses during 2005. There were increases travel and other expenses of $26,882 and $14,676, respectively.

Total operating expense was $3,498,994 for the nine months ended September 30, 2006, compared to $2,086,500 for the nine months ended September 30, 2005, an increase in operating expenses of $1,412,494 or 68%. Operating expenses were comprised of selling and marketing expenses, research and development, general and administration, depreciation and amortization, and interest.

Selling and marketing expense totaled $1,154,985 for the nine months ended September 30, 2006 compared to $527,554 for the nine months ended September 30, 2005, resulting in an increase in selling and marketing expense of $627,431 or 119%. The increase in selling and marketing expenses attributed to the additional costs from the VHT and CKS acquisitions was $239,155. Other increases included professional services related to the management of our marketing and sales department and development of collateral materials and corporate web sites for the HQS product of $314,699; travel expense for employees and contracted employees related to the management of our marketing and sales department of $71,171 the majority of which, $59,680, was for the HQS product line. Marketing and promotional expense increased $84,221 due to increased attendance at regional trade shows and the development of collateral materials and corporate web sites, the majority of which, $65,707, was for the HQS product line. Commissions increased $43,090 due to new sales of which $30,826 was for the HQS product line. There was an increase of $16,799 in occupancy costs. The occupancy expenses were allocated to departments during the nine months ended September 30, 2006, whereas this amount was applied fully to general and administrative expenses during 2005.

Research and development expense was $821,524 for the nine months ended September 30, 2006, as compared to $476,218 for the nine months ended September 30, 2005, resulting in an increase of $345,306 or 73%. Increases in selling and marketing expenses attributed to the additional costs from the VHT and CKS acquisitions were $230,482. Salaries and benefits increased by $188,243. VHT and CKS product lines increase by $208,590, which was offset by a $20,348 decrease in the HQS product line. Professional services for outside contractors to manage the integration of our products increased $82,953, of which $65,769 was from the HQS product line and $17,128 was from the VHT and CKS product lines. Occupancy costs increased by $37,462. The occupancy expenses were allocated to departments during the months ended September 30, 2006, whereas this amount was applied fully to general and administrative expenses during 2005. Travel expenses increased by $25,276 primarily due to increased travel associated with the consultants hired for the HQS product line. Communications and other expenses increased by $6,056 and $7,098, respectively.

General and administration expense was $1,391,659 for the nine months ended September 30, 2006 and $882,259 for the nine months ended September 30, 2005, representing an increase of $509,400 or 58%. The principal reason for the increase in general and administration expense is attributed to the VHT and CKS acquisitions which accounted for $448,143 of the increase. The remaining increase is attributable to HSS and HQS. Within HSS and HQS, salaries and benefits increased by $85,047 due to the increase in the finance and human resources department. Total other expenses increased by $176,711, which consisted of a $116,426 increase from the acquisition of CKS and VHT, and a $60,285 increase attributable to HSS and HQS. The increase to other expense was primarily due to an increase in the bad debt allowance. Outside services increased by $50,069, which consisted of a $36,348 increase from the acquisition of CKS and VHT, and a $13,720 increase attributable to HSS and HQS. Occupancy costs for general and administration decreased by $37,025. This decrease is a combination of HQS shifting $97,049 of expense from general and administrative to cost of sales, selling and marketing, and research and development, and a $60,023 increase from the acquisition of CKS and VHT. Travel expense increased by $33,296, which consisted of a $17,574 increase from the acquisition of CKS and VHT, and a $15,723 increase in the pre-existing accounts. Communications expenses increased by $6,814.

Depreciation expense was $104,424 for the nine months ended September 30, 2006 and $130,096 for the nine months ended September 30, 2005, resulting in a decrease of $25,672 or 20%. The principal reason for the decrease in depreciation expense is due to the fixed assets that were acquired at the inception of the business in October of 2002 being fully depreciated.

