UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-Q

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

                      For Quarter Ended September 30, 2004
                         Commission File Number 0-21177

                           NETSMART TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

                               Delaware 13-3680154
                (State or other jurisdiction of (I.R.S. Employer
              incorporation or organization) Identification Number)

                   3500 Sunrise Highway, Great River, NY 11739
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (631) 968-2000

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes  __ No  X
           ---


Number of shares of common stock outstanding as of October 15, 2004:  5,338,700
                                                                      =========


                                       


Netsmart Technologies, Inc. and Subsidiary

Index

Part I: - Financial Information:

Item 1.  Financial Statements:                                            Page
                                                                          ----


Condensed Consolidated Balance Sheets - September 30, 2004 (Unaudited)
 and December 31, 2003                                                     1-2

Condensed Consolidated Statements of Income - (Unaudited)
 Nine Months Ended September 30, 2004 and 2003 and Three Months
 Ended September 30, 2004 and 2003                                          3

Condensed Consolidated Statements of Cash Flows - (Unaudited)
 Nine Months Ended September 30, 2004 and 2003                             4-5

Condensed Consolidated Statement of Stockholders' Equity - (Unaudited)
 Nine Months Ended September 30, 2004                                       6

Notes to Condensed Consolidated Financial Statements                       7-11

Item 2.  Management's Discussion and Analysis of
 Financial Condition and Results of Operations                            12-24

Item 3.  Quantitative and Qualitative Disclosures About Market Risk         25

Item 4.  Controls and Procedures                                            25

Part II  Other Information

Item 6.  Exhibits and Reports on Form 8-K                                   26






NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------

                                                   September 30,    December 31,
                                                   ------------     -----------
                                                       2004            2003
                                                       ----            ----
                                                    Unaudited
                                                    ---------

Assets:
Current Assets:
        Cash and Cash Equivalents                    $16,505,978   $15,920,993
        Accounts Receivable - Net                      9,247,427     8,004,481
        Costs and Estimated Profits in Excess
          of Interim Billings                          1,650,186     1,817,135
        Deferred taxes                                   918,000       918,000
        Other Current Assets                             301,245       541,458
                                                      ----------    ----------

        Total Current Assets                          28,622,836    27,202,067
                                                      ----------    ----------

Property and Equipment - Net                           2,690,328     2,591,758
                                                      ----------    ----------

Other Assets:
        Software Development Costs - Net               1,219,073     1,087,116
        Customer Lists - Net                           2,332,031     2,701,751
        Deferred taxes less current portion              882,000       882,000
        Other Assets                                      89,846       168,697
                                                      ----------    ----------

Total Other Assets                                     4,522,950     4,839,564
                                                      ----------    ----------

Total Assets                                         $35,836,114   $34,633,389
                                                      ==========    ==========



See Notes to Condensed Consolidated Financial Statements.

                                       1




NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------


                                                                    September 30,     December 31,
                                                                    -------------     ------------
                                                                        2004              2003
                                                                        ----              ----
                                                                     Unaudited
                                                                     ---------
                                                                                 

Liabilities and Stockholders' Equity:
Current Liabilities:
        Current Portion - Long Term Debt                            $    666,667    $    666,667
        Current Portion Capital Lease Obligations                         63,189          61,416
        Accounts Payable                                               1,936,457       1,329,765
        Accrued Expenses                                               1,131,048       2,295,454
        Interim Billings in Excess of Costs and Estimated
          Profits                                                      6,970,837       7,263,285
        Deferred Revenue                                               1,026,092         871,628
                                                                      ----------      ----------

        Total Current Liabilities                                     11,794,290      12,488,215
                                                                      ----------      ----------

        Long Term Debt - Less current portion                            500,026       1,000,020
        Capital Lease Obligations - Less current portion                  38,125          85,982
        Interest Rate Swap at Fair Value                                  24,431          59,068
        Deferred Rent Payable                                            419,507             --   
                                                                      ----------      ----------

        Total Non Current Liabilities                                    982,089       1,145,070
                                                                      ----------      ----------

Commitments and Contingencies

Stockholders' Equity:
        Preferred Stock - $.01 Par Value, 3,000,000
          Shares Authorized; None issued and outstanding                     --              --

        Common Stock - $.01 Par Value; Authorized
          15,000,000 Shares; Issued and outstanding
          5,566,624 and 5,338,700 shares at
          September 30, 2004 and 5,528,247 and 5,304,489
          shares at December 31, 2003                                     55,666          55,282

        Additional Paid in Capital                                    29,637,323      29,010,212
        Accumulated Comprehensive loss - Interest Rate Swap              (24,431)        (59,068)
        Accumulated Deficit                                           (4,895,841)     (6,346,873)
                                                                      ----------      -----------
                                                                      24,772,717      22,659,553
        Less:  cost of shares of Common Stock held
          in treasury - 227,924 shares at September 30, 2004
          and 223,758 at December 31, 2003                            (1,712,982)     (1,659,449)
                                                                      ----------      -----------

        Total Stockholders' Equity                                    23,059,735      21,000,104
                                                                      ----------      ----------

Total Liabilities and Stockholders' Equity                          $ 35,836,114    $ 34,633,389
                                                                      ==========      ==========


See Notes to Condensed Consolidated Financial Statements 


                                       2




NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - (Unaudited)
-------------------------------------------------------------------------------

                                                  Nine months ended               Three months ended
                                                    September 30,                    September 30  
                                               ----------------------           ---------------------
                                               2004              2003           2004              2003
                                               ----              ----           ----              ----
                                                                               

Revenues:
  Software and Related
    Systems and Services:
    General                                    $12,638,623    $12,771,454       $  4,334,656   $  4,509,773
    Maintenance Contract
      Services                                   6,101,765      5,283,395          2,132,857      1,796,190
                                                ----------     ----------         ----------     ----------
    Total Software and Related
      Systems and Services                      18,740,388     18,054,849          6,467,513      6,305,963

  Application Service Provider Services          1,167,297        289,228            425,412        289,228

  Data Center Services                           1,525,048      1,471,785            527,894        512,482
                                                ----------     ----------         ----------     ----------

  Total Revenues                                21,432,733     19,815,862          7,420,819      7,107,673
                                                ----------     ----------         ----------     ----------

Cost of Revenues:
  Software and Related
    Systems and Services:
    General                                      5,795,270      7,703,205          1,957,961      2,518,065
    Maintenance Contract
      Services                                   3,065,395      2,600,031          1,073,140        860,130
                                                ----------     ----------         ----------     ----------

    Total Software and Related
      Systems and Services                       8,860,665     10,303,236          3,031,101      3,378,195

  Application Service Provider Services            683,637        190,295            244,537        190,295

  Data Center Services                             645,490        793,741            214,798        262,065
                                                ----------     ----------         ----------      ---------

  Total Cost of Revenues                        10,189,792     11,287,272          3,490,436      3,830,555
                                                ----------     ----------         ----------     ----------

Gross Profit                                    11,242,941      8,528,590          3,930,383      3,277,118
                                                ----------     ----------         ----------     ----------

Selling, General and
  Administrative Expenses                        5,617,963      5,371,960          1,884,451      1,945,236
Research, Development and Maintenance            3,600,334      1,509,377          1,220,555        566,350
                                                ----------     ----------         ----------     ----------

  Total                                          9,218,297      6,881,337          3,105,006      2,511,586
                                                ----------     ----------         ----------     ----------

Operating Income                                 2,024,644      1,647,253            825,377        765,532

Interest and Other Income                           93,526         52,409             28,574         21,781

Interest and Other Expense                        (104,138)      (150,991)           (26,773)       (49,154)
                                                ----------     ----------         ----------     ----------

Income before Income Tax Expense (Benefit)       2,014,032      1,548,671            827,178        738,159

Income Tax Expense (Benefit)                       563,000       (790,000)           194,000       (808,000)
                                                ----------     ----------         ----------     ----------

  Net Income                                   $ 1,451,032    $ 2,338,671       $    633,178   $  1,546,159
                                                ==========     ==========         ==========     ==========

Earnings Per Share ("EPS") of Common Stock:
  Basic EPS                                    $       .27    $       .56       $        .12   $        .34
                                                ==========     ==========         ==========     ==========

Weighted Average Number of Shares of
  Common Stock Outstanding                       5,329,549      4,159,740          5,338,700     4,512,891
                                                ==========     ==========         ==========    ==========

Diluted EPS                                    $       .26    $       .52       $        .11   $       .33
                                                ==========     ==========         ==========    ==========

Weighted Average Number of Shares of
  Common Stock and Common Stock
  Equivalents Outstanding                        5,544,614      4,468,963          5,547,848     4,706,257
                                                ==========     ==========         ==========    ==========

See Notes to Condensed Consolidated Financial Statements.


