U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

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

For the quarterly period ended March 31, 2005

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

For the transition period from to

Commission file number 0-17192

REVCARE, INC.

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

Nevada		84-1061382
(State or other jurisdiction of incorporation of organization)		(I.R.S. Employer Identification No.)

5400 Orange Avenue, Suite 200, Cypress, CA 90630

(Address of principal executive offices)

Issuer’s telephone number (714) 995—0627

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 ý No o

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: As of May 13, 2005 the issuer had 21,526,909 shares of common stock outstanding.

Transitional Small Business Disclosure Format (Check one): Yes o No ý

REVCARE, INC.

FORM 10-QSB

INDEX

PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Balance Sheet as of March 31, 2005 (unaudited)

	Condensed Consolidated Statements of Operations for the six - month periods ended March 31, 2005 and 2004 (unaudited)

	Condensed Consolidated Statements of Operations for the three - month periods ended March 31, 2005 and 2004 (unaudited)

	Condensed Consolidated Statements of Cash Flows for the six - month periods ended March 31, 2005 and 2004 (unaudited)

	Notes to Condensed Consolidated Financial Statements (unaudited)

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Controls and Procedures

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings

Item 2.	Changes in Securities and use of proceeds

Item 3.	Defaults Upon Senior Securities

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

Item 5.	Other Information

Item 6.	Exhibits and Reports on Form 8-K

REVCARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

March 31, 2005

(UNAUDITED)

ASSETS
Current assets:
Cash	$	89,131
Restricted cash	1,279,707
Accounts receivable, net of allowance for doubtful accounts of $189,713	1,055,849
Prepaid expenses and other	347,584

Total current assets	2,772,271

Goodwill	6,865,293
Property and equipment, net	2,421,191
Note receivable from officer	100,000
Employee advances	90,000

Total assets	$	12,248,755

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Bank overdraft	$	3,976
Accounts payable	1,223,825
Accounts payable to a related party	49,042
Collections payable to customers	1,849,367
Accrued liabilities	1,317,743
Lines of credit	322,017
Notes payable	625,000
Current portion of notes payable to vendors	17,217
Current portion of capital lease obligations	94,891
Current portion of notes payable to related parties	4,656,487
Notes payable to Lighthouse	272,173
Current portion of financing obligation	396,881

Total current liabilities	10,828,619

Notes payable to vendors, less current portion	153,024
Capital lease obligations, less current portion	58,806
Notes payable to related parties, less current portion	280,616
Financing obligation, less current portion	4,741,561

Total liabilities	16,062,626

COMMITMENTS AND CONTINGENCIES (Note 10)

SHAREHOLDERS’ EQUITY (DEFICIT):
Series A convertible, redeemable preferred stock, $0.001 par value, stated at $2 liquidation preference per share, 5,000,000 shares authorized; 345,000 shares issued and outstanding	690,000
Common stock, $0.001 par value; 55,000,000 shares authorized; 21,526,909 shares issued and outstanding	21,520
Paid-in capital	10,658,282
Accumulated deficit	(15,133,673		)
	(3,763,871		)
Less common stock in treasury at cost, 33,000 shares	(50,000		)

Total shareholders’ equity (deficit)	(3,813,871		)

	$	12,248,755

The accompanying notes are an integral part of this condensed consolidated financial statement.

REVCARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

	2005			2004
REVENUES
Service fees	$	3,634,491		$	3,815,524
Sale of portfolio receivables	50,431			—
	3,684,922			3,815,524

OPERATING EXPENSES:
Salaries, wages and related benefits	1,901,309			2,197,161
Other operating expenses	537,769			527,860
Selling, general and administrative	1,460,329			1,428,290
Depreciation and amortization	149,550			188,903
	4,048,957			4,342,214
OPERATING LOSS	(364,035		)	(526,690		)
OTHER INCOME (EXPENSE):
Interest expense, net	(453,426		)	(466,127		)
Rental operations, net	49,078			40,191
	(404,348		)	(425,936		)

LOSS BEFORE INCOME TAXES	(768,383		)	(952,626		)
INCOME TAX PROVISION	—			—

NET LOSS	$	(768,383	)	$	(952,626	)

BASIC AND DILUTED LOSS PER SHARE:	$	(0.04	)	$	(0.04	)

Weighted average shares used in all calculations (basic and diluted)	21,526,909			21,526,909

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

REVCARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

	2005			2004
REVENUES
Service fees	$	2,009,277		$	1,850,886
Sale of portfolio receivables	13,431			—
	2,022,708			1,850,886

OPERATING EXPENSES:
Salaries, wages and related benefits	993,513			1,056,238
Other operating expenses	245,552			288,582
Selling, general and administrative	680,214			766,893
Depreciation and amortization	66,143			92,396
	1,985,422			2,204,109
OPERATING INCOME (LOSS)	37,286			(353,223		)
OTHER INCOME (EXPENSE):
Interest expense, net	(227,390		)	(230,156		)
Rental operations, net	1,962			18,556
	(225,428		)	(211,600		)

LOSS BEFORE INCOME TAXES	(188,142		)	(564,823		)
INCOME TAX PROVISION	—			—

NET LOSS	$	(188,142	)	$	(564,823	)

BASIC AND DILUTED LOSS PER SHARE:	$	(0.01	)	$	(0.03	)

Weighted average shares used in all calculations (basic and diluted)	21,526,909			21,526,909

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

REVCARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations	$	(768,383	)	$	(952,626	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	149,550			188,903
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, net	(90,588		)	543,863
Decrease (increase) in prepaid expenses and other	30,922			(47,604		)
Increase in accounts payable	108,365			396,889
Increase in accounts payable to a related party	731			23,256
(Decrease) increase in collections payable to customers	(24,814		)	61,904
Increase (decrease) in accrued liabilities	379,290			(103,419		)

Net cash (used in) provided by operating activities	(214,927		)	111,166

CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in restricted cash	52,951			5,891
Disposal (purchases) of property and equipment, net	300			(2,900		)

Net cash provided by investing activities	53,251			2,991

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in balance of lines of credit	45,733			(355,953		)
Proceeds from note payable from bank	—			300,000
Principal payments on notes payable to vendors	(16,697		)	—
Principal payments on financing obligation	(191,066		)	(181,677		)
Increase in notes payable to Lighthouse	11,898			250,015
Proceeds from related party notes payable	257,049			150,000
Principal payments on notes payable from bank	—			(78,750		)
Principal payments on related party notes payable	(83,423		)	(150,000		)
Principal payments on capital lease obligations	(23,408		)	(47,835		)
Decrease in bank overdraft	(14,087		)	(2,876		)

