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

                                   Form 10-K

             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
                  For the fiscal year ended December 31, 1996

                        Commission File Number 0-21177

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

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

               146 Nassau Avenue, Islip, NY                     11751
        (Address of principal executive offices)             (Zip Code)

     Registrant's telephone number, including area code:   (516) 968-2000

       Securities registered pursuant to Section 12(b) of the Act:  ____

          Securities registered pursuant to Section 12(g) of the Act:

 Title of Each Class                 Outstanding shares as of March 20, 1997
            -------------------      ---------------------------------------
            Common Stock, par value
               .01 per share                    6,798,203

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months,  (or for such shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

Yes_X_        No__



<PAGE>



Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S - K is not contained herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

DOCUMENTS INCORPORATED BY REFERENCE

None


<PAGE>



PART I

Item 1.  Business

Introduction

Netsmart Technologies, Inc. ("Netsmart") develops, markets and supports computer
software  designed to enable  organizations  to provide a range of services in a
network computing  environment.  A network  computing  environment is a computer
system  that  provides  multiple  users  with  access to a common  database  and
functions. A network system can be a local system, such as a local area network,
known as a LAN,  which operates  within an office or facility,  or a distributed
system which provides simultaneous access to a common data base to many users at
multiple locations.

There are typically  three parties in  Netsmart's  network  system - the sponsor
(the party that maintains the data base, and may be a managed care organization,
a  university  or a  financial  institution),  the  users  (the  users  are  the
individuals  who use the system,  and may be the  subscribers  of a managed care
organization,  the  students  at a  university  or the bank care or credit  card
holders of a financial network) and the service providers (the service providers
are those who provide  goods or services  to the users,  and may be  physicians,
pharmacies,  banks and  merchants who provide  goods,  services or funds to bank
card or credit card holders).

Netsmart has developed  proprietary  network  technology  utilizing  smart cards
which it markets in the  health  care,  financial  and  education  fields as the
CarteSmart System.

A smart card is a plastic  card about the size of a standard  credit  card which
contains  a single  embedded  microprocessor  chip with both  data  storage  and
computing  capabilities.   The  smart  card  software  provides  access  to  the
information  stored in the chip,  the ability to update stored  information  and
includes security elements to restrict unauthorized access to or modification of
certain information stored on the card utilizing a smart card reader system. The
smart  card  reader  system and the  software  provides  the  ability to include
information  on both the  smart  card and the  organization's  computer  system.
Netsmart also supplies network applications which use telecommunications  rather
that than smart cards to obtain access to and manage data.

Substantially  all of  Netsmart's  revenue  through  December  31,  1995 and 77%
through  December 31, 1996 was generated by its health  information  systems and
related  services which are marketed by it's  subsidiary  Creative  Socio-Medics
Corp.  ("CSM").  CSM was acquired by Carte Medical Holdings,  Inc.  ("Holdings")
from a nonaffiliated  party in June 1994 and transferred by Holdings to Netsmart
in September 1995.

Netsmart  is a  Delaware  Corporation  formed in  September  1992 under the name
Medical  Services  Corp.  The name was changed to Carte Medical  Corporation  in
October  1993,  CSMC in June 1995 and  Netsmart  Technologies,  Inc. in February
1996.  References to Netsmart  include both the Company,  its former and present
subsidiaries,  including CSM from June 16, 1994. The Company's executive offices
are located at 146 Nassau Avenue,  Islip,  New York 11751,  telephone (516) 968-
2000. In October 1993,  Medical Services Corp. merged its subsidiary into itself
and changed its name to Carte Medical  Corporation.  In June 1995, Carte Medical
Corporation's  name was changed to CSMC  Corporation,  and in February 1996 CSMC
Corporation's name was changed to Netsmart Technologies, Inc.


Health Information Systems and Services

Since the June 1994  acquisition  of CSM,  Netsmart has offered its  customers a
range of products and  services  principally  based upon the health  information
systems which were developed and marketed by CSM prior to the acquisition. Users
typically  purchase  one of the  health  information  systems,  in the form of a
perpetual license to use the system, as well as contract  services,  maintenance
and third  party  hardware  and  software  which  Netsmart  offers  pursuant  to
arrangements with the hardware and

                                      1

<PAGE>



software vendors.  The contract services include project  management,  training,
consulting and software  development  services,  which are provided  either on a
time and  material  basis or pursuant to a  fixed-price  contract.  The software
development  services  may  require  CSM to adapt one of its health  information
systems to meet the specific requirements of the customer.

Although the health information systems constituted the basis of CSM's business,
revenue from the license of such systems has not  represented a major  component
of its revenues.  The typical  price for a license for CSM's health  information
systems  ranges from  $10,000 to $30,000.  During the years ended  December  31,
1996, 1995 and 1994, CSM installed health information  systems licensing of such
systems represented approximately $329,000,  $162,000 and $375,000, in the years
ended  December  31,  1996,   1995  and  1994,   respectively,   accounting  for
approximately 3.9%, 2.2% and 7.4% of revenue for such periods.

A customer's  purchase  order may also include third party hardware or software.
For the years ended December 31, 1996, 1995 and 1994,  revenue from hardware and
third party software accounted for approximately $1.1 million,  $2.1 million and
$552,000,  representing 13%, 29.1% and 18.9%, respectively,  of revenues in such
periods.

In addition to its health information  systems and related services,  CSM offers
specialty  care  facilities a data center,  at which its personnel  perform data
entry and data  processing and produce  operations  reports.  These services are
typically provided to smaller  substance-abuse  clinics.  During the years ended
December 31, 1996,  1995 and 1994,  CSM's  service  bureau  operation  generated
revenue of approximately $2.2 million, $1.7 million and $884,000,  respectively,
representing  approximately  25.8%,  23.6% and 30.2% of CSM's  revenues for such
periods.  The largest user of the service bureau is the State of New York Office
of Alcohol and Substance  Abuse  Services,  which uses CSM's  service  bureau to
maintain its statewide database of methadone maintenance patients, however, such
customer  accounted  for  less  than 4% of CSM's  revenues  in the  years  ended
December  31, 1996,  1995 and 1994.  Netsmart  intends to augment the  marketing
effort for the service  bureaus,  although no  assurance  can be given that such
operations will continue to be profitable.

Maintenance  services have generated  increasing revenue and are becoming a more
significant  portion of CSM's business.  Since purchasers of health  information
system licenses  typically purchase  maintenance  service.  Maintenance  revenue
increases as new customers obtain licenses for its health information  services.
Under its  maintenance  contracts,  which are executed on an annual  basis,  CSM
maintains its software and provides certain upgrades.  Its obligations under the
maintenance contract may require CSM to make any modifications necessary to meet
new Federal reporting requirements. CSM does not maintain the hardware and third
party software sold to its customers.

The CarteSmart System

Netsmart's   CarteSmart   System   software   was   designed   to   operate   on
industry-standard  computer  networks and smart cards. A smart card is a plastic
card  the  size  of  a  standard   credit   card  which   contains  an  embedded
microprocessor  chip. The card has data storage and computing  capabilities  and
the smart card  software  includes  security  elements to restrict  unauthorized
access to or modification of certain information  contained on the card. A smart
card may also include a magnetic  stripe to allow it to be used in networks that
do not include  smart card  functionality.  The smart  cards are  designed to be
issued only by the sponsor  organization,  such as a managed care  organization,
specialty  care  facility,  administrator  of an  entitlement  program  or other
similar organization, a university or a bank or credit card organization.

The CarteSmart  software  consists of components which allow Netsmart to develop
network  applications  for  sponsors  with less effort than would be required if
those network  applications were developed from scratch. The CarteSmart software
consists of an Application  Program Interface ("API") and an API Generator which
shows fast customization of the API for specific network  applications.  The API
is a set of  software  modules  that  provide the common  functions  required to
support a computer  network using smart cards.  By using the API,  Netsmart or a
sponsor may develop  network  systems  more  quickly than if all of the software
necessary to Implement the network

                                      2

<PAGE>



were custom written for a particular network application. The API Generator is a
tool  developed  by Netsmart  that it  designed  to allow  Netsmart or a network
sponsor to develop a custom API for a  particular  network and reduce the effort
required to build network systems.

The  CarteSmart  System is  designed  to operate on file  servers  and  personal
computers  which utilize the DOS,  Windows 3.1,  Windows 95,  Windows MT or UNIX
operating  systems,  depending  upon the  application.  The software used in the
smart card can be used or adapted for use in most  commercially  available smart
CarteSmart  cards  generally  meet  international  standards and are  considered
commodity products, although each manufacturer has its own software to interface
with a  computer.  Accordingly,  Netsmart  believes  that a  manufacturer  would
provide any necessary assistance in order to market its cards.

Although  Netsmart's  CarteSmart System software has general  applications,  its
experience with its CarteSmart clients reflects a need to customize the software
to meet the specific need of the client.  Although the customization need not be
significant,  each user has its  unique  requirements  that  must be met.  These
requirements  may include the need to enable the CarteSmart  System to interface
with the client's  existing  systems to the  development  of a range of software
products to meet needs which are not presently being served.

Netsmart's initial  applications were designed to meet the needs of managed care
organizations  and  entitlement  programs  and  Netsmart  developed a smart card
interface  to its  health  management  systems.  Each  time a  patient  visits a
participating  health  care  provider,  the  health  care  provider  adds to the
patient's  data base  information  concerning  the  visit,  including  the date,
procedures  performed  and  diagnosis.  At the  time  of the  first  visit  to a
participating  physician,  the  physician  enters  information  relating  to the
diagnosis  and  treatment  given on that visit  together  with such  information
relating  to  chronic  conditions,  such as  allergies  and  medication,  as the
physician  deems  important.  Netsmart does not anticipate  that the health care
provider will be expected to include  information  relating to earlier diagnosis
or  treatment;  however,  the  organization  which  provides  the smart card may
require  additional   information  to  be  input  at  the  initial  visit.  This
information  is input into the patient's  smart card and may also be transmitted
to  the  managed  care   organization's   central  data  base,   where,   unless
dissemination  of such  information  has been  restricted  by the patient  other
health  care  providers  will have  access to the  information.  The health care
provider can read  information  from, and write  information onto the smart card
through a card interface device, which is standard computer peripheral equipment
readily  available  from  composer  outlets  and can be  easily  connected  to a
personal computer. The information  transferred to the smart card is first input
by the health care  provider  on a computer  and  includes  the date of service,
diagnosis,   treatment  including  any  prescribed  medication,  and  any  other
information which the health care provider determines.

At the time of the visit, the health care provider inputs the standard codes for
use diagnosis and  procedures  performed.  Errors in inputting the diagnosis and
the procedure code delay payment or affect the amount of payment.  The SmartCard
System can be  integrated  with the health  care  provider's  existing  practice
management system,  without incurring any additional  personnel.  The CarteSmart
System software has integrated  within it an easy to use diagnosis and procedure
code look-up  capability,  as well as error checking and other  safeguards which
assist the health care  provider in inputting the proper codes based upon normal
medical terminology.

The smart card stores only a limited amount of  information,  and is intended to
reflect  current medical  conditions and not a record of medical  treatment from
birth.   When  the  storage  capacity  of  the  card,  which  is  equivalent  to
approximately ten typed pages, is reached,  items are deleted on a chronological
basis,  with the  earliest  items  being  deleted  first,  although  there is an
override  procedure  by  which  certain  crucial  medical  information,  such as
allergies and chronic conditions,  can be retained,  regardless of the date when
the patient was diagnosed or treated for the  condition.  The card also includes
information on each  prescription  which the patient is taking.  A smart card is
different from a magnetic stripe card, such as is used at Virginia  Commonwealth
University ("VCU"),  in that it has an updatable data storage capacity,  which a
magnetic stripe card does not.


                                      3

<PAGE>



To date,  Netsmart has licensed its CarteSmart  software in  conjunction  with a
pilot project for San Diego County,  which  involved the issuance of smart cards
to  approximately  1,200 mental health patients  participating in the California
Medical Managed Care Initiative.  Netsmart is presently  contracted to develop a
plan for an expansion of the program to include  substance  abuse and acute care
as well as mental health for the county's total health care population. Netsmart
is also  marketing  its  CarteSmart  System to other  entitlement  programs  and
managed care organizations;  however,  except for the pilot project in San Diego
County,   Netsmart   has  not  entered  into  any   agreements   with  any  such
organizations,  and no assurance  can be given that Netsmart will enter into any
such agreements.

During 1995,  Netsmart  commenced  marketing its  CarteSmart  based  products to
markets other than the health care field. In July 1995, Netsmart entered into an
agreement pursuant to which it installed a magnetic stripe identification system
which uses CarteSmart  technology to provide for the  centralized  issuance of a
single card to all persons allowed access to the facility and its services.  The
card  contains  the  individual's   name,  photo,   signature  and  unique  card
identification  number,  which defines the holder's  entitlement to food service
and  library  services.  Approximately  20,000  students  are using the  system.
Netsmart is  negotiating  with  respect to an agreement to expand the program to
support additional services, however, no assurance can be given that the program
will be  expanded.  A magnetic  card differs from a smart card since it does not
have an independent updatable data storage capability.  Netsmart believes that a
major market for its smart card technology is the financial  services  industry,
including  banks and  credit  card  issuers.  Commencing  in May 1995,  Netsmart
entered into a series of letter  agreements with IBN for services and CarteSmart
software  licenses  for the  implementation  of a  satellite  based  distributed
network of automatic  teller machines and off-line point of sale terminals using
smart cards for the former  Soviet  Union.  Netsmart  entered  into a definitive
agreement  to develop  the system and  license  the system to IBN.  IBN is a New
York-based company which has rights to install such systems in the former Soviet
Union. Netsmart's agreement with IBN is not contingent upon the success of IBN's
installations  in the former Soviet  Union,  although the extent of its revenues
from  royalties will be based on the number of cards issued and may be adversely
affected by political  developments in the former Soviet Union. The system being
delivered to IBN includes Oasis  Technologies  IST/Share  Financial  Transaction
System  software and other third party  software  which  Netsmart is integrating
with its CarteSmart software to complete the IBN system.

In  developing  the  CarteSmart  System  for the  financial  services  industry,
Netsmart is using networking  technologies that use telecommunications  networks
as well as smart cards. In addition,  Netsmart, through a subsidiary,  purchased
the SATC Software, which processes retail plastic card transactions and merchant
transactions.  The  purchase  price is $650,000,  of which  $325,000 was paid by
Netsmart  and the  remaining  $325,000 was paid by Oasis.  The SATC  Software is
designed  to  perform  functions  required  by credit  card  issuers,  including
applications  processing and tracking credit evaluations,  credit  authorization
and the printing of statements. Netsmart has an agreement with Oasis pursuant to
which  the  subsidiary  will  become a joint  venture  corporation  owned 50% by
Netsmart and 50% by Oasis and/or its principals.

Markets and Marketing

Although the market for smart card systems includes numerous  applications where
a secure  distributed  data base processing  system in important,  CSM's initial
marketing  efforts  were  directed  to the  health  and human  services  market,
including  managed care  organizations and entitlement  programs.  In the United
States alone, CSM believes that there are presently more than 75 million persons
who  participate  in managed care  programs,  which are  sponsored by almost 600
organizations  or health  insurers.  Because  of the  relationship  between  the
organization  and the  participating  medical care  providers and patients,  the
organization  can  institute  a smart card  system  without  the need for CSM to
conduct a separate  marketing  effort  directed at the medical  care  providers.
Although  independent  health  insurers  which do not  operate  a  managed  care
organization  may, in the future,  be a market for a smart card system,  because
the relationship  between the insurer and the medical care provider is different
from that of the managed care organization and its participating medical care

                                      4

<PAGE>



providers,  CSM is not treating independent  insurance companies as a market for
the CarteSmart  System,  an no assurance can be given that it will ever become a
market for the system.

The  market  for CSM's  health  information  systems  and  related  services  is
comprised of various providers of specialty care involving  long-term  treatment
of a repetitive nature rather than short-term critical care, such as medical and
surgical hospitals or clinics.  CSM believes that there are approximately 15,000
providers of such treatment programs in the United States,  including public and
private  hospitals,  private  and  community-based  residential  facilities  and
Federal,   state  and  local   governmental   agencies.   Of  these  facilities,
approximately 200 are customers of CSM.

Netsmart's health information systems are marketed principally to specialty care
facilities,  many of which are  operated  by  government  entities  and  include
entitlement  programs.  During the years ended December 31, 1996, 1995 and 1994,
approximately  31%, 54% and 47%,  respectively,  of revenues was generated  from
contracts with government agencies. Contracts with government agencies generally
include provisions which permit the contracting agency to cancel the contract at
its convenience.

For the year ended December 31, 1996,  one customer  accounted for more than 10%
of Netsmart's  revenue.  IBN Limited  generated  revenue of  approximately  $1.9
million representing 22% of Netsmart's revenue.

For the year ended December 31, 1995,  one customer  accounted for more than 10%
of Netsmart's revenue.  The State of Colorado generated revenue of approximately
$1.4 million, representing 18.5% of revenue for the year. CSM's largest customer
for 1994 was Cuyahoga County (Cleveland) Ohio, from which CSM recognized revenue
of $250,000, or 7.0% of revenue.

Netsmart  believes  that the  CarteSmart  software has  applications  beyond the
health and human  services  market and is  seeking  to market  the  software  to
educational institutions and in the financial services industry. In April, 1995,
Netsmart entered into a joint marketing agreement with Oasis,  pursuant to which
each company  markets the software of the other company.  Oasis,  an independent
software developer,  has developed and markets a transaction  processing system,
known as  IST/Share,  designed for high volume users in the  financial  services
industry.  Mr. Storm R. Morgan, a director of and consultant to Netsmart,  is an
officer of, and has an equity  interest  in Oasis.  Netsmart  believes  that its
agreement  with Oasis will  enhance  its  ability  to market and  introduce  its
product to the financial  services  industry where Oasis has an existing  client
base.

Netsmart may enter into  negotiations  with other companies which have business,
product  lines  or  products  which  are  compatible  with  Netsmart's  business
objectives.  However, no assurance can be given as to the ability of Netsmart to
enter into any agreement  with such a company or that any agreement  will result
in licenses of the CarteSmart System.

At  December  31,  1996 and 1995,  Netsmart  had a backlog of orders,  including
ongoing  maintenance and data center contracts,  in the aggregate amount of $3.7
million  and $4.2  million  respectively.  Substantially  all of the  backlog at
December  31,  1996 is  expected  to be filled  during  1997.  Such  orders  and
contracts relate substantially to health information sales and services.

Netsmart's sales force is comprised of three full-time sales representatives, as
well as Mr. Leonard M.  Luttinger,  chief operating  officer,  John F. Phillips,
president of CSM, and Storm R. Morgan,  a consultant  to Netsmart.  Mr. Storm R.
Morgan's services include activities relating to the marketing of the CarteSmart
System to  industries  outside of the medical  field.  His  present  efforts are
devoted  principally  to  the  financial  services  industry.  In  addition  Mr.
Luttinger  and other  members of  Netsmart's  technical  staff are  available to
assist in market support,  especially for proposals which contemplate the use of
smart card transaction processing networks.


Product Development


                                      5

<PAGE>



During 1996 the Company did not incur any  research  and  development  expenses,
since the personnel who had been engaged in such  activities  were reassigned to
work on the IBN  contract  and the  development  of Smart  Card  products.  As a
result,  their  salaries and related  expenses were included as costs of revenue
with  respect  to their  work on the  Smart  Card  product.  As a result of such
product development the Company incurred $279,000 in capitalized software costs.
Netsmart  intends to develop a product  based on both the SATC  Software and its
own  technologies  including  the  CarteSmart  System,  and to develop a network
support tool for the  financial  services  industry.  The proposed  enhancements
include an increased  language  capability  so that it can be  multilingual,  an
interface  with the CarteSmart  System and an interface  with Oasis'  IST/Share,
which is a transaction  processing system for high volume users in the financial
services  industry.  During 1995 and 1994  Netsmart  developed  and enhanced the
CarteSmart System, and six of its employees were engaged in such activities. For
the year ended December 31, 1995 and the year ended December 31, 1994,  research
and development expenses were $699,000 and $367,000, respectively,  representing
a 90.4% increase.  The increase reflects research and development for smart card
and  related  products  and  the  graphical   interface  for  Netsmart's  health
information systems.