                                       3



NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
-------------------------------------------------------------------------------


                                                         Nine Months ended
                                                           September 30,
                                                      2004              2003
                                                      ----              ----
Operating Activities:
  Net Income                                        $ 1,451,032    $ 2,338,671
                                                     ----------     ----------

  Adjustments to Reconcile Net Income
    to Net Cash Provided by Operating Activities:
    Depreciation and Amortization                     1,193,915        870,298
    Provision for Doubtful Accounts                      64,000        125,000
    Amortization of Warrants Issued for Services
      and Costs Related to Warrant Extension                --          20,736
    Deferred Income Taxes                               462,000       (900,000)

 Changes in Assets and Liabilities:
  [Increase] Decrease in:
    Accounts Receivable                              (1,306,946)       692,748
    Costs and Estimated Profits in
     Excess of Interim Billings                         166,949      1,318,397
    Other Current Assets                                240,213       (313,319)
    Other Assets                                         43,851         33,768

 Increase [Decrease] in
  Accounts Payable                                      606,692       (317,103)
  Accrued Expenses                                     (457,125)       551,234
  Interim Billings in Excess of
    Costs and Estimated Profits                        (526,155)       600,795
  Deferred Revenue                                      154,464       (362,117)
  Deferred Rent Payable                                 419,507            --  
                                                     ----------     ----------

 Total Adjustments                                    1,061,365      2,320,437
                                                     ----------     ----------

Net Cash Provided by Operating Activities             2,512,397      4,659,108
                                                     ----------     ----------

Investing Activities:
  Acquisition of Property and Equipment              (1,292,033)      (356,221)
  Capitalized Software Development                     (185,000)           --

  Net Cost of CareNet Acquisition                           --      (1,047,845)
  Net Cost of TxM Acquisition                           (16,263)           --  
                                                     ----------     ----------
  Net Cash Used In Investing Activities              (1,493,296)    (1,404,066)
                                                     ----------     ----------


See Notes to Condensed Consolidated Financial Statements.


                                       4




NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
-------------------------------------------------------------------------------

                                                              Nine Months ended
                                                                September 30,   
                                                           2004               2003
                                                           ----               ----
                                                                     

Financing Activities:
  Payment of Capitalized Lease Obligations              $    (46,084)   $    (30,922)
  Net Proceeds from Stock Options Exercised                  111,962       2,134,766
  Payments of Term Loan                                     (499,994)       (416,661)
  Dividend Paid                                                  --         (441,447)
                                                         -----------     -----------

  Net Cash (Used in) Provided by Financing Activities       (434,116)      1,245,736
                                                         -----------     -----------

  Net Increase in Cash
    and Cash Equivalents                                     584,985       4,500,778

  Cash and Cash Equivalents -
    Beginning of Period                                   15,920,993       7,251,740
                                                         -----------     -----------

  Cash and Cash Equivalents -
    End of Period                                       $ 16,505,978    $ 11,752,518
                                                         ===========     ===========

Supplemental  Disclosure of Cash Flow Information:
  Cash paid during the period for:
    Interest                                            $    107,050    $    153,780
    Income Taxes                                        $    220,520    $     99,587

Non Cash Investing and Financing Activities:
The fair value of the interest rate swap decreased by $34,637 for the nine
months ended September 30, 2004. The fair value of the interest rate swap
decreased by $32,631 for the nine months ended September 30, 2003.

During the nine months ended September 30, 2004, the Company received 4,166
shares of its common stock as consideration for the exercise of certain stock
options. The value of the shares received was $53,533, which was the market
value of the common stock on the date of exercise.

During the nine months ended September 30, 2004, the Company acquired for
$250,000 TxM software and customer lists. The consideration consisted of $16,263
in cash and the assumption of $233,707 for certain liabilities for services to
be performed in the future.


See Notes to Condensed Consolidated Financial Statements.


                                       5



NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-----------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                         
                                         Additional                  Accumulated
                                         ----------                  -----------
                                         Paid-in                     Comprehensive
                                         -------                     -------------
                                         Capital                     Loss                                                 Total
                                         -------                     ----                                                 -----
                      Common Stock       Common        Accumulated   Interest Rate  Comprehensive   Treasury Shares    Stockholders'
                      ------------       ------        -----------   -------------  -------------   ---------------    -------------
                    Shares     Amount    Stock           Deficit     Swap               Income    Shares      Amount      Equity
                    ------     -----     -----           ------      ----               ------    ------      ------      ------
                                                                                           

Balance-
January 1, 2004     5,528,247  $55,282   $29,010,212  $(6,346,873)   $(59,068)     $      --      223,758  $(1,659,449) $21,000,104

Common Stock
Issued - Exercise
of Options             36,377      364       165,111          --          --              --          --           --       165,495

Change in Fair
Value of Interest
Rate Swap                 --       --            --           --       34,637      $   34,637         --           --        34,637

Treasury Shares
from Cashless
Exercise of
Stock Options             --       --            --           --          --              --        4,166      (53,533)     (53,533)

Change in Deferred
Tax Asset
Valuation                 --       --        462,000          --          --              --          --           --       462,000

Net Income                --       --            --     1,451,032         --        1,451,032         --           --     1,451,032
                                                                                    ---------
                                                                                   $1,485,669     
                    ---------   ------    ----------    ---------      ------       =========     -------    --------    ----------
Balance -
September 30, 2004  5,566,624  $55,666   $29,637,323  $(4,895,841)   $(24,431)                    227,924  $(1,712,982) $23,059,735
                    =========   ======    ==========    =========      ======                     =======    =========   ==========


See Notes to Condensed Consolidated Financial Statements.



                                       6





NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


(1)  Financial Statements

The accompanying condensed consolidated financial statements include the
accounts of Netsmart Technologies, Inc. and its subsidiary ("the Company"). All
intercompany balances and transactions have been eliminated in consolidation.

These unaudited, condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. 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. The results of operations for any interim period are not
necessarily indicative of the results of operations to be expected for the
fiscal year. For further information, refer to the consolidated financial
statements and accompanying footnotes included in the Company's annual report on
Form 10-K for the year ended December 31, 2003.


(2)  Earnings Per Share

The following table sets forth the components used in the computation of basic
and diluted earnings per share:

                                    Nine Months Ended September 30,       Three Months Ended September 30,
                                    ------------------------------        --------------------------------
                                        2004              2003                2004            2003
                                        ----              ----                ----            ----
                                                                                  


Numerator:
  Net income                           $1,451,032      $2,338,671         $  633,178        $1,546,159

Denominator:
  Weighted average shares               5,329,549       4,159,740          5,338,700         4,512,891
                                        ---------       ---------          ---------         ---------
  Effect of dilutive securities:
    Employee stock options                215,065         307,086            209,148           193,366
    Stock warrants                            --            2,137                --                -- 
                                        ---------       ---------          ---------         ---------
    Dilutive potential common shares      215,065         309,223            209,148           193,366
                                        ---------       ---------          ---------         ---------

    Denominator for diluted earnings
      per share-adjusted weighted
      average shares after assumed
      conversions                       5,544,614       4,468,963          5,547,848         4,706,257
                                        =========       =========          =========         =========

Options to purchase 300,780 shares of the company's common stock that were
outstanding as of September 30, 2004 were not included in the calculation of
diluted earnings per share for the three months ended September 30, 2004 since
such inclusion would have been antidilutive.