Net cash used in financing activities	(14,001		)	(117,076		)

NET DECREASE IN CASH	(175,677		)	(2,919		)

CASH, at beginning of period	264,808			125,737

CASH, at end of period	$	89,131		$	122,818

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING ACTIVITIES:
Interest paid	$	353,637		$	234,182
Interest payable converted to debt	18,947			$	—

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

REVCARE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2005

(UNAUDITED)

1. Quarterly Information

The accompanying condensed consolidated financial statements have been prepared in accordance with Securities and Exchange Commission requirements for interim financial statements. Therefore, they do not include all disclosures that would be presented in the Annual Report on Form 10-KSB of RevCare, Inc., a Nevada corporation (together with its subsidiaries, the Company). These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s 2004 Annual Report on Form 10-KSB.

The information furnished reflects all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of consolidated financial position and consolidated results of operations for the interim periods. The operating results are not necessarily indicative of results to be expected for the year ending September 30, 2005.

2. Organization and Basis of Presentation

RevCare, Inc. (formerly known as Cypress Financial Services, Inc.) provides accounts receivable management, administration, and debt collection services primarily to health care providers and consumer credit issuers.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of obligations in the normal course of business. The Company generated net losses of $2,034,380 for fiscal year 2004 and $768,383 and $188,142 for the six months and quarter ended March 31, 2005, respectively. In addition, the Company had total shareholders’ deficit of $3,813,871 and a working capital deficit of $8,056,348 at March 31, 2005. The working capital deficit includes $3,520,235 of principal and accumulated interest that the Company owes to its largest shareholder, FBR, which has provided funding to the Company in the past. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. The Company continues to initiate operational changes and seek financing transactions designed to meet the Company’s liquidity requirements.

Management believes that the recent losses are primarily attributable to a decrease in revenues from its service lines which exceeded significant decreases in operating costs. The Company has lost more clients than it gained in 2005. The Company��s cash balances may be diminished during 2005 due to many factors, including the use of cash for operations, changes in working capital, capital expenditures, repayment of outstanding notes payable and related interest and other factors. The number of major receivable management contracts for the Company in 2005 is expected to be a little higher than 2004 and we expect this trend to continue. However, implementation and installation costs of new contracts will negatively impact the Company’s cash balances. Despite these factors, the Company believes that available funds and cash flows expected to be generated by current operations will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for its operating segments for at least the next twelve months. However, the Company will not have sufficient cash to repay non-operating liabilities (primarily the Notes Payable and Financing Obligations) and credit facilities that will be due during the next twelve months.

The Company will be required to consider other financing alternatives during the next twelve months or thereafter as a result of future business developments, including any acquisitions of business assets, any shortfall of cash flows generated by future operations in meeting the Company’s ongoing cash requirements, or if the Company was unable to renew or replace the current credit facility after its expiration in February 2006. Such financing alternatives could include selling additional equity or debt securities, obtaining long or short-term credit facilities, or selling operating assets. No assurance can be given, however, that the Company could obtain such financing on terms favorable to the Company or at all. Any sale of additional common stock or convertible equity or debt securities would result in additional dilution to the Company’s shareholders. As a component of the process of requesting any additional financing that may be required, management may approach FBR. However, there can be no assurance that such financing could be arranged on terms satisfactory to us or FBR, or at all.

3. Summary of Significant Accounting Policies

a. Principles of Consolidation

The condensed consolidated financial statements include the accounts of RevCare, Inc. and its wholly owned subsidiaries. All significant inter-company accounts have been eliminated.

b. Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates.

c. Revenue Recognition

i. Service Fees

The Company provides collection, auditing, billing and services for entities primarily in the healthcare industry for a fee. Revenue recognition varies between the business segments based upon the services provided.

Revenues from the delinquent debt and insurance collection practices are based on a percentage of total collections per each contract. Such revenues are recognized upon receipt of cash from the third-party payers that the Company collects from on behalf of its client.

Revenues from the auditing and billing divisions are based on respective contractual percentage of payments received by our clients. Customers, comprised mostly of insurance companies, generally make payments to our clients who then report such amounts to the Company. The Company recognizes revenues based on such payment reports.

ii. Sale of Portfolio Receivables and Securitized Residual Interest

We previously purchased charged-off accounts receivable portfolios. Collections from these portfolios represented a portion of our revenues. Portions of these portfolios were also sold to provide additional revenues. We discontinued purchasing these portfolios in 1999 and subsequent to September 30, 2001, we sold our remaining portfolios and assets included in the Company’s 1998 securitization. The terms of the sale included an immediate payment of $300,000 and a contingency payment of up to $350,000. As of March 31, 2005, the Company has received additional consideration of $174,565 from the buyer for collections received through March 31, 2005 that were subject to the contingency payment. The amount that was recognized as revenue on sale of portfolio receivables in the six and three-months ended March 31, 2005 was $50,431 and $13,431, respectively. Additional receipt of contingent payments will be dependent upon the success of the buyer in its collections; therefore, we are unable to predict the timing of any additional payments.

d. Accounts Receivable and Allowance for Doubtful Accounts

Unbilled receivables primarily relate to the cost of services provided by our managed care unit upon its completion of the work as required by the respective contracts but has not been invoiced at the end of an accounting period. These amounts are subsequently classified as billed receivables when the respective invoices are sent to the clients.

The Company maintains allowances for doubtful accounts for estimated losses resulting from our customer’s inability to make required payments. Management reviews all accounts receivable on a monthly basis. Specific invoices over 60 days are discussed with clients. Based upon historical experience with individual clients, management assesses whether a specific reserve is required for each invoice or client balance.