Competition

Netsmart is in the business of licensing  software to  entitlement  programs and
managed care organizations, specialty care institutions and other major computer
users who have a need for access to a  distributed  data  network and  marketing
health  information  systems  software  to  specialty  care  organizations.  The
software  industry  in  general  is  highly  competitive,   in  addition,   with
technological  developments in the communications  industry, it is possible that
communications  as well as computer and software  companies may offer similar or
compatible  services.  Although  Netsmart  believes that it can provide a health
care facility or managed care organization with software to enable it to perform
its services more  effectively,  other  companies,  including major computer and
communications  companies  have the staff and  resources to develop  competitive
systems,  and users,  such as insurance  companies,  have the ability to develop
software systems in house. Because of the large subscriber base participating in
the major managed care  organizations,  the inability of Netsmart to license any
such  organizations  could have a materially  adverse  effect upon its business.
Furthermore,  various  companies  have offered smart card  programs,  by which a
person can have his medical  records  stored and software  vendors and insurance
companies  have  developed  software to enable a physician or other medical care
provider to have direct  access to the  insurer's  computer  and other  software
designed to maintain  patient health and/or  medication  records.  The market is
very  cost  sensitive.  In  marketing  systems  such as the  CarteSmart  System,
Netsmart  must be able to  demonstrate  the  ability of the  network  sponsor to
provide enhanced  services at lower effective cost. Major systems and consulting
vendors,  such as Unisys,  AT&T Corp. and Andersen  Worldwide may offer packages
which include smart cards and other network services.  No assurance can be given
that  Netsmart  will be able to  compete  successfully  with  such  competitors.
Netsmart believes the health insurance industry is developing switching software
to be used in  transmitting  claims from health care  providers to the insurers,
and  insurers  or  managed  care  organizations  may also  develop or license or
purchase  from others the software to process such claims,  which would  compete
with certain functions of the CarteSmart System. The health information  systems
business is highly  competitive,  and is serviced by a number of major companies
and a larger number of smaller companies,  many of which are better capitalized,
better known and have better  marketing  staffs than Netsmart,  and no assurance
can be  given  that  Netsmart  will be able to  compete  effectively  with  such
companies.  Major vendors of health  information  systems include Shared Medical
Systems  Corp.  And HBO Corp.  Netsmart  believes  that price  competition  is a
significant factor in its ability to market its health  information  systems and
services.

Netsmart also faces intense  competition  as it seeks to enter the education and
financial  services  markets.  Competition for the education market includes not
only  major  and  minor  software  developers,   but  credit  card  issuers  and
telecommunications  companies.  In  marketing  its  CarteSmartbased  products to
educational  institutions,  Netsmart can focus on the benefits to the university
of providing an all-purpose card to ease administration and reduce costs.


                                      6

<PAGE>



Major  credit  card  issuers  and  communications  companies,  such as  American
Express,  AT&T and MCI, can offer similar  services by permitting the university
to link their cards with the university's services.  Such organizations can also
use these  marketing  efforts  so a part of their  overall  corporate  marketing
strategy to familiarize the students with their particular cards and services in
hopes of  attracting  the students with their  particular  cards and services in
hopes  of  attracting  the  students  as a  long-term  user of their  cards  and
services.  As part of a marketing plan,  rather than a profit center,  such card
issuers may be able to offer the universities services similar to Netsmart,  but
at a lower cost to the university.  In this context, it is possible that, unless
Netsmart  can enter into a  marketing  arrangement  with a major card  issuer or
telecommunications  company, Netsmart may not be able to compete successfully in
marketing its CarteSmart products to educational institutions.

The  financial  services  industry is served by numerous  software  vendors.  In
addition,  major  banks,  credit  card  issuers  and  other  financial  services
companies  have the  resources  to  develop  networking  software  in house.  At
present, most financial institutions use magnetic stripe cards rather than smart
cards.  Netsmart  believes  that its  CarteSmart  System  together with the SATC
Software and its joint marketing  agreement with Oasis,  which presently  serves
the financial services  industry,  will assist Netsmart in selling and licensing
its products and services in the financial  services industry.  However,  to the
extent  that  smart  cards  become  more  important  in the  financial  services
industry,  more  companies in the financial  services  industry,  as well as the
major  computer  and  software  companies,  all of whom  are  better  known  and
substantially  better  capitalized than Netsmart,  and numerous smaller software
developers,  are expected to play an increasingly  active role in developing and
marketing smart card based products. No assurance can be given as to the ability
of Netsmart to compete in this industry.

Government Regulations

The Federal and State governments have adopted numerous  regulations relating to
the health care  industry,  including  regulations  relating to the  payments to
health care providers for various services.  The adoption of new regulations can
have a  significant  effect upon the  operations  of health care  providers  and
insurance companies. Although Netsmart's business is aimed at meeting certain of
the problems  resulting from  government  regulations and from efforts to reduce
the cost of health care, the effect of future  regulations  by  governments  and
payment  practices  by  government   agencies  or  health  insurers,   including
reductions  in the  funding  for or scope of  entitlement  programs,  cannot  be
predicted.  Any change in, the structure of health care in the United States can
have  a  material  effect  on  companies  providing  services,  including  those
providing  software.  Although Netsmart believes that one likely direction which
may result  from the  current  study of the  health  care  industry  would be an
increased trend to managed care programs,  which is the market to which Netsmart
is seeking to license its  CarteSmart  System.  No  assurance  can be given that
Netsmart's  business  will benefit  from any changes in the industry  structure.
Even if the  industry  does evolve  toward  more  health care being  provided by
managed  care  organizations,  it is  possible  that there  will be  substantial
concentration in a few very large organizations, which may seek to develop their
own  software  or obtain  software  from other  sources.  To the extent that the
health care industry evolves with greater government sponsored programs and less
privately  run  organizations,  Netsmart's  business may be adversely  affected.
Furthermore,  to the extant that each state changes its own  regulations  in the
health  care  field,  it may be  necessary  for  Netsmart  to modify  its health
information systems to meet any new record-keeping or other requirements imposed
by changes in  regulations,  an no assurance  can be given that Netsmart will be
able to  generate  revenues  sufficient  to cover  the costs of  developing  the
modifications.

A substantial  percentage of CSM's business has been with  government  agencies,
including  specialized  care  facilities  operated by, or under  contract  with,
government  agencies.  The decision on the part of a government  agency to enter
into a contract is dependent  upon a number of factors,  including  economic and
budgetary  problems  affecting  the  local  area,  and  government   procurement
regulations,  which may  include  the need for  approval by more than one agency
before a contract is signed.  In addition,  contracts with  government  agencies
generally include  provisions which permit the contracting  agency to cancel the
contract at its convenience.


                                      7

<PAGE>



Intellectual Property Rights

The CarteSmart  System is a proprietary  system developed by Netsmart.  Netsmart
has no patent  rights for the  CarteSmart  System or health  information  system
software,  but it relies  upon  nondisclosure  and secrecy  agreements  with its
employees and third parties to whom Netsmart discloses information. No assurance
can be given that Netsmart will be able to protect its proprietary rights to its
system or that any third party will not claim  rights in the system.  Disclosure
of the  codes  used in the  CarteSmart  System  or in any  proprietary  product,
whether  or  not  in  violation  of a  nondisclosure  agreement,  could  have  a
materially  adverse  affect upon  Netsmart,  even if Netsmart is  successful  in
obtaining  injunctive relief.  Furthermore,  Netsmart may not be able to enforce
its rights in the CarteSmart System in certain foreign countries.

Source of Supply

Since Netsmart does not provide any of the hardware or the smart cards it is the
responsibility  of the  licensee  to obtain the  hardware  smart cards and other
supplies.  Netsmart's  software  operates on computer  hardware  and smart cards
manufactured by a number of suppliers.

Employees

As of December 31, 1996,  Netsmart had 71 employees,  including five  executive,
five  marketing  and  marketing  support,  54 technical  and seven  clerical and
administrative  employees.  The chief  executive  officer and the  president  of
Netsmart devote only a portion of their time to the business of Netsmart.


Item 2.   Property

The Company's  executive  offices and  facilities  are located in  approximately
18,000 square feet of space at 146 Nassau Avenue, Islip, New York, pursuant to a
lease which  terminates  on February 28,  1999,  at a minimum  annual  rental of
$248,000.  This lease provides for fixed annual increases ranging from 4% to 5%.
The Company believes that such space is adequate for its immediate needs.

The Company also leases  approximately 1,800 square feet of office space at 7590
Fay Avenue, La Jolla, California,  pursuant to a lease which terminates on March
31, 1999, at a minimum  annual rental of $31,000.  This lease provides for fixed
annual increases of 4%.

The company occupies, on a month to month basis, approximately 1,500 square feet
of office space in Wethersfield, Conneticut, at a monthly rental of $2,000.

The Company  believes  that its space is adequate  for its  immediate  needs and
that,  if  additional  space  is  required,  it would be  readily  available  on
commercially reasonable rates.


Item 3.   Legal Proceedings

None.

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

No matters were submitted to security holders for a vote during the three months
ended December 31, 1996.

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

The  Company's  shares of Common Stock is traded on the Nasdaq  Market under the
symbol  NTST.  Set forth  below is the  reported  high and low bid prices of the
shares of Common Stock for the transition period listed.

                                      8

<PAGE>



      Quarter Ending                            High Bid          Low Bid

      September 30, 1996                        $13.25            $12.50
      December 31, 1996                           3.38              3.00

As of December  31, 1996 there were  approximately  347 holders of record of the
Company's common stock.

No cash  dividends  have been paid to the holders of the shares of Common  Stock
during the years ended December 31, 1996 and 1995 and 1994.



                                      9

<PAGE>



Item 6.  Selected Financial Data

                                                   Year Ended
                                                   ----------
                                    1996          1995      1994          1993
                                    ----          ----      ----          ----
                                             (in 000's except per share data)
Selected Statements
  of Operations Data:

Revenues                        $    8,541     $  7,382    $ 2,924     $    57

Income (Loss) from
 Operations                         (4,151)      (1,433)    (1,491)        (339)

Net Income (Loss)                1&2(6,579)     3(2,850)    (1,751)        (433)

Net Income (Loss)
  per Common Share              $    (1.29)     $  (.59)   $  (.36)    $   (.10)

Weighted average number
  of shares outstanding              5,149        4,822       4,822       4,763

Selected Balance
 Sheet Data:
 Working Capital (deficiency)          477       (2,562)     (4,037)       (938)

Total Assets                         8,251        6,390       7,193         585

Total Liabilities                    3,836        5,887       6,342         938

Redeemable Preferred Stock             --            96          96          96

Accumulated Deficit                 (11,726)     (5,147)     (2,297)       (546)

Stockholders' Equity
(deficiency)                          4,415         407         755        (449)


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
of Operations

Years Ended December 31, 1996 and 1995.

The Company's revenue for 1996 was $8.5 million, an increase of $1.1 million, or
15% from the revenue for 1995 which was $7.4 million.  Approximately  $1,550,000
of the increase in revenue was generated pursuant
--------
      1Includes  $3,492  of non cash  compensation  charges  arising  out of the
issuance by the Company of warrants and options  having  exercises  prices which
were less than the market  value of the Common  Stock at the date of approval by
the board of directors.
      2  Includes  $1,692 of non cash  costs  associated  with the  issuance  of
500,000 common shares to certain  noteholders  and 25,000 shares of common stock
to the Company's asset based lender.
      3Includes  financing costs of $460  representing the write-off of deferred
financing costs relating to a proposed public offering  scheduled for early 1995
but cancelled.

                                         10

<PAGE>



to the  Company's  agreement  with  IBN.  IBN  represented  the  Company's  most
significant  customer for 1996,  accounting  for  approximately  22% of revenue.
Furthermore,  through  December  31,  1996  IBN has  generated  revenue  of $2.4
million,  or  approximately  89.6%  of the  Company's  total  revenue  from  the
SmartCard  systems  during the two years ended  December  31, 1996 and 1995 on a
combined basis. The revenue generated to date includes approximately $419,000 of
guaranteed  royalties.  As of December 31, 1996,  the contract was more than 80%
complete.  The Company is  continuing to provide  professional  services to IBN,
although revenues from such services have declined  substantially from the level
at the beginning of the year. The Company intends to expand its marketing effort
for its CarteSmarte  System,  however, at December 31, 1996, the Company did not
have any significant contracts for the CarteSmart system.

Revenue from the Company's health information systems continued to represent the
Company's  principal  source of revenue in 1996,  accounting for $6.5 million or
76% of revenue.  However,  as a result of the increase of revenue from SmartCard
systems,  principally  from IBN,  revenue  from health  information  systems and
services declined as a percentage of total revenue.  Except for revenue from the
IBN contract,  the largest component of revenue in 1996 was data center (service
bureau)  revenue which  increased to $2,207,000 in 1996 from $1,742,000 in 1995,
reflecting  an  increase  of 27%.  The  turnkey  systems  revenue  decreased  to
$1,663,000  in 1996  from  $1,777,000  in 1995,  reflecting  a  decrease  of 6%.
Maintenance  revenue  increased to $1,226,000  in 1996 from  $1,099,000 in 1995,
reflecting  a 11%  increase.  Revenue  from third party  hardware  and  software
decreased  to  $1,114,000  in 1996 from  $2,148,000  in 1995, a decrease of 48%.
Sales of third party hardware and software are made only in connection  with the
sales of turnkey  systems.  License  revenue  increased to $329,000 in 1996 from
$162,000 in 1995.  License  revenue is  generated as part of a sale of a turnkey
system  pursuant to a contract or purchase order that includes  development of a
turnkey system and  maintenance.  The Company believes that the increase in 1996
installations  should enable the Company to increase the maintenance  revenue in
future periods.

Revenue from contracts from government  agencies  represented 31% of revenue for
1996 . The Company  believes that such  contracts  will continue to represent an
important  part of its business,  particularly  its health  information  systems
business.   In  1996,   contracts  from   government   agencies   accounted  for
approximately 40% of its revenue from health information systems.

Gross profit  decreased to  $1,332,000  in 1996 from  $1,763,000  in 1995, a 24%
decrease. The decrease in the gross profit was substantially the result of costs
associated with the completion of the IBN contract. At December 31, 1996 the IBN
contract was more than 80% complete.

Selling,  general  and  administrative  expenses  were $1.9  million in 1996,  a
decrease of 24% from the $2.5 million in 1995. The decline was substantially the
result  of a one time  charge in 1995 of a write off  deferred  public  offering
costs in the amount of $460,000 as well as a reduction in executive compensation
and a reduction in staff.

During 1996, the Company incurred non cash compensation  charges of $3.5 million
arising  out of the  issuance by the  Company of  warrants  and  options  having
exercise prices which were less than the market value of the Common Stock at the
date of approval by the board of  directors.  During  1996,  the Company  issued
500,000  common  shares to certain  noteholders  and 25,000 common shares to the
Company's asset based lender. As a result of such issuance, the Company incurred
a financing cost charge to operations of approximately $1.7 million.

In 1996, the Company did not incur any research and development expenses,  since
the personnel who had been engaged in such activities were reassigned to work on
the IBN contract and the development of SmartCard products.  As s result,  their
salaries and related  expenses were included in costs of revenue with respect to
the work on the IBN contract and  capitalized  software  development  costs with
respect  to their work on the  SmartCard  product.  As a result of such  product
development,  the Company  incurred  $279,000 in  capitalized  software costs of
which $28,000 has been amortized in 1996 and charged to cost of sales.  In 1995,
the  Company  incurred  research  and  development  expenses  in the  amount  of
$699,000.

In 1996 the Company  recognized  its 50% share of its loss in its joint  venture
corporation  with respect to the purchase of SATC  software.  The amount of such
loss was $264,000.


                                         11

<PAGE>



Interest  expense was $473,000 in 1996,  a decrease of $81,000,  or 15% from the
interest expense in 1995. The most significant component of the interest expense
on an ongoing basis is the interest payable to the Company's asset-based lender,
which it pays  interest  equal to the  greater if 18% per annum or prime plus 8%
plus a fee of 1% of the face amount of the invoice.

As a result of the foregoing  factors,  the Company  incurred a net loss of $6.6
million, or $1.29 per share in 1996 as compared with a net loss of $2.9 million,
or $.73 per share in 1995.


Years Ended December 31, 1995 and 1994

The results of the Company's operations for the year ended December 31, 1995 are
not comparable  with the results of operations for 1994 since the acquisition of
CSM was effective  July 1, 1994,  and the results of operations for 1994 include
the CSM business only from such date.

The  Company's  revenue for 1995 was $7.4 million,  representing  an increase of
152% from the  revenue of the  Company for 1994 of $2.9  million.  The  increase
reflected the  inclusion of CSM's  operation for only the last six months of the
year.  Revenue from health  information  systems and services accounted for $6.8
million,  or 91.5%  of total  revenue  for 1995 and more  than 99% of pro  forma
combined  revenue of the Company and CSM for 1994.  CarteSmart  Systems  revenue
accounted for the balance of the revenue for the periods.  In 1994,  the Company
generated  CarteSmart  Systems  revenue of $90,000 from the pilot project in San
Diego County. In 1995, revenue from CarteSmart technology was $631,000.

The  largest  component  of revenue for 1995 was $2.0  million  from the sale of
third party  hardware and software,  as compared  with  $519,000 for 1994.  Such
revenue represented 26.7% and 17.7% of revenue for 1995 and 1994,  respectively.
A  significant  portion  of  revenue in 1995  represented  the sale of  hardware
($842,000) and software and related services  ($524,000)  pursuant to a purchase
order from the State of Colorado for its Department of Human  Services.  Revenue
from services  related to turnkey systems and data center revenue  accounted for
$1.8 million and $1.7 million, or 24.1% and 23.6% of revenue,  respectively, for
1995, as compared  with  $664,000 and  $884,000,  or 22.7% and 30.2% of revenue,
respectively,  for 1994.  Maintenance  revenue was $1.1  million and $500,000 in
1995  and  1994,   respectively,   representing   14.9%  and  17%  of   revenue,
respectively.  The  Company  believes  that the  increase  in  installations  at
December 31, 1995 from the prior year should  enable the Company to increase the
maintenance revenue in future periods. Revenue from CarteSmart Systems increased
to  $631,000  in 1995,  representing  8.6% of  revenue,  from  $90,000  in 1994,
representing  3.1% of revenue.  The CarteSmart  System revenue reflected revenue
from IBN ($481,000), VCU ($118,000) and the San Diego pilot program ($31,000) in
1995 and the San Diego Prom ($90,000) in 1994.  The overall  increase in revenue
reflects the inclusion of CarteSmart  Systems revenue  combined with the revenue
from the Colorado agreement.

Both the increase in revenue and the change in revenue mix  reflected  increased
revenue  resulting  from an enhanced  marketing  effort  following the June 1994
acquisition  of CSM.  During  the  second  half of 1994,  the  Company  received
significant  purchase  orders from the State of Colorado for its  Department  of
Human  Services  and the State of  Oklahoma.  The  Colorado  order  covered  the
purchase  of  the  Company's  health  information  system,  including  software,
consulting  services and hardware,  at a total purchase  price of  approximately
$1.2 million.  Of the purchase  price,  approximately  $700,000  represented the
purchase  price  of the  software  and  consulting  services,  and  the  balance
represents  the cost of the  hardware.  In July  1994,  the  Company  received a
purchase  order  from a state  agency  of the  State  of  Oklahoma  for a health
information system which includes the graphical interface.  The order called for
the  installation  of the  system  in ten  hospitals  for a  purchase  price  of
approximately   $430,000.  The  Company  is  continuing  to  market  its  health
information systems to entitlement  programs.  It believes that the inclusion of
the graphical and smart card functions, which were implemented during the second
half of 1994 and the  first  half of  1995,  will  assist  it in  marketing  its
products to entitlement  programs.  It also believes that the  successful  pilot
project for the smart card  interface in San Diego  provides the Company with an
important tool in marketing this function to both new and existing clients.  The
Company is commencing a marketing  effort for its CarteSmart  System directed at
the financial services industry and educational  institutions.  However,  in the
industries to which the Company is marketing its products,  there is typically a
long selling  cycle,  as a result of which the Company must  continue to support
its marketing effort for a significant period before any revenue is realized.