(3)  Stock Options and Similar Equity Instruments

At September 30, 2004, the Company had three stock-based employee compensation
plans. As permitted under Statement of Financial Accounting Standards ("SFAS")


                                       7




No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure",
which amended SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", the Company has elected to continue to follow the intrinsic value
method in accounting for its stock-based employee compensation arrangements, as
defined by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees", and related interpretations including Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of APB No. 25. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation:

                                          Nine Months Ended September 30,       Three Months Ended September 30,
                                          ------------------------------        --------------------------------
                                             2004                 2003             2004                2003
                                             ----                 ----             ----                ----
                                                                                      


Net Income as Reported                    $1,451,032           $2,338,671        $   633,178         $1,546,159

Deduct:  Total stock-based employee
compensation expense determined
under fair value-based method for
all awards, net of related tax effect        738,048              573,649            376,081            275,025
                                           ---------            ---------         ----------          ---------

Pro Forma Net Income                      $  712,984           $1,765,022        $   257,097         $1,271,134
                                           =========            =========         ==========          =========

Basic Net Income Per Share as Reported    $      .27           $      .56        $       .12         $      .34
                                           =========            =========         ==========          =========

Basic Pro Forma Net Income Per Share      $      .13           $      .42        $       .05         $      .28
                                           =========            =========         ==========          =========

Diluted Net Income Per Share as Reported  $      .26           $      .52        $       .11         $      .33
                                           =========            =========         ==========          =========

Diluted Pro Forma Net Income Per Share    $      .13           $      .39        $       .05         $      .27
                                           =========            =========         ==========          =========

The fair value of options at date of grant was estimated using the Black-Scholes
fair value based method with the following weighted average assumptions:
                                                         Nine Months Ended
                                                           September 30,
                                                        2004            2003
                                                        ----            ----
Expected Life (Years)                                      5            5.04
Interest Rate                                              4%              4%
Annual Rate of Dividends                                   0%              0%
Volatility                                                68%             66%

The weighted average fair value of options at date of grant using the fair value
based method during 2004 and 2003 is estimated at $3.95 and $2.38 respectively.


(4)  Income Taxes

The provision for income taxes for the nine months ended September 30, 2004,
consists of a current tax provision of $101,000 and a deferred tax provision of
approximately $462,000. The deferred tax provision was $801,000 based upon
utilization of available net operating loss carry forwards offset by a reduction
in the deferred tax asset valuation allowance of $339,000. Included in the


                                       8


deferred tax provision was a credit to Additional Paid in Capital in the amount
of $462,000, which is related to a component of the net operating loss carry
forwards created as a result of deductions arising from the exercise of options
and warrants. The provision for income taxes for the nine months ending
September 30, 2003, reflects a deferred tax provision of approximately $780,000,
offset by a reduction in the deferred tax asset valuation allowance of the same
amount. During the nine months ended September 2003, the Company recognized an
additional $900,000 benefit from its net operation loss carry forward.


(5)  Stockholders' Equity

During the nine months ended September 30, 2004, options to purchase 38,377
shares were exercised and the Company received gross proceeds of $165,495.
Included in the gross proceeds received from the exercise of options was the
delivery of 4,166 shares of the Company's common stock, which were valued at
$53,533, which was based upon the market price of the common stock on the date
of exercise in accordance with the cashless exercise provisions of the Company's
stock option plans.

Included in the above options exercised were 12,250 options owned by certain of
the Company's officers and members of the Board of Directors, which were
exercised on a cashless basis and represent all cashless exercises during the
nine months ended September 30, 2004.

During the nine months ended September 30, 2004, the Company granted the
following options, under the 2001 Long-Term Incentive Plan, to employees and
certain members of its Board of Directors. For each issue of options granted,
the price per share of each option was equal to the fair market value at the
date of each grant in accordance with the terms of the 2001 Long-Term Incentive
Plan. The options granted to date under the 2001 Long-Term Incentive Plan vest
50% after six months and 100% after one year.

           Number of Shares
           Underlying Options           Date of Grant        Price per Share
           -------------------          -------------        ---------------
                   1,500                April 1, 2004            $13.29
                 299,280                May 13, 2004             $ 8.49
                  95,975                June 18, 2004            $ 8.20


(6)  Operating Segments

The Company currently classifies its operations into three business segments:
(1) Software and Related Systems and Services, (2) Data Center Services and (3)
Application Service Provider ("ASP") Services. Software and Related Systems and
Services is the design, installation, implementation and maintenance of computer
information systems that provide comprehensive healthcare information technology
solutions, including billing, patient tracking and scheduling for inpatient and
outpatient environments, as well as clinical documentation and medical record
generation and management. Data Center Services involves Company personnel
performing data entry and data processing services for customers. ASP Services
involve the Company offerings of its Avatar suite of products, its CareNet
products and InfoScribeR products on a virtual private network or internet
delivery approach, thereby allowing its customers to rapidly deploy products and
pay on a monthly service basis, thus eliminating capital intensive system
requirements. ASP Services is a new segment established as a result of the
CareNet acquisition in June 2003. Prior to the acquisition of Carenet, the
Company's ASP operations were immaterial and were included in Software and
Related Systems and Services. Intersegment sales and sales outside the United
States are not material. Information concerning the Company's business segments
are as follows:

                                       9







                                            Software and                      Application
                                            ------------                      -----------
                                          Related Systems    Data Center    Service Provider
                                          ---------------    -----------    ----------------
                                            and Services       Services         Services        Consolidated
                                            ------------       --------         --------        ------------
                                                                                     

Nine Months Ended September 30, 2004
------------------------------------
Revenue                                    $18,740,388      $ 1,525,048      $ 1,167,297         $21,432,733
Income before income taxes                   1,491,204          547,163          (24,335)          2,014,032
Total identifiable assets at
  September 30, 2004                        30,021,788        2,456,000        3,358,326          35,836,114

Nine Months Ended September 30, 2003
------------------------------------
Revenue                                    $18,054,849      $ 1,471,785      $   289,228         $19,815,862
Income before income taxes                   1,186,233          328,338           34,100           1,548,671
Total identifiable assets at
  September 30, 2003                        23,469,145        1,931,050        2,231,812          27,632,007
 
Three Months Ended September 30, 2004
-------------------------------------
Revenue                                    $ 6,467,513      $   527,894      $   425,412         $ 7,420,819
Income before income taxes                     612,547          205,436            9,195             827,178

Three Months Ended September 30, 2003
-------------------------------------
Revenue                                    $ 6,305,963      $   512,482      $   289,228         $ 7,107,673
Income before income taxes                     561,806          142,253           34,100             738,159


(7)  Reclassifications

Certain accounts in the prior year financial statements have been reclassified
for comparative purposes to conform to the presentation in the current year
financial statements. These reclassifications have no effect on previously
reported income.


(8)  Commitment and Contingencies

Effective April 1, 2004, the Company entered into revised employment agreements
with Messrs. James L. Conway, Gerald O. Koop and Anthony F. Grisanti. The terms
and conditions of the revised contracts are identical in all material respects
to the previous contracts except that (i) the term of each individual's contract
was extended by one year, so that Messrs. Conway and Grisanti's contracts will
expire on December 31, 2006 and Mr. Koop's contract will expire on December 31,
2005 and (ii) the revised contracts do not provide for a five-year consulting
period following each individual's respective term of employment during which
such individual would have been entitled to compensation of $75,000 per year.

Effective April 1, 2004, the Company adopted an Executive Retirement,
Non-Competition and Consulting Plan which was subsequently amended August 5,
2004 effective April 1, 2004, pursuant to which, following their retirement,
selected officers will be entitled to receive a minimum payment of approximately
$85,000 per year for a period of six years provided that such officers provide a
minimum amount of consulting days each month as well as agree to certain


                                       10


covenants not to compete. The annual payments are subject to 10% increases up to
a maximum of $136,893 per year. Pursuant to the Executive Retirement,
Non-Competition and Consulting Plan, the selected officers are also entitled to
receive health benefits for life, provided that there are no breaches of the
covenants not to compete.