The Company has generally improved the size and quality of its clients, which has reduced the level of write-offs over the last six months and quarter ended March 31, 2005. The financial condition of a potential client is reviewed to determine credit worthiness. Should a potential client’s credit worthiness come into question, the Company has two options; either reject the engagement or accept the client as a “Net” remit client. Under the “Net” remit option, the Company retains the portion of the collections that represent fees to the Company instead of remitting the entire amount collected and invoicing the client for the fees due.

e. Property and Equipment

Furniture, fixtures and equipment are carried at cost and depreciated using both straight-line and accelerated methods over the estimated useful lives of the assets, which are generally 4 to 7 years. The building is being depreciated over a period of 39 years. Repairs and maintenance are charged to expense as incurred; replacements and improvements are capitalized.

f. Impairment of Long-Lived Assets

The Company assesses the recoverability of its long-lived assets on an annual basis or whenever adverse events or changes in

circumstances or business climate indicate that expected undiscounted future cash flows related to such long-lived assets may not be sufficient to support the net book value of such assets. Such a triggering event could include a significant decrease in the market value of an asset, or a significant change in the extent or manner in which an asset is used or a significant physical change in an asset. If undiscounted cash flows are not sufficient to support the recorded assets, impairment is recognized to reduce the carrying value of the long-lived asset to the estimated fair value. Estimated fair value will be determined by discounting the future expected cash flows using a current discount rate in effect at the time of impairment. Cash flow projections, although subject to a degree of uncertainty, are based on trends of historical performance and management’s estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. Additionally, in conjunction with the review for impairment, the remaining estimated lives of certain of the Company’s long-lived assets are assessed.

g. Collections Payable to Customers

The Company records liabilities for collections received on behalf of its customers as collections payable to customers. Amounts are segregated and held in separate accounts are shown as restricted cash in the accompanying condensed consolidated balance sheet.

Commencing in September 2001, in some cases where California-based delinquent debt collection clients did not have the agreement with the Company which required the Company to maintain the funds collected on the clients’ behalf in a separate account, the Company transferred funds from the client account to its general operating account. In addition, payments to such clients were withheld for 90 to 120 days, and sometimes longer. The Company has relied upon the repeal of previous California statutes requiring segregation of client funds by collection agencies when our client contract did not contain an express provision requiring segregation. In July 2003, the Company determined, despite the lack of clear authority, that the practice of transferring client funds to operating accounts or delay on remitting funds might be deemed a breach of our obligations. Since the Company is unable to determine definitively if this is the case, the Company has taken and is taking additional steps to address this practice. Client funds are no longer transferred to operating accounts for any reason (other than funds owed to the Company for its services to which it is contractually entitled).

h. Fair Value of Financial Instruments

Fair values of financial instruments are estimated using available market information and other valuation methodologies. The fair values of the Company’s financial instruments are estimated to approximate the related book value, unless otherwise indicated.

i. Restricted Cash

Restricted cash is primarily comprised of cash in clients’ trust accounts and lease deposits. As a condition of our lease agreement dated May 21, 2003, we set aside $1,050,000 in a restricted account to collateralize the letters of credit used as deposits to the subsequent lease of the property (see Note 7).

j. Goodwill

Goodwill represents the excess of cost over the fair value of net assets acquired. The carrying value of goodwill is reviewed on a regular basis for the existence of facts or circumstances, both internally and externally, that may suggest impairment. The Company periodically re-evaluates the original assumptions and rationale utilized in the establishment of the carrying value and estimated useful lives of goodwill.

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, “Intangible Assets.” SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Upon adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life but is instead subject to periodic testing for impairment. The Company adopted this Statement and completed its initial impairment test for goodwill as of October 1, 2002. As a result of this assessment, the Company determined that one of its segments, HELP, was impaired and recorded an impairment charge of $1,576,328 in the quarter ended December 31, 2002. The impairment was reported as a cumulative effect of a change in accounting principle.

For the year ended September 30, 2004, the Company recognized a goodwill impairment expense of $625,500 related to the Physician Services segment. There were no goodwill impairment recorded in the six months and quarter ended March 31, 2005.

k. Loss Per Share

The Company reports basic and diluted earnings (loss) per share (EPS) in accordance with SFAS No. 128. Basic EPS is computed by dividing losses available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS is computed by adding to the weighted average number of shares the dilutive effect of common stock equivalents, if any.

For the six and three months ended March 31, 2005 and 2004, the computations of basic and diluted EPS were as follows:

	Six months Ended March 31,
	2005			2004
Net loss	$	(768,383	)	$	(952,626	)
Net loss per share (basic and diluted)	$	(0.04	)	$	(0.04	)
Weighted average shares used in all calculations (basic and diluted)	21,526,909			21,526,909

	Three Months Ended March 31,
	2005			2004
Net loss	$	(188,142	)	$	(564,823	)
Net loss per share (basic and diluted)	$	(0.01	)	$	(0.03	)
Weighted average shares used in all calculations (basic and diluted)	21,526,909			21,526,909

For the periods presented there were no reconciling items in computing the basic and diluted EPS calculations for either the numerator or the denominator.

For the periods ended March 31, 2005 and 2004, the denominator in the diluted EPS computation was the same as the denominator for basic EPS due to the anti-dilutive effects of convertible preferred stock, warrants and stock options on the Company’s net loss. As of March 31, 2005 and 2004, the Company had outstanding warrants, stock options and convertible preferred stock of 2,723,808 and 1,783,808 shares, respectively, that were anti-dilutive and excluded from the computation of dilutive EPS. Additionally, the computation of diluted net income per share excludes the effect of common stock issuable upon conversion of the Convertible Notes (Notes 5 and 6) since their inclusion would also have had an anti-dilutive effect.

l. Income Taxes

The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and the tax basis of assets and liabilities and are measured using the enacted tax rates and laws. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

m. Stock Option Plan

As permitted under SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which amended SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company has elected to continue to account for its stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.” Under APB 25, compensation expense is recognized over the vesting period based on the excess of the fair market value over the exercise price on the date of grant. It is the Company’s policy to issue options at fair market value or at a 10 percent premium over fair market value if the individual is a 10 percent or more shareholder. Since the exercise price meets or exceeds fair market value, there is no compensation expense to be realized.

In 1995, the Company adopted, and the shareholders approved, the 1995 Stock Option Plan (the Plan) which authorized 450,000 stock option grants to purchase the Company’s common stock. In August 1998, the Board of Directors and Shareholders approved a 500,000-share increase to the Plan increasing the total number of shares reserved for issuance pursuant to the Plan to 950,000 shares. During fiscal year 2000, the Board of Directors and Shareholders approved increasing the total number of shares reserved for issuance pursuant to the Plan to 3,250,000 shares.

The Plan provides for the grant by the Company, of options to purchase shares of the Company’s common stock to its officers, directors, employees, consultants and advisors. The Plan provides that it is to be administered by a committee appointed by the Board of Directors (the Committee) all of whom are “disinterested” under 16b-3 of the Securities Exchange Act of 1934, as amended. The Committee has discretion, subject to the terms of the Plan, to select the persons entitled to receive options under the Plan, the terms and conditions on which options are granted, the exercise price, the time period for vesting such shares, the number of shares subject thereto, and whether such options shall qualify as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code, or “non-qualified stock options.”