Interest expense was $26,402 for the nine months ended September 30, 2006 and $70,373 for the nine months ended September 30, 2005, representing a decrease of $43,971 or 62%. The principal reason for this decrease was the payoff of the loan and security agreement in November 2005.

Liquidity and Capital Resources

At September 30, 2006, we had incurred an accumulated deficit of $14,663,631 compared to $13,012,275 at December 31, 2005. At September 30, 2006, we had a working capital deficit of $232,069, compared to working capital of $619,775 at December 31, 2005. We had incurred net operating losses for the nine months ended September 30, 2006 and the year ended December 31, 2005 of $1,245,048 and $489,595, respectively.

On November 8, 2005, we entered into a Preferred Stock Purchase Agreement with our principal stockholder, Stanford International Bank Ltd. We agreed to issue to Stanford our Series C Preferred Stock at a price of $2.00 per share together with warrants to purchase 3/10 of a share of Common Stock for each share of Series C Preferred Stock purchased. The Warrants are exercisable at a price of $0.002 per share. On November 8, 2005, we refinanced the outstanding amount of $1,250,000 under the loan and security agreement and have drawn down an additional $3,900,000 of working capital through September 30, 2006. Among other things, the proceeds were used to finance the acquisitions of Vanta and Carekeeper. We have $500,000 of additional availability under the Preferred Stock Purchase Agreement, which can be drawn down on two weeks’ notice. An additional $3,600,000 is available to complete acquisitions or additional working capital uses that may be approved by Stanford in its sole discretion.

We believe that the $500,000 available to us with two weeks notice under the Preferred Stock Purchase Agreement and an additional $1,450,000 from the Preferred Stock Purchase Agreement for working capital, together with funds generated from operations, will be sufficient to meet our working capital needs over the next twelve months. We anticipate that working capital requirements will decrease from the current level over the next twelve months as we begin to consolidate business processes such as customer support, sales and marketing and implementation services, eliminate duplicate processes or systems, evaluate current products for duplication of services between companies and complete the improvements to our infrastructure. We currently anticipate proceeds from the Preferred Stock Purchase Agreement will be sufficient to meet presently anticipated working capital and capital expenditure requirements through September 30, 2007. For the design and development of a new database structure and application architecture project discussed in the Research and Development section of this report we anticipate spending on external resources approximately $175,000 in the fourth quarter of 2006 and an additional $100,000 for each quarter of 2007.

As of September 30, 2006, we had cash totaling $314,947. Significant cash flow activities for the nine months ended September 30, 2006 are as follows:

Cash used in operating activities was $1,747,181 for the nine months ended September 30, 2006, whereas such activities used $76,185 during the same period of 2005. Cash used by operating activities for the nine months ended September 30, 2006, is primarily attributable to a net loss of $1,245,048, a net increase in accounts receivable of $354,318, an increase in prepaid expenses of $99,357, and an increase in royalties receivable of $6,965, a decrease in accounts payable of $326,613, a decrease in the reserve for customer refunds of $287,218, a decrease in deferred revenues of $249,818 and a decrease in customer deposits of $5,153. These were partially offset by an increase in accrued expenses of $14,487 as well as non-cash items such as depreciation and amortization of $787,208 and an increase in stock based compensation of $25,614.

Cash used in investing activities was $1,739,010 for the nine months ended September 30, 2006, where such activities used $227,099 for the nine months ended September 30, 2005. Cash used in investing activities in 2006 is attributable to purchases of Vanta Health Technologies of $1,034,493 and CareKeeper Software of $25,003, and increases in property and equipment of $101,059 and capitalized software development costs of $604,395. These were partially offset by the acquisition of cash from CareKeeper Software of $26,420.

Cash from financing activities was $3,462,208 for the nine months ended September 30, 2006, whereas such activities provided $189,991 during the same period of 2005. The increase in cash provided by financing activities in 2006 is attributed to $3,700,000 in proceeds from the Preferred Stock Purchase Agreement and the issuance of $35,720 of Common Stock. It is offset by the repayment of $12,424 of capital lease obligations and the repayment of $261,088 of loans payable.