                                         12

<PAGE>



Gross  profit  increased  to $1.8  million  in 1995 from  $390,000  in 1994,  an
increase of 352%,  which  reflected  an increase in the gross margin to 23.9% in
1995 from 13.3% in 1994.  The  increase in gross profit  resulted  from both the
improved  gross margin and the inclusion of twelve  months of CSM  operations in
1995 and six months of such operations in 1994. The improved margin reflects the
significant  increase in  CarteSmart  revenue,  on which the Company  realized a
higher margin than on its health information systems and services.  However, the
amortization of capitalized  software costs of $419,000 during 1995 is reflected
as a cost of revenue,  which offset the higher margin for the CarteSmart System.
During 1995, the Company changed its CarteSmart  System from a DOS-based  system
to a  Windows-based  system.  The  capitalized  costs  related to the  DOS-based
system. As a result, at December 31, 1995, the Company wrote off the unamortized
software  development costs, which increased cost of revenue.  In addition,  the
Company expensed the development of the Windows-based  system, which was charged
to research and development. The gross profit for 1995 benefitted from the gross
margin for maintenance services.  During 1995, the gross profit from maintenance
services  increased to $356,000 from $52,000 in 1994,  reflecting an increase in
the gross margin from such  services to 32.4% for 1995 from 10.4% for 1994.  The
increase in margin  resulted  from  increased  services  performed on a time and
materials  basis as well as a  reduction  in staff  as the  Company  was able to
perform the same services with a smaller staff.

Selling,  general and administrative expenses were $2.5 million and $1.5 million
for  1995  and  1994,  respectively,  representing  a 65.0%  increase.  In 1994,
selling,  general and administrative expenses included approximately $236,000 of
compensation expense arising out of the issuance of Consolidated common stock to
former  officers  of CSM and the grant by SISC to such  persons  of  options  to
purchase shares of the Company's Common Stock which were owned by SISC. However,
in 1995,  selling,  general  and  administrative  expenses  included  a $200,000
increase in  annualized  expenses  resulting  from an increases in the marketing
staff, a $100,000  increase in the level of  compensation  for the Company's and
CSM's officers  following the June 1994  acquisition  of CSM,  $150,000 in legal
expenses,  a portion of which related to the acquisition of CSM, and $313,000 of
the   amortization  of  customer  lists  resulting  from  the  CSM  acquisition.
Commencing  July 1, 1994,  general  and  administrative  expenses  reflects  the
amortization of customer lists resulting from the CSM acquisition.

Research  and   development  was  $699,000  and  $367,000  for  1995  and  1994,
respectively,  representing a 90.4% increase. The increase reflects research and
development for smart card and related products and the graphical  interface for
the Company's health information systems.

During 1995, the Company incurred financing costs of $863,000,  representing the
write-off of deferred  financing  costs  relating to a proposed  initial  public
offering  which had been  scheduled for early 1995, but which had been canceled.
No such expenses were incurred in 1994.

Interest expense was $554,000 and $260,000 for 1995 and 1994,  reflecting a 113%
increase.  The  increased  interest  reflects  (i)  financing  costs of $208,000
reflecting  interest  and  fees  at  higher  borrowing  levels  pursuant  to the
Company's  agreement with its asset-based  lender and (ii) interest at 10% on an
increased average level of borrowings from SISC. The most significant  component
of the  interest on an ongoing  basis is the interest  payable to the  Company's
asset-based  lender,  on which it pays interest  equal to the greater of 18% per
annum or prime plus 8% plus a fee of 1% of the face amount of the  invoice.  The
debt  restructure  whereby at September 30, 1995,  SISC  exchanged  more than $2
million  in debt for  shares of  Series D  Preferred  Stock  and the  subsequent
exchange by SISC of a portion of such preferred stock for Common Stock will have
the effect of reducing the interest payable by the Company, which reduction will
be offset to some extent by dividends payable to SISC with respect to the Series
D Preferred Stock.  However,  the $72,700 annual dividends  payable on the 1,210
shares of Series D Preferred Stock will be significantly  less than the interest
paid on the debt.

As a result of the  foregoing  factors,  the  Company  sustained  losses of $2.9
million,  or $.59 per share,  for 1995, as compared with a loss of $1.8 million,
or $.36 per share.  If certain  additional  compensation  expenses were incurred
during the year,  the pro forma loss would have been $3.5  million,  or $.73 per
share.

In addition,  at December 31, 1995 and 1994,  the estimated  profit  included in
cost and estimated  profit in excess of interim billings and interim billings in
excess of cost and estimated profit decreased  substantially  from approximately
$1.4 million to approximately  $500,000.  This decrease reflected a reduction in
the number of

                                         13

<PAGE>



contracts that have billing schedules which differ from revenue recognition.  As
a result of a  reduced  number of such  contracts  at  December  31,  1995,  the
estimated profits from such contracts declined.

Liquidity and Capital Resources

On August 9,  1996 the  Company  closed  on a public  offering  whereby  it sold
646,875 units at a price of $8 per unit for a net proceeds of $3.8 million. Each
unit  consisted of two shares of Common stock and one Series A Redeemable  stock
purchase warrant.  On August 21, 1996 Series B Common Stock Purchase Warrants to
purchase  800,000  shares of common stock at $2 per share were exercised and the
Company received $1.6 million in gross proceeds.

The  Company's  net loss for the year was $6.6  million  of which  $3.5  million
related to a one time non cash charge arising out of the issuance by the Company
of warrants and options having  exercise  prices which were less than the market
value of the Common  Stock at the date of  approval  by the board of  directors.
Also  included in the 1996 loss was a one time non cash  financing  costs in the
amount of $1.6 million related to the issuance of 500,000 shares of common stock
to certain  noteholders and 25,000 shares of common stock to the Company's asset
based  lender.  Both of these  one time non cash  charges  had no  impact on the
Company's working capital.

Substantially,  as a result of the above, the Company's  working capital deficit
of $2.6 million at December 31, 1995 was improved to a working  capital  surplus
of $477,000 at December 31, 1996.

Since January 1, 1995 and prior to the public offering,  the Company's principal
source of funds, other than revenue,  has been an accounts receivable  financing
agreement and interim loans from nonaffiliated accredited investors. In February
1995, the Company entered into an accounts  receivable  financing agreement with
an asset  based  lender,  pursuant  to which it may borrow up to 80% of eligible
accounts receivable.  As of December 31, 1996 , the outstanding borrowings under
this facility was $590,000.

In January 1996, the Company borrowed $500,000 from unaffiliated investors,  and
issued  its 8% note due the  earlier  of  January  31,  1997 or five days  after
completion of a public offering. These loans were repaid in August 1996.

At December 31, 1996,  accounts  receivable  and costs and estimated  profits in
excess  of  interim  billings  were  approximately  $3.2  million,  representing
approximately 80 days of revenue for the year ended December 31, 1996.  Accounts
receivable  at  December  31, 1996  increased  by $171,000  from  $2,113,000  at
December 31, 1995 to  $2,284,000  at December 31, 1996. At December 31, 1996 one
customer,  IBN accounted for 21% of the total accounts  receivable  balance.  No
other customer accounted for more than 10% of the accounts receivable balance.


Item 8.     Financial Statements and Supplementary Data

The financial  statements and supplementary  data begin on page F-1 of this Form
10-K.


Item 9.     Changes and Disagreements with Accountants on Accounting and 
Financial Disclosure

None



                                         14

<PAGE>




Item 10.    Directors and Executive Officers of the Registrant

The directors and executive officers of the Company are as follows:

Name                      Age         Position

Lewis S. Schiller         66          Chairman of the Board, Chief Executive 
                                      Officer & Director

James L. Conway           48          President and Director

Leonard M. Luttinger      47          Chief Operating Officer and Director

Anthony F. Grisanti       47          Chief Financial Officer, Treasurer 
                                      and Secretary

John F. Phillips          57          Director

E. Gerald Kay             55          Director

Storm R. Morgan           31          Director

Mr.  Lewis S.  Schiller  has been  chairman  of the board and a director  of the
Company since its  organization  in September  1992. Mr. Schiller is chairman of
the board and chief executive officer of Consolidated,  SISC and Holdings and is
chief   executive   officer   and/or   chairman  of   Consolidated's   operating
subsidiaries, whose operations include magnetic resonance imaging centers, three
dimensional  imaging  products,  telecommunications  and  various  manufacturing
operations.  SISC is the sole stockholder of Holdings, the principal stockholder
of  the  Company,  and  SISC  and  Holdings  are  wholly-owned  subsidiaries  of
Consolidated.  Mr.  Schiller has held such positions for more than the past five
years.  Since May 1995, Mr. Schiller has also been chairman of the board,  chief
executive officer and a director of Trans Global Services,  Inc. (formerly known
as Concept  Technologies Group, Inc.),  ("Trans Global"), a contract engineering
company,  of which SISC holds a majority  of the  voting  rights.  Mr.  Schiller
devotes only a portion of his time to the  business of the Company.  On December
11, 1989, Mr. Schiller was elected as chairman and chief executive and financial
officer of General Technologies Group, Ltd. ("GTG"), a Long Island based defense
manufacturing firm in which Consolidated was a stockholder and a major creditor.
On  December  14,  1989,  GTG  filed  for  protection  under  Chapter  11 of the
Bankruptcy Act.  Consolidated also commenced  litigation against GTG, its former
chairman and chief executive  officer,  accountants and secured lender which was
settled  out of court in 1993 and  1996.  Mr.  Schiller  devotes  a  significant
portion of his time to the business of Consolidated and its other  subsidiaries.
He  anticipates  that he will devote such amount of his time to the  business of
the Company as is  necessary;  however,  Mr.  Schiller does not expect to devote
more than 10% of his time to the business of the Company.

Mr.  James L. Conway has been  president  and a director  of the  Company  since
January  1996.  Since  1993,  he  has  been  president  of  S-Tech   Corporation
("S-Tech"),   a  wholly-owned  subsidiary  of  Consolidated  which  manufactures
specialty vending equipment for postal,  telecommunication  and other industries
and avionics  products.  His position as president of S-Tech  Corporation is his
principal  business  activity.  From 1990 to 1993,  he was  president of GTG, as
debtor in possession  following  its filing under  Chapter 11 of the  Bankruptcy
Act. Mr. Conway devotes 40% to 50% of his time to the business of the Company.

Mr.  Leonard M. Luttinger has been president and a director of the Company since
its  organization  in September  1992 until January  1996,  when he became chief
operating  officer.  From March 1991 to September  1992, Mr.  Luttinger was vice
president  of smart card  systems  for  Onecard,  a  corporation  engaged in the
development  of smart-card  technology.  From June 1966 to February 1991, he was
employed  at  Unisys,  a computer  corporation,  and its  predecessor  Burroughs
Corporation,  in various  capacities,  including  manager of  semiconductor  and
memory products and manager of scientific systems.


                                         15

<PAGE>



Mr.  Anthony F.  Grisanti  has been  treasurer  of the Company  since June 1994,
secretary since February 1995 and chief financial officer since January 1996. He
was  chief  financial  officer  of CSM and ACT for more than  five  years  prior
thereto.

Mr. John  Phillips has been a director of the Company and vice  president of CSM
since June 1994, when CSM was acquired. He also served as vice chairman and vice
president -- marketing of the Company from June 1994 to January  1996.  He was a
senior  executive  officer and  director of CSM and ACT for more than five years
prior to June 1994. From January 1993 to June 1994, he was chairman of the Board
of CSM and ACT. From 1986 until  December 1992, he was president of CSM and ACT.
Mr. Phillips is a director of ACT.

Mr. Storm R. Morgan has been a director of the Company since January 1996.  Mr.
Morgan is also senior vice president of Oasis, a position he has held since 
1991, and an officer and director of SMI, a position he has held since 1989.

The  Company's   Certificate  of  Incorporation   includes  certain  provisions,
permitted under Delaware law, which provide that a director of the Company shall
not be personally liable to the Company or its stockholders for monetary damages
for breach of  fiduciary  duty as a director  expect for  liability  (I) for any
breach of the  director's  duty of loyalty to the  Company or its  stockholders,
(ii) for acts or  omissions  not in good  faith  or  which  involve  intentional
misconduct or a knowing  violation of law, (iii) for any transaction  from which
the director derived an improper personal  benefit,  or (iv) for certain conduct
prohibited  by  law.  The  Certificate  of  Incorporation  also  contains  broad
indemnification provisions.  These provisions do not affect the liability of any
director under Federal or applicable state securities' laws.

The  Board  of  Directors  does  not have  any  executive,  nominating  or audit
committees.
       

Item 11.    Executive Compensation

Set forth below is information  concerning the Company's chief executive officer
and the only officers who received or accrued compensation in excess of $100,000
during the years  ended  December  31,  1996,  1995 and 1994.  Information  with
respect to  Messrs.  Bright,  Grisanti  and  Phillips  reflects,  for 1994,  the
combined compensation received from the Company and Old CSM.

<TABLE>
                                   Annual Compensation     Long Term Compensation (Awards)
Name and Principal PositioYear   Salary  Commissions/Bonus Restricted StocOptions/Warrants
                                                           Awards  (Dollars)(Number)
<S>                                <C>         <C>             <C>             <C>    
                                                          
Lewis S. Schiller, CEO    1996     1--          --              --              --
                          1995     1--          --              --              52,500
                          1994     1--          --              --              --

James Conway, President   1996     $77,408      --              --             268,750

Leonard M. Luttinger      1996     62,500      67,262           --             156,250
Chief Operating Officer   1995     125,000      --              --             176,768
                          1994     113,390      --              --             415,000

John F. Phillips,         1996     100,000     33,906           --             627,000
Vice Chairman             1995     123,900      --              --              38,768
and Vice President        1994     108,416      --             5--             415,000
of Marketing

Anthony F. Grisanti       1996     80,000      23,500           --             715,000
Chief Financial Officer   1995     80,000       --              --             832,464
                          1994     71,500       --             5

Storm R. Morgan           91996     --          --              --             262,500

</TABLE>

                                         16

<PAGE>



------------------------


      1Mr.  Schiller  received  no  compensation  from  the  Company.  Effective
December 31,  1994,  Consolidated  changed its fiscal year to the calendar  year
from the twelve  months ended July 31.  During the year ended  December 31, 1996
and 1995,  the period from August 1, 1994 to December 31,  1994,  for the fiscal
years  ended  July  31,  1994,  the  total   compensation  paid  or  accrued  by
Consolidated  to Mr.  Schiller  was  $340,000,  $250,000,  $94,000 and  $181,451
respectively.  The Company has an agreement with Trinity pursuant to which it is
to pay  Trinity  consulting  fees of  $180,000  per  year  for the  three  years
commencing  August 1996. The services to be rendered by Trinity  include general
business and  financial  management  services and may be rendered by officers of
Trinity,  including Mr. Schiller, who is chief executive officer of both Trinity
and the Company.

      2Represents  warrants to purchase  100,000 shares of Common Stock at $2.00
per share and  warrants to  purchase  168,750  shares of Common  Stock at $4 per
share.

      3 Represents  warrants to purchase 25,000 shares of Common Stock at $2 per
share and warrants to purchase 131,250 shares of Common Stock at $4 per share.

      4In December 1994, the Company issued options to purchase 15,000 shares of
Common  Stock at  $5.33  per  share to each of  Messrs.  Luttinger,  Bright  and
Phillips  pursuant to the Company's  1993 Long-Term  Incentive  Plan. In January
1995,  these options were canceled and new options were granted with an exercise
price of $.232 per share,  which was  determined by the Board of Directors to be
the fair  market  value per share on such  date,  to  Messrs.  Luttinger  (8,058
shares), Bright (20,058 shares) and Phillips (20,058 shares).

      5In June 1994 at the closing of the  acquisition  of CSM,  SISC granted to
Messrs.  Bright,  Phillips and Grisanti options to purchase  66,000,  66,000 and
19,920 respectively of the Company's Common Stock owned by SISC. The options are
exercisable  at an exercise price of $.232 per share during the five year period
commencing  June  1994.  In  June  1994,  at the  closing  of  the  acquisition,
Consolidated  issued  to such  individuals  an  aggregate  of  40,000  shares of
Consolidated common stock.

      6Represents options to purchase 27,000 shares of Common Stock at $2 per 
share.

      7Represents options to purchase 15,000 shares of Common Stock at $2 per 
share.

      8Represents options to purchase 23,109 shares of Common Stock at $.232 per
share and 9,355 shares of Common Stock at $.345 per share.

      9In January 1996,  Mr. Storm Morgan was elected a director of the Company.
At the time of his  election.  He was a consultant  of the Company.  The Company
does not pay compensation to Mr. Morgan.  During 1996 the Company operated under
a proposed  agreement  pursuant to which the  Company  paid to SMI, of which Mr.
Morgan is the sole stockholder,  an officer and director,  $619,700 for services
provides by Mr.  Morgan  from a time to time on an as needed  basis and for four
persons to serve in  management-level or other key positions of the Company on a
full time basis.  These individuals  provided  marketing,  support and technical
services  to the  Company.  Mr.  Morgan was not  required  to devote any minimum
amount of time to the  business of the Company.  In addition the Company  during
1996  reimbursed SMI for expenses  incurred by SMI staff a total of $285,524.  A
substantial  amount o these  expenses  were  reimbursed  to the  Company  by its
clients. The Company also paid SMI in 1996 a total of $11,750 in commissions and
$250,000 for services related to the Company's agreement with IBN.

      In February 1997 the Company  modified its agreement with SMI reducing the
monthly fees payable to $9,000.

      10Represents warrants to purchase 150,000 shares of Common stock at $2 per
share and warrants to purchase 112,500 shares of Common stock at $4 per share.


                                         17

<PAGE>



In June 1994, at the closing of the acquisition of CSM, the Company entered into
five-year employment agreements with Messrs.  Luttinger,  Edward D. Bright, John
F.  Phillips  and Anthony F.  Grisanti  providing  for annual  base  salaries of
$125,000,  $125,000,  125,000 and $80,000,  respectively.  The  agreements  with
Messrs.  Luttinger and Evans  replaced  prior  agreements  and  increased  their
compensation. The agreements provide for an annual cost of living adjustment, an
automobile allowance and a bonus of 4% of income before income taxes for Messrs.
Luttinger,  Bright and  Phillips  and 2% of income  before  income taxes for Mr.
Grisanti. The maximum bonus is 300% of salary for Messrs. Luttinger,  Bright and
Phillips and 200% of salary for Mr. Grisanti.  The agreements  provide that such
individuals  will  be  elected  as  executive  officers  of  the  Company.   Mr.
Luttinger's agreement also provides for payment of his relocation expenses.  For
1996, Messrs.  Luttinger,  Phillips and Bright agreed to reduce base salaries of
$62,500,  $100,000 and $100,000,  with certain incentives if certain targets are
attained.  The aggregate annual base salaries for 1996 under these agreements is
$442,500.  In  August  1996 the  Company  entered  into a five  year  employment
agreement with Mr. Conway  providing for an annual base salary of $125,000.  The
agreement  provides  for an annual  cost of  living  adjustment,  an  automobile
allowance and a bonus of 5% income  before  income  taxes.  The maximum bonus is
300% of salary. In addition,  the Company has an agreement with Trinity pursuant
to which the Company will pay Trinity  $180,000  per year during the  three-year
period  commencing  on the first day of the month in which the Company  receives
the proceeds from this Offering.

      Pursuant to his  employment  agreement  with  Consolidated,  Mr.  Schiller
received,  prior to September 1, 1996, an annual salary of $250,000 subject to a
cost of living  increase,  a bonus  equal to 10% of  Consolidated's  net  income
before income taxes or cash flow,  whichever is greater,  in excess of $350,000.
Effective  September  1, 1996,  Mr.  Schiller's  base  salary was  increased  to
$500,000.  Pursuant to his employment agreement with Consolidated,  Mr. Schiller
has the  right  to  acquire  10% of  SISC's  interest  in its  subsidiaries  and
investments, including its investment in the Company, at 110% of SISC's cost.