The Company has granted 3,489,708 options under the Plan, of which 1,510,900 have been forfeited. These options are issued at fair market value or at a 10 percent premium over fair market value if the individual is a 10 percent or more shareholder. All options granted expire ten years from the date of grant. At March 31, 2005, there were 1,271,192 additional shares available for grant under the Plan.

During fiscal year 2004, the Company granted 1,000,000 options to certain employees at an exercise price of $0.50 per share. No compensation expense was recorded.

The fair value of each option grant is estimated on the date of grant using the Black Scholes Option Pricing Model with the following assumptions in 2005 and 2004: weighted average risk-free interest rate of 3.4 and 5.1 percent; a weighted average volatility of 93.5 and 354.9 percent; an expected life of 5 and 5 years respectively; and no expected dividend yield. Under the accounting provisions of SFAS Statement 123, the proforma impact to Net Loss and Earnings Per Share is as follows:

		Six Months Ended March 31,						Three Months Ended March 31,
		2005			2004			2005			2004
Net Loss: As Reported		$	(768,383	)	$	(952,626	)	$	(188,142	)	$	(564,823	)
Less expense recorded in net loss		—			—			—			—
Plus pro forma compensation expense		(656		)	—			(328		)	—

Net Loss:	Pro Forma	$	(769,039	)	$	(952,626	)	$	(188,470	)	$	(564,823	)

Basic EPS:	As Reported	$	(0.04	)	$	(0.04	)	$	(0.01	)	$	(0.03	)
	Pro Forma	$	(0.04	)	$	(0.04	)	$	(0.01	)	$	(0.03	)
Diluted EPS:	As Reported	$	(0.04	)	$	(0.04	)	$	(0.01	)	$	(0.03	)
	Pro Forma	$	(0.04	)	$	(0.04	)	$	(0.01	)	$	(0.03	)

n. Recent Accounting Pronouncements

The FASB has issued Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities” – an interpretation of Accounting Research Bulletin (“ARB”) No. 51. This Interpretation defines a variable interest entity and provides that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity should be included in consolidated financial statements with those of the business enterprise. Furthermore, the FASB indicates that the voting interest approach of ARB No. 51 is not effective in identifying controlling financial interests in entities that are not controllable through voting interest or in which the equity investors do not bear the residual economic risk. This Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. As a result of the issuance of FASB Staff Position FIN 46-6 “Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities,” FIN 46 applies at the end of the interim or annual period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Management adopted this Interpretation effective the end of the three months ended December 31, 2003, which did not have a material effect upon the Company’s consolidated financial statements.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) Share-Based Payment, which addresses the accounting for share-based payment transactions. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires instead that such transactions be accounted and recognized in the statement of income based on their fair value. SFAS No. 123(R) will be effective for public companies that file as small business issuers as of the first interim or annual reporting period that begins after December 15, 2005. SFAS No. 123(R) offers the Company alternative methods of adopting this standard. At the present time, the Company has not yet determined which alternative method it will use and the resulting impact on its financial position or results of operations.

o. Reclassification

Certain amounts in the accompanying fiscal 2004 condensed consolidated financial statements have been reclassified to conform to the fiscal 2005 presentation.

4. Property and Equipment

Property and equipment consists of the following at March 31, 2005:

Land	$	866,575
Building	1,540,577
Equipment and furnishings	1,109,003

	3,516,155
Less - Accumulated depreciation	(1,094,964		)

	$	2,421,191

5. Related Party Transactions

In 1998, as part of Mr. Manny Occiano’s original employment agreement, Mr. Occiano is eligible to participate in the management bonus pool to be established by the Board of Directors and is entitled, during 1999 only, to quarterly advances of $22,500 to be credited against the management bonus when earned. Mr. Occiano received four such advances in 1999 amounting to $90,000. This amount is to be credited against future management bonuses when earned. There have not been any advances made since 1999. Mr. Occiano also received a loan of $100,000 to purchase 66,000 shares of common stock on the open market. The loan is secured by a pledge of the common stock acquired.

In conjunction with the acquisition of Orange County Professional Services, Inc. (OCPS) on August 14, 2000, the Company issued $3,675,000 of secured convertible promissory notes to shareholders and officers of OCPS, one of whom is still an employee of the Company as of March 31, 2005. These notes have been paid and/or amended since that time. The remaining notes bear interest at the prime rate of interest charged by the Company’s lender per annum (5.75% at March 31, 2005) plus 4% payable on September 1, 2005, the maturity date of the notes. The principal balance of these notes at March 31, 2005 was $1,780,412.

On September 28, 2001, the Company entered into a revolving line of credit agreement with two officers of the Company. The agreement permits borrowings up to $350,000 at the bank reference (4.0% at June 30, 2004) rate plus one percent. The line of credit is unsecured and expired in June 2004. As of March 31, 2005, the Company had fully paid its borrowings on this line of credit.

As of March 31, 2005, the total principal balance of the Company’s borrowings from FBR Financial Services Partners, L.P. (FBR), was $3,135,487 under secured convertible notes payable agreements. The significant attributes of these notes include the following:

• The maturity date is September 1, 2005 on notes totaling $2,722,325.

• Interest rates on the notes is the prime rate charged by the Company’s lender (5.75% at March 31, 2005) plus 4% per annum payable on the maturity date.

• All or any portion of the unpaid principal balance and any accrued but unpaid interest outstanding under these Notes may be converted into fully paid and nonassessable shares of capital stock of the Company (the “Stock”) concurrently upon or at any time following a Financing (as defined below) at the option of Holder. The Stock shall have all of the rights, preferences and privileges of the capital stock issued in the Financing. The number of shares of Stock into which these Notes are to be converted shall be determined by dividing said unpaid principal balance and all accrued but unpaid interest by the Conversion Price. The “Conversion Price” shall be determined at such time as the Company closes an equity financing of Stock or debt convertible into Stock with gross proceeds to the Company of least $500,000 (the “Financing”). The Conversion Price shall be the price per share at which the Stock is sold in the Financing or the price at which the debt converts into Stock.

