##### Table of Contents

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SECURITIES AND EXCHANGE COMISSION

Washington, D.C. 20549



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FORM 10-QSB



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[Mark One]

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



For the quarterly period ended SEPTEMBER 30, 2004



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number: 0-25203



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OmniComm Systems, Inc.

(Name of Small Business Issuer in its Charter)



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|                                             |  |                                           
|-------------------------------------------- |  | ------------------------------------------
|Delaware                                     |  | 11-3349762                                
|State of Incorporation                       |  | IRS Federal Employer Identification Number
|                                             | 
|2555 Davie Road, Suite 110-B, Davie, Florida |  | 33317                                     
|Address of Principal Office                  |  | Zip Code                                  



Registrants
Telephone Number: 954.473.1254



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Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    NO ̈



The number of shares outstanding of each of the issuers classes of common equity as of September 30, 2004: 22,679,277
common stock $.001 par value.



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##### Table of Contents

FINANCIAL STATEMENTS



Table of Contents



|                                                                                                                                                            |  |   
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                                                                               |  |   
|Item 1. Unaudited Consolidated Financial Statements                                                                                                         |  |   
|Consolidated Balance Sheets                                                                                                                                 |  | 1 
|Consolidated Income Statements                                                                                                                              |  |   
|Consolidated Statement of Cash Flows                                                                                                                        |  | 3 
|Notes to Consolidated Financial Statements                                                                                                                  |  | 4 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations                                                               |  | 18
|Item 3.
Controls and Procedures                                                                                                                             |  | 25
|PART II.
OTHER INFORMATION                                                                                                                                  |  | 26
|Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                                                                         |  | 26
|Item 6.
Exhibits                                                                                                                                            |  | 26
|SIGNATURES                                                                                                                                                  |  | 27
|CERTIFICATIONS                                                                                                                                              |  |   
|Exhibit 10.9Employment Agreement between the Company and Randall G. Smith, dated September 1, 2004                                                          |  |   
|Exhibit 10.10Employment Agreement between the Company and Ronald T. Linares, dated September 1, 2004                                                        |  |   
|Exhibit 10.11Amended and Restated Promissory Note between the Company and Cornelis F. Wit, dated June 30, 2004                                              |  |   
|Exhibit 10.12Amended and Restated Promissory Note between the Company and Guus van Kesteren, dated June 30,
2004                                            |  |   
|Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act OF 2002 CEO Cornelis F. Wit                        |  |   
|Exhibit 31.2Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act OF 2002 CFO Ronald T. Linares                       |  |   
|Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act OF 2002  CEO Cornelis F. Wit   |  |   
|Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act OF 2002  CFO Ronald T. Linares |  |   



2



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                      |  |                    |             |   |                  |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                                                                      |  | September 30, 2004 |             |   | December 31,2003 |  
|                                                                                                                                                                                                                      |  | (unaudited)        |             |   |                  |  
|ASSETS                                                                                                                                                                                                                |  |                    |             |   |                  |   |             |  
|CURRENT ASSETS                                                                                                                                                                                                        |  |                    |             |   |                  |   |             |  
|Cash                                                                                                                                                                                                                  |  | $                  | 59,076      |   |                  | $ | 1,977       |  
|Accounts receivable                                                                                                                                                                                                   |  |                    | 69,723      |   |                  |   | 112,026     |  
|Prepaid expenses                                                                                                                                                                                                      |  |                    | 25,844      |   |                  |   | 20,799      |  
|                                                                                                                                                                                                                      |  |                    |             |   |                  |   |             |  
|Total current assets                                                                                                                                                                                                  |  |                    | 154,643     |   |                  |   | 134,802     |  
|                                                                                                                                                                                                                      |  |                   
|PROPERTY AND EQUIPMENT, net                                                                                                                                                                                           |  |                    | 56,879      |   |                  |   | 139,830     |  
|                                                                                                                                                                                                                      |  |                   
|OTHER ASSETS                                                                                                                                                                                                          |  |                    |             |   |                  |   |             |  
|Other assets                                                                                                                                                                                                          |  |                    | 12,997      |   |                  |   | 12,997      |  
|                                                                                                                                                                                                                      |  |                    |             |   |                  |   |             |  
|TOTAL ASSETS                                                                                                                                                                                                          |  | $                  | 224,519     |   |                  | $ | 287,629     |  
|                                                                                                                                                                                                                      |  |                    |             |   |                  |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                  |  |                    |             |   |                  |   |             |  
|CURRENT LIABILITIES                                                                                                                                                                                                   |  |                    |             |   |                  |   |             |  
|Accounts payable and accrued expenses                                                                                                                                                                                 |  | $                  | 936,230     |   |                  | $ | 854,150     |  
|Accrued payroll taxes                                                                                                                                                                                                 |  |                    | 132,891     |   |                  |   | 111,159     |  
|10% Convertible Notes                                                                                                                                                                                                 |  |                    | 375,000     |   |                  |   | 375,000     |  
|Notes payable  current portion                                                                                                                                                                                       |  |                    | 125,000     |   |                  |   | -0-         |  
|Notes payable, related party  current portion                                                                                                                                                                        |  |                    | 6,000       |   |                  |   | -0-         |  
|Deferred revenue                                                                                                                                                                                                      |  |                    | 299,360     |   |                  |   | 416,592     |  
|                                                                                                                                                                                                                      |  |                    |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                                                                             |  |                    | 1,874,481   |   |                  |   | 1,756,901   |  
|NOTES PAYABLE, net of current portion                                                                                                                                                                                 |  |                    | 1,316,927   |   |                  |   | 880,926     |  
|NOTES PAYABLE RELATED PARTY, net of current portion                                                                                                                                                                   |  |                    | 848,742     |   |                  |   | 551,644     |  
|                                                                                                                                                                                                                      |  |                    |             |   |                  |   |             |  
|TOTAL LIABILITIES                                                                                                                                                                                                     |  |                    | 4,040,150   |   |                  |   | 3,189,471   |  
|                                                                                                                                                                                                                      |  |                    |             |   |                  |   |             |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                         |  |                    |             |   |                  |   |             |  
|                                                                                                                                                                                                                      |  |                   
|SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                                                                                        |  |                    |             |   |                  |   |             |  
|Undesignated preferred stock - $.001 par value. 4,022,500 shares authorized, no shares issued and outstanding                                                                                                         |  |                    | -0-         |   |                  |   | -0-         |  
|                                                                                                                                                                                                                      |  |                   
|Series B convertible preferred stock, - $.001 par value. 230,000 shares authorized, 103,750 and 157,500 issued and outstanding, respectively;
liquidation preference $1,037,500 and $1,575,500, respectively          |  |                    | 104         |   |                  |   | 158         |  
|                                                                                                                                                                                                                      |  |                   
|Series C convertible preferred stock, - $.001 par value. 747,500 shares authorized, 337,150 and 337,150 issued and outstanding, respectively;
liquidation preference $3,371,500 and $3,371,500, respectively          |  |                    | 337         |   |                  |   | 337         |  
|                                                                                                                                                                                                                      |  |                   
|5% Series A convertible preferred stock - $0.001 par value, 5,000,000 shares authorized; 4,215,224 and 4,215,224 issued and outstanding,
respectively; liquidation preference $4,215,224 and $4,215,224, respectively |  |                    | 4,215       |   |                  |   | 4,215       |  
|                                                                                                                                                                                                                      |  |                   
|Common stock  150,000,000 shares authorized, 22,679,277 and 17,929,277 issued and outstanding, after deducting 669,777 and 669,777
shares of treasury stock, at $.001 par value, respectively                        |  |                    | 23,304      |   |                  |   | 18,554      |  
|Additional paid in capital  preferred                                                                                                                                                                                |  |                    | 8,240,948   |   |                  |   | 8,778,394   |  
|Additional paid in capital  common                                                                                                                                                                                   |  |                    | 13,796,745  |   |                  |   | 12,671,495  |  
|Less: Treasury stock, cost method, 669,777 and 669,777 shares, respectively                                                                                                                                           |  |                    | (299,861    | ) |                  |   | (299,861    | )
|Accumulated deficit                                                                                                                                                                                                   |  |                    | (25,581,423 | ) |                  |   | (24,032,562 | )
|Deferred compensation                                                                                                                                                                                                 |  |                    | -0-         |   |                  |   | (42,572     | )
|                                                                                                                                                                                                                      |  |                    |             |   |                  |   |             |  
|TOTAL SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                                                                                  |  |                    | (3,815,631  | ) |                  |   | (2,901,842  | )
|                                                                                                                                                                                                                      |  |                    |             |   |                  |   |             |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                                                                  |  | $                  | 224,519     |   |                  | $ | 287,629     |  
|                                                                                                                                                                                                                      |  |                    |             |   |                  |   |             |  



See accompanying
summary of accounting policies and notes to financial statements.



1



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER
30, 2003

(Unaudited)