Item 12.    Security Ownership of Certain Beneficial Owners and Management

The  following  table  sets  forth  the,  as of March 14,  1997,  the number and
percentage of shares of outstanding  common stock owned by each person owning at
least 5% of the  Company's  Common  Stock,  each  director  owning stock and all
directors and officers as a group:
                                             Common Stock
                                 Amount and Nature
Name and                            of Beneficial    Percent of Ownership
1Address                             2Ownership           Outstanding

3Lewis S. Schiller                 4,699,737              62.4%
160 Broadway
New York, NY 10038

4SIS Capital Corp.                 4,433,070              60.2%
        and
Carte Medical Holdings, Inc.
160 Broadway
New York, NY 10038

5Leonard M. Luttinger                261,016              3.7%

6John F. Phillips                    131,766              1.9%

7Storm R. Morgan                     307,000              4.3%

8James L. Conway                     293,750              4.2%

All Directors and Officers         5,760,653              68.2%
As a group (four individuals
owning stock) 3, 5, 6, 7, 8, 9

                                         18

<PAGE>



------------------------


      1Unless  otherwise  indicated,  the address of each person is c/o Netsmart
Technologies, Inc., 146 Nassau Avenue, Islip, New York 11751.

      2Unless  otherwise  indicated,  each person  named has the sole voting and
sole  investment  power  and has  direct  beneficial  ownership  of the  shares.
Information as to ownership of Outstanding  Warrants by each person named in the
table is set forth in the footnotes.

      3Includes (a) 100,000  shares of Common Stock owned by Mr.  Schiller,  (b)
3,122,390  shares by  Holdings,  of which Mr.  Schiller  is the chief  executive
officer and has the power to vote the shares,(c)  700,000 shares of Common Stock
issued to SISC as a result of exercising $2 warrants in August 1996. (d) 565,000
shares  of  Common  Stock  issuable  to SISC upon the  exercise  of  outstanding
warrants.  (e) 166,667 shares of Common Stock issuable to Mr.  Schiller upon the
exercise of outstanding warrants.  Includes 151,920 shares of Common Stock owned
by  Holdings,  subject  to  options  granted  by SISC  in  connection  with  the
acquisition of CSM. Shares owned by Mr. Schiller do not include securities owned
by DLB,  which is owned by Mr.  Schiller's  wife and with  respect  to which Mr.
Schiller  disclaims  beneficial  interest.  At March 14, 1997, DLB owned 237,577
shares of Common Stock and  Outstanding  Warrants to purchase  70,833  shares of
Common  Stock at $2.00  per share and  53,126  shares of Common  Stock at $4 per
share. If the shares owned by DLB were included with Mr. Schiller's  shares, the
number shares of Common Stock  beneficially  owned by Mr.  Schiller at March 14,
1997 would be  5,061,273 or 66.1% of the  outstanding  shares of Common Stock at
such date.

      4Includes (a) 3,122,390  shares owned by Holdings,  (b) 700,000  shares of
Common Stock issued to SISC as a result of exercising $2 warrants in August 1996
and (c) 565,000  shares of Common  Stock  issuable to SISC upon the  exercise of
outstanding warrants.  The shares owned by SISC include 151,920 shares of Common
Stock owned by Holdings,  subject to options  granted by SISC in connection with
the acquisition of CSM.

      5Includes (a) 26,766 shares of Common Stock  issuable upon the exercise of
outstanding  options,  (b)  25,000  shares of  Common  Stock  issuable  upon the
exercise of outstanding $2 warrants, (c) 131,250 shares of Common Stock issuable
upon the exercise of outstanding $4 warrants.

      6Represents  66,000 shares  issuable upon exercise of an option granted by
SISC and 65,766 shares of Common Stock  issuable  upon  exercise of  outstanding
options.

      7Mr.  Morgan  holds  Outstanding  Warrants to purchase  150,000  shares of
Common  Stock at $2.00 per share and  112,500  shares of Common  Stock at $4 per
share.

      8Mr.  Conway  holds  Outstanding  Warrants to purchase  100,000  shares of
Common Stock at $2 per share and 168,750 shares of Common Stock at $4 per share.



Item 13.    Certain relationships and Related Transactions



Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K


                                         19

<PAGE>




1.    Financial Statements
      F-3                 Report of Moore Stephens, P.C. Independent Certified
                          Accounts
      F-4 - F-6           Consolidated Balance Sheets as of December 31, 1996 
                          and 1995
      F-7 - F8            Statements of Operations for the Years Ended 
                          December 31, 1996, 1995 and 1994
      F-9                 Statements of Shareholders' Equity for the Years Ended
                          December 31, 1996, 1995 and 1994
      F-9 - F-12          Statements of Cash Flows for the Years Ended 
                          December 31, 1996,  1995 and 1994
      F-13 - F-33         Notes to Financial Statements

2.    Financial Statement Schedules
      None

3.    Reports on Form 8-K
      None

4.    Exhibits



                                         20

<PAGE>

















                             NETSMART TECHNOLOGIES, INC.

                                       F - 1

<PAGE>



NETSMART TECHNOLOGIES, INC.
------------------------------------------------------------------------------


INDEX
------------------------------------------------------------------------------



                                                            Page to Page

Independent Auditor's Report................................F-3

Balance Sheets..............................................F-4.....F-6

Statements of Operations....................................F-7.....F-8

Statements of Stockholders' Equity..........................F-9

Statements of Cash Flows....................................F-10....F-12

Notes to Financial Statements ..............................F-13....F-33




                    .   .   .   .   .   .   .   .   .   .   .

                                      F - 2

<PAGE>



                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Stockholders of
  Netsmart Technologies, Inc.
  New York, New York


            We have  audited the  accompanying  consolidated  balance  sheets of
Netsmart Technologies, Inc. [formerly CSMC Corporation] and its subsidiary as of
December  31,  1996  and  1995,  and  the  related   statements  of  operations,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1996. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

            We  conducted  our  audits in  accordance  with  generally  accepted
auditing  standards.  Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

            In our opinion,  the financial  statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Netsmart Technologies,  Inc. and its subsidiary as of December 31, 1996 and 1995
and the results of their  operations  and their cash flows for each of the three
years in the period ended  December  31,  1996,  in  conformity  with  generally
accepted accounting principles.








                                          MOORE STEPHENS, P. C.
                                          Certified Public Accountants.

Cranford, New Jersey
March 21, 1997, except as to note 5
for which the date is April 8, 1997

                                      F - 3

<PAGE>



NETSMART TECHNOLOGIES, INC.
------------------------------------------------------------------------------


CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------


                                                   December 31,
                                                1 9 9 6      1 9 9 5
Assets:
Current Assets:
  Cash and Cash Equivalents                  $    998,317    $    --
  Accounts Receivable - Net                     2,284,450      2,112,000
  Costs and Estimated Profits in Excess
   of Interim Billings                             931,786       415,000
  Other Current Assets                              82,205       14,000
                                             --------------   -----------

  Total Current Assets                          4,296,758      2,541,000
                                             ------------     -----------

  Property and Equipment - Net                     382,586       347,000
                                             -------------    -----------

Other Assets:
  Software Development Costs                       250,920       --
  Investment in Joint Venture at Equity            120,546       --
  Customer Lists                                3,128,814      3,442,000

  Other Assets                                       71,105       60,000
                                             --------------   ------------

  Total Other Assets                            3,571,385      3,502,000
                                             ------------     ------------

  Total Assets                               $ 8,250,729     $ 6,390,000
                                             ===========      =============



See Notes to Financial Statements.

                                       F - 4

<PAGE>



NETSMART TECHNOLOGIES, INC.
------------------------------------------------------------------------------


CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------


                                                   December 31,
                                                1 9 9 6      1 9 9 5

Liabilities and Stockholders' Equity:
Current Liabilities:
     Cash Overdraft                          $      --       $  95,000
     Notes Payable - Bank                           --          79,000
     Notes Payable - Other                       590,031     1,003,000
     Capitalized Lease Obligations                41,449       169,000
     Accounts Payable                            983,156     1,186,000
     Accrued Expenses                            991,075     1,323,000
     Interim Billings in Excess of Costs 
     and Estimated Profits                     1,102,105       940,000
     Due to Related Parties                       23,542       167,000
     Deferred Revenue                             88,420       141,000

     Total Current Liabilities - Forward       3,819,778     5,103,000
                                             -----------     ----------

Capitalized Lease Obligations - Forward           15,945        34,000
                                             -----------    -----------

Subordinated Debt - Related Party - Forward        --          750,000
                                             ------------   -----------

Commitments and Contingencies - Forward            --              --
                                             -------------  ------------

Redeemable Preferred Stock:
     Series B 6% Redeemable Preferred Stock; 80 Shares
     Authorized, Issued and Outstanding at
     December 31, 1995 [Liquidation Preference
     and Redemption Price of $96,000] - Forwa      --           96,000



See Notes to Financial Statements.

                                       F - 5

<PAGE>



NETSMART TECHNOLOGIES, INC.
------------------------------------------------------------------------------

BALANCE SHEETS
------------------------------------------------------------------------------

                                                         December 31,
                                                   1 9 9 6        1 9 9 5
                                               [Consolidated]    [Consolidated]
     Total Current Liabilities - Forwarded      $   3,819,778      $  5,103,000
                                                -------------       ------------

Capitalized Lease Obligations - Forwarded              15,945            34,000
                                                ----------------    ------------

Subordinated Debt - Related Party - Forwarded                           750,000
                                                -----------------   ------------

Commitments and Contingencies - Forwarded                                    --
                                                ------------------  ------------

Redeemable Preferred Stock - Forwarded                                   96,000
                                                ------------------  ------------

Stockholders' Equity:
 Preferred Stock, $.01 Par Value; Authorized 3,000,000
   Shares; Authorized, Issued and Outstanding:

   Series A 4% Convertible Redeemable Preferred Stock -
     $.01 Par Value 400 Shares Authorized, Issued and
     Outstanding at December 31, 1995 [Liquidation
     Preference of $40,000]                               --             --

   Series D 6%  Redeemable  Preferred  Stock - 
     $.01 Par Value  3,000  Shares Authorized,   
     1,210  and  2,210  Issued  and  Outstanding  
     [Liquidation Preference of $1,210,000 and 
     $2,210,000] at December 31, 1996 and 
     December 31, 1995, Respectively                        12           --

   Additional   Paid-in  Capital  -  Preferred  
     Stock  [$40,000  -  Series  A; $1,209,509 
     - Series D at December 31, 1996, $2,210,000 
     - Series D at December 31, 1995]                 1,209,509       2,250,000

   Common Stock - $.01 Par Value; Authorized
     15,000,000 Shares; Issued and Outstanding
     6,798,203 Shares at December 31, 1996,
     3,011,253 Shares at December 31, 1995               67,982          30,000

   Additional Paid-in Capital - Common Stock         14,863,328       3,274,000

   Accumulated Deficit                              (11,725,825)     (5,147,000)
                                                   ------------     -----------

   Total Stockholders' Equity                         4,415,006         407,000
                                                   ------------     ------------

   Total Liabilities and Stockholders' Equity       $ 8,250,729      $6,390,000
                                                     ===========      ==========
 See Notes to Financial Statements.

                                       F - 6

<PAGE>



NETSMART TECHNOLOGIES, INC.
------------------------------------------------------------------------------


STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------

                                                  Y e a r s  e n d e d
                                                 D e c e m b e r   3 1,
                                          1 9 9 6         1 9 9 5    1 9 9 4
                                         -------        -------     -------
                                      [Consolidated]  [Consolidated] [Combined]
Revenues:
  Software and Related
    Systems and Services:
    General                          $  5,108,095   $  4,541,000   $  1,539,000
    Maintenance Contract
      Services                          1,225,709      1,099,000        501,000
                                        ---------      ---------    -----------

    Total Software and Related
      Systems and Services              6,333,804      5,640,000      2,040,000

  Data Center Services                  2,207,155      1,742,000        884,000
                                        ---------      ---------     ----------

  Total Revenues                        8,540,959      7,382,000      2,924,000
                                        ---------      ---------      ---------

Cost of Revenues:
  Software and Related
    Systems and Services:
    General                             5,114,882      3,986,000      1,669,000
    Maintenance Contract
      Services                            595,366        743,000        449,000
                                          -------     ----------     ----------

    Total Software and Related
      Systems and Services              5,710,248      4,729,000      2,118,000

  Data Center Services                  1,220,368        889,000        416,000
                                        ---------     ----------     ----------

  Total Cost of Revenues                6,930,616      5,618,000      2,534,000
                                        ---------      ---------      ---------

  Gross Profit                          1,610,343      1,764,000        390,000

 Provision for Doubtful Accounts          260,000          8,000             --

 Selling, General and
  Administrative Expenses               1,661,854      2,478,000      1,495,000

Related Party Administrative
  Expenses                                 69,000         18,000         19,000

Stock Based Compensation                3,492,300              --            --

Research and Development                  278,000         699,000       367,000
                                         --------      ----------     ---------

  Loss from Operations                 (4,150,811)    (1,433,000)    (1,491,000)

Financing Costs                         1,692,000        863,000             --

Interest Expense                          472,548        355,000         71,000

Equity in Net Loss of Joint
 Venture                                  264,085             --             --

See Notes to Financial Statements.

                                       F - 7

<PAGE>



NETSMART TECHNOLOGIES, INC.
------------------------------------------------------------------------------


STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------


                                                    Y e a r s  e n d e d
                                                   D e c e m b e r   3 1,
                                          1 9 9 6        1 9 9 5        1 9 9 4
                                          -------        -------        -------
                                       [Consolidated] [Consolidated]  [Combined]

Related Party Interest
  Expense                                      --       199,000         189,000
                                         ----------   ---------     -----------

  Net Loss                            $ (6,579,444) $ (2,850,000)  $ (1,751,000)
                                      ============= =============  =============


Loss Per Share                        $      (1.28) $       (.59)  $       (.36)
                                      ============= =============  =============

Number of Shares of
  Common Stock                          5,149,253      4,821,528      4,821,528
                                     =============  =============  =============


See Notes to Financial Statements.

                                       F - 8

<PAGE>



NETSMART TECHNOLOGIES, INC.
------------------------------------------------------------------------------


STATEMENTS OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------
<TABLE>

                                        Series A       Series D  Additional Common Stock   Additional
                                      Preferred StockPreferred StocPaid-in  $.01 Par Value   Paid-in
                                          at .01        at .01     Capital    Authorized     Capital             Total
                                        Par Value      Par Value  Preferred 15,000,000 ShareCommon  Accumulate   Stockholders'
                                     Shares Amount  Shares Amount  Stock    Shares  Amount    Stock   Deficit    Equity

<S>                                 <C>    <C>    <C>     <C>   <C>         <C>        <C>       <C>          <C>        <C>

 
 Balance - December 31, 1993         400   $ --     -- $   --   $   40,000  1,050,003  $ 11,000  $    46,000  $(546,000) $ (449,000)

Allocated Related Party 
Administrative Expenses               --     --     --     --         --       --           --        19,000       --        19,000

Combination with CSM                  --     --     --     --         --       --           --     2,936,000       --     2,936,000

Net Loss                              --     --     --     --         --       --           --          --    (1,751,000)(1,751,000)
                                      --     --     --     --         --       --           --          --     ---------- ----------
Balance - December 31, 1994 
[Combined]                           400     --     --     --       40,000  1,050,003    11,000    3,001,000  (2,297,000)   755,000

Allocated Related Party
Administrative Expenses               --     --     --     --         --       --           --        18,000       --        18,000

Common Stock Issued to Affiliate      --     --     --     --         --      825,000     8,000       (8,000)      --        --

Common Stock and Preferred Stock 
 241,000        --       2,462,000

Common Stock Issued to Officer for 
Services                              --     --     --     --         --       11,250       --         22,000       --       22,000

Net Loss                              --     --     --     --         --       --           --            --  (2,850,000)(2,850,000)
                                      --     --     --     --         --       --           --                 ---------  ----------

 Balance - December 31, 1995 
[Consolidated]                       400     4     2,210   22    2,249,505  3,011,253    30,113     3,273,968 (5,146,381)   407,221

Common Stock Issued in Exchange for
Ser D and Ser A Preferred Stock     (400)   (4)   (1,000) (10)  (1,039,996) 1,168,200    11,681     1,028,319      --        --

Allocated Related Party 
Administrative Expenses               --     --     --     --         --       --           --          9,000      --         9,000

Compensation from the Issuance of 
Common Stock Warrants                 --     --     --     --         --       --           --      3,492,300      --     3,492,300

Common Stock Issued - Initial 
Public Offering                                                             1,293,750    12,938     5,162,063             5,175,001

Common Stock Issued - Exercise of 
Warrants                                                                      800,000     8,000     1,592,000             1,600,000

Common Stock Issued - 
Financing Costs                                                               525,000     5,250     1,674,750             1,680,000

Costs Associated with Issuance 
of Stock                                                                                           (1,369,072)           (1,369,072)

Net Loss                              --     --     --     --        --        --            --               (6,579,444)(6,579,444)
                                    ------------------------------------------------------------------------------------------------
 Balance - December 31, 1996 
[Consolidated]                        --     --    1,210   12   $1,209,509  6,798,203   $67,982    $14,863,328(11,725,82)$4,415,006
See Notes to Financial Statements.
</TABLE>

                                          F - 9

<PAGE>



NETSMART TECHNOLOGIES, INC.
------------------------------------------------------------------------------


STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------
<TABLE>

                                                            Y e a r s  e n d e d
                                                           D e c e m b e r   3 1,
                                                 1 9 9 6            1 9 9 5           1 9 9 4
                                                -------            -------            -------
                                              [Consolidated]     [Consolidated]      [Combined]
<S>                                          <C>                <C>             <C>    

Operating Activities:
  Net Loss                                   $   (6,579,444)     $ (2,850,000)     $   (1,751,000)
                                             ---------------     ------------     --------------
  Adjustments to Reconcile Net
    Loss to Net Cash [Used
    for] Provided by Operating Activities:
    Depreciation and Amortization                     486,566         872,00              470,000
    Administrative Expenses                             9,000          8,000               19,000
    Additional Compensation Related to the
       issuance of Equity Instruments               3,492,300         22,000              236,000
    Financing Expenses related to the 
    issuance  of Common Stock                       1,680,000            --                  --
    Write Off of Deferred Public
      Offering Costs                                     --           460,000                --
    Equity in Net Loss of Joint Venture               264,085          21,000              15,000
    Provision for Doubtful Accounts                   260,000           8,000                --

  Changes in Assets and Liabilities:
    [Increase] Decrease in:
      Accounts Receivable                            (431,478)       (388,000)            (369,000)
      Costs and Estimated Profits in
        Excess of Interim Billings                   (516,707)         87,000             (233,000)
      Other Current Assets                            (68,810)         10,000               45,000
      Other Assets                                    (10,502)           --                 (3,000)

    Increase [Decrease] in:
      Accounts Payable                               (202,620)         159,000              13,000
      Accrued Expenses                               (332,174)         935,000             199,000
      Interim Billings in Excess of
        Costs and Estimated Profits                   160,626         (217,000)            413,000
      Accrued Payroll Taxes and
        Related Expenses                                --               --               (276,000)
      Due to Related Parties                         (143,458)         496,000           1,629,000
      Deferred Revenue                                (52,580)         141,000               --
                                             --------------------    -----------   -------------------

    Total Adjustments                               4,594,248        2,624,000           2,158,000
                                             ---------------------   -----------   -------------------

  Net Cash - Operating Activities -
    Forward                                        (1,985,196)       (226,000)             407,000
                                             ---------------------   -----------   --------------------

Investing Activities:
  Acquisition of Property and
    Equipment                                         (181,033)       (138,000)           (122,000)
  Software Development Costs                          (278,800)                           (177,000)
  Investment in Joint Venture                         (384,631)                            (25,000)
  Cash Acquired in Combination
    with CSM                                                                                31,000

  Net Cash - Investing Activities -
    Forward)                                  $       (844,464)    $  (138,000)   $       (293,000)
See Notes to Financial Statements.