On February 19, March 16, and December 29, 2004, and January 27, 2005, the Company entered into secured convertible notes payable agreements for $100,000, $50,000, $100,000 and $150,000, respectively, with FBR. The notes bear interest at the prime rate, defined as the base rate on corporate loans posted by at least 75% of the nation’s 30 largest banks as recorded in the Wall Street Journal, (5.75% at March 31, 2005) plus four percent (4%), compounded quarterly. The principal and all accrued interest are due on November 1, 2005, the maturity date of the notes. All or any portion of the unpaid principal balance and any accrued but

unpaid interest outstanding under this Note may be converted (the “Optional Conversion”) at any time at the option of the Holder into fully paid and nonassessable shares of capital common stock of the Company (the “Stock”). The number of shares of Stock into which this Note is to be converted shall be determined by dividing said unpaid principal balance and all accrued but unpaid interest by the Conversion Price. The Conversion Price shall be calculated at the time of the Optional Conversion based on a Company valuation of 90% of 12 times the average prior 12 months monthly revenue prior to the Optional Conversion, the result will then be divided by the number of then outstanding shares on a fully converted basis.

The total interest expense on related party notes for the six-month period and quarter ended March 31, 2005 is $227,085 and $108,075, respectively.

The notes are secured by substantially all of the Company’s assets, including the shares in the Company’s subsidiary, Orange County Professional Services, Inc., pursuant to a security agreement.

6. Notes Payable and Lines of Credit

On February 11, 2003, the Company entered into a secured line of credit, which provides borrowing up to $2,500,000 at the bank’s reference rate of prime (the minimum amount this can be according to the terms of the agreement is 4.25% at March 31, 2004) plus 2.5 percent. The line automatically renews upon the one-year anniversary of the execution, and shall continue to renew each subsequent year, unless earlier termination by either parties. The maximum amount we can borrow is contingent on and collateralized by qualified invoices, which will fluctuate from time to time depending on our business volume. The outstanding balance on this line of credit at March 31, 2005 was $322,017, which was the maximum amount available to the Company under this line at that time.

In November 2003, the Company entered into a “Business Financing Modification Agreement” with Bridge bank whereby the Company borrowed $135,000. The amount borrowed increased to $225,000 in January 2004 and the capacity to borrow was increased to $625,000 in February 2004. The proceeds of the note were used for working capital. The agreement, which bears interest at prime as published in the Wall Street Journal Western edition (5.75% at March 31, 2005) plus 4.3%, required the Company to make 12 monthly principal and interest payments of $19,694 through February 2005. Under the Agreement, $625,000 is guaranteed by FBR. The cost to the Company for this guarantee is 8% of the total $625,000 or $50,000 due within 30 days of the end of the term of the note. The draws under these agreements amortize over twelve months. As of August 5, 2004, the Company signed a “Business Financing Modification Agreement” which allows the Company to advance the remaining balance of the $625,000 and only make interest payment each month. The note is due on August 5, 2005.

On February 9, 2004 the Company entered into a secured convertible note payable agreement for $250,000 with the principal owner of Lighthouse. The note bears interest at the prime rate, defined as the base rate on corporate loans posted by at least 75% of the nation’s 30 largest banks as recorded in the Wall Street Journal, (5.75% at March 31, 2005) plus four percent (4%), compounded quarterly. The principal and all accrued interest are due on November 1, 2005, the maturity date of the note. All or any portion of the unpaid principal balance and any accrued but unpaid interest outstanding under this Note may be converted (the “Optional Conversion”) at any time at the option of the Holder into fully paid and nonassessable shares of capital common stock of the Company (the “Stock”). The number of shares of Stock into which this Note is to be converted shall be determined by dividing said unpaid principal balance and all accrued but unpaid interest by the Conversion Price. The Conversion Price shall be calculated at the time of the Optional Conversion based on a Company valuation of 90% of 12 times the average prior 12 months monthly revenue prior to the Optional Conversion, the result will then be divided by the number of then outstanding shares on a fully converted basis.

7. Sale and Leaseback of Building

On May 21, 2003, the Company’s wholly owned subsidiary, Medical Control Services, Inc. (MCI), which held title to our corporate facility completed the sale of the property to SCP Park Meadows, LLC (SCP). On that same date, the Company entered into a Lease Agreement dated May 21, 2003 with SCP (the “Lease”). The net proceeds from the sale of the property, after paying off the existing mortgage on the property and paying commissions and expenses and depositing $1,050,000 to a restricted account to collateralize the letters of credit used as rent deposits related to the subsequent lease of the property, equaled $1,352,361. The transaction was accounted for as a financing transaction with no gain or loss recorded and the proceeds recorded as a liability. The Lease provides, among other things, all of the following:

• a twelve-year term, with two additional renewal options of five years each;

• base rent of $53,937 per month for the first three years of the Lease, with annual adjustments thereafter based on an index, subject to minimum and maximum annual increases;

• a tenant improvement allowance of $50,000;

• the Company has responsibility for various costs, including those associated with maintaining, insuring, repairing and

replacing items on the property;

• security deposits in the form of two irrevocable letters of credits totaling $1,050,000, $400,000 of which is subject to release if we satisfy specified conditions no sooner than 12 months from the date of the transaction, May 21, 2004, the “Initial Release Date”. As of March 31, 2005, the Company did not meet the specified conditions.

• the Company has an option to repurchase the property between the third and fifth years of the Lease term at a purchase price equal to the amount determined by dividing the annual base rent that otherwise would have been payable for the 12 months following the closing of the repurchase of the property by 8.5%; and;

• the Company has an option to terminate the Lease between the third and fifth years of the Lease upon payment of a termination fee equal to 50% of the amount equal to the net present value of the aggregate base rent payments remaining through the Lease, using a discount rate of 8.5%.

8. Income Taxes

Income tax expense for the periods presented is based on the estimated effective tax rate to be incurred for the year. Because certain items of income and expense are not recognized in the same year in the consolidated financial statements of the Company as in its Federal and California tax returns, deferred assets and liabilities are created. Due to the uncertainty of the Company’s ability to realize its deferred tax assets, a valuation allowance for the full amount of net deferred tax assets has been recorded at March 31, 2005.

9. Reportable Business Segments

The following disclosures are intended to present reportable segments consistent with how the chief operating decision maker organizes segments within the Company for making operating decisions and assessing performance. The chief operating decision maker does not use assets to make financial decisions separately within the segments. All assets are consolidated as a whole and are not identified by segments. Presently, the Company is segregated into three divisions, which are as follows:

Physician Services –

This division provides receivable management services to physician service organizations. While the bulk of the services primarily relate to practice support services, this division has also provided consulting services relating to regulatory compliance as well as education and training of physicians with respect to applicable regulatory matters. Practice support services generally include coding, billings, collections and financial reporting of revenue transactions incurred by physician service organization clients. Fees generated from practice support services are either fixed fee arrangements or a percentage of the volume of revenues managed on behalf of the clients. Hourly or per-diem rates for training and consulting service fees are determined based on the nature of the engagement.