|                                                        |  |                                        |            |   |                                         |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------- |  | -------------------------------------- | ---------- | - | --------------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                        |  | For the nine months endedSeptember 30, |            |   | For the three months endedSeptember 30, |  
|                                                        |  | 2004                                   |            |   | 2003                                    |   |            | 2004 |  |   | 2003       |  
|Revenues                                                |  | $                                      | 686,839    |   |                                         | $ | 539,549    |      |  | $ | 245,788    |   |  | $ | 205,999    |  
|Cost of sales                                           |  |                                        | 192,274    |   |                                         |   | 151,613    |      |  |   | 62,117     |   |  |   | 56,279     |  
|                                                        |  |                                        |            |   |                                         |   |            |      |  |   |            |   |  |   |            |  
|Gross margin                                            |  |                                        | 494,565    |   |                                         |   | 387,936    |      |  |   | 183,671    |   |  |   | 149,720    |  
|                                                        |  |                                        |            |  
|Other expenses                                          |  |                                        |            |   |                                         |   |            |      |  |   |            |   |  |   |            |  
|Salaries, benefits and related taxes                    |  |                                        | 1,343,308  |   |                                         |   | 1,301,348  |      |  |   | 428,700    |   |  |   | 384,405    |  
|Rent & occupancy expenses                               |  |                                        | 114,593    |   |                                         |   | 108,455    |      |  |   | 38,811     |   |  |   | 33,173     |  
|Consulting  medical advisory                           |  |                                        | -0-        |   |                                         |   | (53,385    | )    |  |   | -0-        |   |  |   | -0-        |  
|Consulting  marketing sales                            |  |                                        | -0-        |   |                                         |   | 2,239      |      |  |   | -0-        |   |  |   | -0-        |  
|Legal and professional fees                             |  |                                        | 142,726    |   |                                         |   | 92,594     |      |  |   | 46,894     |   |  |   | 61,077     |  
|Travel                                                  |  |                                        | 44,540     |   |                                         |   | 33,756     |      |  |   | 8,794      |   |  |   | 4,899      |  
|Telephone and internet                                  |  |                                        | 50,883     |   |                                         |   | 49,755     |      |  |   | 17,121     |   |  |   | 14,337     |  
|Selling, general and administrative                     |  |                                        | 89,648     |   |                                         |   | 97,106     |      |  |   | 17,068     |   |  |   | 29,643     |  
|Interest expense, net                                   |  |                                        | 149,696    |   |                                         |   | 90,232     |      |  |   | 60,796     |   |  |   | 31,810     |  
|Depreciation and amortization                           |  |                                        | 108,032    |   |                                         |   | 109,157    |      |  |   | 35,940     |   |  |   | 35,455     |  
|                                                        |  |                                        |            |   |                                         |   |            |      |  |   |            |   |  |   |            |  
|Total other expenses                                    |  |                                        | 2,043,426  |   |                                         |   | 1,831,257  |      |  |   | 654,124    |   |  |   | 594,799    |  
|                                                        |  |                                        |            |   |                                         |   |            |      |  |   |            |   |  |   |            |  
|(Loss) before taxes and preferred dividends             |  |                                        | (1,548,861 | ) |                                         |   | (1,443,321 | )    |  |   | (470,453   | ) |  |   | (445,079   | )
|                                                        |  |                                        |            |  
|Income tax expense (benefit)                            |  |                                        | -0-        |   |                                         |   | -0-        |      |  |   | -0-        |   |  |   | -0-        |  
|                                                        |  |                                        |            |   |                                         |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                       |  |                                        | (1,548,861 | ) |                                         |   | (1,443,321 | )    |  |   | (470,453   | ) |  |   | (445,079   | )
|                                                        |  |                                        |            |  
|Preferred stock dividends in arrears Series A Preferred |  |                                        | (154,162   | ) |                                         |   | (153,600   | )    |  |   | (51,762    | ) |  |   | (51,763    | )
|Preferred stock dividends in arrears Series B Preferred |  |                                        | (77,334    | ) |                                         |   | (119,671   | )    |  |   | (24,123    | ) |  |   | (40,329    | )
|Preferred stock dividends in arrears Series C Preferred |  |                                        | (202,474   | ) |                                         |   | (197,941   | )    |  |   | (67,984    | ) |  |   | (67,985    | )
|Preferred stock dividends  deemed dividends            |  |                                        | -0-        |   |                                         |   | (409,919   | )    |  |   | -0-        |   |  |   | (113,998   | )
|                                                        |  |                                        |            |   |                                         |   |            |      |  |   |            |   |  |   |            |  
|Total preferred stock dividends                         |  |                                        | (433,970   | ) |                                         |   | (881,131   | )    |  |   | (143,869   | ) |  |   | (274,075   | )
|                                                        |  |                                        |            |   |                                         |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) attributable to common stockholders   |  | $                                      | (1,982,831 | ) |                                         | $ | (2,324,452 | )    |  | $ | (614,322   | ) |  | $ | (719,154   | )
|                                                        |  |                                        |            |   |                                         |   |            |      |  |   |            |   |  |   |            |  
|Net (loss) per share                                    |  | $                                      | (0.10      | ) |                                         | $ | (0.18      | )    |  | $ | (0.03      | ) |  | $ | (0.05      | )
|                                                        |  |                                        |            |   |                                         |   |            |      |  |   |            |   |  |   |            |  
|Weighted average number of shares outstanding           |  |                                        | 19,883,109 |   |                                         |   | 12,928,214 |      |  |   | 21,198,842 |   |  |   | 13,911,951 |  
|                                                        |  |                                        |            |   |                                         |   |            |      |  |   |            |   |  |   |            |  



See accompanying
summary of accounting policies and notes to financial statements



2



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003

(unaudited)



|                                                                                           |  |      |            |   |      |   |            |  
|------------------------------------------------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                           |  | 2004 |            |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                       |  |      |            |   |      |   |            |  
|Net income (loss)                                                                          |  | $    | (1,548,861 | ) |      | $ | (1,443,321 | )
|Adjustment to reconcile net income to net cash provided by (used in) operating activities: |  |      |            |   |      |   |            |  
|Depreciation and amortization                                                              |  |      | 108,032    |   |      |   | 109,157    |  
|Amortization of deferred compensation                                                      |  |      | 42,572     |   |      |   | 22,137     |  
|Change in assets and liabilities:                                                          |  |      |            |   |      |   |            |  
|Accounts receivable                                                                        |  |      | 42,303     |   |      |   | 170,713    |  
|Prepaid expenses                                                                           |  |      | (5,045     | ) |      |   | (12,717    | )
|Accounts payable and accrued expenses                                                      |  |      | 103,812    |   |      |   | (110,717   | )
|Deferred revenue                                                                           |  |      | (117,232   | ) |      |   | 47,458     |  
|                                                                                           |  |      |            |   |      |   |            |  
|Net cash provided by (used in) operating activities                                        |  |      | (1,374,419 | ) |      |   | (1,217,290 | )
|                                                                                           |  |      |            |   |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                       |  |      |            |   |      |   |            |  
|Purchase of property and equipment                                                         |  |      | (25,081    | ) |      |   | (10,550    | )
|                                                                                           |  |      |            |   |      |   |            |  
|Net cash provided by (used in) investing activities                                        |  |      | (25,081    | ) |      |   | (10,550    | )
|                                                                                           |  |      |            |   |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                       |  |      |            |   |      |   |            |  
|Proceeds from notes payable                                                                |  |      | 864,099    |   |      |   | 218,600    |  
|Proceeds from the issuance of common stock, net of issuance costs                          |  |      | 592,500    |   |      |   | 567,000    |  
|Payments on notes payable                                                                  |  |      | -0-        |   |      |   | (2,600     | )
|Issuance of Series C convertible preferred stock, net of issuance costs                    |  |      | -0-        |   |      |   | 265,265    |  
|                                                                                           |  |      |            |   |      |   |            |  
|Net cash provided by (used in) financing activities                                        |  |      | 1,456,599  |   |      |   | 1,048,265  |  
|                                                                                           |  |      |            |   |      |   |            |  
|Net increase (decrease) in cash and cash equivalents                                       |  |      | 57,099     |   |      |   | (179,575   | )
|Cash and cash equivalents at beginning of period                                           |  |      | 1,977      |   |      |   | 194,677    |  
|                                                                                           |  |      |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                                 |  | $    | 59,076     |   |      | $ | 15,102     |  
|                                                                                           |  |      |            |   |      |   |            |  



|                                                                   |  |                                        |         |      |   |      
|------------------------------------------------------------------ |  | -------------------------------------- | ------- | ---- | - | -----
|                                                                   |  | For the nine months endedSeptember 30,
|                                                                   |  | 2004                                   |         | 2003
|Supplemental Disclosure of Cash Flow Information:                  |  |                                        |         |      |   |      
|Cash paid during the period for:                                   |  |                                        |         |      |   |      
|Income tax                                                         |  | $                                      | -0-     |      | $ | -0-  
|                                                                   |  |                                        |         |      |   |      
|Interest                                                           |  | $                                      | -0-     |      | $ | -0-  
|                                                                   |  |                                        |         |      |   |      
|Non-cash Transactions                                              |  |                                        |         |      |   |      
|Conversion of Series B Preferred Stock into shares of common stock |  | $                                      | 538,000 |      | $ | -0-  
|Treasury stock repurchase of common stock for trade receivable     |  | $                                      | -0-     |      | $ | 1,067



See accompanying
summary of accounting policies and notes to financial statements



3



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

September 30, 2004

(unaudited)



|NOTE 1: | ORGANIZATION AND NATURE OF OPERATIONS
|------- | -------------------------------------



OmniComm Systems, Inc. is a healthcare technology company that provides Internet-based electronic data capture (EDC) solutions and related
value-added services to pharmaceutical and biotech companies, clinical research organizations, and other clinical trial sponsors. TrialMaster® allows clinical trial sponsors and investigative sites to securely collect, validate, transmit, and
analyze clinical trial data. The Medical Event Reporting System (MERS-TH) is an event reporting system that is being developed for hospitals and medical centers to collect, classify, and analyze events that could potentially compromise patient
safety. MERS-TH provides the opportunity to study and monitor both actual and near-miss events to facilitate process improvement efforts. MERS-TH is being developed in conjunction with Columbia University and will be marketed by both of us to
hospital and medical centers in the U.S. and Europe.



|NOTE 2: | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|------- | ------------------------------------------



BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION



The Companys accounts include those of its two wholly owned subsidiaries, OmniCommerce and OmniTrial B.V and have been
prepared in conformity with (i) generally accepted accounting principles; and (ii) the rules and regulations of the United States Securities and Exchange Commission. All significant intercompany accounts and transactions between the Company and its
subsidiaries have been eliminated in consolidation.



ESTIMATES IN FINANCIAL STATEMENTS



The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results
may differ from those estimates.



RECLASSIFICATIONS



Certain
reclassifications have been made in the 2003 financial statements to conform to the 2004 presentation. These reclassifications did not have any effect on net income (loss) or shareholders equity.



SEGMENT INFORMATION



The Company operates in one reportable segment.



CASH AND CASH EQUIVALENTS



Cash equivalents consist of highly liquid, short-term investments with
maturities of 90 days or less. The carrying amount reported in the accompanying balance sheets approximates fair value.



ACCOUNTS RECEIVABLE



Accounts receivable are judged as to collectibility by management and an allowance for bad debts is established as necessary. As of each balance sheet
date, no reserve was considered necessary.



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(unaudited)

(continued)



CONCENTRATION OF CREDIT RISK



Accounts receivable subject the Company to its highest potential
concentration of credit risk. The Company reserves for credit losses based on historical losses and performs on-going evaluations of its receivables and clients. To date the Company has not incurred any losses from receivables related to TrialMaster
sales. The Company does not require collateral on trade accounts receivables.



PROPERTY AND EQUIPMENT



Property and equipment are recorded at cost. Additions and betterments are capitalized; maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the assets estimated useful life,
which is 5 years for leasehold improvements, equipment and furniture and 3 years for software. Gains or losses on disposal are charged to operations.



INTANGIBLE AND OTHER ASSETS



Intangible assets are amortized on a straight-line basis over periods ranging from one to five years. The Company continually reviews the recoverability
of the carrying value of these assets using the methodology prescribed in SFAS 121. The Company also reviews long-lived assets and the related intangible assets for impairment whenever events or changes in circumstances indicate the carrying amounts
of such assets may not be recoverable. If it is determined the carrying amount of the assets is permanently impaired then intangible assets are written down to fair value and the useful life of the asset may be changed prospectively. Fair value is
determined based on discounted cash flows, appraised values or managements estimates, depending upon the nature of the assets. As of September 30, 2004, management believes no revision to the remaining useful lives or write-down of intangible
assets is required.