</TABLE>
                                         F - 10

<PAGE>



NETSMART TECHNOLOGIES, INC.
------------------------------------------------------------------------------


STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------

<TABLE>

                                                          Y e a r s  e n d e d
                                                         D e c e m b e r   3 1,
                                                1 9 9 6        1 9 9 5        1 9 9 4
                                                -------        -------        -------


                                             [Consolidated]     [Consolidated]   [Combined]
<S>                                          <C>                <C>              <C>    

  Net Cash - Operating Activities -
    Forwarded                                $   (1,985,196)    $     (226,000)   $     407,000
                                             ---------------     --------------   --------------

  Net Cash - Investing Activities -
    Forwarded                                      (844,464)          (138,000)        (293,000)
                                             ---------------    --------------    --------------

Financing Activities:
  Proceeds from Short-Term Notes                    500,000            831,000          200,000
  Payment of Short-Term Notes                       912,270)          (190,000)             --
  Payment of Bank Note Payable                       79,000)          (175,000)         (60,000)
  Payment of Short-Term Notes
    to related party                                750,000)                                --
  Payment of Capitalized Lease
    Obligations                                     145,146)           (29,000)          (8,000)
  Issuance of Common Stock                        5,175,000                                --
  Proceeds from Warrant exercise                  1,600,000                                --
 Cash Overdraft                                     (95,536)            56,000           37,000
  Redemption of Series B Preferred Stock            (96,000)                                --
  Costs associated with issuance of Stock        (1,369,071)
  Deferred Public Offering Costs                                      (129,000)        (283,000)
                                             ---------------       ------------   --------------

  Net Cash - Financing Activities                  3827,977            364,000         (114,000)
                                             --------------        ------------   --------------

  Net Increase [Decrease] in Cash                   998,317                                --

Cash - Beginning of Periods                                                                --
                                             --------------        -----------    --------------

  Cash - End of Periods                      $      998,317        $     --         $      --
                                             ===============       ============   ===============   

Supplemental Disclosure of Cash Flow Information:
  Cash paid during the periods for:
    Interest                                 $       481,856       $   349,000      $     76,000
</TABLE>

Supplemental Disclosures of Non-Cash Investing and Financing Activities:

During the year ended December 31, 1996, the Company had the following:

SISC exchanged 1,000 shares of Series D preferred stock for 1,125,000  shares of
common stock. As a result of this exchange the aggregate redemption price of the
Series D preferred stock was reduced to $1,210,000. The Series A preferred stock
was  converted  into 43,200  shares of common stock in a  transaction  valued at
$43,200.

Pursuant to an agreement  with four  accredited  investors,  the Company  issued
250,000  units  composed  of two shares of common  stock and one Series A Common
Stock  purchase  warrant.  The Company  incurred a one time  non-cash  charge of
$1,611,000.

Pursuant  to a  modification  of an  agreement  with an asset  based  lender the
Company  issued  25,000  common  shares to such  lender and  incurred a one-time
non-cash finance charge of $81,000.



                                         F - 11

<PAGE>



NETSMART TECHNOLOGIES, INC.
------------------------------------------------------------------------------


STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------



The Company  granted stock options to purchase an aggregate of 242,000 shares of
common stock and recognized compensation expense of $154,800.

The Company  granted  3,573,125  Series B Common  Stock  purchase  warrants  and
896,875  Series A Common Stock  purchase  warrants and  recognized  compensation
expense of $3,337,500.

  During the year ended December 31, 1995, the Company had the following:

  1)  $388,000 of accrued interest owed to SISC was exchanged for 1,125,000 
shares of common stock.

  2)  $2,210,000 of SISC debt was exchanged for 2,210 shares of Series D
Preferred Stock.

  3)  825,000 shares of common stock were issued to Holdings as follows:

       A)  750,000 shares were issued in connection with the transfer of the 
Acquisition Corp. stock to CSMC.

       B)  75,000 shares were issued in respect of certain indebtedness 
guaranteed by Consolidated.

  See Notes to Financial Statements.

                                         F - 12

<PAGE>



NETSMART TECHNOLOGIES, INC.
------------------------------------------------------------------------------

NOTES TO FINANCIAL STATEMENTS, Sheet #1
------------------------------------------------------------------------------



[1] Financial Statement Presentation, Organization and Nature of Operations

The  financial  statements  as of December 31, 1996 and 1995 are  presented on a
consolidated  basis and include  Netsmart  Technologies,  Inc.  [formerly  "CSMC
Corporation" and "Carte Medical Corporation"] ["Netsmart"], and its wholly-owned
subsidiary,  Creative Socio-Medics Corp. ["CSM"] [collectively,  the "Company"].
All intercompany transactions are eliminated in consolidation.

The financial statements as of December 31, 1994, which include Netsmart and CSM
commencing  July 1, 1994,  are  presented on a combined  basis  because they are
under  common  control.   All   intercompany   transactions  are  eliminated  in
combination.  The acquisition by Carte Medical Holdings, Inc. ["Holdings"],  the
principal  stockholder  of  Netsmart,  of CSM  occurred  on June 16,  1994.  The
operations of CSM from that date to June 30, 1994 were not  substantial  and are
not included in the combined  financial  statements as of December 31, 1994. The
financial statements prior to July 1, 1994 reflect the results of operations and
financial position of Netsmart.

Netsmart was  incorporated on September 9, 1992 to engage in the development and
marketing  of an  integrated  proprietary  software  system  designed  to run on
multiple  systems in a distributed  network  environment.  Netsmart's  marketing
effort  through  December  31,  1996 was  primarily  directed  at  managed  care
organizations  and  methadone  clinics  and  other  substance  abuse  facilities
throughout the United States. Netsmart's software operates on computer networks,
including networks based on personal  computers,  and so-called "smart cards." A
smart card is a plastic card the size of a standard  credit card which  combines
data storage  capacity and access to information  along with computing  capacity
within a single embedded microprocessor chip contained in the card.

Netsmart is controlled by Consolidated Technology Group Ltd. ["Consolidated"], 
a public company, through its wholly-owned subsidiary Holdings.  Prior to 
June 16, 1994, Netsmart's principal stockholder was SIS Capital Corp. ["SISC"], 
a wholly-owned subsidiary of Consolidated.  Netsmart's chairman of the board is 
the chief executive officer of Consolidated.

In April 1994, Netsmart entered into an Agreement and Plan of Reorganization 
[the "Purchase Agreement"] among Consolidated, Netsmart, CSM Acquisition Corp. 
["Acquisition Corp."], a wholly-owned subsidiary of Consolidated, Creative 
Socio-Medics ["Old CSM"], and Advanced Computer Techniques, Inc. ["ACT"], Old 
CSM's parent.

Pursuant to the Purchase Agreement, in June 1994, Acquisition Corp. acquired the
assets and  assumed  liabilities  of Old CSM in exchange  for 800,000  shares of
Consolidated's  common  stock and  $500,000  cash which was advanced by Netsmart
from a loan from SISC. The following  summarizes the purchase price allocated to
acquired assets at fair value:

Cash                                      $      500,000
Stock of Consolidated                          2,700,000
                                              ----------

  Purchase Cost                           $    3,200,000
  -------------                           ===============

Allocated to:
  Customer Lists                          $    3,851,000
  Accounts Receivable                          1,363,000
  Costs and Estimated Profits in Excess of
   Billings                                      269,000
  Property and Equipment                         261,000
  Other Assets                                   213,000
  Liabilities Assumed                         (2,757,000)
                                              ----------

  Total                                   $     3,200,000
  -----                                   ===============

                                     F - 13

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
------------------------------------------------------------------------------



[1] Financial Statement Presentation, Organization and Nature of Operations 
[Continued]

The value of  Consolidated  stock was calculated  based on the 800,000 shares of
common stock given per the acquisition agreement at the fair value of $3.375 per
share.  The fair value was  determined  based on the  average  trading  price of
Consolidated  common stock for a period before and after the  acquisition  date.
The $2,700,000 is recorded as additional  paid-in capital since such amount will
not be reimbursed.

In June 1994, SISC formed a wholly-owned  subsidiary,  Holdings, and transferred
its stock in Netsmart and Acquisition Corp. to Holdings.  On September 30, 1995,
the  stock  of  Acquisition  Corp.,  whose  name had been  changed  to  Creative
Socio-Medics  Corp. in June 1994, was  transferred  to the Company.  At the same
time,  the Company  issued  825,000  shares of its common stock to Holdings,  of
which  750,000  shares  were  issued  in  connection  with the  transfer  of the
Acquisition  Corp.  stock and 75,000  shares  were  issued in respect of certain
indebtedness guaranteed by Consolidated.

At the time of the  execution of the  Purchase  Agreement,  SISC  granted  three
officers of Old CSM, who became officers of the Company,  options to purchase an
aggregate of 151,920 shares of common stock at $.232 per share. The value of the
options  is  based  on a fair  value  of  approximately  $.89  per  share of the
Company's  common  stock less the  exercise  price of $.232 per share.  The fair
value was determined based on the financial condition of the Company at the time
the options were granted.  The shares subject to option are  outstanding  shares
which were owned by SISC and transferred to Holdings subject to the options. The
Company has granted to these individuals  certain piggy back registration rights
with  respect  to the  shares of common  stock  issuable  upon  exercise  of the
options. The value of these options is approximately  $100,000 and is treated as
compensation  by  the  Company.  At the  closing  of the  purchase  of Old  CSM,
Consolidated transferred to such three officers an aggregate of 40,000 shares of
Consolidated  common stock,  which were valued at  approximately  $136,000.  The
value of such shares is treated as  compensation  by the  Company.  The value of
Consolidated  stock was determined on a consistent basis with those shares given
in the  acquisition.  The  amounts of $100,000  and  $136,000  were  credited to
additional paid-in capital.

The following pro forma  unaudited  results  assumes the  acquisition of CSM had
occurred at the beginning of 1994:
                                                             Year ended
                                                       December 31,1 9 9 4

Net Revenues                                               $   5,050,000
                                                           =============

Net Loss                                                   $ (2,136,000)
                                                           ============

Loss Per Share                                             $       (.44)
                                                           =============

Number of Shares of Common Stock                               4,821,528
                                                           =============

[2] Summary of Significant Accounting Policies

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

Cash and Cash Equivalents - The Company considers all highly liquid  instruments
purchased with a maturity of three months or less to be cash  equivalents.  Cash
equivalents totaled approximately $1,000,000 at December 31, 1996.


                                     F - 14

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
------------------------------------------------------------------------------



[2] Summary of Significant Accounting Policies [Continued]

Concentration  of Credit Risk - The Company  extends  credit to customers  which
results in accounts receivable arising from its normal business activities.  The
Company does not require  collateral from its customers.  The Company  routinely
assesses  the  financial  strength  of its  customers  and  based  upon  factors
surrounding  the  credit  risk  of the  customers  believes  that  its  accounts
receivable  credit  risk  exposure is limited.  Such  estimate of the  financial
strength of such customers may be subject to change in the near term.

The  Company's  health  information  systems are  marketed to  specialized  care
facilities,  many of which are  operated  by  government  entities  and  include
entitlement  programs.  During the years ended December 31, 1996, 1995 and 1994,
approximately  31%, 54% and 49% of the Company's  revenues were  generated  from
contracts with government agencies.

During the year ended  December 31, 1996 and 1995,  one customer  accounted  for
approximately  $1,879,000 and $1,400,000 or 22% and 19% respectively of revenue.
Accounts  receivable of  approximately  $473,000 and $336,000 were due from this
customer at December 31, 1996 and 1995. No one customer  accounted for more than
10% of revenues in 1994.

The  Company  places  its cash and cash  equivalents  with high  credit  quality
financial  institutions.  The  amount on  deposit  in any one  institution  that
exceeds  federally  insured  limits is subject to credit  risk.  At December 31,
1996, cash and cash  equivalent  balances of $1,000,000 were held at a financial
institution  in excess of  federally  insured  limits.  The Company  believes no
significant  concentration  of credit  risk  exists  with  respect to these cash
equivalents.

Revenue  Recognition - The Company  anticipates  that it will recognize  revenue
principally  from  the  licensing  of its  software,  and  from  consulting  and
maintenance  services  rendered in connection  with such  licensing  activities.
Revenue from licensing will be recognized under the terms of the licenses, which
are expected to provide for a royalty, which may be payable annually, monthly or
on some other basis,  based on the number of persons using smart cards  pursuant
to the license agreement. Consulting revenue is recognized when the services are
rendered.  No revenue is recognized prior to obtaining a binding commitment from
the customer.

Revenues  from fixed price  software  development  contracts  and revenue  under
license  agreements  which  require  significant  modification  of the  software
package  to the  customer's  specifications,  are  recognized  on the  estimated
percentage-of-completion  method.  Using the  units-of-work  performed method to
measure progress towards completion, revisions in cost estimates and recognition
of losses on these contracts are reflected in the accounting period in which the
facts become known.  Contract  terms provide for billing  schedules  that differ
from revenue  recognition and give rise to costs and estimated profits in excess
of  billings,  and  billings  in excess of costs and  estimated  profits.  It is
reasonably  possible that the amount of costs and estimated profits in excess of
billing and billings in excess of costs and estimated  profits may be subject to
change in the near  term.  Revenue  from  software  package  license  agreements
without  significant  vendor  obligations  is  recognized  upon  delivery of the
software.  Information processing revenues are recognized in the period in which
the  service  is  provided.  Maintenance  contract  revenue is  recognized  on a
straight-line  basis  over  the  life  of  the  respective  contract.   Software
development  revenues  from  time-and-materials   contracts  are  recognized  as
services are performed.

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

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


                                     F - 15

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
------------------------------------------------------------------------------


[2] Summary of Significant Accounting Policies [Continued]

Direct Costs - Direct costs generally represent labor costs related to licensing
and consulting agreements.

Property and  Equipment and  Depreciation  - Property and equipment is stated at
cost less  accumulated  depreciation.  Depreciation of property and equipment is
computed by the  straight-line  method at rates adequate to allocate the cost of
applicable  assets over their expected  useful lives.  Amortization of leasehold
improvements  is computed  using the  shorter of the lease term or the  expected
useful life of these assets.

Estimated useful lives range from 2 to 10 years as follows:

Equipment                                                  2-5 Years
Furniture and Fixtures                                     5-7 Years
Leasehold Improvements                                     8-10 Years

Capitalized  Software  Development  Costs - Capitalization  of computer software
development  costs begins upon the  establishment of technological  feasibility.
Technological  feasibility  for the  Company's  computer  software  products  is
generally  based upon  achievement  of a detail program design free of high risk
development  issues.  The  establishment  of  technological  feasibility and the
ongoing   assessment  of   recoverability   of  capitalized   computer  software
development costs requires considerable  judgement by management with respect to
certain  external  factors,   including,   but  not  limited  to,  technological
feasibility,  anticipated  future gross  revenues,  estimated  economic life and
changes in software and hardware technology.

Amortization of capitalized  computer software  development costs commences when
the  related  products  become  available  for  general  release  to  customers.
Amortization  is to be  provided  on a product  by  product  basis.  The  annual
amortization  shall be the  greater of the amount  computed  using (a) the ratio
that  current  gross  revenues  for a product  bear to the total of current  and
anticipated  future gross  revenues  for that  product or (b) the  straight-line
method over the remaining  estimated  economic life of the product including the
period being reported on.

During 1996, the Company assigned personnel to develop SmartCard products.  As a
result,  the  applicable  portion  of  cost of  coding  and  testing  subsequent
to the establishment of technological feasibility were capitalized as software
costs with respect to the work on the  SmartCard  product.  As a result of such 
product  development  the Company incurred $556,800 in software costs. Software 
costs of $278,000 prior to technological  feasibility,  were recorded as 
research and development expenses. Amortization,  using the  straight-line 
method  over five years of  capitalized software  development  costs amounted to
$27,880 for the year ended December 31, 1996 and has been included in cost of 
revenues.

In 1995,  due to a change from a DOS based  operating  system to a Windows based
operating  system,  management  determined  that the estimated  economic life of
previously developed computer software had expired.  This has been accounted for
as a change in  accounting  estimate and as a result  amortization  increased by
$210,000 in 1995.  Amortization  of capitalized  computer  software  development
costs  amounted  to  $419,000  and  $221,000  at  December  31,  1995 and  1994,
respectively. Amortization expense has been included in cost of revenues for all
periods.


                                     F - 16

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
------------------------------------------------------------------------------


[2] Summary of Significant Accounting Policies [Continued]

Customer  Lists -  Customer  lists  represent  a listing of  customers  obtained
through the  acquisition  of CSM to which the  Company can market its  products.
Customer lists are being amortized on the straight-line method.

In 1995, the amortization  period of customer lists was changed from 20 years to
12  years.  The  change  in the  period  of  amortization  reflects  changes  in
technology which became important in the health care industry  subsequent to the
acquisition of CSM in June 1994. The development of  Window-based  applications,
particularly  Windows  95,  which  had not  been  developed  at the  time of the
acquisition,  together with the possibility of other changes in the software and
communications industry, represent developments that the Company feels require a
change  in the  amortization  period  to  twelve  years.  Such  change  has been
accounted for as a change in accounting estimate.  The effect of this change was
to increase amortization by $120,000 in 1995.

On January 1, 1996,  the  Company  adopted  Statement  of  Financial  Accounting
Standards  (SFAS) No. 121,  "Accounting for the Impairment of Long-Lived  Assets
and  for  Long-Lived  Assets  to Be  Disposed  Of".  SFAS  No.  121  established
accounting  standards  for the  impairment  of  long-lived  assets  and  certain
identifiable  intangibles,  and goodwill  related to those assets to be held and
used,  and for  long-lived  assets and certain  identifiable  intangibles  to be
disposed  of.   Management  has  determined  that  expected  future  cash  flows
(undiscounted  and without  interest  charges)  exceed the carrying value of the
intangibles at December 31, 1996 and believes that no impairment of these assets
has occurred.  It is at least reasonably possible that management's  estimate of
expected  future  cash flows may change in the near term.  This may result in an
accelerated  amortization  method or write-off of the customer  lists.  Customer
lists at December 31, 1996 and 1995 are as follows:

                                               December 31,
                                          1 9 9 6        1 9 9 5

Customer Lists                            $  3,850,814  $  3,851,000
Less: Accumulated Amortization                 722,000       409,000
                                          ------------  ------------

  Net                                     $  3,128,814  $  3,442,000
  ---                                     ============  ============

Cost Associated With Public Offerings - In 1996, the Company  completed a public
offering of its securities  (See Note 10). Costs of $1,370,000  associated  with
the offering were offset against total gross  proceeds of  $5,175,000.  In early
1995, the Company withdrew a registration statement following the termination of
a previous public  offering.  Costs of $460,000,  associated with that offering,
were expensed, and included in financing costs, in 1995.

Stock Options and Similar  Equity  Instruments - On January 1, 1996, the Company
adopted  the  disclosure  requirements  of  Statement  of  Financial  Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", for stock
options  and  similar  equity  instruments  (collectively,"Options")  issued  to
employees, however, the Company will continue to apply the intrinsic value based
method of accounting  for options  issued to employees  prescribed by Accounting
Principles  Board  ("APB")  Opinion  No.  25,  "Accounting  for Stock  Issued to
Employees"  rather than the fair value based method of accounting  prescribed by
SFAS No.  123.  SFAS No.  123 also  applies to  transactions  in which an entity
issues its equity  instruments to acquire goods or services from  non-employees.
Those  transactions  must be  accounted  for  based  on the  fair  value  of the
consideration  received  or the fair  value of the  equity  instruments  issued,
whichever is more reliably measurable.