Recovery –

This division provides pre-delinquent and delinquent collection services primarily for hospital organizations, financial institutions, and retail organizations. This division specializes in direct collections from patients or consumers. Clients pay the Company a percentage of the amounts collected as fees for this service.

Reimbursement Solutions –

This division specializes in auditing, re-billing, and follow-up collections of reimbursable costs due to hospital organizations from third party payors, which, include among others, Medicare, MediCal, HMO’s, and health insurance organizations. Fees for these services vary from fixed fee arrangements, pre-determined hourly rates, to percentage of revenues generated on behalf of the clients.

Below is a summary of the operating information by segment for the six and three months ended March 31, 2005 and 2004, respectively. The accounting policies used in the disclosure of business segments are the same as those described in the summary of significant accounting policies. Certain assumptions are made concerning the allocations of costs between segments that may influence relative results, most notably, allocations of various types of technology, legal, recruiting and training costs. Management believes that the allocations utilized below are reasonable and consistent with the way it manages the business.

The following table summarizes the results of our reportable segments for the six months ended March 31, 2005 and 2004:

For the six months ended March 31, 2005:

	Recovery				Physician Services					Reimbursement Solutions				Total
Revenue	$	2,217,763	100	%	$	417,257		100	%	$	1,049,902	100	%	$	3,684,922		100	%
Direct Labor	682,827		31	%	281,991			68	%	505,967		48	%	1,470,785			40	%
Indirect Labor	248,698		11	%	113,400			27	%	68,426		7	%	430,524			12	%
Other Expenses	308,599		14	%	119,453			28	%	109,717		10	%	537,769			14	%
Total Expenses	1,240,124		56	%	514,844			123	%	684,110		65	%	2,439,078			66	%

	$	977,639	44	%	$	(97,587	)	-23	%	$	365,792	35	%	$	1,245,844		34	%

Selling, general & administrative expenses														(1,460,329		)	-40	%

Depreciation & amortization														(149,550		)	-4	%

Operating loss														$	(364,035	)	-10	%

For the six months ended March 31, 2004:

	Recovery				Physician Services					Reimbursement Solutions				Total
Revenue	$	2,401,591	100	%	$	625,107		100	%	$	788,826	100	%	$	3,815,524		100	%
Direct Labor	749,164		31	%	467,321			74	%	419,120		53	%	1,635,605			43	%
Indirect Labor	290,768		12	%	135,819			22	%	134,969		17	%	561,556			15	%
Other Expenses	350,625		15	%	136,458			22	%	40,777		5	%	527,860			13	%
Total Expenses	1,390,557		58	%	739,598			118	%	594,866		75	%	2,725,021			71	%

	$	1,011,034	42	%	$	(114,491	)	-18	%	$	193,960	25	%	$	1,090,503		29	%

Selling, general & administrative expenses														(1,428,290		)	-37	%

Depreciation & amortization														(188,903		)	-5	%

Operating loss														$	(526,690	)	-13	%

The following table summarizes the results of our reportable segments for the quarters ended March 31, 2005 and 2003:

For the three months ended March 31, 2005:

	Recovery				Physician Services					Reimbursement Solutions				Total
Revenue	$	1,101,762	100	%	$	199,569		100	%	$	721,377	100	%	$	2,022,708		100	%
Direct Labor	356,436		32	%	131,644			66	%	317,301		44	%	805,381			40	%
Indirect Labor	105,750		10	%	63,231			32	%	19,151		2	%	188,132			9	%
Other Expenses	147,132		13	%	58,603			29	%	39,817		6	%	245,552			12	%
Total Expenses	609,318		55	%	253,478			127	%	376,269		52	%	1,239,065			61	%

	$	492,444	45	%	$	(53,909	)	-27	%	$	345,108	48	%	$	783,643		39	%
Selling, general & administrative expenses														(680,214		)	-34	%
Depreciation & amortization														(66,143		)	-3	%

Operating income														$	37,286		2	%

For the three months ended March 31, 2004:

	Recovery				Physician Services					Reimbursement Solutions				Total
Revenue	$	1,234,576	100	%	$	281,734		100	%	$	334,576	100	%	$	1,850,886		100	%
Direct Labor	392,739		32	%	206,910			73	%	199,237		59	%	798,886			43	%
Indirect Labor	145,683		12	%	49,324			18	%	62,345		19	%	257,352			14	%
Other Expenses	193,068		15	%	69,649			25	%	25,865		8	%	288,582			16	%
Total Expenses	731,490		59	%	325,883			116	%	287,447		86	%	1,344,820			73	%

	$	503,086	41	%	$	(44,149	)	-16	%	$	47,129	14	%	$	506,066		27	%
Selling, general & administrative expenses														(766,893		)	-41	%
Depreciation & amortization														(92,396		)	-5	%

Operating loss														$	(353,223	)	-19	%

10. Commitments and Contingencies

a. Lessee - The Company leases certain office space and equipment under non-cancelable operating and capital leases that expire at various times through fiscal 2015.

b. Lessor - The Company sub-leases a portion of its building to unrelated entities under operating leases which expire at various times through fiscal 2005. The Company leases to several tenants on a month-to-month basis.

c. Employment Agreements - The Company has an employment agreement with its Senior Vice President - Sales which expires on September 1, 2005 (Note 11).

d. Guarantees - The Company indemnifies all directors and officers of the Company and any person who may have been identified by the Board of Directors. The Company is obligated, among other things, to indemnify the directors and officers

of the Company against liabilities arising from their actions in their capacity as directors and officers. The obligation has no maximum and extends into perpetuity. The Company carries Directors and Officers (D&O) insurance of $1,000,000 for the benefit of such persons. Management expects such insurance would cover any costs that might be incurred under the indemnification agreements.

e. Litigation - The Company is involved, from time to time, in litigation that is incidental to its collection business. The Company regularly initiates legal proceedings as a plaintiff in connection with its routine collection activities. In management’s opinion, none of these legal matters individually will have a material adverse effect on the Company’s financial position or the results of its operations.