DEFERRED REVENUE



Deferred revenue represents cash advances received in excess of revenue
earned on on-going contracts. Payment terms vary with each contract but may include an initial payment at the time the contract is executed, with future payments dependent upon the completion of certain contract phases or targeted milestones. In the
event of contract cancellation, the Company is entitled to payment for all work performed through the point of cancellation. As of September 30, 2004, the Company had $299,360 in deferred revenues relating to contracts for services to be performed
over periods ranging from 1 month to approximately 5 years.



REVENUE RECOGNITION POLICY



OmniComms revenue model is transaction-based and can be implemented either as an ASP (application service provider) or licensed for implementation by a customer such as a pharmaceutical company. Revenues are derived from the set-up of
clinical trial engagements; on-going maintenance fees incurred throughout the duration of an engagement; fees for report writing and change orders. The clinical trials that are conducted using TrialMaster can last from a few months to several years.
Most of the fees associated with our product including post-setup customer support in the form of maintenance charges are recognized ratably over the term of the clinical trial. Cost of sales is primarily comprised of programmer salaries and payroll
taxes and is expensed as incurred.



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(unaudited)

(continued)



The Company recognizes revenues, for both financial
statement and tax purposes in accordance with SEC Staff Accounting Bulletin No. 104 Revenue Recognition (SAB 104). SAB 104 requires that revenues be recognized ratably over the life of a contract. In accordance with SAB 104 the Company
will periodically record deferred revenues relating to advance payments in contracts. As of September 30, 2004, the Company had $299,360 in deferred revenue relating to contracts for services to be performed over periods ranging from 1 month to
approximately 5 years.



ADVERTISING



Advertising costs are expensed as incurred. Advertising costs were $(680)
and $3,301 for the nine months ended September 30, 2004 and 2003, respectively.



RESEARCH AND DEVELOPMENT EXPENSES



Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards No. 86 (SFAS 86) requires the capitalization of certain
development costs of software to be sold once technological feasibility is established, which the Company defines as completion to the point of marketability. The capitalized cost is then amortized on a straight-line basis over the estimated product
life. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not
capitalized any software development costs under SFAS 86. Research and development expense was approximately $393,946 in 2004 and $401,034 in 2003 for the nine months ended September 30, respectively.



STOCK BASED COMPENSATION



Stock-based compensation is recognized using the intrinsic value method in
accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and, accordingly, does not recognize compensation expense for its stock-based awards to employees in the Consolidated
Statements of Income. For disclosure purposes, pro forma net loss and loss per common share are provided in accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, as if the fair
value method had been applied. See Note 12 for pro forma information on the impact of the fair-value method of accounting for stock options.



EARNINGS PER SHARE



The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share.
SFAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. The diluted earnings per share calculation is very similar to the previously utilized fully diluted earnings per share calculation method.



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(unaudited)

(continued)



Basic earnings per share were calculated using the
weighted average number of shares outstanding of 19,883,109 and 12,928,214 for the nine months ended September 30, 2004 and 2003, respectively and 21,198,842 and 13,911,951 for the three months ended September 30, 2004 and 2003, respectively. There
were no differences between basic and diluted earnings per share. Options to purchase 3,687,770 shares of common stock at prices ranging from $.15 to $2.75 per share were outstanding at September 30, 2004. Stock warrants to purchase 16,751,296
shares of common stock at prices ranging from $0.25 to $10.00 per share were outstanding at September 30 2004. The Company granted a Unit Purchase Option (Agent Option) to the Placement Agent of its Series B Convertible Preferred Stock
that provides the Placement Agent the ability to purchase 27,000 Series B Preferred Shares with 1,080,000 detachable common stock warrants. The exercise of the Agent Option would result in the issuance of an aggregate of 2,160,000 shares of common
stock at an exercise price of $0.25 per share. The options, warrants and Agent Options were not included in the computation of diluted earnings per share because they have an anti-dilutive effect on net loss per share. The Companys convertible
debt and convertible preferred stock have an anti-dilutive effect on net loss per share.



The Company granted a Unit Purchase Option (Agent Option) to the Placement Agent of its Series C Convertible Preferred Stock that provides the Placement Agent the ability to purchase 24,848 Series C
Preferred Shares with 496,950 detachable common stock warrants. The exercise of the Agent Option would result in the issuance of an aggregate of 1,490,850 shares of common stock at an exercise price of $0.25 per share. The warrants and Agent Options
were not included in the computation of diluted earnings per share because they have an anti-dilutive effect on net loss per share.



INCOME TAXES



The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes.
SFAS 109 has as its basic objective the recognition of current and deferred income tax assets and liabilities based upon all events that have been recognized in the financial statements as measured by the provisions of the enacted tax laws.



Valuation allowances are established when necessary to reduce
deferred tax assets to the estimated amount to be realized. Income tax expense represents the tax payable for the current period and the change during the period in the deferred tax assets and liabilities.



IMPACT OF NEW ACCOUNTING STANDARDS



In March 2004, the Financial Accounting Standards Board (FASB)
issued an exposure draft of Proposed Statement of Financial Accounting Standards, Share-Based Payment, an amendment of FASB Statement No. 123. This proposed Statement addresses the accounting for transactions in which an enterprise
exchanges its equity instruments for employee services. It also addresses transactions in which an enterprise incurs liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of
those equity instruments in exchange for employee services. For public entities, the cost of employee services received in exchange for equity instruments, including employee stock options, would be measured based on the grant-date fair value of
those instruments. That cost would be recognized as compensation expense over the service period, which would normally be the vesting period.



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(unaudited)

(continued)



If the proposed statement were adopted by us as currently
proposed, it would require that compensation expense be recorded for employee stock options vesting or granted subsequent to May 31, 2005. The ultimate impact on diluted earnings per share of expensing stock options will be dependent upon the final
pronouncement issued by the FASB, the method to be used for valuation of stock options determined by us and the amount of future stock option grants.



In March 2004, the FASB issued Proposed FASB Staff Position No. FAS 106-b (FAS 106-b) Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FAS 106-b provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 for employers that sponsor
post-retirement health care plans that provide prescription drug benefits. FAS 106-b will not have a material effect on us since we do not offer prescription drug benefits to any retirees at September 30, 2004.



|NOTE 3: | OPERATIONS AND LIQUIDITY
|------- | ------------------------



We have experienced negative cash flow from operations since 1999 and have funded our activities to date primarily from debt and equity financings. We
will continue to require substantial funds to continue our research and development activities and to market, sell and commercialize our technology. We will need to raise substantial additional capital to fund our future operations. Our capital
requirements will depend on many factors, including the problems, delays, expenses and complications frequently encountered by companies developing and commercializing new technologies; the progress of our research and development activities; the
rate of technological advances; determinations as to the commercial potential of our technology under development; the status of competitive technology; the establishment of collaborative relationships; the success of our sales and marketing
programs; and other changes in economic, regulatory or competitive conditions in our planned business.



Estimates about the adequacy of funding for our activities are based upon certain assumptions, including assumptions that the research and development
programs relating to our technology can be conducted at projected costs and that progress towards the commercialization of our technology will be timely and successful. There can be no assurance that changes in our research and development plans,
acquisitions or other events will not result in accelerated or unexpected expenditures.



To satisfy our capital requirements, we may seek additional financing through debt and equity financings. There can be no assurance that any such funding will be available to us on favorable terms or at all. If
adequate funds are not available when needed, we may be required to delay, scale back or eliminate some or all of our research and product development and marketing programs. If we are successful in obtaining additional financings, the terms of such
financings may have the effect of diluting or adversely affecting the holdings or the rights of the holders of our common and preferred stock.



The ability of the Company to continue in existence is dependent on its having sufficient financial resources to bring products and services to market for
marketplace acceptance. As a result of its significant losses, negative cash flows from operations, and accumulated deficits for the periods ending September 30, 2004 there is doubt about the Companys ability to continue as a going concern.



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(unaudited)

(continued)



|NOTE 4: | PROPERTY AND EQUIPMENT, AT COST
|------- | -------------------------------



Property and equipment consists of the following:



|                              |  |                    |         |                         |   |         |  |                         |         |                       |   |         |  |        
|----------------------------- |  | ------------------ | ------- | ----------------------- | - | ------- |  | ----------------------- | ------- | --------------------- | - | ------- |  | -------
|                              |  | September 30, 2004 |         | December 31, 2003       |   |        
|                              |  | Cost               |         | AccumulatedDepreciation |   | Cost    |  | AccumulatedDepreciation |         | EstimatedUseful Lives
|Computer and office equipment |  | $                  | 443,960 |                         | $ | 402,639 |  | $                       | 423,177 |                       | $ | 337,604 |  | 5 years
|Leasehold improvements        |  |                    | 3,299   |                         |   | 2,547   |  |                         | 3,299   |                       |   | 2,052   |  | 5 years
|Computer software             |  |                    | 274,167 |                         |   | 269,755 |  |                         | 269,869 |                       |   | 235,196 |  | 3 years
|Office furniture              |  |                    | 52,950  |                         |   | 42,556  |  |                         | 52,950  |                       |   | 34,613  |  | 5 years
|                              |  |                    |         |                         |   |         |  |                         |         |                       |   |         |  |        
|                              |  | $                  | 774,376 |                         | $ | 717,497 |  | $                       | 749,295 |                       | $ | 609,465 |  |        
|                              |  |                    |         |                         |   |         |  |                         |         |                       |   |         |  |        



Depreciation expense
for the nine months ended September 30, 2004 and 2003 was $108,032 and $109,157 respectively.



|NOTE 5: | ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|------- | -------------------------------------



Accounts payable and accrued expenses consist of the following at September 30, 2004 and December 31, 2003:



|                                            |  |          |         |          |   |        
|------------------------------------------- |  | -------- | ------- | -------- | - | -------
|                                            |  | 09/30/04 |         | 12/31/03
|Accounts payable                            |  | $        | 351,835 |          | $ | 255,890
|Accrued payroll and related costs           |  |          | 59,260  |          |   | 15,479 
|Other accrued expenses                      |  |          | 206,427 |          |   | 236,927
|Accrued interest                            |  |          | 191,189 |          |   | 218,335
|Accrued expenses of OmniTrial BV            |  |          | 127,519 |          |   | 127,519
|                                            |  |          |         |          |   |        
|Total accounts payable and accrued expenses |  | $        | 936,230 |          | $ | 854,150
|                                            |  |          |         |          |   |        