Mr. Phillip's employment contract expired on December 31, 2003 and he retired
effective April 1, 2004. Pursuant to the terms of the Company's Executive
Retirement, Non-Competition and Consulting Plan, Mr. Phillips will receive
$85,000 per year for each of the next six years.


                                       11



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

Overview

Our operations are grouped into three segments:
   *    Software and Related Systems and Services
   *    Data Center (service bureau) Services
   *    Application Service Provider Services (ASP)

Software and Related Systems and Services is the design, installation,
implementation and maintenance of computer information systems that provide
comprehensive healthcare information technology solutions, including billing,
patient tracking and scheduling for inpatient and outpatient environments, as
well as clinical documentation and medical record generation and management.
Data Center Services involves our personnel performing data entry and data
processing services for customers. Application Service Provider services
involves us offering our Avatar suite of products, our CareNet products and
InfoScribeR products on a virtual private network or through an internet
delivery approach, thereby allowing our customers to deploy products and pay on
a monthly service basis, thus eliminating capital intensive system requirements.
Prior to the acquisition of CareNet, our ASP operations were immaterial and were
included in Software and Related Systems and Services.


Nine Months Ended September 30, 2004 and 2003

Results of Operations

Fixed price software development contracts and licenses accounted for 35% and
44% of consolidated revenue for the nine months ended September 30, 2004 and
2003, respectively. This decrease is the result of more labor revenue being
generated on an as incurred basis, as well as a change in the overall mix of our
revenue components. Our recurring revenue components, which include our
maintenance contract services and our Data Center and ASP services, accounted
for 41% of our consolidated revenue for the nine months ended September 30, 2004
compared to 36% of consolidated revenue for the nine months ended September 30,
2003. We recognize revenue for fixed price contracts on the estimated percentage
of completion basis. Since the billing schedules under the contracts differ from
the recognition of revenue, at the end of any period, these contracts generally
result in either costs and estimated profits in excess of billing or billing in
excess of costs and estimated profits. Revenue from fixed price software
development contracts is determined using the percentage of completion method
which is based upon the time spent by our technical personnel on a project. As a
result, during the third and fourth quarters, when many of our employees are on
vacation and holidays, our revenue is affected. Our time spent on projects
during the second half of the year can generally range from 1% to 10% less than
time spent on projects during the first half of the year.

Our total revenue for the nine months ended September 30, 2004 (the "September
2004 period") was $21,433,000, an increase of $1,617,000, or 8%, from our
revenue for the nine months ended September 30, 2003 (the "September 2003
period"), which was $19,816,000.

Revenue from contracts with state and local government agencies represented 49%
of revenue in the September 2004 period and 59% of revenue in the September 2003
period. This decrease is the result of the substantial completion towards the
end of 2003 of one state contract and two county contracts.


Software and Related Systems and Services

Our Software and Related Systems and Services revenue for the September 2004
period was $18,740,000, an increase of $685,000, or 4%, from our revenue for the

                                       12


September 2003 period, which was $18,055,000. Software and related systems and
services revenue is comprised of turnkey systems labor revenue, revenue from
sales of third party hardware and software, license revenue, maintenance revenue
and revenue from small turnkey systems.

The largest component of revenue was turnkey systems labor revenue, which
increased to $7,134,000 in the September 2004 period from $6,842,000 in the
September 2003 period, reflecting a 4% increase. Turnkey systems labor revenue
refers to labor associated with turnkey installations and includes categories
such as training, installation, project management and development. This
increase was substantially the result of an increased staff working on turnkey
labor contracts. Labor rate price changes from the September 2004 period to the
September 2003 period resulted in a 2% increase in the average daily billing
rate and accounted for approximately $80,000, or 27%, of the total turnkey
systems labor increase. Revenue from third party hardware and software decreased
to $3,245,000 in the September 2004 period, from $3,470,000 in the September
2003 period, which represents a decrease of 7%. Sales of third party hardware
and software, such as pharmacy and database software, are made in connection
with the sales of turnkey systems. These sales are typically made at lower gross
margins than our human services revenue. During the September 2004 period, we
did not sell and perform on as many contracts containing such third party items.
License revenue decreased to $1,587,000 in the September 2004 period, from
$1,877,000 in the September 2003, period reflecting a decrease of 16%. License
revenue is generated as part of a sale of a human services information system
pursuant to a contract or purchase order that includes delivery of the system
and maintenance. We did not sell and perform on as many contracts containing
license revenue in the September 2004 period as we did in the September 2003
period. In addition, in order to encourage our existing customers to upgrade
from our old product to our new Avatar product, we discounted the license fees
to our existing clients. Maintenance revenue increased to $6,102,000 in the
September 2004 period from $5,283,000 in the September 2003 period, reflecting
an increase of 16%. As turnkey systems are completed, they are transitioned to
the maintenance division, thereby increasing our installed base. Revenue from
the sales of our small turnkey division increased to $673,000 in the September
2004 period from $583,000 in the September 2003 period, reflecting an increase
of 15%. This increase is the result of the introduction of our new Avatar
Addictions Management product into the market place during the latter part of
2003. Small turnkey division sales relate to turnkey contracts that are less
than $50,000 and are usually completed within one month.

Gross profit increased to $9,880,000 in the September 2004 period from
$7,752,000 in the September 2003 period, reflecting an increase of 28%. Our
gross margin percentage increased to 53% in the September 2004 period from 43%
in the September 2003 period. Our gross margins improved as a result of certain
of our staff being redirected towards product enhancement efforts resulting in
their direct costs and associated overhead being charged to Research,
Development and Maintenance costs rather than being included in Cost of
Revenues. Our gross margin also increased as a result of improved margins on our
turnkey labor revenue, which was the result of improved efficiency on our fixed
price contracts.

Data Center Services (Service Bureau)

Data center clients typically generate approximately the same amount of revenue
each year. We bill on a transaction basis or on a fixed fee arrangement.
Historically, each year we increase the transaction or fixed fees by an amount
that approximates the New York urban consumer price index increase. The data
center revenue increased to $1,525,000 in the September 2004 period from
$1,472,000 in the September 2003 period, representing an increase of $53,000, or
4%. This increase was due to an increase in the client base as well as increases
in pricing.

Gross profit increased to $880,000 in the September 2004 period from $678,000 in
the September 2003 period, reflecting an increase of 30%. Our gross margin
percentage increased to 58% in the September 2004 period from 46% in the
September 2003 period. This increase was the result of the increase in revenue
as well as a reduction in costs of approximately $148,000. The major areas of
cost reductions were in the area of payroll and fringe benefits in the amount of
$29,000, support overhead in the amount of $53,000, facility costs in the amount

                                       13


of $18,000,depreciation in the amount of $9,000, supplies in the amount of
$9,000 and advertising in the amount of $5,000..

Application Service Provider Services ("ASP")

ASP Services involves the offering of our Avatar suite of products, our CareNet
products and our InfoScribeR products on a virtual private network or internet
delivery approach, thereby allowing our customers to rapidly deploy products and
pay on a monthly service basis, thus eliminating capital intensive system
requirements. This is the first year that we have accounted for ASP Services as
a segment. This is the result of our acquisition of CareNet on June 25, 2003.
Prior to that time, our ASP operations were immaterial.

Revenue for the September 2004 period was $1,167,000, which consisted of revenue
from our CareNet operations of $617,000, revenue from our InfoScribeR operations
of $167,000 and revenue from our Avatar ASP services operations of $383,000.
Revenue for the September 2003 period was $289,000, which consisted of revenue
from our CareNet operations of $190,000 and revenue from our Avatar ASP services
operations of $99,000.

Gross profit for the September 2004 period was $484,000 and our gross margin
percentage was 41%. The gross profit for the September 2003 period was $99,000
and our gross margin percentage was 34%. Because the ASP operations were in
their infancy during the September 2003 period, any comparisons between the
periods would not be meaningful.