f. Other – As discussed in Note 3, the practice of transferring funds collected on behalf of certain California-based delinquent debt clients to operating accounts or delay in remitting funds might be deemed a breach of the Company’s obligations. In July 2003, the Company reported that it has discontinued this practice and has taken steps to reduce the collections payable balance. The Company believes that a potential consequence of any such potential breach is that certain of our California-based delinquent debt collection clients may feel damaged and may request compensation. To the extent the Company is unable to reach an agreement with entities that request compensation, such entities may initiate legal efforts to pursue claims against the Company. In connection with the process to reduce the collections payable balance owed to certain of the Company’s California-based delinquent debt collection clients, the Company, as previously reported in 2003, began contacting those clients and started paying this obligation including any related interest. As of March 31, 2005, the Company has reached 568 of 720 of these former clients and paid amounts due to them including interest payments. As of March 31, 2005, we still have to notify and reimburse 196 clients for collections received on their behalf resulting from past practice. Accordingly, $1,059,081 is included in Collections Payable to Customers related to these former clients. This amount includes accrued interest of $99,030. We will continue to reimburse and pay interest on the amounts due to these former clients as funds are available. However, the Company cannot estimate at this time when all liabilities related to this matter can be paid in full.

We have provided copies of our reports on Form 8-K filed on July 10, 2003 and August 15, 2003, respectively, to the Division of Enforcement of the Securities and Exchange Commission. Shortly thereafter, the SEC has notified the Company that it has begun an informal investigation involving the Company. The Company has cooperated with the SEC in this process, but has not heard from them since as to the status of the investigation. No provision has been included in the condensed consolidated financial statements for the impact of an unfavorable outcome, if any, should occur.

11. Subsequent Events

On April 15, 2005, the Company received the proceeds of a secured convertible demand note payable amounting to $400,000 entered into on April 08, 2005 with FBR. The note payable bears interest at the prime rate, defined as the base rate on corporate loans posted by at least 75% of the nation’s 30 largest banks as recorded in the Wall Street Journal, (5.75% at March 31, 2005) plus four percent (4%), compounded quarterly. The principal and all accrued interest are due and payable five business days after the date declared due and payable in writing by the Holder or upon the occurrence of an Event of Default as defined like bankruptcy, incurrence of indebtedness as defined, or sale, merger or similar transaction of all or substantially all of the Company’s assets. All or any portion of the unpaid principal balance and any accrued but unpaid interest outstanding under this Note may be converted (the “Optional Conversion”) at any time at the option of the Holder into fully paid and nonassessable shares of capital common stock of the Company (the “Stock”). The number of shares of Stock into which this Note is to be converted shall be determined by dividing said unpaid principal balance and all accrued but unpaid interest by the Conversion Price. The Conversion Price shall be calculated at the time of the Optional Conversion based on a Company valuation of 90% of 12 times the average prior 12 months monthly revenue prior to the Optional Conversion, the result will then be divided by the number of then outstanding shares on a fully converted basis.

On April 29, 2005, RevCare, Inc. and two of its wholly owned subsidiaries, Orange County Professional Services, Inc. and Impact Seminars & Consulting, Inc., entered into an Exchange Agreement with Robert Perez, Barbara Perez and Impact Professional Services, LLC (collectively, the “Perez’s”) by which RevCare and its subsidiaries sold certain assets relating to operations in Hawaii and in exchange the Perez’s agreement to reduce the amount of debt owed by RevCare by $435,000 under an Amended and Restated Secured Convertible Promissory Note dated August 29, 2003 held by Robert Perez. In addition to the Exchange Agreement, RevCare and its subsidiaries also entered into a Modification Agreement with respect to the aforementioned Note to effectuate the debt reduction, a one year Non-Competition Agreement not to compete for business with the Perez’s in Hawaii, and a one year Non-Solicitation Agreement by which the Perez’s will not solicit any customers of RevCare. Upon the effectiveness of the transfer, our employment relationship with all of the employees of the Hawaii operation, including Mr. Robert Perez, was terminated.

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this report. Certain statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as elsewhere in this Quarterly Report on Form 10-QSB, are forward-looking statements that involve risks and uncertainties. Such forward-looking statements include, without limitation, statements using words such as “may,” “potential,” “expects,” “believes,” “estimates,” “plans,” “intends,” “anticipates,” and similar expressions. These forward-looking statements are subject to risks and uncertainties that could cause actual results to vary materially from those expressed, implied or projected by such statements. Certain factors that might cause a difference as well as other risks are detailed in the Company’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2004. These forward-looking statements speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based.

Results of Operations:

Recovery Operations

Net Fees generated from collection activities on receivables that the Company manages on behalf of fee-for-service clients showed decreases of $183,828 and $132,814 for the six-month period and quarter ended March 31, 2005, respectively as compared to the six-month period and quarter ended March 31, 2004. This decrease is attributable to the decrease of account inventory. Direct Labor showed a decrease of $66,337 and $36,303 for the six and three-month periods ended March 31, 2005 as compared to the same periods ended March 31, 2004 due to the application of initiatives designed to reduce direct operating costs and improve employee productivity during the periods presented which include, among other initiatives, the utilization of offshore processes. Indirect Labor also decreased by $42,070 and $39,933 between the six and three-month periods ended March 31, 2005 as compared to the same periods ended March 31, 2004 for the same reasons. Total labor costs decreased by approximately $108,407 and $76,236 and operating costs decreased by $42,026 and $45,936 between the comparable six-month periods and quarters, respectively. The changes in Net Fees and related expenses resulted in a decrease in contribution from this segment’s operations of approximately $33,395 and $10,642 during the comparable six-month periods and quarters ended March 31, 2005 and 2004.

Physician Services

Revenue received for services to physician service organizations decreased to $417,257 and $199,569 for the six-month period and quarter ended March 31, 2005, as compared to $625,107 and $281,734 the same periods in 2004, due primarily to the reduction in client base in this segment. There were no new contracts signed to replace the void. Accordingly, significant cost reductions were made resulting in a decrease in direct and indirect labor costs of $207,749 and $61,359 between the six-month periods and quarters ended March 31, 2005 and 2004, respectively. Additionally, non-labor operating expenses decreased by $17,005 and $11,046, during the comparable periods for the same reasons. As a result of these changes, losses in this segment decreased to $97,587 as compared to $114,491 for the six-month periods ended March 31, 2005 and 2004. For the quarters ended March 31, 2005 and 2004 loss from segment operations were $53,909 and $44,149, respectively. Management expects to continue further cost reductions in this segment until new clients are obtained.