                                     F - 17

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #6
------------------------------------------------------------------------------



[2] Summary of Significant Accounting Policies [Continued]

Loss Per Share - Loss per share is  computed  by  dividing  the net loss for the
period by the weighted average number of shares of common stock outstanding. For
purposes  of  computing  weighted  average  number of  shares  of  common  stock
outstanding,  the  Company  has  common  stock  equivalents.  The  common  stock
equivalents are assumed converted to common stock, when dilutive. During periods
of  operations  in which losses were  incurred,  common stock  equivalents  were
excluded from the weighted average number of common shares  outstanding  because
their inclusion would be  anti-dilutive.  In August 1993, the Company effected a
2,000-for-one  common  stock  recapitalization,  in October  1993,  the  Company
effected a  .576-for-one  reverse  split in its common  stock,  and, in February
1996, the Company effected a  three-for-four  reverse split in its common stock.
In January 1996, the Company issued 1,125,000 shares of common stock in exchange
for  1,000  shares  of  Series  D  Preferred  Stock.  All  share  and per  share
information in these financial statements gives effect,  retroactively,  to such
transactions.  Dividends on preferred  stock are included in the  calculation of
loss per share.

Investment in Joint  Venture - The Company's  investment in a joint venture (See
Note 16) is accounted for under the equity method.

Allocated Related Party Administrative Expenses - During the first six months of
1996 and all of 1995 and 1994,  certain  administrative  services were performed
for the Company by  Consolidated  and its  subsidiaries.  The fair value of such
services,  approximately $9,000, $18,000 and $19,000,  respectively, was charged
to related party and administrative  expenses,  and, since Consolidated will not
be reimbursed for such charges,  credited to additional  paid-in  capital.  (See
Note 7)

Research and Development - Expenditures  for research and development  costs for
the year ended December 31, 1996,  1995 and 1994 amounted to $278,000,  $699,000
and $367,000, respectively.

[3] Accounts Receivable

Accounts receivable is shown net of allowance for doubtful accounts of $288,029,
$146,263  and 137,842 at December  31,  1996,  1995 and 1994  respectively.  The
changes in the allowance for doubtful accounts are summarized as follows:

                                                   December 31,
                                       1996        1995       1994

      Beginning Balance              $146,263    $137,842   $137,778
      Provision for Doubtful Account  260,000      60,000     30,000
      Recoveries                         --         --         --
      Charge-offs                    (118,234)    (51,579)   (29,936)

      Ending Balance                $288,029     $146,263   $137,842
                                    ========     ========   ========



                                     F - 18

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #7
------------------------------------------------------------------------------


[4] Costs and Estimated Profits in Excess of Interim Billings and Interim 
Billings in Excess of Costs and Estimated Profits

Costs,  estimated profits, and billings on uncompleted  contracts are summarized
as follows:

                                                      December 31,
                                                  1 9 9 6        1 9 9 5

Costs Incurred on Uncompleted Contracts         $  3,483,918   $  2,588,000
Estimated Profits                                    652,749        491,000
                                                -------------- --------------

Total                                               4,136,667      3,079,000
Billings to Date                                    4,306,986      3,604,000
                                                -------------  -------------

   Net                                          $    (170,319) $    (525,000)
   ---                                          =============  =============

Included in the accompanying balance sheet under the following captions:

Costs and estimated profits in excess of interim$     931,786  $     415,000
Interim billings in excess of costs and estimate   (1,102,105)       940,000
                                                -------------        -------

   Net                                          $    (170,319) $    (525,000)
   ---                                          =============  =============

[5] Going Concern Considerations

The  accompanying  financial  statements  have been  prepared on a going concern
basis which  contemplates  the  realization  of assets and the  satisfaction  of
liabilities  and  commitments in the normal course of business.  The Company has
sustained  losses since  inception and the  accumulated  deficit at December 31,
1996 is  $11,725,825.  The ability of the Company to continue as a going concern
is dependent upon the success of the Company's  marketing  effort and its access
to sufficient funding to enable it to continue operations.  The Company has been
funded through December 31, 1996 through loans from principal  stockholders,  an
asset-based  lender and others,  and from the sale of stock [See Notes 7 and 8].
All these  factors  had raised  substantial  doubt about the ability of the 
Company to continue as a going concern.

Such  substantial  doubt has been  alleviated  due to the  Company's  ability to
secure  contracts,  such as the  agreement  effective  April 8, 1997 with Health
System Design  Corporation,which will allow the Company to provide the "Provider
Management  Information System" to the nearly 600 Provider Agencies in the State
of Ohio.  Management  believes  that the gross profit from this contract in 1997
will range from $567,000 to $2.3 million. The Company believes that the $567,000
gross profit can be attained  with the existing  staff.  

There can be no assurances that management's plans to reduce operating losses by
increasing  revenues  to fund  operations  will  be  successful.  The  financial
statements do not include any  adjustments  relating to the  recoverability  and
classification  of  recorded  assets,  or  the  amounts  and  classification  of
liabilities  that might be necessary in the event the Company cannot continue in
existence.



                                     F - 19

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #8
------------------------------------------------------------------------------


[6] Property and Equipment

Property and equipment consist of the following:
                                                      December 31,
                                                   1 9 9 6    1 9 9 5

Equipment, Furniture and Fixtures              $  538,634   $  674,000
Leasehold Improvements                            164,335      164,000
                                               -----------  -----------

Totals - At Cost                                   702,969      838,000
Less:  Accumulated Depreciation                    320,383      491,000
                                               -----------      -------

   Net                                          $ 382,586    $  347,000
   ---                                          =========    ==========

Depreciation expense amounted to $145,686,  $140,000, and $69,000,  respectively
for the years ended December 31, 1996, 1995 and 1994.

[7] Related Party Transactions

[A] Issuance of Stock at Organization - In connection  with the  organization of
the Company in September 1992, the Company issued 824,256 shares of common stock
as follows:  582,072 shares of common stock to SISC, for $1,300,  112,584 shares
to DLB, Inc.  ["DLB"] for $6,700,  and 43,200 shares of common stock for nominal
consideration to each of DLB and two individuals,  one of whom became a director
in June 1994.  DLB is controlled by the wife of the chairman of the board who is
also the  chairman  of the  board of  Consolidated.  The  chairman  of the board
disclaims any beneficial interest in any securities owned by DLB.

Also in connection with the  organization of the Company,  the Company  acquired
all of the capital  stock of LMT in exchange for 129,600  shares of common stock
and 400 shares of Series A 4% Convertible  Redeemable preferred stock, par value
$.01 per  share  ["Series  A  preferred  stock"].  The 400  shares  of  Series A
preferred  stock are  convertible  into 43,200  shares of common stock [See Note
10].  LMT was a shell  corporation  with no  operating  business.  The shares of
common  stock  issued  included  60,480 to the chief  operating  officer  of the
Company and 25,920 to the  vice-president  of the Company.  The remaining 43,200
and all of the shares of Series A preferred  stock were issued to a  non-related
individual.  The  Company  expensed  the value of the Series A  preferred  stock
($40,000).  The issuance of the common stock was treated as compensation  valued
at $.01 per share.  In August 1996 the Company  converted its Series A Preferred
stock into 43,200 Common Shares.

[B] Loans by Related Parties - At September 30, 1995, the total indebtedness due
SISC was $2,960,000 plus interest of $388,000. As of such date, (i) the interest
was exchanged for 1,125,000 shares of common stock,  (ii) $2,210,000 of the debt
was  exchanged  for 2,210  shares  of Series D 6%  preferred  stock  ["Series  D
preferred  stock"],  having  a  liquidation  price  of  $1.00  per  share  and a
redemption price of $1,000 per share, and (iii) the remaining  $750,000 due SISC
is  represented by the Company's 10%  subordinated  note due January 15, 1997 or
earlier  upon the  completion  of the  Company's  initial  public  offering.  In
conjunction with the September 30, 1995 debt  restructuring,  $136,000 which was
previously  recorded as paid-in capital,  was reclassified to debt owed to SISC.
The  Series D  preferred  stock may be  redeemed  at the  option of the  Company
commencing  October 1, 1998,  and is redeemable at any time after  issuance from
50% of the  proceeds  of any over  allotment  on the  Company's  initial  public
offering or other issuance of equity securities  subsequent to the completion of
the Company's initial public offering.

At December 31,  1994,  SISC has  advanced  $2,626,000  which are in the form of
demand notes bearing interest at 10%. This amount includes a $97,000 note due to
DLB, Inc. which was purchased by SISC in April 1994.  Interest  expense on these
notes for the years ended December 31, 1996,  1995 and 1994 amounted to $10,125,
$199,000 and $189,000, respectively.

                                     F - 20

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #9
------------------------------------------------------------------------------


[7] Related Party Transactions - [Continued]

[B] Loans by Related Parties - [Continued]

In  connection  with the  issuance  by the  Company  of its  Interim  Notes [the
"Interim Notes"] in July and August 1993, SISC, in anticipation of the Company's
receipt of the proceeds of such loans,  advanced the Company,  on a non-interest
bearing  basis,  $79,000,  which was repaid by the Company in August 1993.  Such
advance was used by the Company to pay the  principal  on a $50,000  demand note
and interest of $2,000 and to pay normal operating expenses.  In connection with
the Interim Notes, SISC transferred to the lenders an aggregate of 15,120 shares
of common stock for $.232 per share.  In  connection  with the  agreement of the
holders of the  Interim  Notes to extend the  maturity  date of the notes to the
earlier of September  30, 1994,  or three days after the Company  completes  its
initial public offering, SISC transferred an aggregate of 9,375 shares of common
stock to such  noteholders.  The  Company  incurred  a charge of $7,000  against
operations  for  financing  costs in  conjunction  with the issuance of stock by
SISC. The Interim Notes were paid in full in 1996.

During the period  from  January to June 1994,  SISC  advanced an  aggregate  of
$330,000 to CSM. As a result of the  acquisition,  such obligations are included
in the  principal  amount  of the  Company's  obligations  to SISC,  which  were
approximately  $2.6 million at December  31,  1994.  Included in the advances by
SISC to the  Company  were  $300,000  which  was used to pay  payroll  taxes and
interest and $500,000 which was used in connection with the purchase of CSM.

At December 31, 1995 and 1994,  ACT [the parent of Old CSM] loaned  $167,000 and
$58,000 to the Company in the form of demand notes  bearing  interest at 10% per
annum. These loans were paid in full in 1996.

In October 1993, SISC  transferred  shares of common stock to two officers,  who
received 17,460 and 18,000 shares, respectively,  and to five employees, each of
whom received 6,000 shares. The fair value of such shares, approximately $15,000
in the aggregate, was charged to compensation.

The Company has an agreement  with  Consolidated  and its subsidiary The Trinity
Group, Inc. ("Trinity") pursuant to which the Company will pay Trinity a monthly
fee of $15,000 for a three-year term commencing on the first day of the month in
which the Company receives the proceeds from the Offering for general  business,
management and financial  consulting  services.  Pursuant to this agreement,  in
1996 the Company charged $60,000 to related party administrative expenses.

The Company  entered into an agreement with SMI Corporation  (SMI),  pursuant to
which the company would pay SMI compensation of $25,000 to $59,000 per month for
which  SMI  would  provide  persons  to serve in  management-level  or other key
positions  for the  Company.  In  addition,  the Company is to pay SMI 6% of the
revenues  generated from Smart Card and related  services.  The agreement  would
continue until December 31, 2000. The sole  stockholder of SMI, Mr. Storm Morgan
was  elected as a director of the  Company in January  1996.  For the year ended
December  31, 1996,  the Company  incurred  and paid,  $619,700 of  compensation
expense pursuant to its agreement with SMI as well as an additional $250,000 for
services.  In February of 1997 the Company  modified the  agreement  whereby the
monthly  fees  were  reduced  to $9,000  and all  commission  arrangements  were
canceled.

[8] Notes Payable

Bank - Notes payable to bank in the amount of $79,000,  at December 31,1995 were
payable on demand. The notes had a interest rate of 1-1/2% over the bank's prime
rate and were  collateralized by the assets of CSM. The loan was paid in full in
1996. The prime rate at December 31, 1996 was approximately 8.25%.


                                     F - 21

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #10
------------------------------------------------------------------------------


[8] Notes Payable [Continued]

Asset-Based  Lender - In February  1995,  the Company  entered  into an accounts
receivable financing with an asset-based lender.  Borrowings under this facility
were  $590,000  and  $707,000 at December  31, 1996 and 1995  respectively.  The
Company can borrow up to 75% of eligible  receivables,  and it pays  interest at
the  greater  of 18% per  annum  or prime  plus 8% and a fee  equal to 1% of the
amount of the invoice.  This note is  collateralized  by all of the accounts and
property and equipment of the Company.  In addition,  the Company's  obligations
under this facility are guaranteed by the chairman of the board and president of
the Company.  Also,  the then chief  executive  officer and the treasurer of the
Company have issued their limited guaranty to the lender.

In March 1996,  the agreement  with the asset based lender was modified to allow
borrowings up to 80% of eligible  receivables to a maximum of $1,000,000 for the
period up to the public  offering at which  point the terms would  revert to the
agreement of a maximum  borrowing of $750,000.  In  consideration,  the Company,
upon completion of the public offering paid the asset based lender a $25,000 fee
and issued it 25,000 shares of the Company's  common stock. The Company incurred
a one time non-cash finance charge of approximately $81,000.

Investors  - In 1994 and 1993,  the  Company  borrowed  $200,000  and  $216,000,
respectively,  from  accredited  investors and issued its 1993 Interim Notes and
December 1994 Interim Notes,  respectively,  to such  investors.  In 1994,  SISC
purchased an Interim Note in the amount of $54,000 from a  noteholder.  In 1995,
the first payment of approximately $66,000 was paid on the December 1994 Interim
Notes. The balance of these notes were paid in full in 1996 as well as a $12,500
extension fee to the holders of the December 1994 Interim  Notes.  In connection
with the  agreement  of the  holders  of the 1993  Interim  Notes to extend  the
maturity  date of the notes to the earlier of September  30, 1994, or three days
after the Company  completes its initial public  offering.  SISC  transferred an
aggregate  of 9,375  shares of common  stock to such  noteholders.  The  Company
incurred  a  charge  of  $7,000  against   operations  for  financing  costs  in
conjunction with the issuance of stock by SISC.

In  connection  with the  issuance  of the  December  1994  Interim  Notes:  (i)
Consolidated  issued the lender  85,000  shares of its stock,  (ii) the  Company
issued to SISC  outstanding  warrants to purchase 300,000 shares of common stock
at $2.00 per share,  and (iii) the Company  issued 75,000 shares of common stock
to Holdings.  The Company incurred charges totaling $103,000 against  operations
for financing  costs in  conjunction  with the issuances of stock.  Such charges
were  recorded  as  intercompany  charges  due to SISC and  Consolidated  by the
Company.

Notes payable consist of the following:
                                                        December 31,
                                                     1 9 9 6    1 9 9 5
Bank - payable on demand with  interest  at 1-1/2%  over the bank's  prime rate,
  which was 8.5% at December 31,
   1995.                                        $         --  $     79,000

Investors - interest at 10%.                              --       296,000

Asset-Based Lender - payable on demand with interest
   at the greater of 18% per annum or prime plus 8%     590,031    707,000

   Totals                                       $       590,03$  1,082,000
   ------                                       ===============  ==========

The weighted  average interest rate on short-term  borrowings  outstanding as of
December 31, 1996 and 1995 amounted to approximately 22% and 17%, respectively.


                                     F - 22

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #11
------------------------------------------------------------------------------


[8] Notes Payable [Continued]

In January 1996, the Company borrowed  $500,000 from four accredited  investors.
In connection  with such loans,  the Company issued its 8% promissory  notes due
January  31,  1997,  which  were  subsequently  paid  from the  proceeds  of the
Company's initial public offering. The Company also agreed to issue and register
with the Securities Act one unit for each $2.00 principal  amount of notes.  The
unit issued to the  noteholders  mirrored the units issued in the initial public
offering  which  consisted of two shares of the  Company's  Common Stock and one
Series A Redeemable  Common Stock Purchase  Warrant.  The Company incurred a one
time non-cash finance charge of $1,611,000 upon the issuance of these units.

[9] Income Taxes

The Company utilizes an asset and liability  approach to determine the extent of
any deferred income taxes, as described in SFAS No. 109,  "Accounting for Income
Taxes"  of  the  Financial   Accounting   Standards  Board.  This  method  gives
consideration to the future tax consequences associated with differences between
financial statement and tax bases of assets and liabilities.

For  financial  reporting  purposes at December  31,  1996,  the Company has net
operating loss carryforwards of $8,200,000 expiring by 2011. Pursuant to Section
382 of the  Internal  Revenue  Code  regarding  substantial  changes  in Company
ownership,  utilization  of these  losses may be limited.  Based on this and the
fact that the Company has generated  operating losses through December 31, 1996,
the deferred tax asset of approximately  $3,300,000 is offset by an allowance of
$3,300,000.

A  deferred  tax  asset of  approximately  $1,400,000,  related  to  stock-based
compensation  awards, has been offset by a valuation allowance of $1,400,000 due
to the uncertainty of its realization.

Deferred Tax Asset

  Federal and State Net Operating Loss Carryforwards         $ 3,300,000
  Stock Based Compensation Awards                              1,400,000
  Less: Valuation Allowance                                   (4,700,000)
                                                            --------------
Net Deferred Tax Asset                                      $      --
----------------------                                      =================

  The Valuation Allowance increased by $2,900,000 in 1996.

The  provision  for income  taxes  varies  from the amount  computed by applying
statutory rates for the reasons summarized below:

Provision Based on Statutory Rates                                  34 %
State Taxes Net of Federal Benefit                                   6 %
Increase in Valuation Allowance                                    (40)%
                                                            ------------

  Total                                                              -- %


The expiration dates of net operating loss carryforwards are as follows:

December 31,                               Amount

   2007                                   $ 113,000
   2008                                     433,000
   2009                                   1,751,000
   2010                                   2,850,000
   2011                                   3,153,000
                                         ----------

                                        $ 8,200,000

                                     F - 23

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #12
------------------------------------------------------------------------------


[10] Capital Stock

Capital Stock - The Company is authorized to issue 3,000,000 shares of preferred
stock,  par value $.01 per share,  and  15,000,000  shares of common stock,  par
value $.01 per share.  The  Company's  Board of Directors is authorized to issue
preferred  stock from time to time without  stockholder  action,  in one or more
distinct  series.  The Board of Directors  is  authorized  to fix the  following
rights and preferences, among others, for each series: (i) the rate of dividends
and whether such dividends shall be cumulative;  (ii) the price at and the terms
and  conditions on which shares may be redeemed;  (iii) the amount  payable upon
shares in the event of voluntary or involuntary liquidation; (iv) whether or not
a sinking fund shall be provided for the  redemption or purchase of shares;  (v)
the terms and conditions on which shares may be converted; and (vi) whether, and
in what  proportion  to any other  series or class,  a series  shall have voting
rights other than  required by law. The Board of Directors  has  authorized  the
issuance of the Series A preferred  stock,  the Series B preferred stock and the
Series D preferred Stock.

Preferred  Stock - The Series A  preferred  stock is 4%  convertible  redeemable
preferred  stock.  The  stockholders  are  entitled to receive a $4.00 per share
annual  dividend when and as declared by the Board of  Directors.  Dividends are
fully cumulative and accrue from October 1, 1992. Dividends are payable annually
on March 1. The stock is  redeemable at the option of the Company at any time at
which the Company has  consolidated  net worth of at least $2,500,000 at a price
of $1,000 per share plus  accrued  dividends.  Each share of Series A  preferred
stock is  convertible  into 108 shares of common stock at the  discretion of the
stockholder.  In  the  event  of  involuntary  or  voluntary  liquidation,   the
stockholders  are  entitled to receive $100 per share and all accrued and unpaid
dividends.  As of December 31, 1995,  approximately $4,000 of dividends [$10 per
share]  were in  arrears.  In August  1996 the  Company  converted  its Series A
Preferred stock into 43,200 Common Shares.

The Series B preferred stock is 6% redeemable  convertible  preferred stock. The
stockholders are entitled to receive a $72.00 per share annual dividend when and
as declared by the Board of Directors. Dividends are fully cumulative and accrue
from April 1, 1993.  Dividends  are  payable  annually  on March 1. The stock is
redeemable at the discretion of the Company at any time at which the Company has
consolidated  net worth of at least  $5,000,000  at a price of $1,200  per share
plus accrued  dividends.  Each share of Series B preferred  stock is convertible
into 259.2 shares of common stock at the discretion of the stockholders.  In the
event of involuntary or voluntary liquidation,  the stockholders are entitled to
receive  $1,200 per share and all accrued and unpaid  dividends.  Each holder of
Series B preferred stock has the right,  following the Company's  initial public
offering,  to  require  the  Company  to  redeem  all of the  shares of Series B
preferred  stock owned by such holder at a redemption  price equal to $1,200 per
share.  As of  December  31,  1995,  approximately  $11,000  [$138 per share] of
dividends  were in arrears.  In August 1996 the  Company  redeemed  its Series B
Redeemable Preferred stock in the amount of $96,000.