Other accrued
expenses consist primarily of placement agent fees and expenses due on private placements of our debt and equity securities that occurred during 2001 to 2004 and accrued legal fees associated with the sale of Series C Convertible Preferred Stock.



|NOTE 6: | EARNINGS PER SHARE
|------- | ------------------



Basic earnings per shares (EPS) is computed by dividing income available to common shareholders (which for the Company equals its net loss) by
the weighted average number of common shares outstanding, and dilutive EPS adds the dilutive effect of stock options and other common stock equivalents. Antidilutive shares aggregating 44,836,065 have been omitted from the calculation of dilutive
EPS for the nine months ended September 30, 2004. A reconciliation between numerators and denominators of the basic and diluted earnings per shares is as follows:



|                                    |  |                                          |            |   |                                          |            |                 |   |       |                 |  |   |                   |   |                 |            |  |   |       |  
|----------------------------------- |  | ---------------------------------------- | ---------- | - | ---------------------------------------- | ---------- | --------------- | - | ----- | --------------- |  | - | ----------------- | - | --------------- | ---------- |  | - | ----- | -
|                                    |  | The Nine Months Ended September 30, 2004 |            |   | The Nine Months Ended September 30, 2003 |           
|                                    |  | IncomeNumerator                          |            |   | SharesDenominator                        |            | Per-ShareAmount |   |       | IncomeNumerator |  |   | SharesDenominator |   | Per-ShareAmount |           
|Basic EPS                           |  | $                                        | (1,982,831 | ) |                                          | 19,883,109 |                 | $ | (0.10 | )               |  | $ | (2,324,452        | ) |                 | 12,928,214 |  | $ | (0.18 | )
|Effect of Dilutive Securities None. |  |                                          | -0-        |   |                                          | -0-        |                 |   | -0-   |                 |  |   | -0-               |   |                 | -0-        |  |   | -0-   |  
|                                    |  |                                          |            |   |                                          |            |                 |   |       |                 |  |   |                   |   |                 |            |  |   |       |  
|Diluted EPS                         |  | $                                        | (1,982,831 | ) |                                          | 19,883,109 |                 | $ | (0.10 | )               |  | $ | (2,324,452        | ) |                 | 12,928,214 |  | $ | (0.18 | )



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(unaudited)

(continued)



|                                    |  |                                          |          |   |                                           |            |                 |   |       |                 |  |   |                   |   |                 |            |  |   |       |  
|----------------------------------- |  | ---------------------------------------- | -------- | - | ----------------------------------------- | ---------- | --------------- | - | ----- | --------------- |  | - | ----------------- | - | --------------- | ---------- |  | - | ----- | -
|                                    |  | The Three Months EndedSeptember 30, 2004 |          |   | The Three Months Ended September 30, 2003 |           
|                                    |  | IncomeNumerator                          |          |   | SharesDenominator                         |            | Per-ShareAmount |   |       | IncomeNumerator |  |   | SharesDenominator |   | Per-ShareAmount |           
|Basic EPS                           |  | $                                        | (614,322 | ) |                                           | 21,198,842 |                 | $ | (0.03 | )               |  | $ | (719,154          | ) |                 | 13,911,951 |  | $ | (0.05 | )
|Effect of Dilutive Securities None. |  |                                          | -0-      |   |                                           | -0-        |                 |   | -0-   |                 |  |   | -0-               |   |                 | -0-        |  |   | -0-   |  
|                                    |  |                                          |          |   |                                           |            |                 |   |       |                 |  |   |                   |   |                 |            |  |   |       |  
|Diluted EPS                         |  | $                                        | (614,322 | ) |                                           | 21,198,842 |                 | $ | (0.03 | )               |  | $ | (719,154          | ) |                 | 13,911,951 |  | $ | (0.05 | )



|NOTE 7: | NOTES PAYBLE
|------- | ------------



At September 30 2004, the Company owed $2,296,669 in notes payable. The table below provides details as to the terms and conditions of the notes payable.



|                      |  |                 |  |            |  |              |   |  |        |           |           |   |           |  |   |          
|--------------------- |  | --------------- |  | ---------- |  | ------------ | - |  | ------ | --------- | --------- | - | --------- |  | - | ---------
|Note Holder           |  | OriginationDate |  | Due Date   |  | InterestRate |   |  | Amount |           | ShortTerm |   | Long Term
|Guus van Kesteren     |  | 6/30/2004       |  | 10/31/2006 |  | 9.0          | % |  | $      | 364,758   |           | $ | 0         |  | $ | 364,758  
|Magnolia Private Fnd. |  | 6/30/2004       |  | 10/31/2006 |  | 9.0          | % |  |        | 596,052   |           |   | 0         |  |   | 596,052  
|Nico Letschert        |  | 7/31/2002       |  | 10/31/2005 |  | 9.0          | % |  |        | 10,000    |           |   | 0         |  |   | 10,000   
|Nico Letschert        |  | 9/3/2002        |  | 10/31/2005 |  | 9.0          | % |  |        | 10,000    |           |   | 0         |  |   | 10,000   
|Randall Smith         |  | 11/25/2002      |  | 1/31/2005  |  | 9.0          | % |  |        | 6,000     |           |   | 6,000     |  |   | 0        
|Cornelis Wit          |  | 6/30/2004       |  | 10/31/2006 |  | 9.0          | % |  |        | 483,984   |           |   | 0         |  |   | 483,984  
|Guy Brissette         |  | 12/30/2002      |  | 1/31/2005  |  | 9.0          | % |  |        | 100,000   |           |   | 100,000   |  |   | 0        
|Noesis Capital        |  | 6/30/2004       |  | 10/31/2006 |  | 9.0          | % |  |        | 450,875   |           |   | 0         |  |   | 450,875  
|Carel Letschert       |  | 11/7/2003       |  | 1/31/2005  |  | 9.0          | % |  |        | 25,000    |           |   | 25,000    |  |   | 0        
|Noesis NV             |  | 1/30/2004       |  | 1/31/2006  |  | 9.0          | % |  |        | 100,000   |           |   | 0         |  |   | 100,000  
|Noesis NV             |  | 6/17/2004       |  | 1/31/2006  |  | 9.0          | % |  |        | 50,000    |           |   | 0         |  |   | 50,000   
|Wim Letschert         |  | 6/30/2004       |  | 1/31/2006  |  | 9.0          | % |  |        | 50,000    |           |   | 0         |  |   | 50,000   
|Carel Letschert       |  | 7/29/2004       |  | 10/31/2006 |  | 9.0          | % |  |        | 50,000    |           |   | 0         |  |   | 50,000   
|                      |  |                 |  |            |  |              |   |  |        |           |           |   |           |  |   |          
|                      |  |                 |  |            |  |              |   |  | $      | 2,296,669 |           | $ | 131,000   |  | $ | 2,165,669
|                      |  |                 |  |            |  |              |   |  |        |           |           |   |           |  |   |          



|NOTE 8: | CONVERTIBLE NOTES
|------- | -----------------



During the first quarter of 1999, the Company issued 10% Convertible Notes Payable in the amount of $862,500 pursuant to a Confidential Private Placement
Memorandum. There were costs of $119,625 associated with this offering. The Company also granted the agent the option to purchase 250,000 common shares at $.001 per share. The agent exercised the option. The net proceeds to the Company were
$742,875. The notes bear interest at ten percent annually, payable semi-annually. The notes are convertible after maturity, which is five years, into shares of common stock of the Company at $1.25 per share. As of September 30, 2004 approximately
$487,500 of the Convertible Notes had been converted into 390,000 shares of common stock of the Company leaving an outstanding principal balance of $375,000.



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(unaudited)

(continued)



The Company is currently in default on principal and
interest payments owed totaling $514,735 on its 10% Convertible Notes. The terms of the notes provide a payment grace period of thirty days in which to make required semi-annual interest payments. The company has been in default since January 30,
2002. At the option of the note holders the full amount of the convertible notes could be declared in default.



|NOTE 9: | COMMITMENTS AND CONTINGENCIES
|------- | -----------------------------



The Company currently leases office space under an operating lease. The minimum future lease payments required under the Companys operating leases
at September 30, 2004 are as follows:



|      |  |   |       
|----- |  | - | ------
|2004  |  | $ | 22,629
|2005  |  |   | 54,522
|2006  |  |   | 0     
|2007  |  |   | 0     
|2008  |  |   | 0     
|      |  |   |       
|Total |  | $ | 77,151
|      |  |   |       



In addition, to
annual base rental payments, the Company pays for the operating expenses associated with its leased office space and is responsible for any escalation in operating expenses as determined in the lease. Rental expense was $114,593 and $108,455 for the
nine months ended September 30, 2004 and 2003.



EMPLOYMENT AGREEMENTS



In August 2003,
we entered into an employment agreement with Cornelis F. Wit to serve as our Chief Executive Officer and President through December 31, 2004. Mr. Wit receives an annual salary of $175,000 payable in cash and/or stock plus a bonus tied to our
operating results. As part of the agreement incentive options are awardable under the agreement based upon sales and cash flow objectives. In the event that the we consummate a transaction with a third party resulting in the sale, merger,
consolidation, reorganization or other business combination involving all or a majority of our business, assets or stock, whether effected in one transaction or a series of transactions due to the initiative of Mr. Wit (whether or not during the
term of the agreement), Mr. Wit will receive a fee equal to 2% of the aggregate consideration. The agreement also provides, among other things, for participation in employee benefits available to employees and executives. Under the terms of the
agreement, we may terminate Mr. Wits employment upon 30 days notice of a material breach and Mr. Wit may terminate the agreement under the same terms and conditions. The employment agreement contains customary non-disclosure provisions, as
well as a one year non-compete clause if Mr. Wit leaves the company voluntarily or a six month non-compete clause following his termination by us.



In September 2004, we entered into a one-year employment agreement with Mr. Randall Smith to serve as our Chief Technology Officer. Under the terms of the
agreement, as compensation for his services, Mr. Smith receives an annual salary of $181,500 to be paid in the form of cash and/or stock, as agreed upon by the parties, and he is eligible to receive a bonus based upon achieving technology related
milestones. The agreement also provides, among other things, for participation in employee benefit plans or programs applicable to employees and executives. Under the terms of the agreement, we may terminate the employment of Mr. Smith upon 30 days
notice of a material breach and Mr. Smith may terminate the agreement under the same terms and conditions.



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(unaudited)

(continued)



If Mr. Smith is terminated by us for any reason other than
for cause, we must pay him severance benefits equal to six months salary. The employment agreement contains customary non-disclosure provisions, as well as a one year non-competition restriction following the termination of the agreement. The
agreement renews automatically for one-year terms unless expressly cancelled by either Mr. Smith or the Company in writing ninety (90) days prior to termination of the term.