Reimbursement Solutions

Revenue increased by $261,076 and $386,801 for the six-month period and quarter ended March 31, 2005 as compared to the same period ended March 31, 2004. The increase was primarily due to new inventory of large non-recurring insurance follow-up projects in fiscal year 2005. New clients and projects were also signed during the quarter ended March 31, 2005. We expect to see more revenues generated in the early part of the next quarter as a result of these new clients and projects. Direct and indirect labor increased $20,304 and $74,870, respectively, between the comparable six-month periods and quarters as a result of increases in revenues. Additionally, other operating expenses increased by $68,940 for the six-month period and $13,952 for the quarter ended March 31, 2005 as compared to the same six-month period and quarter ended March 31, 2004 for the reasons discussed above. The changes in Net Fees and related expenses resulted in an increase in contribution from this segment’s operations of approximately $171,832 and $297,979 during the comparable six-month periods and quarters ended March 31, 2005 and 2004.

Selling, General, and Administrative Expenses

Total payroll costs decreased by $13,436 and $7,803 during the six-month period and quarter ended March 31, 2005 as compared to March 31, 2004 as a result of continued implementation of cost reduction initiatives designed to improve the financial performance of the Company. Non-payroll costs increased by $45,476 during the six-month period ended March 31, 2005 as compared to March 31, 2004 due to increases in professional fees.

Depreciation expense decreased by $39,353 and $26,253 for the six-month period and quarter ended March 31, 2005, respectively, as compared to March 31, 2004, as more of the Company’s depreciable assets become fully depreciated. There were no significant additions to depreciable assets in the periods presented. Amortization expense ceased completely due to adoption of SFAS No. 142. Net interest expense decreased by $12,701 and $2,766 for the six-month period and quarter ended March 31, 2005, respectively, as compared to March 31, 2004 due to lower interest rates prevailing during the current period. Income from rental operations remained consistent during the six month-period ended March 31, 2005 and March 31, 2004 but decreased by $16,594 during the comparable three-month periods due to non renewal by certain tenants of their leases.

Liquidity and Capital Resources

Historically, we have financed our operations through cash flows generated by operations and borrowings from credit facilities that are in place. Capital expenditures and investments in new technology have been primarily financed through non-cancelable capital leases, which expire at various times through fiscal year 2006. As of March 31, 2005, our net working capital deficit totaled $8,056,348 and shareholder deficit totaled $3,813,871. The working capital deficit includes $3,520,235 of principal and accumulated interest that we owe on the debt held by FBR, who is also our largest shareholder and has provided funding to the Company in the past. The Company’s cash balances are likely to be diminished during 2005 due to many factors, including the use of cash for operations, changes in working capital, capital expenditures, repayment of outstanding notes payable and related interest and other factors. The number of major receivable management contracts for the Company in 2005 is expected to be a little higher than 2004. However, implementation and installation costs of new contracts will negatively impact the Company’s cash balances. Despite these factors, the Company believes that available funds and cash flows expected to be generated by current operations will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for its operating segments for at least the next twelve months. However, the Company will not have sufficient cash to repay non-operating liabilities (primarily the Notes Payable and Financing Obligations) and credit facilities that will be due during the next twelve months.

The Company will be required to consider other financing alternatives during the next twelve months or thereafter and the timing and extent of the Company’s activities will depend in part on future business developments, including any acquisitions or divestiture of business assets, any shortfall of cash flows generated by future operations in meeting the Company’s ongoing cash requirements, or any inability of the Company to renew or replace the current credit facility after its expiration in February 2006. Such financing alternatives could include selling additional equity or debt securities, obtaining long or short-term credit facilities, or selling operating assets. Any sale of additional common stock or convertible equity or debt securities would result in additional dilution to the Company’s shareholders. As a component of the process of requesting any additional financing that may be required, management may approach FBR. However, there can be no assurance that such financing could be arranged on terms satisfactory to us or FBR, or at all.

Critical Accounting Policies

Revenue Recognition

The Company provides collection, auditing, billing and staffing services for entities primarily in the healthcare industry for a fee. Revenue recognition varies between the business segments based upon the services provided.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from our customer’s inability to make required payments. Management reviews all accounts receivable on a monthly basis. Specific invoices over 60 days are discussed with clients. Based upon historical experience with individual clients, management assesses whether a specific reserve is required for each invoice or client balance.

The Company has generally improved the size and quality of its clients, which has reduced the level of write-offs. The financial condition of a potential client is reviewed to determine credit worthiness. Should a potential client’s credit worthiness come into question, the Company has two options; either reject the engagement or accept the client as a “Net” remit client. Under the “Net” remit option, the Company retains the portion of the collections that represent fees to the Company instead of remitting the entire amount collected and invoicing the client for the fees due.

Impairment of Long-Lived Assets

The Company assesses the recoverability of its long-lived assets on an annual basis or whenever adverse events or changes in circumstances or business climate indicate that expected undiscounted future cash flows related to such long-lived assets may not be sufficient to support the net book value of such assets. Such a triggering event could include a significant decrease in the market value of an asset, or a significant change in the extent or manner in which an asset is used or a significant physical change in an asset. If undiscounted cash flows are not sufficient to support the recorded assets, impairment is recognized to reduce the carrying value of the long-lived asset to the estimated fair value. Estimated fair value will be determined by discounting the future expected cash flows using a current discount rate in effect at the time of impairment. Cash flow projections, although subject to a degree of uncertainty, are based on trends of historical performance and management’s estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. Additionally, in conjunction with the review for impairment, the remaining estimated lives of certain of the Company’s long-lived assets are assessed.

Item 3 Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, of the effectiveness of the Company’s “disclosure controls and procedures” as of the end of the period covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Company’s Chief Executive Officer has concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings. There has been no change in the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Not Applicable

Item 2. Changes in Securities

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

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

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits and Reports on Form 8-K

31.1		CEO Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		CEO Certifications pursuant to 18 U.S.C. Section 1350 as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements 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.

		REVCARE, INC.


Date:	May 13, 2005	By: /s/	Manuel Occiano
			Manuel Occiano
			Chief Executive Officer and
			Acting Chief Financial Officer

Revcare (RVCR) Inactive 10QSB2005 Q2 Quarterly report (small business)

APPLICABLE ONLY TO CORPORATE ISSUERS

REVCARE, INC. AND SUBSIDIARIES