Operating Expenses

Selling, general and administrative expenses were $5,618,000 in the September
2004 period, reflecting an increase of $246,000, or 5%, from $5,372,000 in the
September 2003 period. The increases were: advertising and promotion, which
increased by $52,000; trade show costs, which increased by $38,000; commissions,
which increased by $87,000; depreciation expense which increased by $263,000;
amortization of the CareNet acquisition costs, which was $154,000; accounting
costs, which increased by $36,000; consulting which increased by $58,000; and
general insurance costs, which increased by $46,000. The cost increases were
partially offset by reductions in: bad debt expense, which decreased by
$208,000; legal costs which decreased by $30,000 and the provision for bonuses
which decreased by $252,000.

We incurred research, development and maintenance expenses of $3,600,000 in the
September 2004 period, an increase of 139% from $1,509,000 in the September 2003
period. During 2004, we invested in infrastructure to improve the way we support
our customers and products. These changes related to redirecting personnel that
were previously employed performing actual program "bug" fixing procedures,
which would be included in costs of goods sold to our research, development and
maintenance area. These personnel now perform product version control, which
includes design, programming, testing, documentation and quality control of our
products. These efforts accounted for a substantial increase in our research,
development and maintenance expenses. The increase in research, development and
maintenance expense is also the result of continuing investment in product
enhancement and extensions. These extensions include the development of new
software modules which addresses Federal reporting requirements, as well as
continued investment in core products. These amounts have been appropriately
accounted for in accordance with SFAS No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed."

Interest and other expense was $104,000 in the September 2004 period, a decrease
of $47,000, or 31%, from the $151,000 in the September 2003 period. This
decrease is the result of the completion of the amortization of the financing
costs associated with our loan agreement, which was amortized over a three year
period, as well as reduced borrowing during the September 2004 period under our
loan with Fleet Bank. This decrease was partially offset by an increase in
borrowing related to the promissory note issued to Shuttle Data Systems Corp. in

                                       14


connection with our acquisition of CareNet.

Interest income was $94,000 in the September 2004 period, an increase of
$42,000, or 81%, from the $52,000 in the September 2003 period. Interest income
is generated from short-term investments made with a substantial portion of the
proceeds received from the term loan, as well as cash generated from operations
and the proceeds of the exercise of options and warrants.

We have a net operating loss tax carry forward of approximately $4.4 million at
September 30, 2004. In the September 2004 period, we recorded a current income
tax expense of $101,000, which related to various state and local taxes, as well
as a provision for the Federal alternative minimum tax. The income tax provision
was increased by a deferred tax provision of $462,000. The deferred tax
provision was $801,000 based on utilization of net operating loss carry forwards
offset by a reduction in the deferred tax asset valuation allowance of $339,000.
In the September 2003 period, we recorded a current income tax expense of
$110,000, which related to various state and local taxes, as well as a provision
for the Federal alternative minimum tax. The current income tax provision was
reduced by $780,000 as a result of the use of available net operating losses.
The deferred tax asset and the valuation allowance were reduced by the same
amount. We also re-evaluated the deferred tax asset valuation allowance and
further reduced the allowance by $900,000, which was recorded as a tax benefit.

As a result of the foregoing factors, in the September 2004 period we had net
income of $1,451,000, or $.27 per share (basic) and $.26 per share (diluted).
For the September 2003 period, we had net income of $2,339,000, or $.56 per
share (basic) and $.52 per share (diluted).

Three Months Ended September 30, 2004 and 2003

Results of Operations

Fixed price software development contracts and licenses accounted for 35% and
39% of consolidated revenue for the three months ended September 30, 2004 and
2003, respectively. This decrease is the result of more labor revenue being
generated on an as incurred basis, as well as a change in the overall mix of our
revenue components. Our recurring revenue components, which include our
maintenance contract services and our Data Center and ASP services, accounted
for 42% of our consolidated revenue for the three months ended September 30,
2004 compared to 37% of consolidated revenue for the three months ended
September 30, 2003. We recognize revenue for fixed price contracts on the
estimated percentage of completion basis. Since the billing schedules under the
contracts differ from the recognition of revenue, at the end of any period,
these contracts generally result in either costs and estimated profits in excess
of billing or billing in excess of cost and estimated profits. Revenue from
fixed price software development contracts is determined using the percentage of
completion method which is based upon the time spent by our technical personnel
on a project. As a result, during the third and fourth quarters, when many of
our employees are on vacation and holidays, our revenue is affected. Our time
spent on projects during the second half of the year can generally range from 1%
to 10% less than time spent on projects during the first half of the year.

Our total revenue for the three months ended September 30, 2004 (the "September
2004 quarter") was $7,421,000, an increase of $313,000, or 4%, from our revenue
for the three months ended September 30, 2003 (the "September 2003 quarter"),
which was $7,108,000.

Revenue from contracts with state and local government agencies represented 47%
of revenue in the September 2004 quarter and 54% of revenue in the September
2003 quarter. This decrease is the result of the substantial completion towards
the end of 2003 of one state contract and two county contracts.


                                       15


Software and Related Systems and Services

Our Software and Related Systems and Services revenue for the September 2004
quarter was $6,468,000, an increase of $162,000, or 3%, from our revenue for the
September 2003 quarter, which was $6,306,000. Software and related systems and
services revenue is comprised of turnkey systems labor revenue, revenue from
sales of third party hardware and software, license revenue, maintenance revenue
and revenue from small turnkey systems.

The largest component of revenue was turnkey systems labor revenue, which
increased to $2,426,000 in the September 2004 quarter from $2,342,000 in the
September 2003 quarter, reflecting a 4% increase. Turnkey systems labor revenue
refers to labor associated with turnkey installations and includes categories
such as training, installation, project management and development. This
increase was substantially the result of an increased staff working on turnkey
labor contracts which was partially offset by a small decrease in our average
daily billing rate. Labor rate price changes from the September 2004 quarter to
the September 2003 quarter resulted in a 1% decrease in the average daily
billing rate and accounted for a negative variance of approximately $13,000.
Revenue from third party hardware and software decreased to $1,200,000 in the
September 2004 quarter, from $1,324,000 in the September 2003 quarter, which
represents a decrease of 9%. Sales of third party hardware and software, such as
pharmacy and data base software, are made in connection with the sales of
turnkey systems. These sales are typically made at lower gross margins than our
human services revenue. License revenue decreased to $542,000 in the September
2004 quarter from $632,000 in the September 2003 quarter, reflecting a decrease
of 14%. License revenue is generated as part of a sale of a human services
information system pursuant to a contract or purchase order that includes
delivery of the system and maintenance. During the September 2004 quarter we did
not sell and perform on as many contracts containing license revenue as in the
September 2003 quarter. In addition, in order to encourage our existing
customers to upgrade from our old product to our new Avatar product we
discounted the license fees to our existing clients. Maintenance revenue
increased to $2,133,000 in the September 2004 quarter, from $1,796,000 in the
September 2003 quarter, reflecting an increase of 19%. As turnkey systems are
completed, they are transitioned to the maintenance division, thereby increasing
our installed base. Revenue from the sales of our small turnkey division
decreased to $166,000 in the September 2004 quarter, from $212,000 in the
September 2003 quarter, reflecting a decrease of 22%. This decrease is the
result of a slow down in the sales and implementation of our Avatar AM product.
Small turnkey division sales relate to turnkey contracts that are less than
$50,000 and are usually completed within one month.

Gross profit increased to $3,436,000 in the September 2004 quarter from
$2,928,000 in the September 2003 quarter, reflecting an increase of 17%. Our
gross margin percentage increased to 53% in the September 2004 quarter from 46%
in the September 2003 quarter. Our gross margins improved as a result of certain
of our staff being redirected towards product enhancement efforts resulting in
their direct costs and associated overhead being charged to Research,
Development and Maintenance costs rather than being included in Cost of Revenue.
Our gross margin also increased primarily as a result of improved margins on our
turnkey labor revenue, which was the result of improved efficiency on our fixed
price contracts.


Data Center Services (Service Bureau)

Data center clients typically generate approximately the same amount of revenue
each year. We bill on a transaction basis or on a fixed fee arrangement.
Historically, each year we increase the transaction or fixed fees by an amount
that approximates the New York urban consumer price index increase. The data
center revenue increased to $528,000 in the September 2004 quarter, from
$512,000 in the September 2003 quarter, representing an increase of $16,000, or
3%. This increase was due to an increase in the client base as well as increases
in pricing.