In September 2004, we entered into a one-year employment agreement with Mr. Ronald Linares to serve as our Chief Financial
Officer. Under the terms of this agreement, Mr. Linares receives an annual salary of $161,500 to be paid in the form of cash and/or stock, as agreed upon by the parties, and he is eligible to receive additional incentive compensation based upon
achieving financial milestones. The agreement also provides, among other things, for participation in employee benefit plans or programs applicable to employees and executives. Under the terms of the agreement, we may terminate the employment of Mr.
Linares upon 30 days notice of a material breach and Mr. Linares may terminate the agreement under the same terms and conditions. If Mr. Linares is terminated by us for any reason other than for cause, we must pay him severance benefits equal to six
months salary. The employment agreement contains customary non-disclosure provisions, as well as a one year non-competition restriction following the termination of the agreement. The agreement renews automatically for one-year terms unless
expressly cancelled by either Mr. Linares or the Company in writing ninety (90) days prior to termination of the term.



In January 2003, we entered into a three-year employment agreement with Mr. Charles Beardsley to serve as our Senior Vice President for Sales and
Marketing. Under the terms of this agreement, Mr. Beardsley currently receives an annual salary of $165,000 to be paid in the form of cash and/or stock, as agreed upon by the parties, and he is eligible to receive additional incentive compensation
based upon achieving financial milestones. Mr. Beardsley is eligible for a commission, payable on a quarterly basis, equal to 2% of the Companys Net Operating Income as defined in an exhibit to his employment contract. Mr. Beardsley was
granted an aggregate of 150,000 options under our 1998 Stock Incentive Plan. The options, which vest 50,000 annually beginning with January 2, 2004, are exercisable at a price of $0.25 per share, for five years from the date of vesting. Mr.
Beardsley received a grant of 100,000 shares of restricted common stock upon execution of his employment agreement. The agreement also provides, among other things, for participation in employee benefit plans or programs applicable to employees and
executives. Under the terms of the agreement, we may terminate the employment of Mr. Beardsley upon 30 days notice of a material breach and Mr. Beardsley may terminate the agreement under the same terms and conditions. If Mr. Beardsley is terminated
by us for any reason other than for cause, we must pay him severance benefits equal to twelve months salary. The employment agreement contains customary non-disclosure provisions.



FINANCIAL ADVISORY AGREEMENT



During March 2002, the Company entered into a one-year financial advisory agreement with Noesis Capital to assist the
Company in performing certain financial advisory services including the sale of securities, and the possible sale, merger or other business combination involving the Company. Pursuant to this agreement, the Company is obligated to pay $90,000 in
professional fees during the one-year term of the agreement. The advisory agreement was extended on May 11, 2004 for a term that will expire on December 31, 2005.



12



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(unaudited)

(continued)



|NOTE 10: | RELATED PARTY TRANSACTIONS
|-------- | --------------------------



Cornelis F. Wit, our President and Chief Executive Officer and a member of our board of directors served as President of Corporate Finance of Noesis
Capital Corp. from March 1995 to September 2000. Noesis Capital Corp., a NASD member firm, has served as placement agent for us in six private placements of securities which occurred between September 1999 and September 2004. Guus van Kesteren, a
member of our board of directors, is a consultant to Noesis Capital Corp.



Between February 2001 and July 2001, we borrowed an aggregate of $190,000 from Guus van Kesteren under promissory notes which bore interest of 12% per annum. These promissory notes were amended and restated on August
30, 2001 in the amount of $196,644 with new terms which included an interest rate of 8% per annum, and with one half of the principal payable upon the closing of any financing by us resulting in gross proceeds in excess of $2,000,000, and the
balance of the principal together with accrued interest payable no later than August 30, 2003. This note was amended in September 2004 extending the maturity date to October 2006.



During March 2002, we borrowed $2,341 from Randall G. Smith, our Chairman of the board and Chief Technology Officer. This
amount was repaid without interest on April 12, 2002. In addition, we borrowed $6,000 without interest from Mr. Smith on November 25, 2002. In March 2003 this note was amended and restated extending the maturity date to January 31, 2005.



In December 2002, we borrowed $50,000 from Cornelis Wit, our President
and Chief Executive Officer and a member of our board of directors. This amount was borrowed under a promissory note bearing interest at a rate of 9% per annum, payable on March 31, 2003. This note was amended in September 2004 extending the
maturity date to October 31, 2006.



In December 2002, we
borrowed $50,000 from Guus van Kesteren a member of our board of directors. This amount was borrowed under a promissory note bearing interest at a rate of 9% per annum, payable on March 31, 2003. This note was amended in September 2004 extending the
maturity date to October 31, 2006.



In March 2003, we borrowed
$2,600 from Cornelis Wit, our Chief Executive Officer and President and a member of our board of directors. This amount was repaid without interest on April 3, 2003.



From September to November 2003 we borrowed $262,000 from Cornelis Wit, our President and Chief Executive Officer, and a
member of our board of directors. These amounts were borrowed under promissory notes bearing interest at 9% per annum with maturity dates ranging from January 31, 2005 to October 31, 2005. These notes were amended and restated on September 30, 2004
under the terms of a new note bearing interest at 9% interest payable on October 31, 2006.



During October 2003, the Company borrowed $16,000 from Guus van Kesteren, a Company Director. This amount was borrowed under a promissory note bearing interest at a rate of 9% per annum, payable on October 31, 2005.
On December 31, 2003, Mr. van Kesteren elected to convert this note payable into common stock of the Company at a conversion price of $0.25 per share. The Company issued 64,000 shares of restricted common stock in connection with this conversion.



13



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(unaudited)

(continued)



From February to June 2004, the Company borrowed $106,000
from Guus van Kesteren, a Company Director. These amounts were borrowed under promissory notes bearing interest at 9% per annum with maturity dates ranging from January 31, 2006 to October 31, 2006. These notes were amended and restated on June 30,
2004 under the terms of a new note bearing interest at 9% interest payable on October 31, 2006.



From January to June 2004, the Company borrowed $153,500 from Cornelis Wit, the Companys President and Chief Executive Officer and a Director. These
amounts were borrowed under promissory notes bearing interest at 9% per annum with maturity dates ranging from January 31, 2006 to October 31, 2006. These notes were amended and restated on June 30, 2004 under the terms of a new note bearing
interest at 9% interest payable on October 31, 2006.



|NOTE 11: | POST-RETIREMENT EMPLOYEE BENEFITS
|-------- | ---------------------------------



The Company does not have a policy to cover employees for any health care or other welfare benefits that are incurred after employment (post-retirement).
Therefore, no provision is required under SFASs 106 or 112.



|NOTE 12: | STOCKHOLDERS EQUITY (DEFICIT)
|-------- | ------------------------------



Our authorized capital stock consists of 150,000,000 shares of common stock, $.001 par value per share, and 10,000,000 shares of preferred stock, par
value $.001 per share, of which 5,000,000 shares have been designated as 5% Series A Preferred, 230,000 shares have been designated as Series B Preferred Stock and 747,500 shares have been designated as Series C Preferred Stock.



As of September 30, 2004 we had the following outstanding securities:



| |  | 22,679,277 shares of common stock issued and outstanding;
| | - | ---------------------------------------------------------



| |  | 16,751,296 warrants issued and outstanding to purchase shares of our common stock;
| | - | ----------------------------------------------------------------------------------



| |  | 4,215,224 shares of our Series A Preferred Stock issued and outstanding, convertible into 2,810,149 shares of common stock
| | - | --------------------------------------------------------------------------------------------------------------------------



| |  | 103,750 shares of our Series B Preferred Stock issued and outstanding; convertible into 4,150,000 shares of common stock
| | - | ------------------------------------------------------------------------------------------------------------------------



| |  | 337,150 shares of our Series C Preferred Stock issued and outstanding; convertible into 13,486,000 shares of common stock
| | - | -------------------------------------------------------------------------------------------------------------------------



| |  | a Series B Placement Agent Unit Option;
| | - | ---------------------------------------



| |  | a Series C Placement Agent Unit Option; and
| | - | -------------------------------------------



| |  | 10% Convertible Notes, convertible into 300,000 shares of common stock
| | - | ----------------------------------------------------------------------



Preferred Stock Arrearges



There were arrearages of $444,484 and $290,322 on the Series A Preferred Stock for undeclared dividends as of September 30, 2004 and December 31, 2003.



There were arrearages of $443,264 and $365,930 on the Series
B Preferred Stock for undeclared dividends as of September 30, 2004 and December 31, 2003.



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(unaudited)

(continued)



There were arrearages of $525,204 and $322,730 on the
Series C Preferred Stock for undeclared dividends as of September 30, 2004 and December 31, 2003.



Stock Option Plan



In 1998, the Companys Board of Directors approved the OmniComm Systems 1998 Stock Option Plan, (the 1998 Plan). The 1998 Plan provides
for granting Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Phantom Stock Unit Awards and Performance Share Units. Pursuant to the 1998 Plan the Company may grant options to purchase up to
5,000,000 shares of the Companys common stock. The term of each option may not exceed ten years from the date of grant, and options vest in accordance with a vesting schedule established by the Plan administrator.



The Companys share option activity and related information is
summarized below:



|                                   |  |                                     |  |                              |      |         |           |                              |   |     
|---------------------------------- |  | ----------------------------------- |  | ---------------------------- | ---- | ------- | --------- | ---------------------------- | - | ----
|                                   |  | Nine months endedSeptember 30, 2004 |  | Year ended December 31, 2003
|                                   |  | Options                             |  | WeightedAverageExercisePrice |      | Options |           | WeightedAverageExercisePrice
|Outstanding at beginning of period |  | 3,593,500                           |  | $                            | 0.83 |         | 2,785,039 |                              | $ | 1.00
|Granted                            |  | 317,270                             |  | $                            | 0.25 |         | 1,471,000 |                              | $ | 0.25
|Exercised                          |  | -0-                                 |  | $                            | 0.00 |         | 40,000    |                              | $ | 0.25
|Cancelled                          |  | 223,000                             |  | $                            | 0.29 |         | 622,539   |                              | $ | 0.27
|                                   |  |                                     |  |                              |      |         |           |                              |   |     
|Outstanding at end of period       |  | 3,687,770                           |  | $                            | 0.68 |         | 3,593,500 |                              | $ | 0.83
|                                   |  |                                     |  |                              |      |         |           |                              |   |     
|Exercisable at end of period       |  | 3,203,270                           |  | $                            | 0.57 |         | 3,099,500 |                              | $ | 0.53
|                                   |  |                                     |  |                              |      |         |           |                              |   |     



The following table
summarizes information about stock options outstanding at September 30, 2004:



|                         |  |                  |  |                                                 |  |                              |      |                  |           |                              |   |     
|------------------------ |  | ---------------- |  | ----------------------------------------------- |  | ---------------------------- | ---- | ---------------- | --------- | ---------------------------- | - | ----
|                         |  | Outstanding      |  | Exercisable                                    
|Range of Exercise Prices |  | Number ofOptions |  | WeightedAverageRemainingYears ofContractualLife |  | WeightedAverageExercisePrice |      | Number ofOptions |           | WeightedAverageExercisePrice
|$0.25 - $0.47            |  | 3,102,770        |  | 3.87                                            |  | $                            | 0.30 |                  | 2,618,770 |                              | $ | 0.31
|$0.50 - $0.80            |  | 257,000          |  | 5.51                                            |  | $                            | 0.54 |                  | 257,000   |                              | $ | 0.54
|$1.00 - $2.75            |  | 328,000          |  | 0.87                                            |  | $                            | 2.09 |                  | 328,000   |                              | $ | 2.09



Accounting for
Stock Based Compensation



At September 30, 2004, the
Company has one stock-based compensation plan which is described more fully above. The Company accounts for its plan under the recognition and measurement principles of APB Opinion No 25, Accounting for Stock Issued to Employees,
(APB 25) and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to or above 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 FASB Statement No. 123, Accounting for Stock-Based Compensation
to stock-based employee compensation.