The Series D preferred stock is 6% redeemable  preferred stock. The stockholders
are entitled to receive a $60.00 per share annual  dividend when and as declared
by the Board of Directors.  Dividends are  cumulative and accrue from October 1,
1995. Dividends are payable semi-annually on April 1 and October 1. The stock is
redeemable at the option of the Company for $1,000 per share commencing  October
1, 1998.  Earlier  redemption is permitted under certain  circumstances.  In the
event of voluntary or involuntary liquidation,  the stockholders are entitled to
receive $1.00 per share and all accrued and unpaid dividends.

In January 1996,  SISC  exchanged  1,000 shares of Series D preferred  stock for
1,125,000  shares of common stock.  As a result of this exchange,  the aggregate
redemption price of the Series D preferred stock was reduced to $1,210,000.

The Series A, Series B and Series D preferred  stock are nonvoting  except as is
required by law.



                                     F - 24

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #13
------------------------------------------------------------------------------


[10] Capital Stock - [Continued]

The  Company  has  granted to the  holders of the Series A  preferred  stock and
Series B preferred  stock and certain  warrant  holders,  with  respect to their
warrants,  certain piggyback registration rights following the Company's initial
public  offering,  with  respect to the  shares of common  stock  issuable  upon
conversion or exercise of the preferred stock or warrants.

On August  19,  1996 the  Company  closed on a public  offering  whereby it sold
646,875 units at a price of $8 per unit for net proceeds of  approximately  $3.8
million.  Each unit  consisted  of two  shares of common  stock and one series A
Redeemable Common Stock Purchase Warrant.

On August 21, 1996 Series B Common Stock purchase  warrants to purchase  800,000
shares of common stock at $2 per share were  exercised and the Company  received
$1,600,000 in gross and net proceeds.

See Note 7 for additional  information  relating to the issuance of common stock
and  preferred  stock in  connection  with  the  Company's  organization  and in
connection with certain financings.

See Note 14 for information  relating to the Company's 1993 Long-Term  Incentive
Plan.


[11] Capitalized Lease Obligations

Future minimum payments under  capitalized  lease obligations as of December 31,
1996 are as follows:

Year ending
December 31,
     1997                                             $    43,225
     1998                                                  16,854
                                                      ------------


     Total Minimum Payments                                60,079
     Less Amount Representing Interest at Rates Ranging from
     11% to 12% Per annum                                   2,685

     Balance                                          $    57,394
     -------                                          ===========

Capitalized  lease  obligations are  collateralized by equipment which has a net
book value of $25,000 and $64,000 at December  31, 1996 and 1995,  respectively.
Amortization   of   approximately   $30,700   and  $40,000  in  1996  and  1995,
respectively, has been included in depreciation expense.

[12] Fair Value of Financial Instruments

Effective  December 31, 1995,  the Company  adopted SFAS No. 107, which requires
disclosing fair value to the extent practicable for financial  instruments which
are  recognized  or  unrecognized  in the balance  sheet.  The fair value of the
financial instruments disclosed therein is not necessarily representative of the
amount  that  could be  realized  or  settled,  nor does the fair  value  amount
consider the tax consequences of realization or settlement.  The following table
summarizes  financial  instruments  by individual  balance sheet  accounts as of
December 31, 1996 and 1995:

                                     F - 25

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #14
------------------------------------------------------------------------------


[12] Fair Value of Financial Instruments - [Continued]

                                    Carrying Amount         Fair Value
                                    December 31,            December 31,

                                    1996       1995         1996       1995
                                    ----       ----         ----       ----

Debt Maturing Within One Year    $  590,000  $1,082,000  $  590,000  $1,082,000
Long-Term Debt                                  750,000                 750,000
                                ------------  ---------- -----------  ----------

      Totals                     $  590,000  $1,832,000  $  590,000  $1,832,000
      ------                     ==========  ==========  ==========  ==========

For  debt  classified  as  current,  it was  assumed  that the  carrying  amount
approximated fair value for these instruments because of their short maturities.
The fair value of long-term  debt is based on current rates at which the Company
could borrow funds with similar  remaining  maturities.  The carrying  amount of
long-term debt approximates fair value.

[13] Commitments and Contingencies

The  Company  leases  space  for its  executive  offices  and  facilities  under
noncancellable operating leases expiring March 31, 1999. The Company also leases
additional office space on a month-to-month basis.

Minimum annual  rentals under  noncancellable  operating  leases having terms of
more than one year are as follows:

Years ending
December 31,
  1997                                             $ 280,000
  1998                                               293,000
  1999                                                52,000
                                                   ---------

   Total                                           $ 625,000
   -----                                           ==========

Rent expense amounted to $358,000,  $309,000 and $148,000 respectively,  for the
years ended December 31, 1996, 1995 and 1994.

The  Company  has  an  agreement  with  Trinity  Group,  Inc.   ["Trinity"],   a
wholly-owned subsidiary of Consolidated,  pursuant to which the Company will pay
Trinity $15,000 a month for consulting services.  Neither the Company's chairman
of the board,  who is the chairman of the board of  Consolidated,  nor any other
employee  of  Consolidated,  Trinity  or SISC  receives  compensation  from  the
Company. (See Note 7).

At the time of the  acquisition  of CSM,  the  Company  entered  into  five-year
employment  agreements  with its current chief operating  officer  [formerly the
president] and vice  president,  which replaced  employment  agreements  then in
effect,  and the three  individuals who had been officers of CSM. The agreements
provide for  salaries of  $125,000,  $85,000,  $125,000,  $125,000  and $80,000,
respectively,  subject to cost of living increases.  The agreements also provide
for bonuses based upon a percentage of income before income taxes.  The officers
are also provided with an automobile or an automobile allowance.

In January 1996, the vice-president's  base salary was increased from $85,000 to
$100,000.  Also, for 1996, the chief  operating  officer and two other officers,
whose base salaries were $125,000 each,  agreed to reduce their base salaries to
$62,000,  $100,000 and $100,000,  with certain incentives if certain targets are
attained.  The  current  president  who is  not  one  of  the  five  individuals
previously mentioned,  was compensated during 1996 at the annual rate of $52,000
prior to the public offering and $125,000 subsequent to the public offering.

                                     F - 26

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #15
------------------------------------------------------------------------------


[13] Commitments and Contingencies - [Continued]

The  following  presents  the pro  forma net loss,  for all  periods,  using the
minimum and maximum amounts payable to SMI Corporation:
                                                  Y e a r s   e n d e d
                                                  D e c e m b e r   3 1,
                                                  1 9 9 5         1 9 9 4
Pro Forma Net Loss after Increase in Consulting
  Expense and Executive Compensation Per Agreements
  with SMI Corporation at $25,000 Per Month    $(3,330,000)    $  (2,270,000)
                                               ===========     =============

Net Loss Per Share                             $     (.69)     $     (.47)
                                               ===========     ==============

Pro Forma Net Loss after Increase in Consulting
  Expense and Executive Compensation Per
  Agreements with SMI Corporation at $59,000
  Per Month                                    $  (3,738,000)  $  (2,768,000)
                                               =============   =============

Net Loss Per Share                             $     (.78)     $    (.56)
                                               ============    ==============

The  proforma  disclosure  is not  representative  of the  potential  impact  on
proforma  earnings for years since the agreement was subsequently  modified (see
note 7B).

On or about  September 29, 1995, an action was commenced  against the Company by
the filing of a summons  with  notice in the  Supreme  Court of the State of New
York,  County of New York.  The action  was  commenced  by Jacque W. Pate,  Jr.,
Melvin Pierce, Herbert A. Meisler, John Gavin, Elaine Zanfini,  individually and
derivatively as  shareholders of Onecard Health Systems  Corporation and Onecard
Corporation,  which corporations are collectively  referred to as "Onecard." The
named defendants include, in addition to the Company,  officers and directors of
the  Company,  its  principal  stockholder  and  the  parent  of  its  principal
stockholder.  A complaint was served on November 15, 1995.  The complaint  makes
broad claims  respecting  alleged  misappropriation  of Onecard's trade secrets,
corporate assets and corporate opportunities,  breach of fiduciary relationship,
unfair  competition,  fraud,  breach  of trust and  other  similar  allegations,
apparently  arising at the time of, or in connection with the  organization  of,
the  Company in  September  1992.  The  complaint  seeks  injunctive  relief and
damages,  including  punitive  damages,  of $130 million.  In September 1996 the
above action was dismissed.

In March 1997, the plaintiff has refiled a new action with the same  allegations
and stating claims that were at the basis of the original complaint. Such action
is in the amount of  $130,000,000.  The Company contends that the technology and
software  were  created  from a "clean  office  start" and the action is without
merit and frivolous. No assessment as to any outcome can be made at this time as
the matter is in its very preliminary  stages. The Company denies any allegation
of wrongdoing and intends to vigorously defend the action.

[14] Stock-Based Compensation

In July 1993,  the  Company  adopted,  by action of the board of  directors  and
stockholders,  the 1993  Longterm  Incentive  Plan  (the  "Plan").  The Plan was
amended in October  1993,  April 1994,  October  1994 and February  1996.  These
amendments  increased the number of shares  available for grant  pursuant to the
plan. The Plan does not have an expiration date.

The Plan is  authorized to grant options or other  equity-based  incentives  for
511,000  shares of the common  stock.  If shares  subject to an option under the
Plan cease to be subject to such  options,  or if shares  awarded under the Plan
are  forfeited,  or  otherwise  terminated  without a payment  being made to the
participant in the form of stock, such shares will again be available for future
distribution under the Plan.

                                     F - 27

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #16
------------------------------------------------------------------------------



[14] Stock-Based Compensation - [Continued]

Awards under the Plan may be made to key  employees,  including  officers of and
consultants to the Company,  its  subsidiaries  and  affiliates,  but may not be
granted to any director unless the director is also an employee of or consultant
to the Company or any  subsidiaries or affiliates.  The Plan imposes no limit on
the  number of  officers  and other key  employees  to whom  awards may be made;
however,  no person shall be entitled to receive in any fiscal year awards which
would  entitle  such  person to acquire  more than 3% of the number of shares of
common stock outstanding on the date of grant.

In January  1995,  the Board  granted,  to various  employees,  stock options to
purchase an aggregate of 252,804 shares of common stock at $.232 per share,  and
in December  1995 the Board  granted,  to various  employees,  stock  options to
purchase an aggregate of 104,952 shares of common stock at $.345 per share. Such
exercise  prices were  determined  by the Board to be the fair market  value per
share on the date of grant.  The  options  become  exercisable  as to 50% of the
shares on the first and second anniversaries of the date of grant. These options
expire on January 31, 2000 and December 31, 2000,  respectively.  In  connection
with certain of the January 1995 option grants,  the Board  canceled  previously
granted  options to purchase  206,250  shares at an exercise  price of $5.33 per
share which were  granted in 1994.  In April 1996,  the  Company  granted  stock
options  to  purchase  an  aggregate  of  129,500  shares of common  stock at an
exercise  price of $2.00  per  share  and  recognized  compensation  expense  of
$154,800.  The options are  exercisable as to 50% of the shares on the first and
second anniversaries of the date of grant and expire in April 2001.

In addition, the Company granted to the underwriter,  for nominal consideration,
options to purchase  56,250  units,  consisting  of two common  shares,  and one
purchase  warrant,  for a four year period commencing August 13, 1997 at a price
of $5.37.

A summary of the activity under the Company's stock option plan is as follows:

                                    1996              1995                 1994
                          -----------------------------------------------------
                                   Weighted          Weighted          Weighted
                                    Average           Average           Average
                                    Exercise          Exercise         Exercise
                          Shares   Price    Shares    Price      Shares   Price

Outstanding - Beginning of
  Years                   357,756 $ .265    206,250   $ 5.33               $ --
Granted or  During
 the Years                 242,000  3.57    357,756    .265      206,250    5.33
Canceled During the Years            --    (206,250)    5.33                 --
Expired During the Years             --                  --                  --
Exercised During the Years           --                  --                  --
                          -------  ------- --------  --------     --------  ----

   Outstanding - End of Ye 599,756  1.60     357,756   .265       206,250  5.33
                          ======== =======  ========   =====     ======== =====

   Exercisable - End of Ye 178,878  .265                 --         --       --
                          ======== =======  =========  ======    ========= =====



                                     F - 28

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #17
------------------------------------------------------------------------------


[14] Stock-Based Compensation - [Continued]

                                         1996                       1995
                          ----------------------------------------------
                          Weighted    Weighted       Weighted    Weighted
                           Average     Average        Average     Average
                           Exercise      Fair         Exercise      Fair
                             Price      Value           Price      Value
Options Issued with Exercise
Price Above Stock Price at
Date of Grant              $5.37       $  .93           --          --

Options Issued with Exercise
Price Equal to Stock Price at
Date of Grant                  --         --          $.265       $.14

Options Issued with Exercise
Price Below Stock Price at
Date of Grant              $2.00       $1.78            --          --

The following table summarizes stock option information as of December 31, 1996:

                                                   Weighted
                                            Average Remaining   Weighted Average
Range of Exercise Prices           Shares     Contractual Life   Exercise Price

$.232 to $.345                     347,756      3.4 Years            $ .265
$2.00                              129,500      4.3 Years               2.00
$5.37                              112,500      4.7 Years               5.37
                                   -------      ---------            -------

   Totals                          599,756      3.8 Years            $ 1.60
                                   =======      =========            ======

In October 1993, the Company issued to SISC warrants to purchase  375,000 shares
of  common  stock at $10.00  per  share,  225,000  shares at $6.67 per share and
150,000  shares of common stock at $2.67 per share and issued to SMACS  warrants
to purchase  37,500  shares of common stock at $6.67 per share and 37,500 shares
at $2.67  per  share.  The  warrants  became  exercisable  six  months  from the
completion of the Company's  initial public offering or earlier with the consent
of the Company and the underwriter and expire on November 30, 1998.

In  February  1996,  the  Company  issued an  aggregate  of  3,153,750  Series B
Warrants,  of which 2,526,250 are exercisable at $2.00 per share and 637,500 are
exercisable at $5.00 per share.  These  warrants were issued in connection  with
services  rendered,  which,  in the case of SISC,  included the guarantee of the
December 1995 Interim Notes, and, in certain instances the terms of the warrants
were  revised.  Although  the warrants  were issued prior to the  three-for-four
reverse  split,  which was  effective  in  February  1996,  the number of shares
issuable upon exercise of the warrants, but not the exercise price, was adjusted
for the reverse  split.  Certain of the warrants  initially  had a November 1998
expiration  date,  which  was  extended  to  December  31,  1999,  which  is the
expiration date of all of the warrants.

Of the warrants issued in February 1996,  787,500 warrants  exercisable at $2.00
per share and 37,500  warrants  exercisable  at $5.00 per share  were  issued to
replace 825,000 warrants  previously  issued in October 1993. These warrants had
exercise prices ranging from $2.67 per share to $10.00 per share.



                                     F - 29

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #18
------------------------------------------------------------------------------


[14] Stock-Based Compensation - [Continued]

In July 1996,  pursuant to a warrant  exchange,  (a) the holders of  outstanding
warrants  having a $2.00 exercise price exchanged one third of such warrants for
outstanding warrants to purchase,  at an exercise price of $4.00 per share, 150%
of  the  number  of  shares  of  common  stock  issuable  upon  exercise  of the
outstanding  warrants  that were  exchanged,  and (b) the exercise  price of the
outstanding  warrants have a $5.00 exercise price was reduced to $4.00. Prior to
the warrant  exchange,  there were  outstanding  warrants to purchase  2,516,250
shares of common stock at $2.00 per share and  outstanding  warrants to purchase
2,637,500 shares of common stock at $5.00 per share outstanding.  As a result of
the warrant  exchange,  there are  outstanding  warrants  to purchase  1,677,500
shares of common stock at $2.00 per share and  1,895,625  shares of common stock
at $4.00 per share. This warrants may be exercised  commencing February 13, 1997
or earlier if approved by the company and the  underwriter.  An affiliate of the
Company, a member of the board of the directors and a Company controlled by such
directors,  were given  permission  to  exercise  options in August  1996.  This
individual and entities  exercised  warrants to purchase 800,000 shares at $2.00
per share in August 1996. All of the warrants expire on December 31, 1999. These
warrants  are Series B Common  Stock  Purchase  Warrants.  The Company  recorded
compensation  expenses  of  $3,337,500  in  relation  to the  issuance  of these
warrants.

The Company issued 646,875 Series A Common Stock Purchase  Warrants as a part of
its initial public  offering of its  securities.  These warrants are exercisable
for two year period commencing August 13, 1997 at a price of $4.50.

In addition,  the Company issued 250,000 Series A Common Stock Purchase  Warrant
to various accredited  investors (See Note 8). These warrants have the same term
as the warrants issued to the general public.

A summary of warrant activity is as follows:

                                    1996              1995                 1994
                          -----------------------------------------------------
                                   Weighted          Weighted          Weighted
                                    Average           Average           Average
                                    Exercise          Exercise         Exercise
                          Shares      Price Shares      Price    Shares   Price

Outstanding - Beginning
  of Years                   825,00 $ 7.27  825,000  $ 7.27      825,000  $ 7.27
Granted or Sold During
  the Years               4,470,000   3.35                 --                --
Canceled During the Years  (825,000   7.27                 --                --
Expired During the Years                 --                --                --
Exercised During the Years (800,000   2.00                 --                --
                          ---------  -----  -----------------    --------  -----

Outstanding-End of Years  3,670,000   3.64  825,000     7.27     825,000    7.27
                          =========  =====  =======   ======     =======   =====

Exercisable-End of Years      --      --    825,000     7.27     825,000    7.27
                          ========  ======  =======  =======     =======  ======





                                     F - 30

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #19
------------------------------------------------------------------------------


[14] Stock-Based Compensation - [Continued]

                                         1996                       1995
                          ----------------------------------------------
                          Weighted    Weighted       Weighted    Weighted
                           Average     Average        Average     Average
                           Exercise      Fair         Exercise      Fair
                             Price      Value           Price      Value
Warrants Issued with Exercise
Price Above Stock Price at
Date of Grant              $4.16       $1.04            --          --

Warrants Issued with Exercise
Price Equal to Stock Price at
Date of Grant                  --         --             --         --

Warrants Issued with Exercise
Price Below Stock Price at
Date of Grant              $2.00       $1.78            --          --

The following table summarizes warrant information as of December 31, 1996:

                                                   Weighted
                                            Average Remaining   Weighted Average
Range of Exercise Prices           Shares     Contractual Life    Exercise Price

$2.00                                 877,500   3.0 Years               2.00
$4.00                              1,895,625    3.0 Years               4.00
$4.50                                 896,875   1.7 Years               4.50
                                   ----------   ---------            -------

   Total                           3,670,000    2.7 Years               3.64
                                   =========    =========            =======

The Company applies  accounting  principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, for stock options issued
to employees in accounting for its stock options plans.  Total compensation cost
recognized in income for stock based employee compensation awards was $3,492,300

If the Company had  accounted  for the issuance of all options and  compensation
based  warrants  pursuant  to the fair value based  method of SFAS No. 123,  the
Company would have recorded  additional  compensation  expense totaling $846,000
and $50,000 for the years ended  December 31, 1996 and 1995,  respectively,  and
the Company's net loss and net loss per share would have been as follows:

                                                Y e a r s   e n d e d
                                                D e c e m b e r   3 1,
                                               1 9 9 6          1 9 9 5
                                               -------          -------


Net Loss as Reported                       $ (6,579,444)    $ (2,850,000)
                                           =============    =============

Pro Forma Net Loss                         $ (7,425,444)    $ (2,900,000)
                                           =============    =============

Net Loss Per Share as Reported             $    (1.28)           (.59)
                                           =============    ==============

Pro Forma Net Loss Per Share               $    (1.44)           (.60)
                                           =============    ===============


                                     F - 31

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #20
------------------------------------------------------------------------------


[14] Stock-Based Compensation - [Continued]

The fair value of options and warrants at date of grant was estimated  using the
Black-Scholes  fair value  based  method  with the  following  weighted  average
assumptions:

                                 1 9 9 6     1 9 9 5
                                 -------     -------
Expected Life (Years)                  2           3
Interest Rate                       6.0%        6.0%
Annual Rate of Dividends              0%          0%
Volatility                         67.9%       69.6%

The  weighted  average fair value of options and warrants at date of grant using
the fair value based method during 1996 and 1995 is estimated at $1.33 and $.14,
respectively.

[15] Industry Segments

The Company currently classifies its operations into two business segments:  (1)
Software and Related Systems and Services and (2) Data Center Services. Software
and Related Systems and Services is the design, installation, implementation and
maintenance  of  computer  information  systems.  Data Center  Services  involve
company  personnel  performing  data  entry  and data  processing  services  for
customers.  Intersegment  sales and sales  outside  the  United  States  are not
material. Information concerning the Company's business segments is as follows:
                                                   Y e a r s   e n d e d
                                                   D e c e m b e r  31,
                                            1 9 9 6        1 9 9 5       1 9 9 4
                                            -------        -------       -------
Revenues:
     Software and Related Systems 
Services                              $ 6,333,804   $  5,640,000   $  2,040,000
     Data Center Services               2,207,155      1,742,000        884,000
                                    -------------  -------------    ------------

     Total Revenues                  $  8,540,959   $  7,382,000   $  2,924,000
     --------------                   ============   ============   ============

Gross Profit:
     Software and Related Systems 
and Services                          $   623,456  $     911,000  $     (78,000)
     Data Center Services                 986,787         853,000       468,000
                                     --------------  ------------- -------------

     Total Gross Profit              $  1,610,243   $  1,764,000   $    390,000
     ------------------               ============   ============   ============

Income [Loss] From Operations:
     Software and Related Systems
 and Services                         $(4,053,006)   $(1,692,000)   $(1,649,000)
     Data Center Services                  (97,805)      259,000        158,000

     Total [Loss] From Operations     $(4,150,811)   $(1,433,000)   $(1,491,000)
     ----------------------------     ===========    ===========    ===========

Depreciation and Amortization:
     Software and Related Systems
and Services                         $    367,984   $     765,000  $    401,000
     Data Center Services                 118,582        107,000         69,000
                                    -------------  --------------  -------------

 Total Depreciation and Amortization  $   486,566   $     872,000  $    470,000
 -----------------------------------  ============   =============  ============

Capital Expenditures:
     Software and Related Systems 
and Services                         $    165,716   $    46,000    $    119,000
     Data Center Services                 15,317         92,000           3,000
                                   -------------- -------------- ---------------

     Total Capital Expenditures      $    181,033   $    138,000   $    122,000
     --------------------------       ============   ============   ============

Identifiable Assets:
     Software and Related Systems 
and Services                           $ 4,119,943   $  3,625,000
     Data Center Services                2,607,693      2,691,000
                                       ------------   ------------

     Total Identifiable Assets         $ 6,727,636    $ 6,316,000
     -------------------------         ===========    ===========

                                       F - 32

<PAGE>



NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #21
------------------------------------------------------------------------------


[16] Joint Venture

The Company  executed an agreement in February  1996 to purchase an  application
software  product known as the SATC Software which processes retail plastic card
transactions and merchant transactions. The purchase price for the SATC Software
is  $650,000,  of which  $325,000 was paid in February  1996 with the  remaining
balance of $325,000 due and paid in three installments during 1996.

The Company entered into a joint venture with Oasis Technology,  Ltd.  ["Oasis"]
pursuant to which the joint venture  corporation (50% owned by the Company) will
purchase the SATC software and made an advance  payment of $325,000,  in January
1996, pursuant to such proposed joint venture. The Company has an agreement with
Oasis that Oasis will pay the remaining  $325,000 as part of its contribution to
the joint venture.  Oasis did pay the $325,000 during 1996. The Company accounts
for its  interest  in the Joint  Venture on the equity  method.  During 1996 the
Company  recognized  $264,  085 of its share of  losses  related  to this  joint
venture and contributed an additional $59,631 in cash to fund ongoing costs.

[17] New Authoritative Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting  Standards ("SFAS") No. 125.  "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities".  SFAS No. 125 
is effective for transfers and servicing of financing assets  and extinguishment
of liabilities occurring after December 31, 1996.  The provision of SFAS No. 125
must be applied prospectively; retroactive application is prohibited and early 
application is not allowed.  SFAS No. 125 supersedes SFAS No. 77, "Reporting by 
Transferors for Transfers of Receivables with Recourse".  While both SFAS No. 
125 and SFAS No. 77 required a surrender of "control" or financial assets to 
recognize asale, the SFAS No. 125 requirements of sale are generally more 
stringent.  SFAS No. 125 is not expected to have a material impact on the
Company because the Company hasn't been recognizing sales under SFAS No. 77 and 
will also not be under SFAS No. 125.  Some provisions of SFAS No. 125, which are
unlikely to apply to the Company, have been deferred by the FASB.

The FASB has issued SFAS No. 128 "Earnings  Per Share" and SFAS 129  "Disclosure
of  Information  About  Capital  Structure".  Both are  effective  for financial
statements  issued for periods  ending after  December  15,  1997.  SFAS No. 128
simplifies the computation of earning per share by replacing the presentation of
primary  earnings per share with a presentation of basic earnings per share. The
statement  requires dual presentation of basic and diluted earnings per share by
entities with complex capital  structures.  Basic earnings per share includes no
dilution an is computed by dividing income  available to common  stockholders by
the  weighted  average  number of shares  outstanding  for the  period.  Diluted
earnings per share  reflects the  potential  dilution of  securities  that could
share in the earnings of an entity similar to fully diluted earnings per share.

While the Company has not analyzed  SFAS No. 128  sufficiently  to determine its
long-term impact on per share reported  amounts,  SFAS No. 128 should not have a
significant effect on historically reported per share loss amounts.

SFAS No. 129 does not change any previous  disclosure  requirements,  but rather
consolidates existing disclosure requirements for ease of retrieval.

                                       F - 33

<PAGE>



                                     SIGNATURES

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

                                          NETSMART TECHNOLOGIES, INC.

Date: April 11, 1997                      /S/ Lewis S. Schiller
                                          ---------------------
                                          Lewis S. Schiller
                                          Chief Executive Officer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

Signature                             Title                   Date

/S/ Lewis S. Schiller           Chief Executive Officer  April 11, 1997
----------------------------
Lewis S. Schiller


/S/ Anthony F. Grisanti         Chief Financial Officer  April 11, 1997
Anthony F. Grisanti


/S/ James Conway                President                April 11, 1997
James Conway


<PAGE>



NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1 - CALCULATION OF EARNINGS PER SHARE
------------------------------------------------------------------------------



                                     Years ended                Years ended
                                  December 31, 1996            December 31,
                              Primary EPS Fully Diluted EPS 1 9 9 5     1 9 9 4
                              ----------- ----------------- -------     -------

Net Loss - Historical        $(6,579,444)  $(6,579,444) $(2,850,000)$  (433,000)
                                                        ============ ==========
Adjustments Per Modified Treasury
  Stock Method                   325,389       323,715
                              ----------    ----------

Adjusted Net Loss - Primary  $(6,254,055)

Adjusted Net Loss - Fully Diluted           $(6,255,729)
                                            ===========

Loss Per Share:
  Loss Per Share - Note 1     $     (.75)                $      (.30  $    (.03)
                              ==========                 ===========  ==========
  Loss Per Share - Assuming Full
   Dilution - Note 2                        $     (.75)  $      (.30) $    (.03)
                                            ==========   ===========  ==========

Note    1:  Computed  by dividing  net loss by the  weighted  average  number of
        common shares  (4,136,253)  for the years ended December 31, 1996,  1995
        and 1994 respectively  adjusting it by items (i) to (vi) below using the
        modified treasury stock method of calculating earnings per share.

        (i) Assumes  that  357,756  1995  Stock  Incentive  Plan  stock  options
            outstanding  at December 31, 1996 were exercised at the beginning of
            the  period and that the  proceeds  were used to  purchase  treasury
            stock at the average market price of the Company's  common stock for
            the period as quoted on the NASDAQ,  retire  debt  redeem  preferred
            stock and to invest the balance.

        (ii)Assumes  that  129,500  1995  Stock  Incentive  Plan  stock  options
            outstanding  at December 31, 1996 were exercised at the beginning of
            the  period and that the  proceeds  were used to  purchase  treasury
            stock at the market price of the Company's  common stock at December
            31,  1996 as quoted on the  NASDAQ,  retire  debt and to invest  the
            balance.

        (iiiAssumes that 112,500 stock options  outstanding at December 31, 1996
            were  exercised at the beginning of the period and that the proceeds
            were used to  purchase  treasury  stock at the  market  price of the
            Company's common stock at December 31, 1996 as quoted on the NASDAQ,
            retire debt, redeem preferred stock and to invest the balance.

        (vi)Assumes  Series B common  stock  purchase  warrants to purchase  and
            aggregate of 877,500  common shares were  exercised at the beginning
            of the period and that the proceeds  were used to purchase  treasury
            stock at the average market price of the Company's  common stock for
            the period as quoted on the NASDAQ,  retire debt,  redeem  preferred
            stock and to invest the balance.

        (v) Assumes common stock  purchase  warrants to purchase an aggregate of
            1,895,625  shares were  exercised at the beginning of the period and
            that  the  proceeds  were  used to  purchase  treasury  stock at the
            average market price of the Company's common stock for the period as
            quoted on the NASDAQ,  retire debt,  redeem  preferred  stock and to
            invest the balance.

        (vi)Assumes  that common  stock  purchase  warrants to purchase  896,875
            shares were  exercised  at the  beginning of the period and that the
            proceeds were used to purchase  treasury stock at the average market
            price of the Company's  common stock for the period as quoted on the
            NASDAQ , retire  debt  redeem,  preferred  stock  and to invest  the
            balance.

The proceeds received from the above transactions would then be used to purchase
treasury stock up to 20%,  retire debt redeem  preferred stock and the remaining
balance invested. See Schedule 1.



<PAGE>



NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1 - COMPUTATION OF EARNINGS PER SHARE [CONTINUED]
------------------------------------------------------------------------------



Note    2:  Computed  by dividing  net loss by the  weighted  average  number of
        common shares  (4,136,253)  for the years ended December 31, 1996,  1995
        and 1994  respectively  adjusting it by items (i) to (v) below using the
        modified treasury stock method of calculating earnings per share.

        (i) Assumes  that  357,756  1995  Stock  Incentive  Plan  stock  options
            outstanding  at December 31, 1996 were exercised at the beginning of
            the  period and that the  proceeds  were used to  purchase  treasury
            stock at the market price of the Company's  common stock at December
            31, 1996 as quoted on the NASDAQ, retire debt redeem preferred stock
            and to invest the balance.

        (ii)Assumes  that  129,500  1995  Stock  Incentive  Plan  stock  options
            outstanding  at December 31, 1996 were exercised at the beginning of
            the  period and that the  proceeds  were used to  purchase  treasury
            stock at the market price of the Company's  common stock at December
            31,  1996 as quoted on the  NASDAQ,  retire  debt and to invest  the
            balance.

        (iiiAssumes that 112,500 stock options  outstanding at December 31, 1996
            were  exercised at the beginning of the period and that the proceeds
            were used to  purchase  treasury  stock at the  market  price of the
            Company's common stock at December 31, 1996 as quoted on the NASDAQ,
            retire debt, redeem preferred stock and to invest the balance.

        (iv)Assumes  Series B common  stock  purchase  warrants to purchase  and
            aggregate of 877,500  common shares were  exercised at the beginning
            of the period and that the proceeds  were used to purchase  treasury
            stock at the market price of the Company's  common stock at December
            31,  1996 as quoted on the NASDAQ,  retire  debt,  redeem  preferred
            stock and to invest the balance.

        (v) Assumes  Series B common  stock  purchase  warrants  to  purchase an
            aggregate of 1,895,625 shares were exercised at the beginning of the
            period and that the proceeds were used to purchase treasury stock at
            the market price of the Company's  common stock at December 31, 1996
            as quoted on the NASDAQ,  retire debt, redeem preferred stock and to
            invest the balance.

        (vi)Assumes that stock options to purchase 896,875 shares were exercised
            at the  beginning of the period and that the  proceeds  were used to
            purchase  treasury stock at the market price of the Company's common
            stock at December  31,  1996 as quoted on the NASDAQ , retire  debt,
            redeem preferred stock and to invest the balance.

The proceeds received from the above transactions would then be used to purchase
treasury stock up to 20%,  retire debt redeem  preferred stock and the remaining
balance invested. See Schedule 2.

Note: This calculation is submitted in accordance with the Securities Act of 
1934 Release No. 9083 although it is contrary to Para. 40 of APB 15 because it 
may produce an anti-dillutive result.





<PAGE>



SCHEDULE 1
PRIMARY EARNINGS PER SHARE - DECEMBER 31, 1996
------------------------------------------------------------------------------



Weighted average # of shares o/s 12/31/96             5,149,253

Total issuable warrants and options
Options pursuant to 1995 Stock Incentive Plan           252,804
Options pursuant to 1995 Stock Incentive Plan           104,952
Options pursuant to 1995 Stock Incentive Plan           129,500
Options to purchase stock                               112,500
Series B Common Stock Purchase Warrants                 877,500
Series B Common Stock Purchase Warrants               1,896,625
Series A Common Stock Purchase Warrants                 896,875
                                                     ----------

        Total issuable                                4,269,756

Total that can be reacquired:
(5,149,253 x 20%)                                     1,029,851
                                                     ----------

            Issued not reacquired                     3,239,905


Proceeds                                        Price     # of shares

Options pursuant to 1995 Stock Incentive Plan  $ .232        252,804     58,651
Options pursuant to 1995 Stock Incentive Pla     .345        104,952     36,208
Options pursuant to 1995 Stock Incentive Plan    2.00        129,500    259,000
Options to purchase stock                        5.37        112,500    604,125
Series B Common Stock Purchase Warrants          2.00        877,500  1,755,000
Series B Common Stock Purchase Warrants          4.00      1,895,625  7,582,500
Series A Common Stock Purchase Warrants          4.50        896,875  4,035,938
                                                                      ---------

                                                                      14,331,422

Limitation
1,029,851 shares x 3.25 (avg FMV)                                     3,347,016
                                                                      ---------

   Total proceeds remaining to retire debt, redeem preferred stock and 
interest 10,984,406

Outstanding debt and preferred stock redemption
- A/P and accrued expenses                                    1,974,231
- Note payable                                                  590,031
- Capitalized lease obligation                                   57,394
- Due to related parties                                         23,542
- Preferred stock redemption                                  1,210,000
                                                             ----------

                                                                      3,855,198

   Remaining proceeds for cash                                        7,129,208

Net income  effects of debt  retirement  at 7/1/96  interest  expense  per P&L=
472,548 for a fully year retired 7/1/96 - net interest expense 236,274

Cash invested in money market fund @ 2.5% interest for 6 months

      7,129,208 @ 2.5% /2                                                89,115




<PAGE>



SCHEDULE 1
PRIMARY EARNINGS PER SHARE - DECEMBER 31, 1996
[continued]
------------------------------------------------------------------------------



P&L impact
Reduction of interest expense236,274
Additional interest income    89,115
                             325,389

Weighted average # of shares o/s 12/31/96                     5,149,253
Options and warrants not reacquired                           3,239,905

     Total                                                    8,389,158

December 31, 1996 Net income per F/S           (6,579,444)
Adjustment per modified treasury stock method    325,389

Adjusted net loss                              (6,254,055)

Primary EPS                (6,254,055)/8,389,158=            (.74549258)
                                                             ($.75)

Total reacquired
Options pursuant to 1995 Stock Incentive Plan    3.25        252,804    821,613
Options pursuant to 1995 Stock Incentive Plan     3.25        104,952    341,094
Options pursuant to 1995 Stock Incentive Plan     3.25        129,500    420,875
Options to purchase stock                         3.25        112,500    365,625
Series B Common Stock Purchase Warrants           3.25        877,500  2,851,875
Series B Common Stock Purchase Warrants           3.25      1,895,625  6,160,781
Series A Common Stock Purchase Warrants           3.25        896,875  2,914,844
                                                                       ---------

                                                                      13,876,707





<PAGE>



SCHEDULE 2
PRIMARY EARNINGS PER SHARE - DECEMBER 31, 1996
------------------------------------------------------------------------------



Weighted average # of shares o/s 12/31/96                     5,149,253

Total issuable warrants and options
Options pursuant to 1995 Stock Incentive Plan                   252,804
Options pursuant to 1995 Stock Incentive Plan                   104,952
Options pursuant to 1995 Stock Incentive Plan                   129,500
Options to purchase stock                                       112,500
Series B Common Stock Purchase Warrants                         877,500
Series B Common Stock Purchase Warrants                       1,896,625
Series A Common Stock Purchase Warrants                         896,875
                                                             ----------

  Total issuable                                              4,269,756

Total that can be reacquired:
(5,149,253 x 20%)                                             1,029,851
                                                             ----------

      Issued not reacquired                                   3,239,905


Proceeds                                           Price     # of shares

Options pursuant to 1995 Stock Incentive Plan   $ .232        252,804     58,651
Options pursuant to 1995 Stock Incentive Plan     .345        104,952     36,208
Options pursuant to 1995 Stock Incentive Plan     2.00        129,500    259,000
Options to purchase stock                         5.37        112,500    604,125
Series B Common Stock Purchase Warrants           2.00        877,500  1,755,000
Series B Common Stock Purchase Warrants           4.00      1,895,625  7,582,500
Series A Common Stock Purchase Warrants           4.50        896,875  4,035,938
                                                                        --------

                                                                      14,331,422

Limitation
1,029,851 shares x 3.38 (FMV at 12/31/96)                              3,480,896
                                                                       ---------

   Total proceeds remaining to retire debt, redeem preferred stock and in
10,850,526

Outstanding debt and preferred stock redemption
- A/P and accrued expenses                                    1,974,231
- Note payable                                                  590,031
- Capitalized lease obligation                                   57,394
- Due to related parties                                         23,542
- Preferred stock redemption                                  1,210,000
                                                             ----------

                                                                       3,855,198

   Remaining proceeds for cash                                         6,995,328

Net income  effects of debt  retirement  at 7/1/96  interest  expense  per P&L =
472,548 for a fully year retired 7/1/96 - net interest expense 236,274

Cash invested in money market fund @ 2.5% interest for 6 months

      6,995,328 @ 2.5% /2                                                 87,441



<PAGE>



SCHEDULE 2
PRIMARY EARNINGS PER SHARE - DECEMBER 31, 1996
[continued]
------------------------------------------------------------------------------



P&L impact
Reduction of interest expense236,274
Additional interest income    87,441
                             323,715

Weighted average # of shares o/s 12/31/96                     5,149,253
Options and warrants not reacquired                           3,239,905

     Total                                                    8,389,158

December 31, 1996 Net income per F/S           (6,579,444)
Adjustment per modified treasury stock method    323,715

Adjusted net loss                              (6,255,729)

Fully Diluted EPS          (6,255,729)/8,389,158=            (.74569211)
                                                             ($.75)

Total reacquired
Options pursuant to 1995 Stock Incentive Plan     3.38        252,804    854,428
Options pursuant to 1995 Stock Incentive Plan     3.38        104,952    354,738
Options pursuant to 1995 Stock Incentive Plan     3.38        129,500    437,710
Options to purchase stock                         3.38        112,500    380,250
Series B Common Stock Purchase Warrants           3.38        877,500  2,965,950
Series B Common Stock Purchase Warrants           3.38      1,895,625  6,407,213
Series A Common Stock Purchase Warrants           3.38        896,875  3,031,438
                                                                       ---------

                                                                      14,431,777


<PAGE>