Gross profit increased to $313,000 in the September 2004 quarter from $250,000
in the September 2003 quarter, reflecting an increase of 25%. Our gross margin
percentage increased to 59% in the September 2004 quarter from 49% in the

                                       16


September 2003 quarter. This increase was the result of the increase in revenue
as well as a reduction in costs of approximately $47,000. The major areas of
cost reductions were in the area of payroll and fringe benefits in the amount of
$7,000, support overhead in the amount of $16,000, supplies in the amount of
$5,000, facility costs in the amount of $7,000 and depreciation in the amount of
$3,000.


Application Service Provider Services ("ASP")

ASP Services involves the offering of our Avatar suite of products, our CareNet
products and our InfoScribeR products on a virtual private network or internet
delivery approach, thereby allowing our customers to rapidly deploy products and
pay on a monthly service basis, thus eliminating capital intensive system
requirements. This is the first year that we have accounted for ASP Services as
a segment. This is the result of our acquisition of CareNet on June 25, 2003.
Prior to that time, our ASP operations were immaterial.

Revenue for the September 2004 quarter was $425,000, which consisted of revenue
from our CareNet operations of $227,000, revenue from our InfoScribeR operations
of $55,000 and revenue from our Avatar ASP services operations of $143,000.
Revenue for the September 2003 quarter was $289,000, which consisted of revenue
from our CareNet operations of $190,000 and revenue from our Avatar ASP services
operations of $99,000.

Gross profit for the September 2004 quarter was $180,000 and our gross margin
percentage was 43%. The gross profit for the September 2003 quarter was $99,000
and our gross margin percentage was 34%. Because the ASP operations were in
their infancy during the September 2003 quarter, any comparisons between the
quarters would not be meaningful.


Operating Expenses

Selling, general and administrative expenses were $1,884,000 in the September
2004 quarter, reflecting a decrease of $61,000, or 3%, from the $1,945,000 in
the September 2003 quarter. The decreases were in: bad debt expense, which
decreased by $93,000; General and administrative salaries and fringe, which
decreased by $41,000 and the provision for bonuses which decreased by $137,000.
The costs decreases were partially offset by increases in: commissions, which
increased by $68,000; depreciation expense which increased by $85,000 and
consulting fees, which increased by $45,000;

We incurred research, development and maintenance expenses of $1,221,000 in the
September 2004 quarter, an increase of 116% from $566,000 in the September 2003
quarter. During 2004, we invested in infrastructure to improve the way we
support our customers and products. These changes related to redirecting
personnel that were previously employed performing actual program "bug" fixing
procedures, which would be included in Cost of Revenues to our research,
development and maintenance area. These personnel now perform product version
control, which includes design, programming, testing, documentation and quality
control of our products. These efforts accounted for a substantial increase in
our research, development and maintenance expenses. The increase in research,
development and maintenance expense is also the result of continuing investment
in product enhancement and extensions. These extensions include the development
of new software modules which addresses Federal reporting requirements, as well
as continued investment in core products. These amounts have been appropriately
accounted for in accordance with SFAS No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed."

Interest and other expense was $27,000 in the September 2004 quarter, a decrease
of $22,000, or 45%, from the $49,000 in the September 2003 quarter. This
decrease is the result of the completion of the amortization of the financing
costs associated with our loan agreement, which was amortized over a three year
period, as well as reduced borrowing during the September 2004 quarter under our

                                       17


loan with Fleet Bank.

Interest income was $29,000 in the September 2004 quarter, an increase of
$7,000, or 32%, from the $22,000 in the September 2003 quarter. Interest income
is generated from short-term investments made with a substantial portion of the
proceeds received from the term loan, as well as cash generated from operations
and the proceeds of the exercise of options and warrants.

We have a net operating loss tax carry forward of approximately $4.4 million at
September 30, 2004. In the September 2004 quarter, we recorded a current income
tax expense of $27,000, which related to various state and local taxes, as well
as a provision for the Federal alternative minimum tax. The income tax provision
was increased by a deferred tax provision of $167,000. The deferred tax
provision was 314,000 based on utilization of net operating loss carry forwards
offset by a reduction in the deferred tax asset valuation allowance of $147,000.
In the September 2003 quarter, we recorded a current income tax credit of
$8,000, which related to various state and local net operating loss tax benefits
as well as a provision for the Federal alternative minimum tax. The current
income tax credit was further reduced by $412,000 as a result of the use of
available net operating losses. The deferred tax asset and valuation allowance
were reduced by the same amount. We also re-evaluated the deferred tax asset
valuation allowance and further reduced the allowance by $800,000, which was
recorded as a tax benefit.

As a result of the foregoing factors, in the September 2004 quarter we had net
income of $633,000, or $.12 per share (basic) and $.11 per share (diluted). For
the September 2003 quarter, we had net income of $1,546,000, or $.34 per share
(basic) and $.33 per share (diluted).


Liquidity and Capital Resources

We had working capital of approximately $16.8 million at September 30, 2004 as
compared to working capital of approximately $14.7 million at December 31, 2003.
This increase of approximately $2.1 million in working capital was the result of
the following: our net income, after adding back depreciation and amortization,
increased working capital by $2,645,000. The increase in working capital also
included $111,000 in net proceeds from the exercise of our stock options. These
increases were partially offset by an investment in capitalized software of
$185,000, by an additional $601,000 for the acquisition of equipment and by
$233,000 for the acquisition of certain software and customer lists. The
remaining increase in working capital of $378,000 was due to changes in other
current assets and liabilities.

In June 2001, we entered into a revolving credit and term loan agreement with
Fleet Bank ("Fleet"). This financing provides us with a five-year term loan of
$2.5 million, as well as a two year $1.5 million revolving line of credit. The
$1.5 million line of credit expired in June 2003. We did not utilize this line
of credit during its duration. The current term loan bears interest at LIBOR
plus 2.5%. We have entered into an interest rate swap agreement with Fleet for
the amount outstanding under the term loan whereby we converted our variable
rate on the term loan to a fixed rate of 7.95% in order to reduce the interest
rate risk associated with these borrowings. We have made principal payments on
the $2.5 million term loan and the amount outstanding at September 30, 2004 is
$875,000.

The terms of our term loan agreement require compliance with certain covenants,
including maintaining a minimum net equity of $9 million, minimum cash reserves
of $500,000, maintenance of certain financial ratios, limitations on capital
expenditures and indebtedness and prohibition of the payment of cash dividends.
As of September 30, 2004, we were in compliance with the financial covenants of
this agreement.

On February 27, 2003, our Board of Directors authorized the purchase of up to
$100,000 of our common stock at any time that the market price is less than
$3.50 per share. Purchases of stock will be made from time to time, depending on
market conditions, in open market or in privately negotiated transactions, at

                                       18



prices deemed appropriate by management. There is no set time limit on the
purchases. We expect to fund any stock repurchases from our operating cash flow.
As of September 30, 2004, we have not made any stock repurchases.

In June 2003, we acquired substantially all of the assets of the CareNet segment
of Shuttle Data Systems Corporation, d/b/a Adia Information Management Corp. The
total purchase price included, among other consideration, a three year
promissory note in the principal amount of $500,000 payable in 36 equal monthly
installments of principal plus interest at the prime rate plus 1%. We have made
the required principal and interest payments on the note and the principal
amount outstanding at September 30, 2004 is $292,000.

During the nine months ended September 30, 2004, we capitalized software
development costs of $185,000 relating to our RAD Plus 2004 product.

A part of our growth strategy is to acquire other businesses that are related to
our current business. Such acquisitions may be made with cash, our securities,
or a combination of cash and securities. If we fail to make any acquisitions our
future growth will be limited to only internal growth. As of the date of this
Form 10-Q quarterly report, we did not have any formal or informal agreements or
understandings with respect to any material acquisitions, and we cannot give any
assurance that we will be able to complete any material acquisitions.