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(unaudited)

(continued)



|                                                                                                                                            |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                            |  | Nine months EndedSeptember 30, |        
|(in thousands, except for per share data)                                                                                                   |  | 2004                           |         |   | 2003 |  
|Net loss available to common stockholders As reported                                                                                       |  | $                              | (1,983  | ) |      | $ | (2,324  | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                | (9,688  | ) |      |   | (9,378  | )
|                                                                                                                                            |  |                                |         |   |      |   |         |  
|Pro forma net loss available to common stockholders                                                                                         |  | $                              | (11,671 | ) |      | $ | (11,702 | )
|                                                                                                                                            |  |                                |         |   |      |   |         |  
|Weighted average number of common shares outstanding used to compute net income (loss) per common sharebasic and diluted                   |  |                                | 19,883  |   |      |   | 12,928  |  
|                                                                                                                                            |  |                                |         |   |      |   |         |  
|Basic and diluted net loss per share                                                                                                        |  |                                |         |   |      |   |         |  
|As reported                                                                                                                                 |  | $                              | (0.10   | ) |      | $ | (0.18   | )
|                                                                                                                                            |  |                                |         |   |      |   |         |  
|Pro forma                                                                                                                                   |  | $                              | (0.59   | ) |      | $ | (0.91   | )
|                                                                                                                                            |  |                                |         |   |      |   |         |  



The estimated fair
value of each OmniComm option granted is calculated using the Black-Scholes pricing model. The weighted average assumptions used in the model were as follows:



|                              |  |                                |   |  |         |  
|----------------------------- |  | ------------------------------ | - |  | ------- | -
|                              |  | Nine months EndedSeptember 30, |  
|                              |  | 2004                           |   |  | 2003    |  
|Risk-free interest rate       |  | 2.07                           | % |  | 5.00    | %
|Expected years until exercise |  | 6 Years                        |   |  | 6 Years |  
|Expected stock volatility     |  | 115.0                          | % |  | 150.0   | %
|Dividend yield                |  | 0                              | % |  | 0       | %



Other Stock
Based Compensation



During 2003, the Company issued an
aggregate of 100,000 shares of restricted common stock to employees. The stock issued had a fair market value of $25,000 and was issued under the terms of an employment contract.



|NOTE 13: | INCOME TAXES
|-------- | ------------



The tax expense (benefit) for income taxes differs from the amount computed by applying the statutory federal income tax rate of 34% to income (loss)
before provision (benefit) for income taxes as follows:



|                                      |  |         |          |   |         |   |          |  
|------------------------------------- |  | ------- | -------- | - | ------- | - | -------- | -
|                                      |  | 9/30/04 |          |   | 9/30/03 |  
|Current tax expense (benefit):        |  |         |          |   |         |   |          |  
|Income tax at statutory rates         |  | $       | -0-      |   |         | $ | -0-      |  
|                                      |  |         |          |   |         |   |          |  
|Deferred tax expense (benefit):       |  |         |          |   |         |   |          |  
|Amortization of goodwill and covenant |  |         | -0-      |   |         |   | -0-      |  
|Operating loss carryforward           |  |         | (582,836 | ) |         |   | (543,122 | )
|                                      |  |         |          |   |         |   |          |  
|                                      |  |         | (582,836 | ) |         |   | (543,122 | )
|                                      |  |         |          |   |         |   |          |  
|Valuation allowance                   |  |         | 582,836  |   |         |   | 543,122  |  
|                                      |  |         |          |   |         |   |          |  
|Total tax expense (benefit)           |  | $       | -0-      |   |         | $ | -0-      |  
|                                      |  |         |          |   |         |   |          |  



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##### Table of Contents

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(unaudited)

(continued)



Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:



|                             |  |         |            |   |          |   |            |  
|---------------------------- |  | ------- | ---------- | - | -------- | - | ---------- | -
|                             |  | 9/30/04 |            |   | 12/31/03 |  
|Deferred tax assets:         |  |         |            |   |          |   |            |  
|Amortization of intangibles  |  | $       | 283,698    |   |          | $ | 283,698    |  
|Operating loss carryforwards |  |         | 6,824,382  |   |          |   | 6,241,546  |  
|                             |  |         |            |   |          |   |            |  
|Gross deferred tax assets    |  |         | 7,108,080  |   |          |   | 6,525,244  |  
|                             |  |         |            |   |          |   |            |  
|Valuation allowance          |  |         | (7,108,080 | ) |          |   | (6,525,244 | )
|                             |  |         |            |   |          |   |            |  
|Net deferred tax asset       |  | $       | -0-        |   |          | $ | -0-        |  
|                             |  |         |            |   |          |   |            |  



The Company has net
operating loss carryforwards (NOL) for income tax purposes of approximately $18,123,391. This loss is allowed to be offset against future income until the year 2023 when the NOLs will expire. Other timing differences relate to depreciation and
amortization for the stock acquisition of Education Navigator in 1998. The tax benefits relating to all timing differences have been fully reserved for in the valuation allowance account due to the lack of operating history and the substantial
losses incurred through September 30, 2004.



|NOTE 14: | SUBSEQUENT EVENTS
|-------- | -----------------



The Company had a recorded liability of $132,891 at September 30, 2004 for federal employment taxes. The Company had fully satisfied the liability as of
November 12, 2004.



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS



General



The following information
should be read in conjunction with the Consolidated Interim Financial Statements and Notes thereto and other information set forth in this report.



Forward-Looking Statements



Statements contained in this Form 10-QSB that are not historical fact are forward looking statements. These statements can often be identified by the use of
forward-looking terminology such as estimate, project, believe, expect, may, will, should, intends, or anticipates or the negative thereof or
other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. We wish to caution the reader that these forward-looking statements, such as statements relating to timing, costs and of the
acquisition of, or investments in, existing business, the revenue or profitability levels of such businesses, and other matters contained in this Form 10-QSB regarding matters that are not historical facts, are only predictions. No assurance can be
given that plans for the future will be consummated or that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these plans and projections and other forward-looking
statements are based upon a variety of assumptions, which we consider reasonable, but which nevertheless may not be realized. Because of the number and range of the assumptions underlying our projections and forward-looking statements, many of which
are subject to significant uncertainties and contingencies that are beyond our reasonable control, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this Form
10-QSB. Therefore, our actual experience and results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other
forward- looking statements should not be regarded as a representation by us or any other person that these plans will be consummated or that estimates and projections will be realized, and actual results may vary materially. There can be no
assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. The Company does not undertake any obligation to update or revise any forward-looking statement made
by it or on its behalf, whether as a result of new information, future events or otherwise.



Overview



We are a healthcare
technology company that provides electronic data capture (EDC) solutions and related value-added services to pharmaceutical and biotechnology companies, clinical research organizations, and other clinical trial sponsors via our Web-based
software, TrialMaster. TrialMaster allows clinical trial sponsors and investigative sites to securely collect, validate, transmit, and analyze clinical study data including patient histories, patient dosing, adverse events, and other clinical trial
information. Medical Error Reporting System (MERS-TH) is being co-developed with Columbia University. MERS-TH has been designed to provide U.S. and European hospitals and medical centers, a standardized system for collecting data on
medical errors, adverse events and near misses. All of our personnel are involved in the development and marketing of TrialMaster and MERS-TH.



The Nine months Ended September 30, 2004 Compared With the Nine months Ended September 30, 2003



Results of Operations



Revenues for the nine months ended September 30, 2004 were $686,839 compared to $539,549 for the same period in 2003, an increase of 27.3%.
The revenue increase can be attributed to an incremental increase in per project revenue. We have found EDC users receptive to our products and believe our mix of technology and customer oriented design approach allow us to compete favorably. The
combination of a flexible design architecture, robust features and competitive pricing of TrialMaster provide an attractive alternative to potential clients when compared to the products offered by our competitors.



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TrialMaster is currently being sold as an application service provider (ASP) that provides EDC and other
services such as an enterprise management suite which assists its clients in the pharmaceutical, biotechnology and medical device industries in accelerating the completion of clinical trials. TrialMaster contracts provide for pricing that is based
on both the size and duration of the clinical trial. Size parameters include the number of case report forms used to collect data and the number of sites utilizing TrialMaster. The client will pay a trial setup fee based on the previously mentioned
factors, and then pay an on-going maintenance fee for the duration of the clinical trial that provides software, network and site support during the trial. Generally, these contracts will range in duration from four months to several years. Setup
fees are generally earned prior to the inception of a trial, however, the revenues will be recognized in accordance with SEC Staff Accounting Bulletin No. 104 Revenue Recognition which requires that the revenues be recognized ratably
over the life of the contract. The maintenance fee revenues are earned and recognized monthly. Costs associated with contract revenues are recognized as incurred.



Cost of goods sold increased to $192,274 in 2004 compared to $151,613 in 2003. Cost of goods sold were approximately 28.0% of sales in 2004
compared to 28.1% in fiscal 2003. Salaries have increased during 2004 due to the addition of one additional programmer as part of our trial operations. We used the services of a third party vendor on a European clinical trial conducted during
2003-2004. Cost of goods sold relates primarily to salaries and related benefits associated with the programmers, developers and systems analysts producing clinical trials on behalf of our clients.