Accounts receivable at September 30, 2006, was $1,230,774 as compared to $686,164 at December 31, 2005, an increase of approximately 79%. Days of sales outstanding were 71 days for the nine months ended September 30, 2006 compared with 42 days for the year ended December 31, 2005. The increase in accounts receivable is due to the acquisition of $312,852 of accounts receivable from Vanta and Carekeeper. and an increase of $231,758 in HQS customers. At September 30, 2006, Amedisys, Inc accounted for 49% of the accounts receivable. As disclosed under “Risk Factors,” the loss of Amedisys would materially decrease our revenues.

Software development cost, net of accumulated amortization, was $3,741,259 at September 30, 2006 compared to $218,310 at December 31, 2005. The accumulated amortization at September 30, 2006 and December 31, 2005 was $2,273,614 and $1,590,830, respectively. The increase in software development is primarily attributable to the VHT and CKS acquisitions.

Other assets at September 30, 2006 were $592,256 compared to $333,924 at December 31, 2005. These amounts consisted of Property and equipment, net of depreciation, of $284,061 and $228,956, prepaid expenses and current assets of $213,534 and $81,484, security deposits of $23,484 and $23,484, and long term receivable from stockholder of $71,177 and $0, at September 30, 2006 and December 31, 2005, respectively.

Accounts payable and accrued expenses at September 30, 2006 and December 31, 2005 were $558,152 and $249,859, respectively.

Item 3. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our chief executive officer and chief financial officer concluded that, as of such date, we had corrected a material weakness associated with separation of duties due to the hiring of an additional full time employee in our finance department. Management decided that the risks associated with this weakness along with the increased work load with the acquisition of VHT and CKS justified the expense associated with retaining an additional employee. We recruited a financial analyst to provide further separation of duties and to produce additional management reports.

Changes in Internal Control

There has been no change in our internal control over financial reporting, except for the addition of the additional FTE enabling us to separate duties such as cash receipts and accounts receivable, identified in connection with the quarterly evaluation that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Notwithstanding the above, our chief executive officer and chief financial officer have concluded that, as of September 30, 2006, we have a material weakness associated with the inadequacy of our accounting software to handle consolidation of multiple entities causing us to extract data into spreadsheets for manual intervention. Management is currently evaluating other accounting software that would eliminate this weakness and anticipates making a decision on the the acquisitions and this accounting software in 2007. In the interim we are compensating with additional variance analysis to actual performance and budget.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Incident to our business activities, we may at times be parties to legal proceedings, lawsuits and claims. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Management believes at this time there are no ongoing matters which will have a material adverse effect upon our consolidated annual results of operations or cash flows, or our financial position.

Item 2. Unregistered Sales of Equity Securities and use of Proceeds

None.

As of September 30, 2006, 436,125 options were issued and there were 63,875 authorized but unissued stock options under the 2003 Management and Director Equity Incentive Compensation Plan..

Item 3. Defaults upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Documents filed as part of this Form 10-QSB.

31.1

Rule 13a-14(a)/15d-4(a) Certification of Principal Executive Officer

31.2

Rule 13a-14(a)/15d-4(a) Certification of Principal Financial Officer

32.1

Section 1350 Certification of Principal Executive Officer

32.2

Section 1350 Certification of Principal Financial Officer

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 14, 2006


	HEALTH SYSTEMS SOLUTIONS, INC.

	By:	/s/ B. M. Milvain
		B. M. Milvain, President Principal Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on November 14, 2006.

SIGNATURE TITLE

/s/ B. M. Milvain President and Director

B. M. Milvain

/s/ Susan Baxter Gibson Principal Financial Officer

Susan Baxter Gibson

Health Systems Solutions (HSSO) Inactive 10QSB2006 Q3 Quarterly report (small business)