Based on our outstanding contracts and our continuing business, we believe that
our cash flow from operations and our cash on hand will be sufficient to enable
us to fund our operations for at least the next twelve months. It is possible
that we may need additional funding if we go forward with certain acquisitions
or if our business does not develop as we anticipate or if our expenses,
including our software development costs relating to our expansion of our
product line and our marketing costs for seeking to expand the market for our
products and services to include smaller clinics and facilities and sole group
practitioners, exceed our expectation.


Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements.

Contractual Obligations

The following table summarizes, as of September 30, 2004, our obligations and
commitments to make future payments under debt, capital leases and operating
leases:

      Contractual Obligations        Payments Due by Period
      -----------------------        ----------------------
                                     Total        Less than     1 - 3 years     4 - 5 years      Over 5
                                     -----        ---------     -----------     -----------      ------
                                                    1 year                                       years
                                                    ------                                       -----
                                                                               


Long Term Debt(1)                    $1,166,693    $  666,667    $  500,026    $      --        $     --
Capital Lease Obligations(2)            109,182        68,957        40,225           --              --
Operating Leases(3)                   6,336,911       592,252     1,784,443     1,232,808        2,727,408
Total Contractual Cash Obligations   $7,612,786    $1,327,876    $2,324,694    $1,232,808       $2,727,408

----------
(1) See Note 7 to Netsmart's Consolidated Financial Statements for the years ended
December 31, 2003, 2002 and 2001, which describes the Company's financing
agreement.
(2) See Note 10 to Netsmart's Consolidated Financial Statements for the
years ended December 31, 2003, 2002 and 2001, which describes the Company's
Capital Lease Obligation.
(3) See Note 12 to Netsmart's Consolidated Financial Statements for the years
ended December 31, 2003, 2002 and 2001, which describes the Company's Operating
Lease Obligations.


                                       19



Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. These accounting
principles require us to make certain estimates, judgments and assumptions. We
believe that the estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at the time that these
estimates, judgments and assumptions are made. These estimates, judgments and
assumptions can affect the reported amounts of assets and liabilities as of the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the periods presented. Among other things, estimates are
used in accounting for allowances for bad debts, deferred income taxes, expected
realizable values of assets (primarily capitalized software development costs
and customer lists) and revenue recognition. To the extent there are material
differences between these estimates, judgments or assumptions and actual
results, our financial statements will be affected. The significant accounting
policies that we believe are the most critical to aid in fully understanding and
evaluating our reported financial results include the following:

        Revenue Recognition
        Capitalized Software Development Costs
        Impairment of Customer Lists


Revenue Recognition: Revenue associated with fixed price turnkey sales consists
of the following components: licensing of software, labor associated with the
installation and implementation of the software; and maintenance services
rendered in connection with such licensing activities. Revenue from fixed price
software development contracts and revenue under license agreements, which
require significant modification of the software package to the customer's
specifications, are recognized utilizing the estimated percentage-of-completion
method which uses the units-of-work-performed method to measure progress towards
completion. Revisions in cost estimates and recognition of losses on these
contracts are reflected in the accounting period in which the facts become
known. The complexity of the estimation process and issues related to the
assumptions, risks and uncertainties inherent with the application of the
percentage of completion method of accounting affect the amounts of revenue and
related expenses reported in our Consolidated Financial Statements. A number of
internal and external factors can affect our estimates, including labor rates,
utilization and efficiency variances and specification and testing requirement
changes. Maintenance contract revenue is recognized on a straight-line basis
over the life of the respective contract. We also derive revenue from the sale
of third party hardware and software which is recognized based upon the terms of
each contract. Consulting revenue is recognized when the services are rendered.
Data Center revenue and Application Service Provider revenue are recognized in
the period in which the services are provided. The above sources of revenue are
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectibility is probable.

Contract terms often provide for billing schedules that differ from revenue
recognition and give rise to costs and estimated profits in excess of billings,
and billings in excess of costs and estimated profits.

Deferred revenue represents revenue billed and collected but not yet earned.

The cost of maintenance revenue, which consists solely of staff payroll and
applicable overhead, is expensed as incurred.




                                       20


Capitalized Software Development Costs - Capitalization of computer software
development costs begins upon the establishment of technological feasibility and
ends upon its availability for general release to customers. Technological
feasibility for our computer software products is generally based upon
achievement of a detail program design free of high risk development issues. We
capitalize only those costs directly attributable to the development of the
software. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized computer software development costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, technological feasibility, anticipated
future gross revenue, estimated economic life and changes in software and
hardware technology. Prior to reaching technological feasibility these costs are
expensed as incurred and included in research, development and maintenance.
Activities undertaken after the products are available for general release to
customers to correct errors or keep the product updated are expensed as incurred
and included in research, development and maintenance. Amortization of
capitalized computer software development costs commences when the related
products become available for general release to customers. Amortization is
provided on a product by product basis. The annual amortization is the greater
of the amount computed using (a) the ratio that current gross revenue for a
product bears to the total of current and anticipated future gross revenue for
that product or (b) the straight-line method over the remaining estimated
economic life of the product. The estimated life of these products range from 3
to 8 years.

We periodically perform reviews of the recoverability of such capitalized
software costs. At the time a determination is made that capitalized amounts are
not recoverable based on the estimated cash flows to be generated from the
applicable software, any remaining capitalized amounts are written off.


Impairment of Customer Lists - Pursuant to SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", we evaluate our long-lived assets
for financial impairment, and continue to evaluate them as events or changes in
circumstances indicate that the carrying amount of such assets may not be fully
recoverable. We evaluate the recoverability of long-lived assets by measuring
the carrying amount of the assets against the estimated undiscounted future cash
flows associated with them. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying amount of such assets, the assets are adjusted to their
fair values.


Forward-Looking Statements

Statements in this Form 10-Q quarterly report may be "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include, but are not limited to, statements
that express our intentions, beliefs, expectations, strategies, predictions or
any other statements relating to our future activities or other future events or
conditions. These statements are based on current expectations, estimates and
projections about our business based, in part, on assumptions made by
management. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in the forward-looking statements due to numerous
factors, including those described below and those risks discussed from time to
time in our Form 10-K annual report for the year ended December 31, 2003,
including the risks described under "Risk Factors" and in other documents which
we file with the Securities and Exchange Commission. In addition, such
statements could be affected by risks and uncertainties related to product
demand, market and customer acceptance, competition, government regulations and
requirements, pricing and development difficulties, as well as general industry
and market conditions and growth rates, and general economic conditions. Any

                                       21


forward-looking statements speak only as of the date on which they are made, and
we do not undertake any obligation to update any forward-looking statement to
reflect events or circumstances after the date of this Form 10-Q.


Risk Factors

Intellectual Property Rights

We defend our intellectual property rights, but unlicensed copying and use of
software and intellectual property rights may result in a loss of revenue to us.

General Economic and Geo-Political Risks

Softness in healthcare information technology spending or other changes in
general economic conditions that affect demand for computer software could
adversely affect our revenue. Terrorist activity and armed conflict pose the
additional risk of general economic disruption. These conditions lend additional
uncertainty to the timing and budget for technology investment decisions by our
customers.

Competition

We continue to experience intensive competition across all markets for our
products and services. These competitive pressures may result in decreased sales
volumes, price reductions, and/or increased operating costs, such as for
marketing and sales incentives, resulting in lower revenue, gross margins and
operating income.