We expect to increase development programming labor costs on an absolute basis as our trial
revenues increase. We expect labor costs to remain at approximately 25% of sales. TrialMaster V3.0, the latest release of our trial-building software has improved our ability to reduce trial production related costs since it automates many of the
trial building functions that were manually performed in prior releases of our software. We expect the next release of TrialMaster, V4.0, to increase the efficiency of trial building operations by 20 to 25%. V4.0 is being designed using
Microsofts .Net® framework. Microsoft® .NET is described by Microsoft as a set of software technologies for connecting information, people, systems, and devices. This new generation of technology is based on Web servicessmall
building-block applications that can connect to each other as well as to other, larger applications over the Internet.



Salaries and related expenses are our biggest expense at 65.7% of total Other Expenses for the first nine months of 2004. Salaries and related expenses totaled $1,343,308
in 2004 compared to $1,301,348 in 2003, an increase of 3.2%. We currently employ approximately 16 employees out of our Davie, Florida corporate office and have two out-of-state employees. We expect to increase headcount by about 25% within our
production function in concert with anticipated increases in TrialMaster clients during fiscal 2005. We will look to selectively add experienced sales and marketing personnel in 2005 in an effort to increase our market penetration and to continue
broadening our client base.



Rent expense increased by $6,138 during the first
nine months of 2004. Our corporate office lease was extended through September 2005. In December 2001, we established a disaster recovery site at an IBM owned Co-Location facility in Atlanta, Georgia and will continue utilizing this facility for the
foreseeable future since it is designed to ensure 100% system up-time and to provide system redundancy.



Legal and professional fees totaled $142,726 in 2004 compared with $92,594 during the first nine months of 2004 and fiscal 2003, respectively, an increase of approximately $50,132. The 2003 amount includes a credit of
approximately $52,000 relating to the settlement of legal fees incurred during 2002. We expect on-going legal and professional fees to approximate what was experienced during the first nine months of 2004.



Selling, general and administrative expenses (SGA) were $89,648 during 2004
compared to $97,106 in 2003, a decrease of 7.7%. These expenses relate primarily to costs incurred in running our office day-to-day and other costs



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not directly related to other captioned items in our income statement, and include the cost of office equipment and
supplies, the costs of attending conferences and seminars and other expenses incurred in the normal course of business. Included in the 2004 results of operations was the recovery of $20,000 of a previously impaired investment we made in Medical
Network AG EMN, a Swiss healthcare related technology company. We originally established a 100% valuation allowance on our $355,000 investment during fiscal 2000. We do not expect to recover any additional funds from our investment in the future.



Net interest expense was $149,696 during 2004 versus $90,232 in fiscal 2003 an
increase of $59,464 or 65.9%. We have used debt financing during 2004 to satisfy our working capital needs. During this period we issued $864,099 in promissory notes. When evaluating the cost of capital available to us in combination with our
overall capital structure we concluded that this financing best fulfilled our short and long-term capital needs.



We sold additional Series C Convertible Preferred Stock during the first quarter of 2003 and we issued an additional 590,000 warrants to investors of our Series C
Convertible Preferred Stock. The warrants were valued at $135,344 utilizing the Black-Scholes model. The net proceeds received in the Series C Convertible Preferred Stock Unit offering were allocated to the Series C Preferred Stock and we recognized
a deemed dividend on preferred stock of $135,344 resulting in a charge to retained earnings and a credit to additional paid-in capital within our stockholders equity as of March 31, 2003.



We sold common stock during the first half of 2003 and we issued an additional 700,000
warrants to those investors. The warrants were valued at $160,577 utilizing the Black-Scholes model. The net proceeds received in the Series C Convertible Preferred Stock Unit offering were allocated to the Series C Preferred Stock and we recognized
a deemed dividend on preferred stock of $160,577 resulting in a charge to retained earnings and a credit to additional paid-in capital within our stockholders equity as of September 30, 2003.



We issued 496,950 warrants to the placement agent of our Series Preferred C Stock as part of
their compensation. The warrants were valued at $113,998 utilizing the Black-Scholes model. We recognized a deemed dividend on preferred stock of $113,998 resulting in a charge to retained earnings and a credit to additional paid-in capital within
our stockholders equity as of September 30, 2003.



There were arrearages
of $154,162 in 5% Series A Preferred Stock dividends, $77,334 in Series B Preferred Stock dividends and $202,474 in Series C Preferred Stock dividends at September 30, 2004, compared with arrearages of $153,600 in 5% Series A Preferred Stock
dividends, $119,671 in Series B Preferred Stock dividends and $197,941 in Series C Preferred Stock dividends at September 30, 2003. We deducted $433,970 and $471,212 from Net Income (Loss) Attributable to Common Stockholders for the nine
months ended September 30, 2004 and September 30 2003, respectively, relating to undeclared Series A, B and C Convertible Preferred Stock dividends.



The Three months Ended September 30, 2004 Compared With the Three months Ended September 30, 2003



Results of Operations



Revenues for the three months ended September 30, 2004 were $245,788 compared to $205,999 for the same period in 2003, an increase of 19.3%.
The revenue increase can be attributed to an incremental increase in per project revenue.



The visibility of the EDC niche increased markedly during the first half of 2004. The biggest company in the EDC market, PhaseForward, completed an IPO and several other competitors were able to raise funds via
private placements of their equity. This visibility in the investment community is likely to continue attracting capital to the segment. We believe that attention from the investment community is a good indicator that the EDC market will continue to
attract capital and that industry growth is sustainable.



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Cost of goods sold increased to $62,117 for the three months ended September 30, 2004 compared to $56,279 for the
comparable period in 2003. Cost of goods sold were approximately 25.3% of sales in 2004 compared to 27.3% in fiscal 2003.



Salaries and related expenses are our biggest expense at 65.5% of total Other Expenses for the three months ended September 2004. Salaries and related expenses totaled
$428,700 in 2004 compared to $384,405 in 2003, an increase of 11.5%



Rent
expense increased by $5,638 for the three months ended September 30, 2004. Our corporate office lease was extended through September 2005. In December 2001, we established a disaster recovery site at an IBM owned Co-Location facility in Atlanta,
Georgia and will continue utilizing this facility for the foreseeable future since it is designed to ensure 100% system up-time and to provide system redundancy.



Legal and professional fees totaled $46,895 for the three months ended September 30, 2004 compared with $61,077 during the comparable period
in fiscal 2003, a decrease of approximately $14,812. We expect on-going legal and professional fees to approximate what was experienced during the first half of 2004.



Selling, general and administrative expenses (SGA) were $17,068 for the three months ended September 30, 2004 compared to
$29,643 for the comparable period in 2003, a decrease of 42.4%. These expenses relate primarily to costs incurred in running our office day-to-day and other costs not directly related to other captioned items in our income statement, and include the
cost of office equipment and supplies, the costs of attending conferences and seminars and other expenses incurred in the normal course of business. Included in the 2004 results of operations was the recovery of $20,000 of a previously impaired
investment we made in Medical Network AG EMN, a Swiss healthcare related technology company. We originally established a 100% valuation allowance on our $355,000 investment during fiscal 2000. We do not expect to recover any additional funds from
our investment in the future.



Net interest expense was $60,796 during 2004
versus $31,810 for the three months ended September 30, 2004 and September 30, 2003, respectively, an increase of $28,986, or 91.1%. We have used debt financing during 2004 to satisfy our working capital needs. During the first nine months of 2004
we issued $864,099 in promissory notes. When evaluating the cost of capital available to us in combination with our overall capital structure we concluded that this financing best fulfilled our short and long-term capital needs.



There were arrearages of $51,762 in 5% Series A Preferred Stock dividends, $24,123 in Series
B Preferred Stock dividends and $67,984 in Series C Preferred Stock dividends at September 30, 2004, compared with arrearages of $51,763 in 5% Series A Preferred Stock dividends, $40,329 in Series B Preferred Stock dividends and $67,985 in Series C
Preferred Stock dividends at September 30, 2003. We deducted $143,869 and $160,077 from Net Income (Loss) Attributable to Common Stockholders for the three months ended September 30, 2004 and September 30 2003, respectively, relating to
undeclared Series A, B and C Convertible Preferred Stock dividends.



Liquidity and Capital Resources



We have historically
experienced negative cash flows and have relied primarily on the proceeds from the sale of debt and equity securities to fund our operations. In addition, we have utilized stock-based compensation as a means of paying for consulting and salary
related expenses.



Cash and cash equivalents increased by $57,099 from $1,977
to $59,076 at September 30, 2004. This was the result of cash provided by financing activities of $1,456,599 offset by cash used in operating activities of approximately $1,374,419 and $25,081 used in investing activities. The significant components
of the activity include a loss from operations of approximately $1,548,861 offset by non-cash expenses of $150,604 and approximately $1,456,999 we



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raised through the issuance of debt and equity securities offset by $25,081 used in investing activities and increases in
cash of $23,839 from changes in working capital accounts.



We are not currently
bound by any long or short-term agreements for the purchase or lease of capital expenditures. Any amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately service any increase in our business.
To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future. We do not presently have any commitments for capital expenditures.



We are currently in arrears on principal and interest payments owed totaling $514,735 on our
10% Convertible Notes. The terms of the notes provide a payment grace period of thirty days in which to make required semi-annual interest payments. We were in default effective January 30, 2002.



The Company had a recorded liability of $132,891 at September 30, 2004 for federal employment
taxes. The Company had fully satisfied the liability as of November 12, 2004.



We have been operating with a cash burn rate since beginning our EDC operations. In order to manage cash flows, we have issued preferred stock and common stock to satisfy operating expenses and obligations. Between March 28, 2002 and March
2003 we sold 165,650 shares of our Series C Preferred Stock and warrants to purchase 3,513,000 shares of our common stock. Gross cash proceeds from this offering totaled $1,656,500. We accrued $333,092 in transaction related fees leaving net
proceeds of approximately $1,423,409 of which $100,000 originally had been received as a bridge loan which was later converted at the shareholders request into shares of our Series C Preferred Stock.



From April 2003 through May 31, 2003 we sold an aggregate of 1,400,000 shares of our Common
Stock and warrants to purchase 700,000 shares of our common stock for gross proceeds of $350,000. We accrued $35,000 in transaction fees leaving net proceeds to us of $315,000.



From July 2003 through December 31, 2003 we sold an aggregate of 2,484,000 shares of our common stock for gross proceeds of $621,000. We
accrued $60,500 in transaction fees leaving net proceeds to us of $560,500.



From April 2004 through September 2004 we sold an aggregate of 2,600,000 shares of our common stock for gross proceeds of $650,000. We accrued $57,500 in transaction fees leaving net proceeds to us of $592,500.



Our selling efforts include marketing our products to several Fortune 500 pharmaceutical and
medical device manufacturers and two of the largest CROs. We began providing services to some of these entities during 2003. These contracts should provide us the opportunity to limit our need for funding our operations via debt and equity
capital. Obtaining contracts with clients of this size and reputation will also increase the credibility of the company.