Technology

Our success depends upon our ability to develop new products and enhance our
existing products. Rapid technological advances in hardware and software
development, evolving standards in computer hardware, software technology and
communications infrastructure, changing customer needs and frequent new product
introductions and enhancements characterize the enterprise software market in
which we compete. To keep pace with technological developments, satisfy
increasingly sophisticated customer requirements and achieve market acceptance,
we must enhance and improve our existing products and continue to introduce new
products and services. If we are unable to develop new products or adapt our
current products to run on new or popular operating systems, if we are unable to
enhance and improve our products successfully in a timely manner, or if we fail
to position and/or price our products to meet market demand, customers may not
buy new software licenses and our business and operating results will be
adversely affected. If our enhancement to existing products does not deliver the
functionality that our customer base demands, our customers may not renew
product support and our business and operating results will be adversely
affected. In addition, standards for network protocols, as well as other
industry adopted and de facto standards for the internet, are rapidly evolving.
We cannot provide any assurance that the standards on which we choose to develop
new products will allow us to compete effectively for business opportunities as
they arise in emerging areas. Accelerated product introductions and short
product life cycles require high levels of expenditures for research and
development that could adversely affect our operating results. Further, any new
products we develop may not be introduced in a timely manner and may not achieve
the broad market acceptance necessary to generate significant revenues. Finally,
while customers make first-time buying decisions based on the products, many
make future license and support buying decisions based upon the quality of the
support offering. If we do not continue to enhance our support services our
renewal rates for product support may decline, which would adversely affect our
operating results.


                                       22



Sales and Marketing

Our sales forecasts may not consistently correlate to revenues in a particular
quarter. We use a "pipeline" system, a common industry practice, to forecast
sales and trends in our business. Our sales personnel monitor the status of all
proposals, such as the date when they estimate that a customer will make a
purchase decision and the potential dollar amount of the sale. These estimates
are aggregated periodically to generate a sales pipeline. We compare this
pipeline at various points in time to evaluate trends in our business. This
analysis provides some guidance in business planning and budgeting, but these
pipeline estimates are by their nature speculative. Our pipeline estimates are
not necessarily reliable predictors of revenues in a particular quarter or over
a longer period of time, partially because of changes in conversion rates of the
pipeline into contracts that can be very difficult to estimate. A variation in
the conversion rate of the pipeline into contracts, or in the pipeline itself,
could cause us to plan or budget incorrectly and thereby adversely affect our
business or results of operations. In particular, a slowdown in information
technology spending or economic conditions can cause purchasing decisions to be
delayed, reduced in amount or cancelled, which would reduce the overall pipeline
conversion rate in a particular period of time.

Acquisitions

Acquisitions and investments present many risks, and we may not realize the
financial and strategic goals that were contemplated at the time of any
transaction. We have in the past and expect in the future to acquire or make
investments in complementary companies, products, services and technologies. The
risks we may encounter in acquisitions and investments include:

       *       we may find that the acquired company or assets do not further
               our business strategy or that we paid more than what the company
               or assets are worth;
       *       we may have difficulty integrating the operations and personnel
               of the acquired businesses; 
       *       we may have difficulty  incorporating  the acquired  technologies
               or products with our existing product lines;
       *       we may have product liability,  customer liability or
               intellectual  property liability  associated with the sale of the
               acquired company's products;
       *       our ongoing business may be disrupted by transition or
               integration issues;
       *       our management's attention may be diverted from other business
               concerns;
       *       our management may not be able to improve our financial and
               strategic position;
       *       the acquisition may result in litigation from terminated
               employees or third parties; and
       *       our due diligence process may fail to identify significant issues
               with the target's product quality, financial disclosures and
               accounting practices, product architecture and legal
               contingencies, among other matters.

These factors could have a material adverse effect on our business, results of
operations, financial condition or cash flows, particularly in the case of a
larger acquisition or number of acquisitions.

We previously have generally paid for acquisitions in cash and stock. We may in
the future pay for acquisitions in whole or in part with stock or other
equity-related purchase rights. To the extent that we issue shares of stock or
other rights to purchase stock, including options and other rights, existing
stockholders may be diluted and earnings per share may decrease.

Stock Option Fair Value Method

If we account for employee stock option and employee stock purchase plans using
the fair value method, it could significantly reduce our net income and earnings
per share. There has been ongoing public debate whether employee stock option
and employee stock purchase plans shares should be treated as a compensation
expense and, if so, how to properly value such charges. If we elected or were

                                       23


required to record an expense for our stock-based compensation plans using the
fair value method, we could have significant accounting charges. For example, in
the first nine months of fiscal 2004, had we accounted for stock-based
compensation plans using the fair-value method prescribed in FASB Statement No.
123 as amended by Statement 148, net income would have been reduced by
approximately $738,000. Although we are not currently required to record any
compensation expense using the fair value method in connection with option
grants that have an exercise price at or above fair market value at the grant
date and for shares issued under our employee stock purchase plan, future laws
or regulations could require us to treat all stock-based compensation as an
expense using the fair value method.

Business Disruptions

Business disruptions could adversely affect our future operating results. Our
operating results and financial condition could be materially and adversely
affected in the event of a major earthquake, fire or other catastrophic event.
We are a highly automated business and a disruption or failure of our systems
could cause delays in completing sales and providing services.

Dependence on government contracts

Because we are particularly dependent upon government contracts, any decrease in
funding for entitlement programs could result in decreased revenue. We market
our health information systems principally to behavioral healthcare facilities,
many of which are operated by state and local government entities and include
entitlement programs. We generate a significant portion of our revenue from
contracts that are directly or indirectly with government agencies. Government
agencies generally have the right to cancel contracts at their convenience. Our
ability to generate business from government agencies is affected by funding for
entitlement programs, and our revenue would decline if state agencies reduce
this funding.


                                       24



Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks related to changes in interest rates. Our debt is
at fixed rates of interest after completing an interest rate swap agreement,
which effectively converted our variable rate debt into a fixed rate debt of
7.95%. Therefore, if the LIBOR rate plus 2.5% increases above 7.95%, it may have
a positive effect on our net income.

Most of our cash and cash equivalents, which are invested in money market
accounts and commercial paper, are at variable rates of interest. If short-term
market interest rates decrease by 10% from the levels at September 30, 2004, the
effect on our net income would be a decrease of approximately $12,000 per year.


Item 4. Controls and Procedures

Evaluation and Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures, as of the end of the
period covered by this Form 10-Q, as required by Exchange Act Rule 13a-15. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures were effective to
insure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
with the time periods specified by the SEC's rules and forms.

Changes in Internal Controls

There were no significant changes in our internal controls over financial
reporting that occurred during the quarter ended September 30, 2004 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

Limitations on the Effectiveness of Controls

We believe that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute assurance that all
controls issues and instances of fraud, if any, within a company have been
detected. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives and our Chief Executive
Officer and Chief Financial Officer have concluded that such controls and
procedures are effective at the "reasonable assurance" level.


                                       25



Item 6.        Exhibits and Reports on Form 8-K

        (a)  Exhibits

        Exhibit No.         Description
        ----------          -----------

        31.1                Certification of Chief Executive Officer pursuant to
                            Section 302 of the Sarbanes-Oxley Act of 2002.
        31.2                Certification of Chief Financial Officer pursuant to
                            Section 302 of the Sarbanes-Oxley Act of 2002.
        32                  Certification of Chief Executive Officer and Chief
                            Financial Officer pursuant to 8 U.S.C. section 1350
                            as adopted pursuant to Section 906 of the
                            Sarbanes-Oxley Act of 2002.


        (b) Reports on Form 8-K

        None



                                       26



                                   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.


NETSMART TECHNOLOGIES, INC.



/s/James L. Conway           Chief Executive Officer           October 29, 2004
-------------------          (Principal Executive Officer)
James L. Conway



/s/Anthony F. Grisanti       Chief Financial Officer           October 29, 2004
----------------------       (Principal Financial and
Anthony F. Grisanti          Accounting Officer)



                                       27



                                Index of Exhibits
                                -----------------


        Exhibit No.         Description
        ----------          -----------

        31.1                Certification of Chief Executive Officer pursuant to
                            Section 302 of the Sarbanes-Oxley Act of 2002.
        31.2                Certification of Chief Financial Officer pursuant to
                            Section 302 of the Sarbanes-Oxley Act of 2002.
                            Certification of Chief Executive Officer and Chief
                            Financial Officer pursuant to 8 U.S.C. section 1350
                            as adopted pursuant to Section 906 of the
                            Sarbanes-Oxley Act of 2002.
        32                  Certification of Chief Executive Officer and Chief
                            Financial Officer pursuant to 8 U.S.C. section 1350
                            as adopted pursuant to Section 906 of the
                            Sarbanes-Oxley Act of 2002.