We feel that the momentum established from new client acquisitions and our ability to retain clients for repeat engagements provide a good operating base from which to
build during 2004 and fiscal 2005. We expect to continue increasing the level of resources deployed in our sales and marketing efforts. We embarked on a cost cutting program during fiscal 2000. That program became part of our organizations
identity and remains ingrained in our culture today. We feel that a combination of our lean operating environment and increased success in new client acquisition, coupled with our ability to retain our existing clients will allow us to compete
effectively within the EDC market.



Because of the losses experienced since
1999 we have needed to continue utilizing the proceeds from the sale of debt and equity securities to fund our working capital needs. The capital markets since mid-2000 have provided a difficult climate for raising capital due to the decline in
value of publicly held technology stocks and the resultant apprehension on the part of investors to invest in technology oriented firms. In addition, when available, capital has



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been expensive relative to the valuations that were afforded during the expansion of the Internet sector in 1999 and
2000. The softness in the capital markets coupled with the losses experienced have caused working capital shortfalls. We have used a combination of equity financing and short-term bridge loans to fund our working capital needs. Other than our
current capital and capital we may raise from future debt or equity offerings or short-term bridge loans, we do not have any additional sources of working capital.



We will continue to require substantial funds to continue our research and development activities and to market, sell and commercialize our
technology. We will need to raise substantial additional capital to fund our future operations. Our capital requirements will depend on many factors, including the problems, delays, expenses and complications frequently encountered by companies
developing and commercializing new technologies; the progress of our research and development activities; the rate of technological advances; determinations as to the commercial potential of our technology under development; the status of
competitive technology; the establishment of collaborative relationships; the success of our sales and marketing programs; the cost of filing, prosecuting and defending and enforcing patents and intellectual property rights; and other changes in
economic, regulatory or competitive conditions in our planned business. Estimates about the adequacy of funding for our activities are based upon certain assumptions, including assumptions that the research and development programs relating to our
technology can be conducted at projected costs and that progress towards broader commercialization of our technology will be timely and successful. There can be no assurance that changes in our research and development plans or other events will not
result in accelerated or unexpected expenditures.



To satisfy our capital
requirements, including ongoing future operations, we will seek to raise additional financing through debt and equity financings. There can be no assurance that any such funding will be available to us on favorable terms or at all. If adequate funds
are not available when needed, we may be required to delay, scale back or eliminate some or all of our research and product development programs, and our business operations. If we are successful in obtaining additional financings, the terms of such
financings may have the effect of diluting or adversely affecting the holdings or the rights of the holders of our common and preferred stock. Further, there can be no assurance that even if such additional capital is obtained or the planned cost
reductions are implemented, that we will achieve positive cash flow or profitability or be able to continue as a business.



Our ability to continue in existence is dependent on our having sufficient financial resources to bring products and services to market. As a result of our significant
losses, negative cash flows from operations, and accumulated deficits for the periods ending September 30, 2004, there is doubt about our ability to continue as a going concern. In addition, our auditors Greenberg and Company, included language
which qualified their report regarding our ability to continue as a going concern in their report dated February 6, 2004.



IMPACT OF NEW ACCOUNTING STANDARDS



In March 2004, the Financial Accounting Standards Board (FASB) issued an exposure draft of Proposed Statement of Financial Accounting Standards,
Share-Based Payment, an amendment of FASB Statement No. 123. This proposed Statement addresses the accounting for transactions in which an enterprise exchanges its equity instruments for employee services. It also addresses transactions
in which an enterprise incurs liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of those equity instruments in exchange for employee services. For public entities, the
cost of employee services received in exchange for equity instruments, including employee stock options, would be measured based on the grant-date fair value of those instruments. That cost would be recognized as compensation expense over the
service period, which would normally be the vesting period.



If the proposed
statement were adopted by us as currently proposed, it would require that compensation expense be recorded for employee stock options vesting or granted subsequent to May 31, 2005. The ultimate impact on diluted



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earnings per share of expensing stock options will be dependent upon the final pronouncement issued by the FASB, the
method to be used for valuation of stock options determined by us and the amount of future stock option grants.



In March 2004, the FASB issued Proposed FASB Staff Position No. FAS 106-b (FAS 106-b) Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. FAS 106-b provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 for employers that sponsor post-retirement
health care plans that provide prescription drug benefits. FAS 106-b will not have a material effect on us since we do not offer prescription drug benefits to any retirees at September 30, 2004.



CRITICAL ACCOUNTING POLICIES



The preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 2 of Notes to the Consolidated Financial Statements describes the significant
accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.



A critical accounting policy is defined as one that is both material to the presentation of
our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the
following attributes: 1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to
occur, would have a material effect on our financial condition or results of operations.



Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and
reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the consolidated
financial statements as soon as they became known. In addition, our Management is periodically faced with uncertainties, the outcomes of which are not within our control and will not be known for prolonged periods of time. Based on a critical
assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, our Management believes that our consolidated financial statements are fairly stated in accordance with accounting
principles generally accepted in the United States (GAAP), and present a meaningful presentation of our financial condition and results of operations.



Our Management believes that the following are our critical accounting policies:



DEFERRED REVENUE



Deferred revenue represents cash advances received in excess of revenue earned on on-going contracts. Payment terms vary with each contract but may include an initial payment at the time the contract is executed, with
future payments dependent upon the completion of certain contract phases or targeted milestones. In the event of contract cancellation, we are entitled to payment for all work performed through the point of cancellation.



REVENUE RECOGNITION POLICY



OmniComms revenue model is transaction-based and can be implemented either as an ASP
(application service provider) or licensed for implementation by a customer such as a pharmaceutical company. Revenues are derived from



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the set-up of clinical trial engagements; on-going maintenance fees incurred throughout the duration of an engagement;
fees for report writing and change orders. The clinical trials that are conducted using TrialMaster can last from a few months to several years. Most of the fees associated with our product including post-setup customer support in the form of
maintenance charges are recognized ratably over the term of the clinical trial. Cost of sales is primarily comprised of programmer salaries and taxes and is expensed as incurred.



The Company recognizes sales, for both financial statement and tax purposes in accordance with SEC Staff Accounting Bulletin No. 104
Revenue Recognition (SAB 104). SAB 104 requires that revenues be recognized ratably over the life of a contract. In accordance with SAB 104 the Company will periodically record deferred revenues relating to advance payments in contracts.



STOCK BASED COMPENSATION.



Options granted to employees under our Stock Option Plan are accounted for by using the
intrinsic value method under APB Opinion 25, Accounting for Stock Issued to Employees (APB 25). In October 1995, the Financial Accounting Standards Board issued Statement No.123, Accounting for Stock-Based Compensation (SFAS 123), which defines a
fair value based method of accounting for stock options. All stock based compensation issued to individuals, other than employees and directors such compensation which is accounted for in accordance with APB 25, are accounted for in accordance with
SFAS 123, as amended by SFAS 148.



ITEM 3. CONTROLS AND PROCEDURES



Based on their
evaluation as of the end of the period covered by this Quarterly Report on Form 10-QSB, being September 30, 2004, the Companys principal executive officer and principal financial officer have concluded that the Companys disclosure
controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.



There were no significant changes in the Companys internal controls or in other factors that could significantly affect these controls subsequent to the date of
their evaluation and up to the filing date of this Quarterly Report on Form 10-QSB. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.



It should be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other
inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.



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PART II OTHER INFORMATION



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



From April 2004 through September 2004, we sold an aggregate of 2,600,000 shares of our common stock, pursuant to an exemption from registration under Regulation S of the Securities Act of 1933, as amended (the
Act), resulting in gross proceeds of $650,000 to non-US persons, as that term is defined in Rule 901 of Regulation S. None of these investors were our affiliates. Noesis Capital Corp., an NASD member firm, acted as placement agent in the
offering and as compensation therefore received a commission equal to 8% of the sales made by it, or an aggregate of $46,000, a non-accountable expense allowance equal to 2% of the sales made by it, or an aggregate of $11,500. In addition we will
issue a warrant to purchase at $0.25 per share, 10% of the shares sold, or 260,000 shares of our common stock. At such time that warrant is issued, we will estimate the fair value of the warrants granted to Noesis Capital using the Black-Scholes
option pricing model. Each certificate evidencing securities issued in the foregoing transaction included a legend to the effect that the securities were not registered under the Act, and could not be resold absent registration or the availability
of an applicable exemption therefrom.



ITEM 6. EXHIBITS



The following documents are
filed as a part of this report or are incorporated by reference to previous filings, if so indicated:



|            |  |                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                               
|10.9        |  | Employment Agreement between the Company and Randall G. Smith, dated September 1, 2004                                                                                    
|            | 
|10.10       |  | Employment Agreement between the Company and Ronald T. Linares, dated September 1, 2004                                                                                   
|            | 
|10.11       |  | Amended and Restated Promissory Note between the Company and Cornelis F. Wit, dated June 30, 2004                                                                         
|            | 
|10.12       |  | Amended and Restated Promissory Note between the Company and Guus van Kesteren, dated June 30, 2004                                                                       
|            | 
|31.1        |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange Act of 1934, as amended.
|            | 
|31.2        |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange Act of 1934, as amended.
|            | 
|32.1        |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.                        
|            | 
|32.2        |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.                        



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SIGNATURES



In accordance with Section 13
or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                       |  |                                                                                     
|---------------------- |  | ------------------------------------------------------------------------------------
|OmniComm Systems, Inc.
|Registrant            
|                       | 
|By:                    |  | /s/ Cornelis F. Wit                                                                 
|                       |  | Cornelis F. Wit, Director, Chief Executive Officer and President                    
|Date:                  |  | November 12, 2004                                                                   
|                       | 
|By:                    |  | /s/ Ronald T. Linares                                                               
|                       |  | Ronald T. Linares, Vice President of
Finance, Chief Financial and Accounting Officer
|Date:                  |  | November 12, 2004                                                                   



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Exhibit Index



|            |  |                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                               
|10.9        |  | Employment Agreement between the Company and Randall G. Smith, dated September 1, 2004                                                                                    
|            | 
|10.10       |  | Employment Agreement between the Company and Ronald T. Linares, dated September 1, 2004                                                                                   
|            | 
|10.11       |  | Amended and Restated Promissory Note between the Company and Cornelis F. Wit, dated June 30, 2004                                                                         
|            | 
|10.12       |  | Amended and Restated Promissory Note between the Company and Guus van Kesteren, dated June 30, 2004                                                                       
|            | 
|31.1        |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange Act of 1934, as amended.
|            | 
|31.2        |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange Act of 1934, as amended.
|            | 
|32.1        |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.                        
|            | 
|32.2        |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes