**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





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





For
      the
      fiscal year ended December 31, 2005





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.
                Employerincorporation
                or organization)
            Identification
                Number)





3500
                Sunrise Highway, Suite D-122, Great River, NY
            11739(Address
                of principal executive offices)
            (Zip
                Code)





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





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





Title
                of each class
            Name
                of each exchange on which registeredNone
            None





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





Common
      Stock, par value $.01 per share


(Title
      of
      class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. o Yes x No





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. o Yes x No





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.


x Yes o No





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. o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). o Yes x No





As
      of
      June 30, 2005, the last day of the Registrant’s second fiscal quarter, the
      aggregate market value of the voting and non-voting common equity held by non
      affiliates was approximately $42,386,000.





As
      of
      March 20, 2006, the registrant had outstanding 6,497,724 shares of common
      stock.





DOCUMENTS
      INCORPORATED BY REFERENCE





None








**Part
      I**





**Forward-Looking
      Statements**





Statements
      in this Form 10-K annual report may be “forward-looking statements” within the
      meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
      statements include, but are not limited to, statements that express our
      intentions, beliefs, expectations, strategies, predictions or any other
      statements relating to our future activities or other future events or
      conditions. These statements are based on current expectations, estimates and
      projections about our business based, in part, on assumptions made by
      management. These statements are not guarantees of future performance and
      involve risks, uncertainties and assumptions that are difficult to predict.
      Therefore, actual outcomes and results may differ materially from what is
      expressed or forecasted in the forward-looking statements due to numerous
      factors, including those risks discussed from time to time in this Form 10-K
      annual report for the year ended December 31, 2005, and in other documents
      which
      we file with the Securities and Exchange Commission. In addition, such
      statements could be affected by risks and uncertainties related to product
      demand, market and customer acceptance, competition, government regulations
      and
      requirements, pricing and development difficulties, as well as general industry
      and market conditions and growth rates, and general economic conditions. Any
      forward-looking statements speak only as of the date on which they are made,
      and
      we do not undertake any obligation to update any forward-looking statement
      to
      reflect events or circumstances after the date of this Form 10-K.





**Item
      1.**  **Business.**




In
        this
        report, the terms "Netsmart," "we," "us" or "our" mean Netsmart Technologies,
        Inc. and the subsidiaries in our consolidated financial
        statements.





**Introduction**





We
      develop market, and support application software for health and human services
      organizations. In many cases, our software serves as the foundation for the
      financial, clinical and management processes for our customers, which include
      mental health clinics, substance abuse clinics, psychiatric hospitals, public
      health agencies, and managed care entities.





Our
      software facilitates key functions, such as patient management, billing,
      scheduling, and electronic medical records, for all modalities of care. We
      sell
      our software products, either on a licensed or a subscription basis. We also
      offer software support and upgrades under maintenance agreements with our
      customers, an arrangement which provides us with a recurring revenue stream.
      We
      currently have in place contracts with more than 1,250 customer organizations
      in
      all 50 states, U.S. territories and several other countries. These contracts
      represent more than 100,000 users and include more than 30 state agencies that
      operate and/or manage multiple facilities.





The
      ability for government agencies and non-profit organizations to integrate their
      services is becoming more critical as they face requirements to provide a wider
      range of services to more clients, but with less money. Our software, services,
      and industry knowledge are designed to help our customers gain operational
      efficiencies, while at the same time protecting the privacy of sensitive health
      data. As a result, we are seeing increased demand for our software from
      government agencies who are integrating services, and from major systems
      integrators interested in reselling our software as part of their role in
      supporting these agencies.





The
      cost
      of a new software system for our customers typically ranges from $10,000 to
      $100,000 for a single-facility healthcare organization to $250,000 to several
      million dollars for multi-unit care organizations, such as those run by state
      agencies. Government agencies, such as mental health, mental retardation, child
      welfare, addiction, correction and public health facilities, accounted for
      approximately 44% of revenue in 2005, with the remainder coming from private
      hospitals, smaller clinics, group and sole practitioners.





1


Netsmart
      also furnishes data center services to providers that do not wish to maintain
      the staff and infrastructure required to manage a direct-bill relationship
      with
      multiple payers for mental health, alcohol and substance abuse services. Data
      Center services include statistical reporting, data entry, electronic billing
      and submission. This business line provides a recurring revenue stream that
      contributes to the recurring revenue base described above.





We
      also
      offer an Application Service Provider (“ASP”) option, which makes our Avatar
      software suite, CareNet, InfoScriber and Netsmart University products available
      either via a secure connection to the Internet or via a virtual private network
      (“VPN”). The ASP model reduces the upfront capital investment required for
      customers to procure our software and enables customers to deploy our products
      more rapidly and to pay a monthly services-based fee rather than an upfront
      license fee. The ASP model also eliminates the need for customers to continually
      upgrade their hardware systems. In addition, it provides an opportunity for
      us
      to become more integrated with the customer’s day-to-day
      operations.





**Recent
      Acquisitions**





In
      2005,
      we completed acquisitions of three companies with products and services
      complementary to our existing offerings. Each of these acquisitions expands
      our
      product offerings, and enhances our ability to offer our customers a wide range
      of products and services that are designed to meet their needs.





We
      acquired ContinuedLearning, a Florida-based provider of online training
      services. We have integrated ContinuedLearning’s product offerings with our
      existing customer training programs, and branded the combined offerings as
      “Netsmart University”. Netsmart University includes a wide range of Web-based,
      classroom and onsite training, as well as a learning management system that
      is
      designed to enable behavioral healthcare and other organizations to effectively
      manage their own training and development initiatives. Netsmart University
      offers access to hundreds of online courses in behavioral healthcare, safety,
      and compliance.





We
      acquired Addiction Management Systems, Inc., solidifying our position as one
      of
      the nation’s largest suppliers of automated computerized methadone dispensing
      systems. We now serve more than 400 of the estimated 1,100 methadone clinics
      in
      the U.S., providing a range of offerings for customers ranging from small
“storefront” clinics to large clinics managed by large institutional health
      providers.





In
      September 2005, we completed the acquisition of CMHC Systems, a leading
      competitor in the behavioral healthcare software market. As a result of the
      acquisition, we acquired more than 400 additional customer organizations,
      primarily in the community behavioral healthcare sector.





**Our
      Strategy**





As
      one of
      the largest providers of technology solutions in the behavioral health market,
      we believe we have the unique ability to provide our customers with the widest
      range of solutions that can help them furnish high quality care to their clients
      at a high level of efficiency. Our comprehensive information technology
      solutions include functionality for billing, patient tracking and scheduling
      (for inpatient and outpatient environments), as well as clinical documentation
      and medical record generation and management. The key elements of our strategy
      are to:





***Capitalize
      on market initiatives*** **.** Our
      strategy is to recognize the changes in the health and human services market
      that are necessitated by legislation and other initiatives and to design our
      software and services to meet the needs of our clients resulting from those
      changes. Consequently, we have




·
            designed
                our software to manage a wide variety of processes from check-in
                to
                treatment planning, which we believe is well-suited for agencies
                seeking
                to implement a technology infrastructure that supports integrated
                services




·
            combined
                our products with products offered by other companies with which
                we have a
                marketing arrangement, enabling us to offer comprehensive enterprise-wide
                HIPAA-compliant and HIPAA-related business services for most human
                service
                providers





2


·
            positioned
                and developed our software and services to support the goals and
                implementation of an Electronic Health
                Record





We
      intend
      to maintain and enhance our market position by continuing to invest significant
      resources in research and development of software and services solutions
      designed to address the factors affecting market demand. See “Markets”
below.





***Expand
      our product offerings and revenue base*** **.** We
      intend to use our recent acquisitions to expand both our product offerings
      and
      our sales to existing and newly-acquired customers. Our recent acquisitions
      have
      enabled us to create new packages of products, such as Netsmart University,
      which we are marketing to existing and prospective customers. With many
      Continuing Education Units available, we believe Netsmart University will be
      well-received within our core market and that there are opportunities to sell
      its more generic capabilities into closely-related market segments. Our
      acquisitions have also provided us with the opportunity to sell our existing
      products to the customers of the businesses we acquired, thereby increasing
      our
      recurring revenue.





***Continue
      to pursue strategic acquisitions.*** We have
      in the past grown in part through acquisitions of complimentary businesses.
      We
      intend to continue to identify and acquire companies or lines of business which
      are complimentary to our existing businesses.





**Organization
      of the Company**





We
      are a
      Delaware corporation formed in September 1992 under the name Medical Services
      Corp. Our name was changed to Carte Medical Corporation in October 1993 to
      CSMC
      Corporation in June 1995 and to Netsmart Technologies, Inc. in February 1996.





Our
      executive offices are located at 3500 Sunrise Highway, Suite D-122, Great River,
      New York 11739, telephone (631) 968-2000. Reference to us and to Netsmart
      includes both our legal subsidiaries Netsmart New York and Netsmart Ohio. Our
      website is located at www.ntst.com .





Neither
      the information contained in our website nor the information contained in any
      Internet Web site is a part of this Form 10-K annual report.





**Available
      Information:**





The
      public may read and copy any materials filed by us with the SEC at the SEC’s
      public reference room at 450 Fifth Street, NW, Washington D.C., 20549. The
      public may obtain information about the operation of the SEC’s public reference
      rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website
      at http://www.sec.gov that
      contains reports, proxy and information statements and other information about
      issuers such as us that file electronically with the SEC.





In
      addition, we make available free of charge on our website at www.ntst.com our
      annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
      on
      Form 8-K and amendments to those reports filed or furnished pursuant to Section
      13(a) or 15(d) under the Exchange Act as soon as reasonably practical after
      we
      electronically file such material with, or furnish it to, the SEC.





Our
      Board
      of Directors has adopted a Code of Business Conduct applicable to the Company’s
      officers and employees, and has also adopted a Code of Ethics for its senior
      financial officers. These codes of ethics are posted on the Company’s website at
      www.ntst.com in the Investor Relations section. Any amendment of the codes
      of
      ethics or waiver thereof applicable to any director or executive officer of
      the
      Company, including the Chief Executive Officer or any senior financial officer,
      will be disclosed on the Company’s website within four business days of the date
      of such amendment or waiver. In the case of a waiver, the nature of the waiver,
      the name of the person to whom the waiver was granted and the date of the waiver
      will also be disclosed.





3


The
      Board
      of Directors has also adopted, and we have posted in the Investor Relations
      section of our website, written Charters for each of the Board’s standing
      committees. We will provide without charge, upon a stockholder’s request to our
      address set forth in the preceding section, a copy of the codes of ethics or
      the
      Charter of any standing committee of the Board.





**Business
      Segments**





For
      a
      detailed description of the assets and profits of each of our business segments
      see note 14 to our Consolidated Financial Statements.





Software
      and Related Systems and Services - New York





We
      develop market and support computer software and provide implementation and
      business services that enable health and human services organizations to access,
      manage and share information related to their financial, clinical and management
      processes.





Customer
      organizations typically purchase our software in the form of a perpetual license
      to use the system, as well as purchasing professional services, support, and
      maintenance. In addition, we resell third party hardware and software to our
      customers pursuant to value-added reseller agreements with these partners.
      Our
      products are designed to operate on most hardware platforms and on most
      operating systems, including UNIX, Microsoft Windows and Linux. Because our
      products operate on a variety of platforms, we are not dependent on any single
      hardware vendor or operating system. Since our Avatar suite of software products
      utilizes the Cache database and development software provided by Intersystems
      Corporation, we resell Cache software. Since Avatar is designed to operate
      solely with Cache products, we are dependent on Cache products for our
      operations.





Our
      professional services offerings include project management, implementation,
      training, consulting and software development services, which are provided
      either on a time-and-material or fixed-price contract basis. Our software
      development services may require the adaptation of healthcare information
      technology systems to meet the specific requirements of the
      customer.





Our
      typical license for a health information system ranges from $10,000 to $100,000
      for a single facility healthcare organization to $250,000 to $5,000,000 for
      multi-unit care organizations such as those run by state agencies. Revenue
      from
      license fees was approximately $2,210,000, or 5.8% of consolidated revenue,
      for
      2005, $2,066,000, or 7.1% of consolidated revenue, for 2004 and $2,781,000,
      or
      10.2% of consolidated revenue, for 2003. A customer’s purchase order may also
      include third party hardware or software. Revenue from hardware and third party
      software accounted for approximately $5,544,000, or 14.6% of consolidated
      revenue, for 2005, $4,336,000, or 15.0% of consolidated revenue, for 2004 and
      $4,444,000, or 16.4% of consolidated revenue, for 2003. Revenue from turnkey
      systems labor accounted for approximately $9,845,000, or 25.9% of consolidated
      revenue, for 2005, $9,602,000, or 33.1% of consolidated revenue, for 2004 and
      $9,548,000, or 35.1% of consolidated revenue in 2003.





Our
      small
      systems revenue was approximately $1,042,000, or 2.7% of consolidated revenue,
      for 2005, $928,000, or 3.2% of consolidated revenue, for 2004 and $768,000,
      or
      2.8% of consolidated revenue, for 2003.





4


Maintenance
      services have generated increasing revenue and have become a more significant
      portion of our business, since most purchasers of healthcare information system
      licenses also purchase maintenance service. Maintenance revenue increases as
      existing customers purchase additional licenses and new customers purchase
      their
      initial software licenses. By agreement with our customers, we provide telephone
      help desk support and maintain and upgrade their software. Maintenance contracts
      may require us to make modifications to meet any new federal and state reporting
      requirements that become effective during the term of the maintenance contract.
      We do not maintain the hardware and third party software sold to our customers,
      but we provide a telephone help line service for certain third party software
      which we license to our customers. Our maintenance revenue was approximately
      $9,784,000, or 25.8% of consolidated revenue, for 2005, $8,290,000, or 28.6%
      of
      consolidated revenue, for 2004 and $7,069,000, or 26% of consolidated revenue,
      for 2003.





Software
      and Related Systems and Services - Ohio





As
      with
      Netsmart New York, the Netsmart Ohio operation develops computer software and
      provides implementation and business services that are designed to enable health
      and human services organizations to access, manage and share information related
      to their financial, clinical and management processes.





The
      Ohio
      segment consists mainly of the operations of the former CMHC Systems, Inc.,
      now
      named Netsmart Ohio. The results of operations from this acquisition are
      included from October 1, 2005 through December 31, 2005. The focus of the Ohio
      segment consists primarily of contracts for turnkey system installations of
      behavioral healthcare information management software for mental health,
      substance abuse, and addiction services agencies, and some developmental
      disability centers and behavioral health-related managed care organizations.
      These turnkey installations are usually completed within a six-month
      period.





The
      core
      product of the Ohio segment is the CMHC/MIS, a comprehensive billing and
      clinical software product designed for the UNIX operating system. As with the
      Avatar software, customer organizations typically purchase the CMHC/MIS in
      the
      form of a perpetual license to use the system, as well as purchasing
      professional services, support, and maintenance. In addition, Netsmart Ohio
      resells third party hardware, typically in the form of servers used to run
      the
      application. Professional services for installation and implementation of the
      software are provided either on a time-and-material or fixed-price contract
      basis.





Our
      typical license for a health information system ranges from $10,000 to $100,000
      for a single facility healthcare organization to $250,000 to $500,000 for
      multi-unit care organizations. Revenue from license fees was approximately
      $230,000, or .6% of revenue, for 2005. A customer’s purchase order may also
      include third party hardware or software. Revenue from hardware and third party
      software accounted for approximately $654,000, or 1.7% of revenue, for 2005.
      Revenue from turnkey systems labor accounted for approximately $802,000, or
      2.1%
      of revenue, for 2005.





Data
      Center Services





Our
      Data
      Center provides software that performs clinical and billing services for mental
      health, alcohol and substance abuse outpatient facilities. Services include
      statistical reporting, data entry, electronic billing and
      submission.





Revenue
      from our Data Center was approximately $1,795,000, or 4.7% of our consolidated
      revenue, for 2005, $2,058,000, or 7.1% of our consolidated revenue, for 2004
      and
      $1,973,000, or 7.3% of our consolidated revenue, for 2003.





In
      2005,
      three customers each accounted for 10% or more of total Data Center revenue.
      One
      customer was a New York State agency, which accounted for $211,000, or 12%
      of
      total Data Center revenue. The other two clients were hospitals in New York
      City, which accounted for $209,000 and $192,000, or 11.6% and 10.7% of total
      Data Center revenue. None of the above mentioned clients accounted for more
      than
      10% of our consolidated revenue.





5


In
      2004,
      two customers each accounted for 10% or more of the total Data Center revenue.
      One customer was a New York State agency, which accounted for $207,000, or
      10%
      of total Data Center revenue. The other client was a hospital in New York City,
      which accounted for $216,000, or 10.5% of total Data Center revenue. In 2003,
      one customer, a hospital in New York City, accounted for $274,000, or 13% of
      the
      total Data Center revenue. None of the above mentioned clients accounted for
      more than 10% of our consolidated revenue.





Our
      Data
      Center backlog at December 31, 2005 was $1,660,000. We anticipate that all
      of
      this backlog will be earned in 2006. The Data Center backlog at December 31,
      2004 was $2,132,000.





Application
      Service Provider





Our
      ASP
      services make our Avatar software suite, CareNet, Netsmart University and
      InfoScriber products available either via a secure connection to the Internet
      or
      via a virtual private network (“VPN”). With the ASP option, Netsmart operates
      and maintains the software on behalf of customers on computers in a secure
      data
      center facility in Columbus, Ohio. This enables customers to rapidly deploy
      products and pay on a monthly service basis, thus eliminating capital intensive
      system requirements. Our
      CareNet product is a subscription-based Internet solution for Managed Care
      Organizations that want to exchange data with their providers without having
      to
      maintain their own information technology infrastructure. CareNet furnishes
      a
      private, secure Web-based portal site where providers and their partner agencies
      can log in via the Internet to access client information and complete paperwork
      and necessary reporting on-line.





The
      InfoScriber product is a secure, Web-based e-prescribing system that enables
      practitioners in public or private practices to write and transmit electronic
      prescriptions to pharmacies of choice. It is the only e-prescribing system
      solely focused on the behavioral healthcare market with its unique medications,
      treatment settings and reporting requirements.





Revenue
      from ASP services was approximately for $2,538,000 for 2005 and $1,725,000
      for
      2004.





During
      2005, one customer accounted for $661,000, or 26% of total ASP revenue and
      during 2004, one customer accounted for $443,000, or 26% of total ASP revenue.
      This customer did not account for more than 10% of our total consolidated
      revenue in either 2005 or 2004.





Our
      ASP
      backlog at December 31, 2005 was $3,011,000. We anticipate that all of this
      backlog will be earned in 2006. Our ASP backlog at December 31, 2004 was
      $2,233,000.





**Markets**





Our
      target market for information systems and related services consists of both
      private and publicly-operated providers offering hospital or community-based
      outpatient behavioral/public healthcare services, substance abuse, MR/DD and
      social services. These healthcare providers require comprehensive information
      systems to administer their programs. We believe that there are at least 15,000
      healthcare providers that fall in our target markets in the United States,
      including public and private hospitals, private and community-based residential
      facilities, and federal, state and local governmental agencies.





Many
      long-term behavioral/public healthcare facilities are operated by government
      entities and include those operated as part of entitlement programs. During
      the
      years ended December 31, 2005, 2004 and 2003, approximately 44%, 49% and 57%,
      respectively, of our consolidated revenue was generated from contracts with
      state and local government agencies. Contracts with government agencies
      generally include provisions which permit the contracting agency to cancel
      the
      contract for its convenience, although we have not experienced a termination
      for
      convenience in the last five years.





6


We
      believe that the demand for information technology solutions will continue
      to
      increase as the result of additional federal data standards and requirements
      for
      information exchange, as well as continuous pressure from managed care providers
      to reduce healthcare delivery costs while expanding the availability of
      services.





In
      order
      to remain competitive, health and human services delivery networks need
      comprehensive financial, clinical and management systems that enable providers
      within the networks to maintain a broad scope of accurate medical and financial
      information, manage costs and deliver quality care efficiently. In addition,
      the
      need to upgrade existing systems to meet the increased demand for data
      processing needs of managed care and regulatory oversight has also resulted
      in
      an increasing demand for behavioral healthcare information technology. These
      data management needs include analysis of patient assessments, maintenance
      of
      patient records, administration of patient treatment plans and the overall
      coordination of in-office and remote case management.





In
      addition to our focus on the behavioral healthcare market segment, we also
      serve
      a growing number of public healthcare organizations. Our products are designed
      with functionality to assist this market segment with important considerations
      like maximizing the ability for clinicians to provide care to individual
      patients in high volume patient settings; near real-time analysis of data from
      different systems for disease outbreak investigations and resolution; and
      interoperability with other internal health department databases, including
      environmental health. Since many of the consumers of services of our clients
      are
      some of the poorest Americans, they receive their primary care from public
      health clinics. We believe this is driving the trend towards integration and
      data sharing between these agencies.





We
      are
      also actively engaged in a number of key industry associations and organizations
      to help assure that we pro-actively address trends and future needs of our
      customers. In addition, there are active Netsmart user group organizations
      at
      the state, regional and national levels. These user groups provide us with
      a
      customer/user perspective on emerging requirements and ongoing feedback that
      helps us determine future product direction and requirements.





Additionally,
      the health and human services market in which we operate is always subject
      to
      changes in state and federal regulations, as well as new demands required by
      consumers. Some factors which we believe are affecting market demand for
      software such as ours include:





Electronic
      Health Record (EHR). There is
      much discussion at the national level about the implementation of a standardized
      electronic health record. Proponents state that such a record for patients
      could
      enable a virtual healthcare team and a coordinated system of care with
      consistent, streamlined information exchange and transfer of clinical and
      billing data. Exchanging health information through secure means — including
      appropriate authorizations from patients/consumers — could link information from
      health-related entities with consumers’ personal health information. This
      connection would be intended to make important data available at the right
      times
      and places to support optimal treatment across a variety of healthcare levels.
      We believe that, despite varying views on the best path for adoption of an
      EHR,
      it will eventually become reality.





Integrated
      Services . **** This
      concept, sometimes referred to as “no wrong door,” is an approach whereby
      consumers seeking assistance from social services agencies receive complete
      and
      comprehensive services, regardless of their point of entry into the system.
      As a
      result, many social service agencies are seeking to implement a technology
      infrastructure that supports integrated services.





HIPAA. As a
      supplier of practice management, we believe that the Health Insurance
      Portability and Accountability Act, generally known as HIPAA, essentially
      mandates that the U.S. Department of Health and Human Services enact standards
      regarding the standardization, privacy and security of health care information.
      This legislation requires more providers of services in the under-automated
      health and human services industry to install automated systems, creating an
      increased demand for automated software solutions. We believe that our products,
      in conjunction with products offered by other companies with which we have
      a
      marketing arrangement, enables us to offer comprehensive enterprise-wide
      HIPAA-compliant and HIPAA-related business services for most human service
      providers.




7


General
      Unrest .
      With
      the creation of the Department of Homeland Security (DHS) and an increased
      focus
      on anti-terrorism preparedness and response, the demand for services in the
      mental health and public health arena has increased. Anxiety and fear have
      motivated a growing number of people to seek mental health services. This
      increased demand puts more pressure on providers to improve the efficiency
      of
      their care through the use of practice management and clinical systems. We
      believe that the potential threat of bio-terrorism will also put similar
      pressure on public health agencies to improve their delivery capabilities in
      much the same way. We also believe that this focus on preparedness will lead
      to
      more cross-department integration requirements, which play well to our
      strengths.





We
      are
      positioning our existing products and developing additional products in order
      to
      address these factors.





No
      single
      customer accounted for more than 10% of consolidated revenue for the years
      ended
      December 31, 2005 and 2004. During the year ended December 31, 2003, one
      customer accounted for approximately $2,861,000 or 11.4% of software and related
      systems and services revenue and 10.5% of consolidated revenue.





**Sales
      and Marketing**





We
      have a
      sales force of 47 people who market our products. In addition, since the
      acquisition of CMHC Systems, we have aligned our go-to-market strategy with
      the
      key vertical markets we serve: State Systems, Integrated Delivery Networks
      (such
      as hospitals with multiple facilities and behavioral healthcare offerings),
      Community and Public Healthcare, and Methadone Providers. We also expanded
      our
      direct sales force and aligned them with the vertical markets above to enable
      our sales force to develop in-depth knowledge of the unique needs of each
      segment. In addition, we established an account management team which is
      designed to maintain and grow relationships with our current customers, and
      to
      identify opportunities to sell additional software and services from our present
      product offerings to that current customer base. We also added a dedicated
      business development organization to cultivate large strategic opportunities
      and
      build relationships with the large systems integrators that service these
      organizations. This approach is expected to enable us to leverage our resources
      and to further extend our reach within the markets we serve.





**Backlog**





We
      had a
      backlog of orders, including ongoing maintenance and data center contracts
      for
      our behavioral health information systems, of $44.1 million at December 31,
      2005
      and $25.8 million at December 31, 2004. We expect to fill approximately $41.2
      million of the 2005 backlog during 2006.





Our
      backlog consists of revenue of approximately $11.6 million from existing turnkey
      contracts; maintenance revenue of approximately $26.9 million that is comprised
      both of amounts expected to be filled under unexpired maintenance contracts
      and
      amounts that are subject to automatic renewal; unexpired Data Center contracts
      of approximately $1.7 million, calculated using historical experience to
      determine future usage; unexpired ASP backlog of approximately $3.0 million;
      and
      facility management contracts of approximately $.9 million, which are also
      calculated using historical experience to determine twelve months of future
      usage.





**Product
      Development**





We
      incurred product development costs relating to our health and human services
      information systems of approximately $4,547,000 in 2005, $3,498,000 in 2004
      and
      $2,770,000 in 2003, all of which was company-sponsored and expensed as research,
      development and maintenance. In 2005, we acquired software with a fair value
      of
      approximately $3,300,000, $2,051,000 and $692,000 associated with our
      acquisitions of CMHC Systems, Inc., AMS and Continued Learning, respectively.
      In
      2005, we also capitalized software development costs of $42,000 relating to
      one
      of our Avatar products. This Avatar product is being amortized over a three
      year
      period and in 2005 we charged $2,300 to operations. In 2004, we acquired
      software with a fair value of approximately $150,000 associated with our
      acquisition of TxM software which was related to our partnership arrangement
      with the MSJ Communications Corporation, a wholly-owned subsidiary of the Betty
      Ford Center. In 2003, we capitalized software development costs of $179,500
      relating to our Avatar AM, Order Entry and RAD Plus 2004 products. The Avatar
      AM
      and Order Entry products are being amortized over a three year period and in
      2004, we charged $43,100 to operations. In 2003, we acquired software with
      a
      fair value of approximately $883,000 associated with our acquisition of software
      products from CareNet.





8


To
      assure
      that our customers are informed about our latest product plans and deliverables,
      we have developed Product Roadmaps for our major products. The roadmaps provide
      details about future product releases (both “version” and “maintenance”) along
      with estimated dates and timeframes. This enables our customers to effectively
      plan and budget for future use of our products and related
      services.





**Competition
      and Competitive Position**





The
      multi-billion dollar healthcare software industry is highly competitive, and
      is
      served by numerous vendors. Although we believe that we can provide healthcare
      facilities and managed care organizations with software to enable them to
      perform their services more effectively than our competitors, other software
      companies provide comparable systems and also have the staff and resources
      to
      develop competitive systems.





Some
      dominant health care information technology vendors have achieved annual sales
      of more than $1 billion by focusing on solutions for large medical/surgical
      healthcare providers. As such, their target market has been large hospital
      systems and health maintenance organizations, and they have not focused on
      the
      behavioral/public healthcare industry. We believe that most of the presently
      available healthcare management software does not meet the specific needs of
      the
      behavioral/public healthcare industry, and that the functionality of our
      information systems is better designed to meet the needs of this market.
      However, the behavioral health information systems business is serviced by
      a
      number of companies, some of which are better capitalized with larger
      infrastructures than Netsmart, and we may not be able to continue to compete
      effectively with such companies. As our business expands and includes sales
      to
      larger, integrated healthcare delivery networks, we begin to compete with
      companies such as Siemens, HBOC, IDX, Meditech, Quadramed, and
      Misys.





Additionally,
      we face significant competition in the clearinghouse, medical systems, and
      ASP
      market. General ASP utilities offer customers the use of computer facilities
      and
      operations staff to process either generalized medical software or software
      selected by the customer from other software vendors. Many organizations start
      with billing as their primary reason for automation-related spending. Large
      billing and clearinghouse computer service companies provide a broad spectrum
      of
      billing services for a diverse marketplace. In addition, some professional
      service firms provide staff to operate a customer’s in-house system when the
      customer believes that such an approach will provide the needed expertise at
      a
      cost-effective price.





Our
      ASP
      offering is focused on a specific subset of the large health and human services
      marketplace. Because behavioral healthcare requires the ideal organization
      of
      software, systems and staff to enable a customer to maximize service at a
      reasonable cost, we believe our specialized experience and investment in related
      software provides us with a competitive advantage. In addition, our ASP service
      is based on use of our proprietary suite of Avatar products. This enables our
      customers to use any or all components of a broad array of clinical and
      financial systems for as long as these functions are needed. In addition, our
      experience has shown that once a customer has contracted with us for software
      and services, they generally remain our customer and seldom move away from
      us to
      a competitive offering. In fact, some of our customers have been working with
      us
      for 30 years.


9


We
      compete with the following behavioral healthcare vendors, among
      others:





Anasazi
      Software, Inc.


Askesis
      Development Group, Inc.


Civerex
      Systems, Inc.


Geneva
      Software


InfoMC,
      Inc.


IMPEL
      Strategic Solutions


Multi-Health
      Systems, Inc.


Qualifacts
      System inc.


Raintree
      Systems Inc.


SecureHEALTH
      Inc.


Sequest
      Technologies Inc.


The
      Echo
      Group


UNI/CARE
      Systems, Inc.


XAKTsoft,
      Inc.





As
      a core
      part of our business model and growth strategy, we bid on numerous competitive
      procurements during the calendar year, and have a high win ratio, especially
      in
      the statewide mental health/mental retardation field, where we provide 33
      statewide systems.





We
      have
      an established base of more than 1,200 providers nationwide, including
      substantial private and government providers of healthcare services. These
      providers represent approximately 50,000 clinicians, and include 33 state
      agencies and installations in all 50 states and several foreign
      countries.





**Government
      Regulations and Contracts**





The
      federal government and state governments have adopted numerous regulations
      affecting the healthcare industry, including those relating to payments to
      healthcare providers for various services. The adoption of new regulations
      can
      have a significant effect upon the revenue stream and operations of healthcare
      providers and insurance companies. Our solutions are designed to help our
      customers meet a variety of regulations and payment requirements, mitigating
      some of the problems resulting from government regulations. With
      constantly-changing regulations and efforts to reduce the cost of healthcare,
      we
      cannot predict 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. Any change in the structure of
      healthcare in the United States can have a material effect on companies that
      provide services to the healthcare industry, including those such as us that
      provide software.





Although
      we believe that the likely direction which may result from the current study
      of
      the healthcare industry would be an increased trend toward managed care
      programs, thereby increasing the importance of automation, our business may
      not
      benefit from any changes in the industry structure. Even if the industry does
      evolve toward more healthcare 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. Our business may be adversely affected to the extent that
      the healthcare industry evolves with greater government-sponsored programs
      and
      fewer privately-run organizations. Furthermore, to the extent that each state
      changes its own regulations in the healthcare field, it may be necessary for
      us
      to modify our behavioral health information systems to meet new record-keeping
      or other requirements imposed by changes in regulations, and we may not be
      able
      to generate revenues sufficient to cover the costs of developing the
      modifications.





10


A
      significant amount of our 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 local economic and
      budgetary problems, and government procurement regulations, which may include
      the need for approval by more than one agency before a contract is signed.
      In
      addition, government agencies generally include provisions in their contracts
      which permit the contracting agency to cancel the contract at its convenience.
      We have not experienced a termination for convenience in the last five
      years.





The
      Sarbanes-Oxley Act of 2002 and rules promulgated thereunder by the SEC and
      the
      Nasdaq Stock Market have imposed substantial new or enhanced regulations and
      disclosure requirements in the areas of corporate governance (including director
      independence, director selection and audit, corporate governance and
      compensation committee responsibilities), equity compensation plans, auditor
      independence, pre-approval of auditor fees and services and disclosure and
      internal control procedures. We are committed to industry best practices in
      these areas and believe we are in compliance with the relevant rules and
      regulations.





**Intellectual
      Property Rights**





We
      have
      no patent rights for our behavioral health information system software, but
      we
      rely upon copyright protection for our software, as well as non-disclosure
      and
      secrecy agreements with our employees and third parties to whom we disclose
      information. We may not be able to protect our proprietary rights to our system,
      and third parties may claim rights to our system. The disclosure of the codes
      used in any proprietary product, whether or not in violation of a non-disclosure
      agreement, could have a material adverse affect upon us, even if we are
      successful in obtaining injunctive relief. We must continue to invest in product
      development, employee training, and customer support.





**Employees**





As
      of
      December 31, 2005, we had 322 employees, including 3 executives, 47 sales and
      marketing, 194 technical and 78 clerical and administrative employees.




Executive
      Officers





Information
      concerning our executive officers is included in Item 10, Directors and
      Executive Officers of the Registrant.




**Item
              1A.**
            **Risk
                Factors.**





Because
      we are particularly dependent upon government contracts, any decrease in funding
      for entitlement programs could result in decreased revenue.





We
      market
      our health information systems principally to behavioral health facilities,
      many
      of which are operated by state and local government entities and include
      entitlement programs. During 2005, 2004 and 2003, we generated 44%, 49% and
      57%,
      respectively, of our revenue from contracts that are directly or indirectly
      with
      government agencies. Government agencies generally have the right to cancel
      certain contracts at their convenience. Our ability to generate business from
      government agencies is affected by funding for entitlement programs, and our
      revenue would decline if state agencies reduce this funding.





Changes
      in government regulation of the health care industry may adversely affect our
      revenue, operating expenses and profitability.





Our
      business is based on providing systems for behavioral and public health
      organizations in both the public and private sectors. 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, and our systems are designed to provide
      information based on these requirements. The adoption of new regulations can
      have a significant effect upon the operations of health care providers,
      particularly those operated by state agencies. Furthermore, changes in
      regulations in the health care field may force us to modify our health
      information systems to meet any new record-keeping or other requirements and
      may
      impose added costs on our business. If that happens, we may not be able to
      generate revenues sufficient to cover the costs of developing the modifications.
      In addition, any failure of our systems to comply with new or amended
      regulations could result in reductions in our revenue and profitability.





11


If
      we
      are not able to take advantage of technological advances, we may not be able
      to
      remain competitive and our revenue may decline.





Our
      customers require software which enables them to store, retrieve and process
      very large quantities of data and to provide them with instantaneous
      communications among the various data bases. Our business requires us to take
      advantage of recent advances in software, computer and communications
      technology. This technology has been developing at rapid rates in recent years,
      and our future may be dependent upon our ability to use and develop or obtain
      rights to products utilizing such technology. New technology may develop in
      a
      manner which may make our software obsolete. Our inability to use or develop
      new
      technology would have a significant adverse effect upon our
      business.





We
      may
      have difficulty competing with larger companies that offer similar services,
      which may result in decreased revenue.





Our
      customers in the human services market include entitlement programs, managed
      care organizations and specialty care facilities which have a need for access
      to
      information over a distributed data network. Each of the software industry,
      in
      general, and the health information software business in particular, is highly
      competitive. Other companies have the staff and resources to develop competitive
      systems. We may not be able to compete successfully with such competitors.
      The
      health information systems business is served by a number of major companies
      and
      a larger number of smaller companies. We believe that price competition is
      a
      significant factor in our ability to market our health information systems
      and
      services, and our inability to offer competitive pricing may impair our ability
      to market our systems and services.





If
      we
      are unable to protect our intellectual property, our competitors may gain access
      to our technology, which could harm our ability to successfully compete in
      our
      market.





We
      have
      no patent protection for our proprietary software. We rely on copyright
      protection for our software and non-disclosure and secrecy agreements with
      employees and third parties to whom we disclose information. This protection
      does not prevent our competitors from independently developing products similar
      or superior to our products and technologies. To further develop our services
      or
      products, we may need to acquire licenses for intellectual property. These
      licenses may not be available on commercially reasonable terms, if at all.
      Our
      failure to protect our proprietary technology or to obtain appropriate licenses
      could have a material adverse effect on our business, operating results or
      financial condition. Since our business is dependent upon our proprietary
      products, the unauthorized use or disclosure of this information could harm
      our
      business.





We
      cannot
      guarantee that in the future, third parties will not claim that we infringed
      their intellectual property. Asserting our rights or defending against third
      party claims could involve substantial costs and diversion of resources, which
      could materially and adversely affect our financial condition.





12


Government
      programs may suggest or mandate initiatives that could impact our ability to
      sell our products, resulting in decreased revenue.





A
      major
      initiative being pushed by President Bush and the Department of Health and
      Human
      Services is the National Electronic Health Record. The federal government is
      promoting this platform and technology which is based on supplying “freeware” to
      any agency who desires; however, support is not supplied. This initiative
      competes with the private for profit Health Information Systems vendor community
      and could adversely affect our ability to sell our products, resulting in
      decreased revenue.





The
      covenants in our loan agreements restrict our financial and operational
      flexibility, including our ability to complete additional acquisitions, invest
      in new business opportunities, pay down certain indebtedness or declare
      dividends.





Our
      term
      loan agreements contain covenants that restrict, among other things, our ability
      to borrow money, make particular types of investments, including investments
      in
      our subsidiaries, make other restricted payments, swap or sell assets, merge
      or
      consolidate, or make acquisitions. An event of default under our loan agreement
      could allow our lender to declare all amounts outstanding to be immediately
      due
      and payable. We have pledged substantially all of our consolidated assets to
      secure the debt under our loan agreement. If the amounts outstanding under
      the
      loan agreements were accelerated, the lender could proceed against those
      consolidated assets. Any event of default, therefore, could have a material
      adverse effect on our business. The loan agreements also require us to maintain
      specified financial ratios. Our ability to meet these financial ratios can
      be
      affected by events beyond our control, and we cannot assure you that we will
      continue to meet those ratios. We also may incur future debt obligations that
      might subject us to restrictive covenants that could affect our financial and
      operational flexibility or subject us to other events of default.





We
      have
      only paid one cash dividend after getting our lender’s consent and we do not
      anticipate paying any further cash dividends on our common stock in the
      foreseeable future. We presently intend to retain future earnings, if any,
      in
      order to provide funds for use in the operation and expansion of our business.
      Consequently, investors cannot rely on the payment of dividends to increase
      the
      value of their investment in us. In addition, our loan agreements prohibit
      us
      from paying cash dividends without the prior consent of the lender.





Our
      growth may be limited if we cannot make acquisitions.





A
      part of
      our business strategy is to acquire other businesses that are related to our
      current business. These acquisitions may be made with cash or securities or
      a
      combination of cash and securities. To the extent that we require cash, we
      may
      have to borrow the funds or issue equity, which could dilute our earnings or
      the
      book value per share of our common stock. Our stock price may adversely affect
      our ability to make acquisitions for equity or to raise funds for acquisitions
      through the issuance of equity securities. If we fail to make any acquisitions,
      our future growth may be limited. As of the date hereof, we do not have any
      agreement or understanding, either formal or informal, as to any
      acquisition.





We
      may
      be unable to effectively integrate CMHC Systems, Inc. or any other acquisitions,
      which may disrupt or have a negative impact on our business.





In
      September 2005, we consummated a merger with CMHC Systems, Inc., pursuant to
      which CMHC has become our wholly-owned subsidiary. We may have difficulty
      integrating CMHC’s personnel and operations with our own and we may have the
      same difficulty with any other acquisitions we may make. In addition, the key
      personnel of any acquired business may not be willing to work for us, and its
      officers may exercise their rights to terminate their employment with us. We
      cannot predict the effect expansion may have on our core business. Regardless
      of
      whether we are successful in making an acquisition, the negotiations could
      disrupt our ongoing business, distract our management and employees and increase
      our expenses.


13


Because
      we are dependent on our management, the loss of key executive officers could
      disrupt our business and our financial performance could
      suffer.





Our
      business is largely dependent upon our senior executive officers, Messrs. James
      L. Conway, our chief executive officer and Anthony F. Grisanti, our chief
      financial officer. Although we have employment agreements with these officers,
      the employment agreements do not guarantee that those officers will continue
      as
      our employees, and each of those officers has the right to terminate his
      employment on 90 days notice. Our agreements with Messrs. Conway and Grisanti
      are scheduled to expire on December 31, 2006. Our business may be adversely
      affected if any key management personnel or other key employees left our
      employ.





The
      employment contracts with our executive officers and provisions of Delaware
      law
      may deter or prevent a takeover attempt and may reduce the price investors
      might
      be willing to pay for our common stock.





The
      employment contracts between us and each of James Conway and Anthony Grisanti
      provide that in the event there is a change in control of our company, the
      employee has the option to terminate his employment agreement. Upon such
      termination, each of Messrs. Conway and Grisanti has the right to receive a
      lump
      sum payment equal to his compensation for a 48 month period.





In
      addition, Delaware law restricts business combinations with stockholders who
      acquire 15% or more of a company’s common stock without the consent of the
      company’s board of directors.





These
      provisions could deter or prevent a takeover attempt and may also reduce the
      price that investors might be willing to pay in the future for shares of our
      common stock.





Any
      issuance of preferred stock may adversely effect the voting power and equity
      interest of our common stock.





Our
      certificate of incorporation gives our board of directors the right to create
      new series of preferred stock. As a result, the board of directors may, without
      stockholder approval, issue preferred stock with voting, dividend, conversion,
      liquidation or other rights which could adversely affect the voting power and
      equity interest of the holders of our common stock. The preferred stock, which
      could be issued with the right to more than one vote per share, could be
      utilized as a method of discouraging, delaying or preventing a change of
      control. The possible impact on takeover attempts could adversely affect the
      price of our common stock. Although we have no present intention to issue any
      shares of preferred stock or to create any series of preferred stock, we may
      issue such shares in the future. If we issue preferred stock in a manner which
      dilutes the voting rights of the holders of our common stock, our listing on
      The
      Nasdaq Capital Market may be impaired.





Shares
      may be issued pursuant to options and warrants which may adversely affect the
      market price of our common stock.





We
      may
      issue stock upon the exercise of options to purchase shares of our common stock
      pursuant to our long term incentive plans, under which options to purchase
      945,467 shares were outstanding at December 31, 2005. The exercise of these
      options and the sale of the underlying shares of common stock may have an
      adverse effect upon the price of our common stock.





We
      may
      also issue 147,003 shares of or common stock upon the exercise of warrants
      to
      purchase shares of our common stock pursuant to a Private Placement Offering
      that we entered into in 2005. The exercise of these warrants and the sale of
      the
      underlying shares of common stock may have an adverse effect upon the price
      of
      our stock.


14


**Item
              1B.**
            **Unresolved
                SEC Staff Comments.**





None.





**Item
              2.**
            **Property.**





We
      lease
      office space at the following locations:




Location
            
            Purpose
            
            Space
            
            Annual
                Rental
            
            Expiration3500
                Sunrise Highway
              Great
                River, New York
            
            Executive
                offices
              Software
                and Related Systems and Services - NY
              Data
                Center Services
            
            32,600
                square feet
            
            $521,000,
                plus 3% annual increases
            
            10/22/14570
                Metro Place North
              Dublin,
                Ohio
            
            Software
                & Related Systems and Services - OH
            
            32,000
                square feet
            
            $377,172
            
            09/30/2010555
                Metro Place North
              Dublin,
                Ohio
            
            Software
                & Related Systems and Services - OH
            
            11,775
                square feet
            
            $194,000
            
            07/31/061335
                Dublin Road
              Columbus,
                Ohio
            
            Software
                and Related Systems and Services - NY
              ASP
                Services
            
            3,500
                square feet
            
            $59,000
            
            11/30/065120
                Shoreham Place
              San
                Diego, California
            
            Software
                and Related Systems and Services - NY
            
            2,800
                square feet
            
            $73,000
            
            08/31/0869-730
                Highway 11
              Ranch
                Mirage, California
            
            Software
                and Related Systems and Services - NY
            
            1,400
                square feet
            
            $30,000
            
            10/31/06117
                North 1stStreet
              Ann
                Arbor, Michigan
            
            ASP
                Services
            
            2,200
                square feet
            
            $49,000
            
            01/31/0733-40
                37thStreet
              Long
                Island City, NY
            
            Software
                & Related Systems and Services - NY
            
            2,000
                square feet
            
            $22,000
            
            10/15/08146
                Second Street North
              St.
                Petersburg, FL
            
            ASP
                Services
            
            2,000
                square feet
            
            $28,000
            
            03/31/08





We
      believe that our space is adequate for our immediate needs and that, if
      additional space is required, whether due to the scheduled expiration of a
      lease
      or otherwise, it would be readily available at commercially reasonable
      rates.





**Item
              3.**
            **Legal
                Proceedings.**





None





15





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





None


16


**Part
      II**





**Item
                5.**
            **Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity
                Securities.**





(a)
      Our
      common stock is traded on The Nasdaq Capital Market under the symbol NTST.
      Set
      forth below is the reported high and low sales prices of our common stock
      for each quarterly period during 2005 and 2004.


Quarter
                  Ended
              
              High
              
              LowMarch
                  31,2005
              
              $
              10.27
              
              $
              8.28June
                  30, 2005
              
              
              9.74
              
              
              8.50September
                  30, 2005
              
              
              12.50
              
              
              8.94December31,
                  2005
              
              
              15.00
              
              
              12.17March
                  31,2004
              
              $
              18.70
              
              
              11.49June
                  30, 2004
              
              
              13.85
              
              
              7.11September
                  30, 2004
              
              
              10.00
              
              
              6.07December31,
                  2004
              
              
              9.25
              
              
              7.30


As
      of
      December 31, 2005, there were approximately 3,000 beneficial owners of our
      common stock. The closing price of our common stock was $13.30 per share on
      March 20, 2006. These quotations reflect inter-dealer prices, without retail
      mark-up, mark-down or commission and may not represent actual
      transactions.





We
      do not
      anticipate that we will pay any dividends in the foreseeable future. We
      currently intend to retain future earnings for use in operation and development
      of our business and for potential acquisitions. In addition, the terms of our
      term loan agreement requires our lender’s consent with respect to the payment of
      cash dividends.





The
      information required by Item 201(d) of Regulation S-K is located under “Item 12.
      Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters”.





(b)
      During the year ended December 31, 2005, no purchases were made under the
      Company’s stock buyback plan.


17


**Item
              6.**
            **Selected
                Financial Data.**





The
      selected consolidated financial data set forth below for the five years in
      the
      period ended December 31, 2005 has been derived from the company’s audited
      Consolidated Financial Statements. This information should be read in
      conjunction with the audited Consolidated Financial Statements and notes
      thereto.


Year
                  Ended December 31,2005(1)
              
              2004
              
              2003
              
              2002
              
              2001(in
                  thousands except per share data)Selected
                  Statementsof
                  Operations Data:Revenue
              
              $
              37,978
              
              $
              29,005
              
              $
              27,175
              
              $
              22,126
              
              $
              18,119Income
                  from Operationsbefore
                  interestand
                  other financing costs
              
              
              2,556
              
              
              3,065
              
              
              2,368
              
              
              1,095
              
              
              399Net
                  Income
              
              
              1,590
              
              
              2,753
              2
              
              3,028
              3
              
              1,195
              4
              
              315Dividends
                  DeclaredPer
                  Common Share
              
              
              --
              
              
              --
              
              
              .10
              
              
              --
              
              
              --Per
                  Share Data - Diluted:Net
                  Income
              
              $
              .27
              
              $
              .50
              
              $
              .64
              
              $
              .29
              
              $
              .08Weighted
                  average numberof
                  shares outstanding
              
              
              5,935
              
              
              5,537
              
              
              4,752
              
              
              4,153
              
              
              3,872Selected
                  BalanceSheet
                  Data:Working
                  Capital
              
              $
              4,043
              
              $
              18,216
              
              $
              14,714
              
              $
              9,215
              
              $
              7,903Total
                  Assets
              
              
              64,622
              
              
              37,707
              
              
              34,633
              
              
              22,416
              
              
              18,007Long
                  Term DebtIncluding
                  Current Portion
              
              
              2,750
              
              
              1,000
              
              
              1,667
              
              
              1,750
              
              
              2,250Capitalized
                  Leases IncludingCurrent
                  Portion
              
              
              71
              
              
              86
              
              
              147
              
              
              12
              
              
              41Stock
                  dividend
              
              
              --
              
              
              --
              
              
              441
              
              
              --
              
              
              --Total
                  Liabilities
              
              
              28,336
              
              
              13,080
              
              
              13,633
              
              
              11,110
              
              
              8,060Accumulated
                  Deficit
              
              
              (2,004
              )
              
              (3,594
              )
              
              (6,347
              )
              
              (9,376
              )
              
              (10,571
              )Stockholders’
                  Equity
              
              $
              36,286
              
              $
              24,627
              
              $
              21,000
              
              $
              11,306
              
              $
              9,948








1  In
      2005,
      the Company completed three acquisitions (see note 5 to the Consolidated
      Financial Statements).





2  The
      Company’s tax provision has been reduced as a result of a $1,014,000 reduction
      in its deferred tax asset valuation allowance





3   The
      Company’s tax provision has been reduced as a result of available net operating
      loss carry forwards. In addition, a $900,000 tax benefit was recognized, as
      a
      result of a further reduction in its deferred tax asset valuation
      allowance.





4  The
      Company’s tax provision has been reduced as a result of available net operating
      loss carry forwards. In addition, a $400,000 tax benefit was recognized, as
      a
      result of a further reduction in its deferred tax asset valuation
      allowance .


18


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





**Overview**





Our
      operations are grouped into four segments:




§
            Software
                and Related Systems and Services -
                NY


§
            Software
                and Related Systems and Services -
                Ohio


§
            Data
                Center Services (service bureau
                services)


§
            Application
                Service Provider Services (ASP)





Software
      and Related Systems and Services is the design, installation, implementation
      and
      maintenance of computer information systems that provide comprehensive
      healthcare information technology solutions, including billing, patient tracking
      and scheduling for inpatient and outpatient environments, as well as clinical
      documentation and medical record generation and management. We perform these
      services in both the New York and Ohio segments. Within these segments, we
      recognize revenue based on the nature of the products and services sold, for
      example, a turnkey system or a maintenance contract. Turnkey revenue includes
      turnkey systems labor revenue, third party hardware and software, license
      revenue and sales from our small turnkey division. We further classify our
      revenue into large turnkey and small turnkey components. The large turnkey
      components consist mostly of our Avatar suite of products. When we are engaged
      in fixed price arrangements for large turnkey systems, the installations will
      usually extend over a six-month to a multi-year time period. The duration of
      the
      implementation depends on the size and complexity of the customer organization
      and the specifics of the implementation. Installations of small turnkey
      components are usually completed within a six-month period. Small turnkey
      contracts performed in the New York segment are mostly related to our Avatar
      methadone related products. The small turnkey contracts in the Ohio segment
      are
      for system installations for behavioral healthcare information management
      software for mental health, substance abuse, and addiction services agencies,
      developmental disability centers and behavioral health-related managed care
      organizations. The Ohio segment is a new segment established as a result of
      the
      acquisition of Netsmart - Ohio, formerly CMHC Systems, Inc. The Netsmart -
      Ohio
      operations are included commencing October 1, 2005. Data Center Services
      involves our personnel performing data entry and data processing services for
      customers. Application Service Provider Services involves the offering of our
      Avatar suite of products, our CareNet products, our InfoScribeR products and
      our
      ContinuedLearning products on a virtual private network or through an internet
      delivery approach, thereby allowing our customers to deploy products and pay
      on
      a monthly service basis, thus eliminating capital intensive system requirements
      for such services





On
      April
      28, 2005, we acquired substantially all of the assets, including computer
      software, customer lists and computer equipment, of ContinuedLearning LLC,
      a
      company that offered a comprehensive family of web-based training products
      and
      services, including its Learning Management System. The total purchase price,
      including acquisition costs and recognition of a probable additional payment,
      was $739,238 which consisted of cash of $252,917, which was paid out of existing
      working capital including legal fees of $18,632, broker fees of $10,000, 20,000
      shares of the Company’s common stock valued at $191,400, assumed liabilities of
      $44,921 and an accrual for a probable additional payment of $250,000. The
      purchase agreement provides for the probable additional payment of up to
      $250,000 if certain revenue targets are met in year one. Based upon the
      attainment of certain revenue targets as of December 31, 2005 we recognized
      the
      full $250,000 of this additional payment at December 31, 2005. We also entered
      into a two year employment agreement at an annual salary of $100,000 per year
      with the principal of ContinuedLearning LLC, whereby the principal can receive
      an additional $300,000 in cash, to be accounted for as compensation expense,
      if
      certain revenue targets are met within a two-year period. As of December 31,
      2005, these revenue targets have not been met and consequently, no additional
      compensation expense has been recognized.





On
      June
      20, 2005, we acquired the assets of Addiction Management Systems, Inc (“AMS”).
      The total purchase price, including acquisition costs, was $3,610,682, which
      consisted of cash of $2,641,945 plus legal fees of $19,904 and assumed
      liabilities for services to be provided of $948,833.


19


On
      September 28, 2005, we acquired 100% of the equity interest in CMHC Systems,
      Inc. (“CMHC”) a company that offers a full suite of behavioral healthcare
      information management software for mental health, substance abuse, and
      addiction services agencies, developmental disability centers, and behavioral
      health-related managed care organizations. The purchase price totaled
      approximately $19,565,956, as follows: $12,994,758 in cash, 435,735 shares
      of
      our common stock (valued at $4,915,091), acquisition costs of $864,083, plus
      additional cash consideration currently estimated at $792,024 as required by
      the
“working capital adjustment”. We have accrued $792,024 as the “working capital
      adjustment” which was calculated in accordance with the merger agreement. This
      calculation is subject to adjustment and is currently being disputed by the
      company on the basis of the possibility of certain unrecorded liabilities at
      the
      acquisition date.





In
      addition, we booked a deferred tax liability in the amount of $3,843,000
      relating to the non-deductible nature of certain acquired intangible assets,
      which liability will be amortized in future periods.





Our
      results of operations are subject to various risks and uncertainties, including
      those described in Item 1A, Risk Factors, above and the market risks described
      in Item 7A, Quantitative and Qualitative Disclosures about Market Risks,
      below.





**Years
      Ended December 31, 2005 and 2004**





**Results
      of Operations**





Our
      total
      revenue for 2005 was $37,978,000, an increase of $8,973,000, or 31%, from our
      revenue for 2004 which was $29,005,000. Revenue from the Netsmart - Ohio
      acquisition accounted for $5,219,000 of the increase in revenue from 2005 to
      2004. This revenue was for the period October 1, 2005 through December 31,
      2005.





Revenue
      from contracts with state and local government agencies represented 44% of
      revenue in 2005 and 49% of revenue in 2004. This decrease was the result of
      the
      inclusion of the Netsmart - Ohio revenue, approximately 20% of which is
      generated from contracts with state and local government agencies.





Fixed
      price software development contracts, which include labor, licenses and third
      party resale components, accounted for 24% and 34% of consolidated revenue
      for
      2005 and 2004, respectively. This decrease is the result of a decrease in
      Software and Related Systems and Services revenue generated from fixed price
      contracts and an increase in Software and Related Systems and Services revenue
      generated on an as incurred basis. Our recurring revenue components, which
      include our **** maintenance
      contract services, our Data Center and ASP services, accounted for 46% of our
      consolidated revenue for 2005 compared to 42% of consolidated revenue for 2004.
      This increase was the result of an increase in both maintenance and ASP revenue
      which was partially offset by a decrease in Data Center revenue. Revenue from
      large turnkey fixed price software development contracts is determined using
      the
      percentage of completion method, which is based upon the time spent by our
      technical personnel on a project. Since the billing schedules under the
      contracts differ from the recognition of revenue, at the end of any quarter,
      these contracts generally result in either costs and estimated profits in excess
      of billing or billing in excess of costs and estimated profits. Revenue from
      our
      small turnkey fixed price contracts is accounted for under the completed
      contract method.





**Software
      and Related Systems and Services - New York**





Our
      Software and Related Systems and Services - New York revenue for 2005 was
      $28,425,000, an increase of $3,204,000, or 13%, from our revenue for 2004,
      which
      was $25,221,000. Software and Related Systems and Services - New York revenue
      is
      comprised of turnkey systems labor revenue, revenue from sales of third party
      hardware and software license revenue, maintenance revenue and revenue from
      small turnkey systems in the markets in which we operated prior to our
      acquisition of our Ohio operations in September 2005.





20


Within
      this segment is large turnkey and small turnkey components. The large turnkey
      components consist mostly of our Avatar suite of products. When we are engaged
      in fixed price arrangements for large turnkey systems, the installations will
      usually extend over a six-month to a multi-year time period; these installations
      are accounted for under the percentage of completion method. The duration of
      the
      implementation depends on the size and complexity of the customer organization
      and the specifics of the implementation. Installations of small turnkey
      components are usually completed within a six-month period; these installations
      are accounted for under the completed contract method. Small turnkey contracts
      performed in the New York segment are mostly related to our Avatar methadone
      related products.





The
      largest component of Software and Related Systems and Services revenue was
      turnkey systems labor revenue, which increased $243,000 or 3% to $9,845,000
      in
      2005 from $9,602,000 in 2004. Turnkey systems labor revenue refers to labor
      associated with turnkey installations and includes categories such as training,
      installation, project management and development. The increase in turnkey
      systems labor revenue was primarily due to a 4% increase in the average daily
      billing rate, which accounted for total labor revenue increase of $208,000
      in
      2005 as compared to 2004. Revenue from third party hardware and software
      increased 28% to $5,544,000 in 2005, from $4,335,000 in 2004. Sales of third
      party hardware and software, such as pharmacy and database software, are made
      in
      connection with the sales of turnkey systems. These sales are typically made
      at
      lower gross margins than our software and related systems and services revenue.
      During 2005, the increase in revenue from third party hardware and software
      was
      partially the result of an increase in database software sales and pharmacy
      sales to various customers. License revenue increased 7% to $2,210,000 in 2005,
      from $2,066,000 in 2004. License revenue is generated as part of a sale of
      a
      human services information system pursuant to a contract or purchase order
      that
      includes delivery of the system and maintenance. During 2005, approximately
      one-third of the increase in license revenue was the result of increased user
      license sales to existing customers. Maintenance revenue increased 18% to
      $9,784,000 in 2005 from $8,290,000 in 2004. Revenue from the AMS acquisition
      accounted for approximately one-half of this increase. As turnkey systems are
      completed, they are transitioned to the maintenance division, thereby increasing
      our installed base. Revenue from the sales of our small turnkey contracts
      increased 12% to $1,042,000 in 2005 from $928,000 in 2004. Small turnkey
      contract sales relate to turnkey contracts that are less than $50,000 and are
      usually completed within one to six months. On June 20, 2005, we acquired AMS.
      AMS typically has the type of contracts included in the small turnkey revenue;
      sales of AMS products and services totaled $216,000 in 2005.





Gross
      profit increased 17% to $13,836,000 in 2005 from $11,849,000 in 2004. Our gross
      margin percentage increased to 49% in 2005 from 47% in 2004. Our gross margin
      increased as a result of improved efficiency from our maintenance division
      as
      well as an increase in our license revenue.





**Software
      and Related Systems and Services - Ohio**





The
      Software and Related Systems and Services-Ohio segment is a new segment
      established as a result of the acquisition of Netsmart - Ohio, formerly CMHC
      Systems, Inc. The Ohio operations are included commencing October 1, 2005.
      Netsmart - Ohio offers a full suite of behavioral healthcare information
      management software for mental health, substance abuse, and addiction services
      agencies, developmental disability centers, and behavioral health-related
      managed care organizations. The small turnkey contracts in the Ohio segment
      are
      for system installations for behavioral healthcare information management
      software for mental health, substance abuse, and addiction services agencies,
      developmental disability centers and behavioral health-related managed care
      organizations. The small turnkey contracts are usually completed within a
      six-month period.





Revenue
      for October 1 through December 31, 2005 was $5,219,000 and consisted of the
      following components; Maintenance revenue of $3,533,000, third party hardware
      and software revenue of $654,000, turnkey systems labor revenue of $802,000
      and
      license revenue of $230,000.





Gross
      profit for 2005 was $2,704,000 and our gross margin percentage was 52%.





21


**Data
      Center Services (Service Bureau)**





Data
      center clients typically generate approximately the same amount of revenue
      each
      year. We bill on a transaction basis or on a fixed fee arrangement.
      Historically, each year we increase the transaction or fixed fee by an amount
      that approximates the New York urban consumer price index increase. The data
      center revenue decreased to $1,795,000 in 2005 from $2,058,000 in 2004,
      representing a decrease of $263,000, or 13%. This decrease was the result of
      two
      customers discontinuing the use of our services.





Gross
      profit decreased 25% to $908,000 in 2005 from $1,209,000 in 2004. Our gross
      margin percentage decreased to 51% in 2005 from 59% in 2004. This decrease
      was
      the result of the decrease in revenue, as well as an increase in costs of
      approximately $38,000. The increase in costs was substantially the result of
      an
      increase in communications costs of $29,000, depreciation of $20,000 and
      salaries of $7,000, which was partially offset by a decrease in support overhead
      of approximately $18,000.





**Application
      Service Provider Services (“ASP”)**





ASP
      Services involves the offering of our Avatar suite of products, our CareNet
      products, our ContinuedLearning products and our InfoScribeR products on a
      virtual private network or through an internet delivery approach, thereby
      allowing our customers to rapidly deploy products and pay on a monthly service
      basis, thus eliminating capital intensive system requirements for such services.





ASP
      revenue increased to $2,538,000 in 2005 from $1,725,000 in 2004, representing
      an
      increase of $813,000 or 47%. This increase is the result of additional users,
      including one new customer of our Avatar suite of products, the inclusion of
      our
      Netsmart University revenue for the period April 28, 2005 through December
      31,
      2005, as well as increases in our CareNet and InfoScriber revenue.





On
      April
      28, 2005, we acquired substantially all of the assets, including computer
      software, customer lists and computer equipment, of ContinuedLearning LLC,
      a
      company that offers a comprehensive family of web-based training products and
      services, including its Learning Management System. ContinuedLearning revenue
      totaled $235,000 for 2005.





Gross
      profit for 2005 was $927,000 and for 2004 was $799,000. The gross margin
      percentage was 37% in 2005 and 46% in 2004. Although revenue increased, the
      gross profit and gross margin percentage did not increase proportionally due
      to
      the increased costs associated with the ContinuedLearning operations which
      amounted to $494,000 in 2005. These costs represent the required baseline costs
      to support the ContinuedLearning operation. We expect that as new revenue is
      added to this operation, gross profit and margins will increase
      accordingly.





**Operating
      Expenses**





Selling,
      general and administrative expenses were $11,272,000 in 2005, reflecting an
      increase of $3,978,000, or 55%, from $7,294,000 in 2004. Approximately
      $1,571,000 or 39% of this increase was related to the selling, general and
      administrative costs associated with Netsmart - Ohio. Theses costs included
      such
      categories as salary and fringe benefits of $720,000, consulting costs of
      $199,000 and rent of $170,000. Approximately $641,000 or 16% of this increase
      was related to an increase in bad debts, which included an amount of $340,000
      related to one customer who filed for bankruptcy. The remaining increases were
      in: sales and marketing salaries and fringe benefits, which increased by
      $503,000; sales and marketing consulting costs, which increased by $282,000;
      other consulting which increased by $215,000, of which $86,000 related to
      Sarbanes Oxley compliance efforts and $79,000 related to strategic planning
      efforts; sales and marketing conference costs which increased by $151,000;
      general administrative salaries and fringe benefits, which increased by $187,000
      and $558,000 which related to increased amortization related to the
      ContinuedLearning, Netsmart - Ohio and AMS acquisitions. The cost increases
      were
      partially offset by reductions in: depreciation, which decreased by $133,000;
      and provision for bonuses, which decreased by $142,000.





22


We
      incurred research, development and maintenance expenses of $4,547,000 in 2005,
      an increase of 30% from $3,498,000 in 2004. Approximately $853,000 or 81% of
      this increase was related to the Netsmart - Ohio operations after the
      acquisition. During the latter part of 2004, we invested in infrastructure
      that
      is designed to improve the way we support our customers and products. This
      increased infrastructure costs relate to product version control, which includes
      design, programming, testing, documentation and quality control of our products.
      These efforts accounted for the remaining increase in our research, development
      and maintenance expenses. We also continue to invest in product enhancement
      and
      extensions. These extensions include the development of new software modules
      which address Federal reporting requirements, as well as continuing investment
      in core products. These amounts have been appropriately accounted for in
      accordance with SFAS No. 86, “Accounting for the Cost of Computer Software to be
      Sold, Leased, or Otherwise Marketed.”





Interest
      and other expense was $119,000 in 2005, a decrease of $10,000, or 8%, from
      the
      $129,000 in 2004. This decrease is the result of the completion of the
      amortization of the financing costs associated with our then-current loan
      agreement, which was amortized over a three year period, as well as reduced
      borrowing under our then-current loan agreement during 2005. On October 7,
      2005,
      we borrowed $2,500,000 pursuant to a term loan advanced under a new revolving
      credit and term loan agreement. The decrease in interest expense was partially
      offset by an increase in interest expense relating to the increased borrowings
      under the term loan.





Interest
      income was $311,000 in 2005, an increase of $185,000, or 147%, from $126,000
      in
      2004. This increase is the result of maintaining higher cash balances during
      2005, as well as an increase in interest rates. Interest income is generated
      from short-term investments made with a substantial portion of the proceeds
      received from our term loan, as well as cash generated from operations and
      the
      proceeds of the exercise of options and warrants.





We
      have a
      net operating loss tax carry forward of approximately $5.3 million at December
      31, 2005. In 2005, we recorded a current income tax expense of $324,000, which
      related to various state and local taxes, as well as a provision for the Federal
      alternative minimum tax. The income tax provision was increased by a deferred
      tax provision of $835,000. In 2004, we recorded a current income tax expense
      of
      $187,000, which related to various state and local taxes, as well as a provision
      for the Federal alternative minimum tax. The current provision was reduced
      by
      $952,000 as a result of the use of the available net operating loss carry
      forward. During 2004, the deferred tax valuation allowance of $1,731,000 was
      reversed, $717,000 of which was recorded as an addition to additional paid
      in
      capital and $1,014,000 as a deferred tax benefit. The deferred tax provision
      was
      $1,136,000 based on utilization of net operating loss carry forwards offset
      by a
      reduction in the deferred tax asset valuation allowance of
      $1,014,000.





As
      a
      result of the foregoing factors, in 2005 we had net income of $1,590,000, or
      $.28 per share (basic) and $.27 per share (diluted). For 2004, we had net income
      of $2,753,000, or $.52 per share (basic) and $.50 per share
      (diluted).





**Years
      Ended December 31, 2004 and 2003**





**Results
      of Operations**





Fixed
      price software development contracts, third party hardware and software
      components and licenses accounted for 34% and 44% of consolidated revenue for
      the years ended December 31, 2004 and 2003, respectively. This decrease was
      the
      result of more labor revenue being generated on an as incurred basis, as well
      as
      a change in the overall mix of our revenue components. Our recurring revenue
      components, which include our **** maintenance
      contract services and our Data Center and ASP services, accounted for 42% of
      our
      consolidated revenue for the year ended December 31, 2004 compared to 35% of
      consolidated revenue for the year ended December 31, 2003. Revenue from fixed
      price software development contracts is determined using the percentage of
      completion method which is based upon the time spent by our technical personnel
      on a project. Since the billing schedules under the contracts differ from the
      recognition of revenue, at the end of any period, these contracts generally
      result in either costs and estimated profits in excess of billing or billing
      in
      excess of costs and estimated profits.





23


Our
      total
      revenue for 2004 was $29,005,000, an increase of $1,830,000, or 7%, from our
      revenue for 2003, which was $27,175,000.





Revenue
      from contracts with state and local government agencies represented 49% of
      revenue in 2004 and 57% of revenue in 2003. This decrease is the result of
      the
      substantial completion towards the end of 2003 of one state contract and two
      county contracts.





**Software
      and Related Systems and Services**





Our
      Software and Related Systems and Services revenue for 2004 was $25,221,000,
      an
      increase of $611,000, or 2%, from our revenue for 2003, which was $24,610,000.
      Software and Related Systems and Services revenue is comprised of turnkey
      systems labor revenue, revenue from sales of third party hardware and software,
      license revenue, maintenance revenue and revenue from small turnkey
      systems.





Within
      this segments are large turnkey and small turnkey components. The large turnkey
      components consist mostly of our Avatar suite of products. When we are engaged
      in a fixed price arrangement, these installations will usually extend over
      a
      six-month to a multi-year time period. The duration of the implementation is
      dependant on the size and complexity of the customer organization and the
      specifics of the implementation. The small turnkey components are usually
      completed within a six-month period. Small turnkey contracts were mostly related
      to our Avatar methadone related products.





The
      largest component of revenue was turnkey systems labor revenue, which increased
      to $9,602,000 in 2004 from $9,548,000 in 2003, reflecting a 1% increase. Turnkey
      systems labor revenue refers to labor associated with turnkey installations
      and
      includes categories such as training, installation, project management and
      development. Revenue from third party hardware and software decreased to
      $4,335,000 in 2004, from $4,444,000 in 2003, which represents a decrease of
      2%.
      Sales of third party hardware and software, such as pharmacy and database
      software, are made in connection with the sales of turnkey systems. These sales
      are typically made at lower gross margins than our human services revenue.
      During 2004, we did not sell and perform on as many contracts containing such
      third party items. License revenue decreased to $2,066,000 in 2004, from
      $2,781,000 in 2003, reflecting a decrease of 26%. License revenue is generated
      as part of a sale of a human services information system pursuant to a contract
      or purchase order that includes delivery of the system and maintenance. We
      did
      not sell and perform on as many contracts containing license revenue in 2004
      as
      we did in 2003. In addition, in order to encourage our existing customers to
      upgrade from our old product to our new Avatar product, we discounted the
      license fees to our existing clients. Maintenance revenue increased to
      $8,290,000 in 2004 from $7,069,000 in 2003, reflecting an increase of 17%.
      As
      turnkey systems are completed, they are transitioned to the maintenance
      division, thereby increasing our installed base. Revenue from the sales of
      our
      small turnkey contracts increased to $928,000 in 2004 from $768,000 in 2003,
      reflecting an increase of 21%. This increase is the result of the introduction
      of our new Avatar Addictions Management product into the market place during
      the
      latter part of 2003. Small turnkey sales relate to turnkey contracts that are
      less than $50,000 and are usually completed within one to six
      months.





Gross
      profit decreased to $11,849,000 in 2004 from $11,953,000 in 2003, reflecting
      a
      decrease of 1%. Our gross margin percentage was 47% in 2004 compared to 49%
      in
      2003. Our gross margin decreased as a result of the decrease in license revenue.
      This decrease was partially offset by improved labor efficiency on our fixed
      price contracts.


24


**Data
      Center Services (Service Bureau)**





Data
      center clients typically generate approximately the same amount of revenue
      each
      year. We bill on a transaction basis or on a fixed fee arrangement.
      Historically, each year we increase the transaction or fixed fees by an amount
      that approximates the New York urban consumer price index increase. The data
      center revenue increased to $2,058,000 in 2004 from $1,973,000 in 2003,
      representing an increase of $85,000, or 4%. This increase was due to an increase
      in the client base as well as increases in pricing.





Gross
      profit increased to $1,209,000 in 2004 from $939,000 in 2003, reflecting an
      increase of 29%. Our gross margin percentage increased to 59% in 2004 from
      48%
      in the 2003. This increase was the result of the increase in revenue as well
      as
      a reduction in costs of approximately $185,000. The major areas of cost
      reductions were in the area of payroll and fringe benefits in the amount of
      $21,000, support overhead in the amount of $65,000, facility costs in the amount
      of $22,000, supplies in the amount of $22,000, depreciation in the amount of
      $15,000, and other costs in the amount of $23,000.





**Application
      Service Provider Services (“ASP”** **)**





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





Revenue
      for 2004 was $1,725,000 as compared to $591,000 in 2003.





Gross
      profit for 2004 was $799,000 and our gross margin percentage was 46%. The gross
      profit for 2003 was $214,000 and our gross margin percentage was 36%. Because
      the ASP operations were in their infancy during the 2003, any comparisons
      between the periods would not be meaningful.





**Operating
      Expenses**





Selling,
      general and administrative expenses were $7,294,000 in 2004, reflecting a
      decrease of $675,000, or 8%, from $7,969,000 in 2003. The decreases were in:
      bad
      debt expense, which decreased by $1,250,000; provision for bonuses which
      decreased by $172,000; and general and administrative salaries and related
      fringe expense, which decreased by $101,000. These cost decreases were partially
      offset by increases in: depreciation expense which increased by $351,000;
      amortization of the CareNet acquisition costs, which increased by $139,000;
      consulting costs which increased by $124,000; commissions, which increased
      by
      $87,000; sales salaries and related fringe benefits expense, which increased
      by
      $54,000; advertising and promotion, which increased by $47,000; accounting
      costs, which increased by $40,000; and sales and marketing travel and living
      costs, which increased by $41,000.





We
      incurred research, development and maintenance expenses of $3,498,000 in 2004,
      an increase of 26% from $2,770,000 in 2003. During 2004, we invested in
      infrastructure to improve the way we support our customers and products. These
      changes related to redirecting personnel that were previously employed
      performing actual customer program “bug” fixing procedures, which would be
      included in costs of goods sold, to our research, development and maintenance
      area. These personnel now perform product version control, which includes
      design, programming, testing, documentation and quality control of our products.
      These efforts accounted for a substantial increase in our research, development
      and maintenance expenses. The increase in research, development and maintenance
      expense is also the result of continuing investment in product enhancement
      and
      extensions. These extensions include the development of new software modules
      which addresses Federal reporting requirements, as well as continued investment
      in core products. These amounts have been appropriately accounted for in
      accordance with SFAS No. 86, “Accounting for the Cost of Computer Software to be
      Sold, Leased, or Otherwise Marketed.”




25


Interest
      and other expense was $129,000 in 2004, a decrease of $71,000, or 35%, from
      $200,000 in 2003. This decrease is the result of the completion of the
      amortization of the financing costs associated with our 2001 term loan
      agreement, which was amortized over a three year period, as well as reduced
      borrowing during 2004 under that term loan. This decrease was partially offset
      by an increase in borrowing related to the promissory note issued to Shuttle
      Data Systems Corp. in connection with our acquisition of CareNet.





Interest
      income was $126,000 in 2004, an increase of $52,000, or 70%, from the $74,000
      in
      2003. Interest income is generated from short-term investments made with a
      substantial portion of the proceeds received from the term loan, as well as
      cash
      generated from operations and the proceeds of the exercise of options and
      warrants.





We
      had a
      net operating loss tax carry forward of approximately $4.0 million at December
      31, 2004. In the 2004 period, we recorded a current income tax expense of
      $187,000, which related to various state and local taxes, as well as a provision
      for the Federal alternative minimum tax. The current provision was reduced
      by
      $952,000 as a result of a use of the available net operating loss carry forward.
      The income tax provision was increased by a net deferred tax provision of
      $122,000. The deferred tax asset valuation allowance of $1,731,000 was reversed,
      $717,000 of which was recorded as an addition to additional paid in capital
      and
      $1,014,000 was recorded as a deferred tax benefit, during 2004. The deferred
      tax
      provision was $1,136,000 based on utilization of net operating loss carry
      forwards offset by the reduction in the deferred tax asset valuation allowance
      of $1,014,000. In 2003, we recorded a current income tax expense of $113,000,
      which related to various state and local taxes, as well as a provision for
      the
      Federal alternative minimum tax. The current income tax provision was reduced
      by
      $942,000 as a result of the use of available net operating losses. The deferred
      tax asset and the valuation allowance were reduced by the same amount. We also
      re-evaluated the deferred tax asset valuation allowance and further reduced
      the
      allowance by $900,000 to zero, which was recorded as a tax benefit.





As
      a
      result of the foregoing factors, in the 2004 period we had net income of
      $2,753,000, or $.52 per share (basic) and $.50 per share (diluted). For 2003,
      we
      had net income of $3,029,000, or $.69 per share (basic) and $.64 per share
      (diluted) .





**Liquidity
      and Capital Resources**





We
      had
      working capital of approximately $4.0 million at December 31, 2005 as compared
      to working capital of approximately $18.2 million at December 31, 2004. This
      decrease of approximately $14.2 million in working capital was the result of
      the
      following: $15,890,000 paid for the acquisitions of CMHC, ContinuedLearning
      and
      AMS, $6,032,000 of negative working capital acquired in the acquisition of
      CMHC,
      $1,656,000 of other costs, paid in connection with the CMHC acquisition,
      $1,264,000 in current liabilities assumed and accrued with respect to the
      acquisitions of ContinuedLearning and AMS, $458,000 paid for the acquisition
      of
      equipment, and $42,000 related to the capitalization of software . These
      decreases were partially offset by our net income, after adding back
      depreciation and amortization, which totaled $4,041,000, an increase in the
      current portion of the deferred tax asset in the amount of $484,000, $854,000
      in
      net proceeds from the exercise of stock options, $4,110,000 in net proceeds
      from
      the completion of a private placement and $2,000,000 in net proceeds after
      classifying the current portion of the term loan agreement entered into in
      October 2005. The remaining decrease in working capital of $320,000 was due
      to
      changes in other current assets and liabilities.





In
      October 2005, we entered into a revolving credit and term loan agreement with
      the Bank of America, which was amended as of December 31, 2005 (as so amended,
      the “Credit Agreement”). This financing provides us with a five-year term loan
      of $2.5 million. The term loan bears interest at LIBOR plus 2.25%. We have
      entered into an interest rate swap agreement with the Bank for the amount
      outstanding under the term loan whereby we converted our variable rate on the
      term loan to a fixed rate of 7.1% in order to reduce the interest rate risk
      associated with these borrowings. On October 7, 2005, we borrowed the full
      amount of the $2,500,000 term loan. The revolving credit facility provides
      for
      borrowings of up to $2,500,000. Any amounts borrowed under this arrangement
      will
      bear interest at a rate per annum to be elected by us, equal to either (1)
      the
      LIBOR Rate plus 2.00% or (2) the Bank's prime rate. We have not borrowed any
      amounts under the revolving credit facility. The amount outstanding under the
      Credit Agreement at December 31, 2005 is $2,417,000.





26


The
      terms
      of the Credit Agreement require compliance with certain covenants, including
      maintaining a minimum tangible net worth of $2,250,000 until March 31, 2006
      with
      provisions for increases in future periods, minimum cash reserves of $5,000,000,
      maintenance of certain financial ratios, limitations on capital expenditures
      and
      indebtedness and prohibition of the payment of cash dividends. The Company
      was
      not in compliance with one of the covenants at December 31, 2005. As a result,
      the Company and the Bank entered into a First Amendment and Waiver to the term
      loan, pursuant to which the Bank agreed to amend the terms of the Tangible
      Net
      Worth covenant contained in the Loan Agreement and waive any non-compliance
      by
      the Company. As a result, as of December 31, 2005, the Company was in compliance
      with the financial covenants of the Credit Agreement.





In
      October 2005, we completed a private placement of units consisting of an
      aggregate 490,000 shares of our common stock and warrants to purchase 122,504
      shares of common stock. The warrants have an exercise price of $11 per share.
      We
      received net proceeds of approximately $4.1 million.





In
      September 2001, we entered into the 2001 Term Loan Agreement with Bank of
      America (formerly Fleet Bank). This financing provides us with a five-year
      term
      loan of $2.5 million. The current term loan bears interest at LIBOR plus 2.5%.
      We have entered into an interest rate swap agreement with the bank for the
      amount outstanding under the term loan whereby we converted our variable rate
      on
      the term loan to a fixed rate of 7.95% in order to reduce the interest rate
      risk
      associated with these borrowings. The amount outstanding at December 31, 2005
      is
      $250,000.





The
      terms
      of the 2001 Term Loan Agreement require compliance with certain covenants,
      including maintaining a minimum net equity of $9 million, minimum cash reserves
      of $500,000, maintenance of certain financial ratios, limitations on capital
      expenditures and indebtedness and prohibition of the payment of cash dividends.
      As of December 31, 2005, we were in compliance with the financial covenants
      of
      the 2001 Term Loan Agreement.





We
      issued
      a note payable to Shuttle Data Systems Corporation, d/b/a Adia Information
      Management Corp. in connection with our acquisition of CareNet. This three
      year
      promissory note is payable in 36 equal monthly installments of principal plus
      interest at the prime rate plus 1%. We have made the required principal and
      interest payments on the note and the principal amount outstanding at December
      31, 2005 is $83,000.





In
      the
      2005, we capitalized software development costs of $42,000 relating to one
      of
      our AVATAR products.





In
      2004,
      we capitalized $185,000 related to our RAD Plus 2004 product.





A
      part of
      our growth strategy is to acquire other businesses that are related to our
      current business. Such acquisitions may be made with cash, our securities,
      or a
      combination of cash and securities. If we fail to make any acquisitions our
      future growth will be limited to only internal growth. We are continually
      seeking acquisitions that will add complementary products to our offerings
      and
      that will provide value for the markets we serve. As of the date of this Form
      10-K annual report, we did not have any formal or informal agreements or
      understandings with respect to any acquisitions.





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





27


**Off-Balance
      Sheet Arrangements**





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





**Contractual
      Obligations**





The
      following table summarizes, as of December 31, 2005, our obligations and
      commitments to make future payments under debt, capital leases, operating leases
      and other long-term liabilities:





**Contractual
                Obligations**
            
            **Payments
                Due by Period****Total**
            
            **Less
                than**
              **1
                year**
            
            **1
                - 3 years**
            
            **4
                - 5 years**
            
            **Over
                5 years**Long
                Term Debt1
            
            $
            2,750,036
            
            $
            833,369
            
            $
            1,000,000
            
            $
            916,667
            
            $
            --Capital
                Lease Obligations2
            
            
            70,837
            
            
            61,316
            
            
            9,521
            
            
            --
            
            
            --Operating
                Leases3
            
            
            8,422,459
            
            
            1,480,565
            
            
            2,277,794
            
            
            1,932,100
            
            
            2,732,000Other
                Long-Term Liabilities3
            
            
            1,693,738
            
            
            741,625
            
            
            930,863
            
            
            21,250
            
            
            --Total
                Contractual and Other Long-Term
              Obligations
            
            $
            12,937,070
            
            $
            3,116,875
            
            $
            4,218,178
            
            $
            2,870,017
            
            $
            2,732,000





1 See Note
      7 to Netsmart’s Consolidated Financial Statements for the years ended December
      31, 2005, 2004 and 2003, which describes the Company’s financing
      agreements.


2 See Note
      10 to Netsmart’s Consolidated Financial Statements for the years ended December
      31, 2005, 2004 and 2003, which describes the Company’s Capital Lease
      Obligation.


3 See Note
      12 to Netsmart’s Consolidated Financial Statements for the years ended December
      31, 2005, 2004 and 2003 which describes the Company’s Operating Lease and other
      Contractual Obligations.





**Critical
      Accounting Policies and Estimates**





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





28


Revenue
      Recognition


Capitalized
      Software Development Costs


Impairment
      of Customer Lists


Bad
      Debts


Fair
      Value of Acquired Deferred Post-Contract Customer Support


Valuation
      Allowance for Deferred Income Tax Assets


Purchase
      Price Allocation of Netsmart Ohio Acquisition


Liquidated
      Damages of Registration Rights Agreement





Revenue
      Recognition - The
      Company recognizes large turnkey revenue from long-term (six months or longer),
      fixed price contracts for financial statement purposes under the percentage
      of
      completion method when significant modification of the software package is
      required to meet the customer specifications. The percentage of completion
      method takes into account progress towards completion of a contract using time
      spent by technical personnel on a particular project as the measuring standard.
      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.





The
      Company recognizes small turnkey revenue from short-term (less than six months),
      fixed price contracts for financial statement purposes under the completed
      contract method. Payments received in advance by customers are deferred until
      earned and represented as deferred revenue in the accompanying balance
      sheet.





Revenue
      associated with fixed price turnkey sales consists of the following components:
      licensing of software, labor associated with the installation and implementation
      of the software; and maintenance services rendered in connection with such
      licensing activities. The complexity of the estimation process and issues
      related to the assumptions, risks and uncertainties inherent with the
      application of the percentage of completion method of accounting affect the
      amounts of revenue and related expenses reported in our Consolidated Financial
      Statements. A number of internal and external factors can affect our estimates,
      including labor rates, utilization and efficiency variances and specification
      and testing requirement changes. Maintenance contract revenue is recognized
      on a
      straight-line basis over the life of the respective contract. We also derive
      revenue from the sale of third party hardware and software which is recognized
      based upon the terms of each contract. Consulting revenue is recognized when
      the
      services are rendered. Data Center revenue and Application Service Provider
      revenue are recognized in the period in which the services are provided. The
      above sources of revenue are recognized when persuasive evidence of an
      arrangement exists, delivery has occurred, the fee is fixed and determinable
      and
      collectibility is probable.





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





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





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





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





29


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





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





Bad
      Debts - We
      maintain allowances for doubtful accounts for estimated bad debts. Our practice
      is to specifically identify clients and invoices where we believe collection
      may
      be at risk and provide for these on a current basis. If the financial condition
      of our customers were to deteriorate, resulting in an impairment of their
      ability to make payments, additional allowances might be required. In addition,
      since we evaluate each account and invoice on a case-by-case basis, the
      provision could vary from period to period.





Fair
      value of acquired deferred post-contract customer support
      (“PCS”) - We
      value PCS in accordance with View B of EITF 04-11. In order to remain
      competitive and maintain our existing customer base we upgrade and maintain
      software for purposes of bug fixes, ongoing regulatory changes as well as
      software corrections and enhancements. These services are not sold separately
      and are therefore fair valued as a single unit. Although these services are
      provided on a when-and-if-available basis, we have an obligation to our existing
      customer base to develop upgrades and enhancements in order to maintain our
      customer relationships as well as increase future revenue. The fair value of
      this liability is estimated using the value of the services provided using
      an
      estimated fulfillment margin. As of December 31, 2005 the fair value of PCS
      recorded as deferred revenue is $5.3 million. If we did not intend to perform
      research and development for unspecified software upgrades, the estimated value
      of the PCS would have been $4.0 million. We intend to fulfill 100% of our
      obligations under these PCS obligations assumed.





Valuation
      Allowance for Deferred Income Tax Assets -- We
      measure deferred income taxes using enacted tax rates and laws that we expect
      will be in effect when the underlying assets or liabilities settle. We record
      a
      valuation allowance against our deferred income tax assets balance when it
      is
      more likely than not that the benefits of the net tax asset balance will not
      be
      realized, and record a corresponding charge to income tax expense. Our ability
      to reduce the valuation allowance for deferred income tax assets depends on
      our
      ability to generate taxable income in the future. Based on our projection of
      the
      Company’s future taxable income we have determined that a valuation allowance is
      no longer required.





Purchase
      Price Allocation of Netsmart Ohio Acquisition - Purchase
      price allocations are subject to change. Changes could include a reallocation
      of
      intangible assets which would likely have the effect of increasing or decreasing
      future amortization expense, since the intangible assets are initially assigned
      varied lives. Additionally, the lives assigned to the identifiable intangible
      assets represent management’s best estimates of the time periods in which it
      will continue to receive benefits from these assets. The useful lives may need
      to be adjusted in the future based upon changes to the expected useful lives
      of
      such assets.





30


Liquidated
      Damages of Registration Rights Agreement - We are
      required to deliver registered shares in connection with our private placement
      of shares and warrants in October 2005 or, in the alternative, pay liquidated
      damages. In accordance with View A of EITF 05-04 the liquidating damages
      penalties related to our obligation to register the shares and the shares
      underlying warrants are combined with our right to deliver unregistered shares.
      Thus these instruments have two settlement alternatives: (a) the delivery of
      registered shares in exchange for the exercise price or (b) the delivery of
      unregistered shares, plus the liquidated damages cash penalty required to be
      paid under the registration rights provisions of the subscription agreement,
      in
      exchange for the exercise price.





The
      Company has determined that the delivery of unregistered shares is considered
      an
      economic alternative, and the combined financial instrument should be classified
      as equity. In this regard we have also determined that SFAS 5 is the appropriate
      accounting for the registration rights agreements whereby any potential
      penalties will be recorded in earnings when and if incurred.








**Item
              7A.**
            **Quantitative
                and Qualitative Disclosures About Market
                Risk**





We
      are
      exposed to market risk related to changes in interest rates. Most of our debt
      is
      at fixed rates of interest after completing interest rate swap agreements,
      which
      effectively converted our variable rate debt into fixed rate debt at 7.95%
      and
      7.1% per annum. Therefore, if the LIBOR rate plus 2.5% increases above 7.95%
      or
      7.1% per annum, it may have a positive effect on our comprehensive
      income.





Most
      of
      our invested cash and cash equivalents, which are invested in money market
      accounts and commercial paper, are at variable rates of interest. If market
      interest rates decrease by 10 percent from levels at December 31, 2005, the
      effect on our net income would be a decrease of approximately $33,000 per
      year.





31


**Netsmart
      Technologies, Inc.**


**Quarterly
      Summary**


Unaudited





The
      following table sets forth certain unaudited quarterly results of operations
      for
      each of the quarters in the years ended December 31, 2005 and 2004. All
      quarterly information was obtained from unaudited financial statements not
      otherwise contained in this report. We believe that all necessary adjustments
      have been made to present fairly the quarterly information when read in
      conjunction with the Consolidated Financial Statements and notes thereto
      included elsewhere in this report. The operating results for any quarter are
      not
      necessarily indicative of the results for any future period.


1stQuarter
              
              2ndQuarter
              
              3rdQuarter
              
              4thQuarter**2005(a)**Total
                  revenue
              
              $
              7,429
              
              $
              7,759
              
              $
              8,517
              
              $
              14,273Gross
                  profit
              
              
              3,600
              
              
              3,862
              
              
              3,896
              
              
              7,018Net
                  income
              
              
              363
              
              
              449
              
              
              379
              
              
              399Per
                  share amounts:Net
                  earnings - Basic:
              
              $
              .07
              
              $
              .08
              
              $
              .07
              
              $
              .06Net
                  earnings - Diluted:
              
              $
              .07
              
              $
              .08
              
              $
              .07
              
              $
              .05**2004
                  (b) (c)**Total
                  revenue
              
              $
              6,823
              
              $
              7,189
              
              $
              7,421
              
              $
              7,572Gross
                  profit
              
              
              3,163
              
              
              3,435
              
              
              3,565
              
              
              3,694Net
                  income
              
              
              325
              
              
              493
              
              
              633
              
              
              1,302Per
                  share amounts:Net
                  earnings - Basic:
              
              $
              .06
              
              $
              .09
              
              $
              .12
              
              $
              .24Net
                  earnings - Diluted:
              
              $
              .06
              
              $
              .09
              
              $
              .11
              
              $
              .24




In
      thousands, except per share data amounts





(a)
      During 2005, the Company made three acquisitions. See note 5 to the Consolidated
      Financial Statements.





(b)
      The
      Company utilized an effective income tax rate of approximately 28% through
      the
      third quarter of 2004. In the fourth quarter of 2004, the Company determined
      that the effective income tax rate should approximate 10%. Accordingly, the
      change in estimate recorded in the fourth quarter was to reduce the income
      tax
      provision by approximately $360,000 related to the first three quarters of
      2004.





(c)
      During the fourth quarter the Company changed its method of calculating overhead
      for its research, development and maintenance costs, from using a standard
      overhead rate factor to a specific costs method. As a result, $1,248 of costs
      have been reclassified from research, development and maintenance costs into
      costs of goods sold. The effect of this reclassification on gross profit for
      each quarter during 2004 has been reflected above.





32


**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





**Item
              9A.**
            **Controls
                and Procedures.**





**Evaluation
      and Disclosure Controls and Procedures**




As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of our management, including our
      Chief Executive Officer and Chief Financial Officer, of the effectiveness of
      the
      design and operation of our disclosure controls and procedures (as defined
      in
      Exchange Act Rule 13a-15(e) and 15d-15(e)). Our disclosure controls and
      procedures are designed to ensure that information required to be disclosed
      by
      us in the reports that we file or submit to the Securities and Exchange
      Commission under the Securities Exchange Act of 1934, as amended, is recorded,
      processed, summarized and reported within the time periods specified by the
      Commission’s rules and forms, and that information is accumulated and
      communicated to our management, including our Chief Executive Officer and our
      Chief Financial Officer, as appropriate to allow timely decisions regarding
      required disclosure. Based upon the evaluation that was conducted, the Chief
      Executive Officer and Chief Financial Officer have concluded that as of the
      end
      of the period covered by this Annual Report on Form 10-K our disclosure controls
      and procedures were effective.




**Changes
      in Internal Controls**




There
      were no changes made in our internal controls over financial reporting that
      occurred during our most recently completed fiscal quarter that have materially
      affected, or are reasonably likely to materially affect our internal controls
      over financial reporting.





As
      a
      result of the CMHC acquisition, the company is currently evaluating its
      operations and, commencing in the first quarter of fiscal 2006, integrating
      the
      New York and Ohio operations. In doing so, we have chosen to use the most
      efficient processes and internal controls of the two operations in each
      location. This includes combining sales, marketing and certain administrative
      functions for greater efficiency of operation.





**Limitations
      on the Effectiveness of Controls**





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





**Item
              9B.**
            **Other
                Information.**





None





33


**Part
      III**





**Item
              10.**
            **Directors
                and Executive Officers of the
                Registrant.**





Our
      directors and executive officers are as follows:





Name
            Age
            PositionJames
                L. Conway
            58
            Chief
                executive officer and directorAnthony
                F. Grisanti
            56
            Chief
                financial officer, treasurer and secretaryGerald
                O. Koop
            67
            DirectorJohn
                F. Phillips
            67
            DirectorJoseph
                G. Sicinski1
                & 2
            73
            DirectorFrancis
                J. Calcagno1,
                2 & 3
            56
            DirectorJohn
                S.T. Gallagher1,
                2 & 3
            74
            DirectorYacov
                Shamash3
            56
            Director







1
            Member
                of the compensation committee.


2
            Member
                of the audit committee.


3
            Member
                of the nominating and governance
                committee.





Director
      and Executive Officer Biographies





Mr.
      James
      L. Conway has been our Chief Executive Officer since April 1998, a director
      since January 1996 and was President from January 1996 until January 2001.
      From
      1993 until April 1998, he was president of a Long Island-based manufacturer
      of
      specialty vending equipment for postal, telecommunication and other industries.
      He was previously vice president, treasurer and director of ITT Credit
      Corporation. Mr. Conway was recently elected to the board of LISTnet, which
      is
      an organization with the objective of promoting Long Island as one of the
      national centers of excellence for software and technology solutions. He also
      serves and is a member of the CEO Roundtable for Long Island.





Mr.
      Anthony F. Grisanti has been our Treasurer since June 1994, Secretary since
      February 1995 and Chief Financial Officer since January 1996.





Mr.
      Gerald O. Koop has been one of our directors since June 1998 and was President
      of Netsmart from January 2001 until his resignation on December 31, 2005. Mr.
      Koop continues to serve as an employee of Netsmart but is no longer an executive
      officer.





Mr.
      John
      F. Phillips has been one of our directors since June 1994. Mr. Phillips served
      as a Vice President of Netsmart and as President of Creative Socio-Medics from
      June 1994 until his retirement in April 2004. Mr. Phillips continues to serve
      as
      a consultant to Netsmart pursuant to the terms of the Netsmart Executive
      Retirement, Non Competition and Consulting Plan.





Mr.
      Joseph G. Sicinski has been one of our directors since June 1998. He was
      president and a director of the Trans Global Services, Inc., a technical
      staffing company, from September 1992 until April 1998. From April 1998 until
      September 2002 he was also chief executive officer of Trans Global. In September
      2003 he retired from Trans Global and co-founded Novus Management Services,
      Inc., a company providing services related to the insurance industry where
      he is
      also a board member. In February 2004 he co-founded BDS Strategic Solutions,
      Inc., a company providing permanent and temporary staffing solution services
      and
      programs related to human resource issues. He is chairman of the board of
      directors of BDS.





34


Mr.
      Francis J. Calcagno has been one of our directors since September 2001. He
      is a
      senior managing director of Dominick & Dominick LLC, a company engaged in
      investment banking, a position he has held since 1997. From 1993 until 1997,
      he
      was a managing director of Deloitte and Touche, LLP.





Mr.
      John
      S.T. Gallagher has been one of our directors since March 2002. He has been
      chief
      executive officer of SUNY Stony Brook since November 2005. Prior to that time,
      he served as deputy county executive for health and human services in Nassau
      County, New York from February 2002. He has been a senior executive officer
      of
      North Shore University Hospital and North Shore - Long Island Jewish Health
      System since 1982, having served as executive vice president of North Shore
      from
      1982 until 1992, president from 1992 until 1997 and chief executive officer
      of
      the combined hospital system from 1997 until January 2002. In January 2002,
      he
      became co-chairman of the North Shore - Long Island Jewish Heath System
      Foundation. Mr. Gallagher is also a director of Perot Systems Corporation,
      a
      worldwide provider of information technology services, since 2000 and of
      American Medical Alert Corporation, a healthcare service provider, since
      2005 **.**





Dr.
      Yacov
      Shamash is Vice President for Economic Development and the Dean of the College
      of Engineering and Applied Sciences at Stony Brook University. Prior to joining
      SUNY Stony Brook in 1992, Dr. Shamash served as the Director of the School
      of
      Electrical Engineering and Computer Science at Washington State University.
      He
      has also held faculty positions at Florida Atlantic University, the University
      of Pennsylvania and Tel Aviv University. He received his undergraduate and
      graduate degrees from Imperial College of Science and Technology in London,
      England. Dr. Shamash has been a member of the Board of Directors of KeyTronic
      Corporation, a contract manufacturer, since 1989 and of American Medical Alert
      Corporation, a healthcare service provider, since 2001.





Directors
      are elected for a term of one year.





None
      of
      our officers and directors are related.





Our
      certificate of incorporation includes certain provisions, permitted under
      Delaware law, which provide that a director shall not be personally liable
      to us
      or our stockholders for monetary damages for breach of fiduciary duty as a
      director except for liability (i) for any breach of the director’s duty of
      loyalty to us or our 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.





Board
      Committees





Our
      board
      of directors has three committees - the audit committee, the compensation
      committee and the nominating and governance committee. All of the members of
      each committee are “independent” as defined under Nasdaq rules.





The
      responsibilities of the audit committee include overseeing our financial
      reporting process, reporting the results of its activities to the board,
      retaining and ensuring the independence of our independent registered public
      accountants, approving services to be provided by our independent registered
      public accountants, reviewing our periodic filings with the independent
      registered public accountants prior to filing, and reviewing and responding
      to
      any matters raised by the Independent Registered Public Accountants in their
      management letter and SAS 61 Communications. The audit committee consists of
      Mr.
      John S.T. Gallagher, who is chairman of the committee and Messrs. Francis
      Calcagno and Joseph G. Sicinski. The board of directors has determined that
      each
      of Messrs. Gallagher and Calcagno, qualifies as an “Audit Committee financial
      expert,” as defined by Securities and Exchange Commission rules, based in his
      education, experience and background. A copy of the Audit Committee charter
      can
      be found on our website at www.ntst.com .





35


The
      compensation committee serves as the stock option committee for our stock option
      plans and the employee stock purchase plan, and it reviews and approves any
      employment agreements with management and changes in compensation for our
      executive officers. The members of the compensation committee are Mr. Gallagher,
      who is chairman of the committee and Messrs. Calcagno and Sicinski. A copy
      of
      the Compensation Committee charter can be found on our website at www.ntst.com .





The
      nominating and governance committee is primarily responsible for reviewing
      our
      corporate governance principles and independence standards: overseeing the
      annual evaluation of our board and its committees; discharging the board’s
      responsibilities related to compensation of directors; identifying and
      evaluating individuals for board and committee membership and chairs; making
      recommendations to the board concerning the selection of director nominees
      and
      making recommendations as to the size and composition of the board and its
      committees. It will consider director nominee recommendations by stockholders
      provided that the names of such nominees, accompanied by relevant biographical
      information are properly submitted to our Secretary in accordance with the
      stockholder nomination procedures adopted by the Board of Directors, as
      described below. The members of the Nominating and Governance Committee are
      Dr.
      Shamash, who is the chairman of the committee and Messrs. Gallagher and
      Calcagno. A copy of the Nominating and Governance Committee charter can be
      found
      on our website at www.ntst.com .





Excluding
      actions by unanimous written consent, during 2005, the board of directors held
      thirteen meetings, the compensation committee held three meetings, the
      nominating and governance committee held one meeting and the audit committee
      held five meetings. The independent directors also held one
      meeting.





The
      audit
      committee met with our independent registered public accountants and chief
      financial officer prior to filing of this Form 10-K annual report to review
      the
      2005 audited financial statements with the independent registered public
      accountants. During 2005, all of our directors attended at least 75% of the
      aggregate of meetings of the board and the meetings of any committee of which
      they are members.





Directors’
      Fees





We
      pay an
      annual fee of $20,000 to each of Messrs. Calcagno, Sicinski, Shamash and
      Gallagher and we pay an additional $12,500 per annum to Mr. Gallagher in respect
      of his services as chairman of our Audit Committee and Compensation
      Committee.





Stockholder
      Nomination Procedures





Any
      stockholder who wants to nominate a candidate for election to the Board must
      deliver timely notice to our Secretary at our principal executive offices.
      In
      order to be timely, the notice must be delivered





·
            in
                the case of an annual meeting, not less than 120 days prior to the
                anniver-sary date of the immediately preceding annual meeting of
                stockholders, although if we did not hold an annual meeting or the
                annual
                meeting is called for a date that is not within 30 days of the anniversary
                date of the prior year’s annual meeting, the notice must be received a
                reasonable time before we begin to print and mail our proxy materials;
                and





·
            in
                the case of a special meeting of stockholders called for the purpose
                of
                electing directors, the notice must be received a reasonable time
                before
                we begin to print and mail our proxy
                materials.





36


Section
      16(a) Beneficial Ownership Reporting Compliance





Section
      16(a) of the Securities Exchange Act of 1934 requires our executive officers,
      directors and persons who own more than ten percent of a registered class of
      our
      equity securities ("Reporting Persons") to file reports of ownership and changes
      in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission
      and
      the Nasdaq Stock Exchange. These Reporting Persons are required by SEC
      regulation to furnish us with copies of all Forms 3, 4 and 5 they file with
      the
      SEC and Nasdaq. Based solely upon our review of the copies of the forms we
      have
      received, and upon representations received from such Reporting Persons, we
      believe that all Reporting Persons complied on a timely basis with all filing
      requirements applicable to them with respect to transactions during fiscal
      2005
      except that each of Messrs. Gallagher, Sicinski, Calcagno and Shamash failed
      to
      timely file the requisite Form 4 reporting the grant of certain options pursuant
      to the automatic grant provisions of our 2001 Long Term Incentive
      Plan.





Code
      of Ethics





We
      have
      adopted a Code of Ethics applicable to our principal executive officers,
      principal financial officer, principal accounting officer and controller and
      a
      Code of Business Conduct applicable to all of our employees, each which is
      posted on our website at www.ntst.com .
      Our
      Board of Directors has adopted a Code of Business Conduct applicable to the
      Company’s officers and employees, and has also adopted a Code of Ethics for its
      senior financial officers. These codes of ethics are posted on the Company’s
      website at www.ntst.com in the Investor Relations section. Any amendment of
      the
      codes of ethics or waiver thereof applicable to any director or executive
      officer of the Company, including the Chief Executive Officer or any senior
      financial officer, will be disclosed on the Company’s website within four
      business days of the date of such amendment or waiver. In the case of a waiver,
      the nature of the waiver, the name of the person to whom the waiver was granted
      and the date of the waiver will also be disclosed. A copy of the codes of ethics
      may also be obtained without charge by writing to Mr. Anthony F. Grisanti,
      Chief
      Financial Officer, Netsmart Technologies, Inc, 3500 Sunrise Highway, Great
      River, NY 11739.





**Item
              11.**
            **Executive
                Compensation.**





Set
      forth
      below is information with respect to compensation paid or accrued by us for
      the
      three years ended December 31, 2005, 2004 and 2003 to our chief executive
      officer and to each of our other officers whose salary and bonus for 2005
      exceeded $100,000.


37


**S** **ummary** **C** **ompensation** **T** **able**


Annual
              Compensation
            
            Long-Term
                Compensation (Awards)Name
                and Principal Position
            
            Year
            
            Salary
            
            Bonus
            
            Options,
                SARs
              (Number)James
                L. Conway, CEO
            
            
            2005
              2004
              2003
            
            $
            313,390
              218,698
              207,814
            
            $
            75,000
              175,000
              188,000
            
            
            100,000
              42,500
              49,500Gerald
                O. Koop, president(a) (b)
            
            
            2005
              2004
              2003
            
            
            201,938
              194,665
              189,880
            
            
            91,932
              174,078
              206,539
            
            
            25,000
              40,000
              49,500Anthony
                F. Grisanti, chief financial officer
            
            
            2005
              2004
              2003
            
            
            204,432
              167,535
              162,343
            
            
            60,000
              125,000
              144,000
            
            
            45,000
              27,500
              27,500





(a)
      Mr.
      Koop resigned as president on December 31, 2005.





(b)
      The
      bonuses for Mr. Koop include accrued commissions of $73,932 for 2005, $111,578
      for 2004 and $135,539 for 2003. The 2005 commissions will be paid in
      installments through 2006, the 2004 and 2003 commissions were paid in
      installments through 2005 and 2004.





**Employment
      Agreements**





In
      April
      2004, we entered into revised employment agreements with Messrs. James L. Conway
      and Anthony F. Grisanti. The terms and conditions of the revised contracts
      are
      identical in all material respects to the previous contracts except that (i)
      the
      term of each individual’s contract was extended by one year, so that Messrs.
      Conway and Grisanti’s contract will expire on December 31, 2006 and (ii) the
      revised contracts do not provide for a five-year consulting period following
      each individual’s respective term of employment during which such individual
      would have been entitled to compensation of $75,000 per year. Messrs. Conway
      and
      Grisanti’s contracts also provide for an option to extend their contracts for
      one additional year so that upon the exercise of such option, their contracts
      would expire on December 31, 2007. We believe that these officers are vital
      to
      our business. Mr. Koop was party to a revised employment agreement that was
      identical to the agreements with Messrs. Conway and Grisanti except as to the
      expiration date, which was December 31, 2005.





The
      agreements provide for annual increases associated with cost of living indexes
      or 5%, whichever is greater. The agreements provide that the executives are
      eligible to participate in a bonus pool to be determined annually by the board,
      based on the executive’s performance. The agreements also provide each of these
      officers with an automobile allowance, which is included under “Salary”, and
      insurance benefits. In the event of the officer’s dismissal or resignation or a
      material change in his duties or in the event of a termination of employment
      by
      the executive or by us as a result of a change of control, the officer may
      receive severance payments of 36 months’ compensation.





Effective
      April 1, 2004, we adopted an Executive Retirement, Non-Competition and
      Consulting Plan which was subsequently amended August 5, 2004 effective April
      1,
      2004, pursuant to which, following their retirement, selected officers will
      be
      entitled to receive a minimum payment of approximately $85,000 per year for
      a
      period of six years, provided, that such officers (i) provide a minimum amount
      of consulting days each month and (ii) agree to certain covenants not to
      compete. The annual payments are subject to 10% increases up to a maximum of
      $136,893 per year. Pursuant to the Executive Retirement, Non-Competition and
      Consulting Plan, the selected officers are also entitled to receive health
      benefits for life, provided that there are no breaches of the covenants not
      to
      compete. Each of Messrs. Conway and Grisanti are entitled to receive benefits
      under the plan.





38


Mr.
      Koop’s employment contract expired on December 31, 2005 and he resigned as
      president on that date. Mr. Koop continues to serve as an employee but is no
      longer an executive officer.





Compensation
      Committee Interlocks and Insider Participation





During
      fiscal 2005, our compensation committee consisted of Messrs. Calcagno, Gallagher
      and Sicinski. None of them were our officers or employees during fiscal 2005
      or
      were previously an officer of ours nor did any of them have any relationship
      with us that is required to be disclosed under this heading.


39





**Option
      Exercises and Outstanding Options**





The
      following table sets forth information concerning the grants of options made
      during the year ended December 31, 2005.





**Options
                Grants in Last Fiscal Year****Potential
                Realized Value at Assumed Annual Rates of Stock Price Appreciation
                for
                Option Term (3)**Number
                of Securities Underlying Options Granted
            
            %
                of Total Options Granted to Employees in 2005 (1)
            
            Exercise
                or Base Price $/Sh (2)
            
            Expiration
                Date
            
            5%
                ($)
            
            10%
                ($)Gerald
                Koop
            
            
            25,000
            
            
            5.7
            %
            
            $
            9.85
            
            
            7/13/10
            
            $
            83,749
            
            $
            189,997$
            -
            
            $
            -25,000
            
            
            5.7
            %
            
            
            
            
            
            
            
            $
            83,749
            
            $
            189,997Yacov
                Shamash
            
            
            3,927
            
            
            .9
            %
            
            $
            9.85
            
            
            7/13/10
            
            $
            13,155
            
            $
            29,845Yacov
                Shamash
            
            
            2,073
            
            
            .5
            %
            
            $
            9.57
            
            
            4/1/10
            
            $
            6,747
            
            $
            15,3076,000
            
            
            1.4
            %
            
            
            
            
            
            
            
            $
            19,902
            
            $
            45,151Anthony
                Grisanti
            
            
            45,000
            
            
            10.3
            %
            
            $
            9.85
            
            
            7/13/10
            
            $
            150,747
            
            $
            341,994$
            -
            
            $
            -45,000
            
            
            10.3
            %
            
            
            
            
            
            
            
            $
            150,747
            
            $
            341,994James
                Conway
            
            
            100,000
            
            
            22.8
            %
            
            $
            9.85
            
            
            7/13/10
            
            $
            334,994
            
            $
            759,988$
            -
            
            $
            -100,000
            
            
            22.8
            %
            
            
            
            
            
            
            
            $
            334,994
            
            $
            759,988Joseph
                Sicinski
            
            
            3,927
            
            
            .9
            %
            
            $
            9.85
            
            
            7/13/10
            
            $
            13,155
            
            $
            29,845Joseph
                Sicinski
            
            
            2,073
            
            
            .5
            %
            
            $
            9.57
            
            
            4/1/10
            
            $
            6,747
            
            $
            15,3076,000
            
            
            1.4
            %
            
            
            
            
            
            
            
            $
            19,902
            
            $
            45,151Frank
                Calcagno
            
            
            3,927
            
            
            .9
            %
            
            $
            9.85
            
            
            7/13/10
            
            $
            13,155
            
            $
            29,845Frank
                Calcagno
            
            
            2,073
            
            
            .5
            %
            
            $
            9.57
            
            
            4/1/10
            
            $
            6,747
            
            $
            15,3076,000
            
            
            1.4
            %
            
            
            
            
            
            
            
            $
            19,902
            
            $
            45,151Jack
                Gallagher
            
            
            5,427
            
            
            1.2
            %
            
            $
            9.85
            
            
            7/13/10
            
            $
            18,180
            
            $
            41,245Jack
                Gallagher
            
            
            2,073
            
            
            0.5
            %
            
            $
            9.57
            
            
            4/1/10
            
            $
            16,747
            
            $
            15,3077,500
            
            
            1.7
            %
            
            
            
            
            
            
            
            $
            24,927
            
            $
            56,551




(1)
        Based
        on a total of 438,292 shares subject to options granted to employees under
        Netsmart's options plans in 2005.


(2)
        Under
        all stock option plans, the option purchase price is equal to the fair market
        value at the date of grant. Options were
        granted to executives on April 1, 2005 and July 14, 2005.
 (3)
        In
        accordance with the U.S. Securities and Exchange Commission rules, these
        columns
        show gains that could
        accrue for the respective options, assuming that the market price of Netsmart
        common stock appreciatesfrom
        the
        date of grant over a period of 6 years at an annualized rate of 5% and 10%,
        respectively. If the stockprice
        does not increase above the exercise price at the time of exercise, realized
        value to the named executive from
        these options would be zero.





40


The
      following table sets forth information concerning the exercise of options during
      the year ended December 31, 2005 and the year-end value of options held by
      our
      officers named in the Summary Compensation Table. No stock appreciation rights
      have been granted.





**Aggregate
      Option Exercises in Last Fiscal Year and Fiscal Year-End Option
      Value**


(Includes
      options that were fully exercisable at year end or by 60 days after the
      date


as
      of
      which the information is provided)





Number
              of Securities Underlying Unexercised Options
              At Fiscal Year-End
              (#)
            
            Value
              of Unexercised In-the-Money Options At
              FiscalYear-End ($)Name
            
            Shares
                Acquired
              Upon
                Exercise
            
            Value
              Realized
              ($)
            
            Exercisable/
              Unexercisable
            
            Exercisable/
              UnexercisableJames
                L. Conway
            
            
            24,750
            
            $
            242,075
            
            
            142,500/--
            
            $
            451,000/--Gerald
                O. Koop
            
            
            24,750
            
            $
            242,075
            
            
            65,000/--
            
            $
            233,800/--Anthony
                F. Grisanti
            
            
            34,750
            
            $
            422,988
            
            
            100,000/--
            
            $
            454,300/--





The
      determination of “in the money” options at December 31, 2005, is based on the
      closing price of the common stock on the Nasdaq SmallCap Market on December
      31,
      2005, which was $12.61 per share.





Information
      relating to securities issued under equity compensation plans is disclosed
      in
      response to “Item 12. Security Ownership of Certain Benefical Owners and
      Management and Related Stockholder Matters.”


41


**Item
              12.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters.**





Set
      forth
      below is information as of February 23, 2006, as to each person known by us,
      based on information provided to us by the persons named below and filings
      with
      the Securities and Exchange Commission, to own beneficially at least 5% of
      our
      common stock, each director, each officer listed in the Summary Compensation
      Table and all officers and directors as a group.





Name
                and Address
            
            Shares
            
            Percent
                of Outstanding Common StockJames
                L. Conway
            
            
            248,848
            
            
            3.7
            %John
                F. Phillips
            
            
            109,825
            
            
            1.7
            %Gerald
                O. Koop
            
            
            204,883
            
            
            3.1
            %Anthony
                F. Grisanti
            
            
            204,815
            
            
            3.1
            %Joseph
                G. Sicinski
            
            
            37,000
            
            
            *Francis
                J. Calcagno
            
            
            22,000
            
            
            *John
                S.T. Gallagher
            
            
            30,000
            
            
            *Yacov
                Shamash
            
            
            12,000
            
            
            *All
                directors and officers as a group (eight individuals)
            
            
            869,371
            
            
            12.6
            %Eagle
                Asset Management
              880
                Carillon Parkway
              St.
                Petersburg, FL
            
            
            656,734
            
            
            10.1
            %Dawson
                Herman
              354
                Pequot Avenue
              Southport,
                CT
            
            
            743,150
            
            
            11.4
            %Daniel
                Zeff
              50
                California St.
              San
                Francisco, CA.
            
            
            330,870
            
            
            5.1
            %FMR
                Corp.
              82
                Devonshire St.
              Boston,
                MA
            
            
            449,985
            
            
            6.9
            %Mosaix
                Ventures L.P.
              1822
                North Mohawk
              Chicago,
                IL
            
            
            612,055
            
            
            9.3
            %John
                A. Paton
              P.O.
                Box 729
              Dublin,
                OH
            
            
            347,192
            
            
            5.3
            %





*  Less
      than
      1%.





Except
      as
      set forth in the following paragraphs, each person has the sole voting and
      sole
      investment power and direct beneficial ownership of the shares. Each person
      is
      deemed to beneficially own shares of common stock issuable upon exercise of
      options or warrants which are exercisable on or within 60 days after the date
      as
      of which the information is provided.





Except
      as
      otherwise noted above, the address of each person listed is c/o Netsmart
      Technologies, Inc., 3500 Sunrise Highway, Great River, NY 11739.


42


The
      number of shares owned by our directors and officers shown in the table above
      includes shares of common stock which are issuable upon exercise of options
      that
      are exercisable at February 2, 2006 or will become exercisable within 60 days
      after that date. Set forth below is the number of shares issuable upon exercise
      of those options for each of such directors and the officers.





Name
            
            NumberJohn
                F. Phillips
            
            
            15,000Yacov
                Shamash
            
            
            12,000Gerald
                O. Koop
            
            
            65,000James
                L. Conway
            
            
            142,500Anthony
                F. Grisanti
            
            
            100,000Joseph
                G. Sicinski
            
            
            12,000Francis
                J. Calcagno
            
            
            22,000John
                S.T. Gallagher
            
            
            20,000All
                officers and directors as a group
            
            
            388,500





**Equity
      Compensation Plan Information**





The
      following table sets forth information relating to our compensation plans as
      of
      December 31, 2005.




Plan
                Category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            
            Weighted-average
                exercise price of outstanding options, warrants and rights
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))(a)
            
            (b)
            
            (c)Equity
                compensation plans approved by security holders
            
            
            915,467
            
            $
            8.561
            
            
            10,503Equity
                compensation plans not approved by security holders
            
            
            30,0001
            
            $
            14.77
            
            
            --Total
            
            
            945,467
            
            $
            8.758
            
            
            10,503





1 Options
      to acquire 30,000 shares were granted to certain former employees of
      Netsmart-Ohio to induce them to remain in our employ. The options have a
      ten-year term, an exercise price of $14.77 per share and become exercisable
      over
      a period of three years.





**Item
              13.**
            **Certain
                Relationships and Related
                Transactions.**





Effective
      April 1, 2004, we adopted an Executive Retirement, Non-Competition and
      Consulting Plan which was subsequently amended August 5, 2004 effective April
      1,
      2004, pursuant to which, following their retirement, selected officers will
      be
      entitled to receive a minimum payment of approximately $85,000 per year for
      a
      period of six years, provided, that such officers (i) provide a minimum amount
      of consulting days each month and (ii) agree to certain covenants not to
      compete. The annual payments are subject to 10% increases up to a maximum of
      $136,893 per year. Pursuant to the Executive Retirement, Non-Competition and
      Consulting Plan, the selected officers are also entitled to receive health
      benefits for life, provided that there are no breaches of the covenants not
      to
      compete. Each of Messrs. Conway, and Grisanti are entitled to receive benefits
      under the plan.




43


Mr.
      Koop’s employment contract expired on December 31, 2005 and he retired as
      President as of that date. He is still employed by Netsmart but not as an
      executive officer. Upon his retirement as an employee, pursuant to the terms
      of
      our Executive Retirement, Non-Competition and Consulting Plan, Mr. Koop will
      receive $85,000 per year for each of the six years following his retirement;
      provided, that he complies with the non-competition covenants of the
      plan.





Netsmart
      was a party to an employment agreement with John Phillips, a former Vice
      President who currently serves as a director of Netsmart. Mr. Phillip’s
      employment contract expired on December 31, 2003 and he retired effective April
      1, 2004. Pursuant to the terms of Netsmart’s Executive Retirement,
      Non-Competition and Consulting Plan, Mr. Phillips will receive $85,000 per
      year
      for each of the next six years; provided that he complies with the
      non-competition covenants of the plan.





As
      a
      result of the CMHC acquisition, we are leasing a building in which the
      operations of CMHC are housed. This building is owned by a limited partnership
      in which John Paton, former primary shareholder of CMHC, is sole owner. Paton
      currently holds 5.3% of the outstanding shares of Netsmart. He currently has
      a
      fifteen month consulting agreement with Netsmart and does not hold an officer
      position nor is he a director of the company. Netsmart does not guarantee any
      payments on the mortgage that exists related to this property.





**Item
              14.**
            **Principal
                Accounting Fees and
                Services.**





**Audit
      Fees**





We
      were
      billed by Marcum & Kliegman LLP the aggregate amount of approximately
      $337,000 in respect of fiscal 2005 and $151,000 in respect of fiscal 2004 for
      fees for professional services rendered for the audit of our annual financial
      statements and review of our financial statements included in our Forms
      10-Q.





**Audit-Related
      Fees**





We
      were
      billed by Marcum & Kliegman LLP in fiscal 2005 and 2004 in the amounts of
      $99,200 and $13,241, respectively for assurance and related services such as
      fees for our 401K audit and acquisition services, that were reasonably related
      to the performance of the audit or review of our financial statements that
      are
      not reported under the preceding paragraph. Including,
      services rendered in connection with acquisitions, reviews of registration
      statements and issuances of related consents, audits of employees benefit plans
      and advice regarding common stock purchase warrants and Sox 404 related
      efforts.





**Tax
      Fees**





We
      were
      billed by Marcum & Kliegman LLP the aggregate amount of $72,050 in respect
      of fiscal 2005 and $25,600 in respect of fiscal 2004 for fees for services
      consisting primarily of tax compliance, tax advice or tax planning in respect
      of
      the preparation of our federal and state tax returns.





**All
      Other Fees**





Marcum
      & Kliegman did not render any other services during fiscal 2005 and fiscal
      2004 that are not described in the preceding paragraphs.





**Auditor
      Independence**





Our
      Audit
      Committee has determined that the provision of services by Marcum & Kliegman
      LLP other than for audit related services is compatible with maintaining the
      independence of Marcum & Kliegman as our independent accountants.





44


**Pre-Approval
      Policies**





Our
      Audit
      Committee has pre-approved the provision by Marcum & Kliegman LLP of audit
      services and of non-prohibited audit related services for fees in an amount
      not
      to exceed an aggregate of $10,000 as well as $25,000 for acquisition due
      diligence services. Our Audit Committee has not otherwise adopted any blanket
      pre-approval policies.





Our
      Audit
      Committee approved all of the services provided by Marcum & Kliegman LLP and
      described in the preceding paragraphs.





**Part
      IV**





**Item
              15.**
            **Exhibits,
                Financial Statements Schedules and Reports on Form
                8-K.**





1.
            Financial
                Statements


Report
      of
      Marcum & Kliegman LLP


Consolidated
      Balance Sheets as of December 31, 2004 and 2003


Consolidated
      Statements of Income for the Years Ended December 31, 2004, 2003 and 2002


Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2004, 2003
      and
      2002


Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002


Notes
      to
      Consolidated Financial Statements





2.
            Financial
                Statement Schedules


None





3.
            Exhibits


3.1
            Restated
                Certificate of Incorporation, as amended (Filed as an exhibit to
                the
                Registrant’s registration statement on Form S-1, File No. 333-2550, which
                was declared effective by the Commission on August 13, 1996, and
                incorporated herein by reference.)


3.2
            By-Laws
                (Filed as an exhibit to the Registrant’s registration statement on Form
                S-1, File No. 333-2550, which was declared effective by the Commission
                on
                August 13, 1996, and incorporated herein by
                reference.)


10.1
            Employment
                Agreement dated April 1, 2004, between the Registrant and James L.
                Conway
                (Filed as an exhibit to the Registrant’s 10-Q dated May 5,
                2004.)


10.2
            Consulting
                Agreement dated April 1, 2004, between the Registrant and John F.
                Phillips
                (Filed as an exhibit to the Registrant’s 10-Q dated May 5,
                2004.)


10.3
            Employment
                Agreement dated April 1, 2004, between the Registrant and Gerald
                O. Koop
                (Filed as an exhibit to the Registrant’s 10-Q dated May 5,
                2004.)


10.4
            Employment
                Agreement dated April 1, 2004, between the Registrant and Anthony
                F.
                Grisanti (Filed as an exhibit to the Registrant’s 10-Q dated May 5,
                2004.)


10.6
            1993
                Long-Term Incentive Plan (Filed as an exhibit to the Registrant’s
                registration statement on Form S-1, File No. 333-2550, which was
                declared
                effective by the Commission on August 13, 1996, and incorporated
                herein by
                reference.)


10.7
            1998
                Long-Term Incentive Plan (Filed as an appendix to the Registrant’s proxy
                statement dated September 30, 1999, relating to its 1999 Annual Meeting
                of
                Stockholders and incorporated herein by
                reference.)


10.8
            1999
                Long-Term Incentive Plan (Filed as an appendix to the Registrant’s proxy
                statement dated November 9, 2000, relating to its 2000 Annual Meeting
                of
                Stockholders and incorporated herein by
                reference.)


10.9
            2001
                Long-Term Incentive Plan - Amended (Filed as an exhibit to the
                Registrant’s 8-K dated June 16,
                2005.)


10.10
            1999
                Employee Stock Purchase Plan (Filed as an appendix to the Registrant’s
                proxy statement dated November 9, 2000, relating to its 2000 Annual
                Meeting of Stockholders and incorporated herein by
                reference.)


10.11
            Agreement
                dated June 1, 2001, between the Registrant and Fleet Bank (Filed
                as an
                exhibit to the Registrant’s 10-K/A dated August 21,
                2003.)




45


10.12
            AIMS
                Acquisition Agreement (Filed as an exhibit to the Registrant’s 8-K dated
                May 10, 2001.)


10.13
            Agreement
                dated June 25, 2003, among Registrant, Creative Socio-Medics Corp.,
                Shuttle Data Systems Corp., d/b/a/ ADIA Information Management Corp.
                and
                Steven Heintz, Jr. (Filed as an exhibit to the Registrant’s 8-K dated July
                8, 2003.)


10.14
            Lease
                agreement dated as of December 22, 2003, between Registrant and Spacely
                LLC. (Filed as an exhibit to the Registrant’s 10-K dated March 23,
                2004.)


10.15
            Amended
                Executive Retirement, Non Competition and Consulting Plan. (Filed
                as an
                exhibit to the Registrant’s 10-Q dated August 9,
                2004.)


10.16
            Merger
                Agreement dated September 20, 2005, between CMHC Systems, Inc., Hayes
                Acquisition Corp., a newly-formed wholly-owned subsidiary of the
                Registrant, and John Paton, solely in the capacity of Securities
                Holders
                Representative. (Filed as an exhibit to the Registrant’s Form 8-K dated
                September 19, 2005.)


10.17
            Revolving
                Credit and Term Loan Agreement with Netsmart Technologies, Inc. and
                the
                Bank of America, N.A. (Filed as an exhibit to the Registrant’s Form 8-K
                dated October 7, 2005.)


10.18
            Asset
                Purchase Agreement dated June 17, 2005 between Addiction Management
                Systems, Inc. and Creative Socio-Medics Corp. (Filed as an exhibit
                to the
                Registrant’s Form 8-K dated June 21,
                2005.)


10.20
            Amendment
                No. 1 to Employment Agreement dated June 16, 2005, between the Registrant
                and James L. Conway. (Filed as an exhibit to the Registrant’s Form 8-K
                dated June 16, 2005.)


10.21
            Amendment
                No. 1 to Employment Agreement dated June 16, 2005 between the Registrant
                and Anthony F. Grisanti. (Filed as an exhibit to the Registrant’s Form 8-K
                dated June 16, 2005.)


10.22
            Asset
                Purchase Agreement dated April 27, 2005 between ContinuedLearning
                LLC and
                Creative Socio-Medics Corp. (Filed as an exhibit to the Registrant’s Form
                8-K dated April 27, 2005.)


10.23
            Employment
                Agreement dated April 27, 2005 between Netsmart Technologies, Inc.
                and A.
                Sheree Graves. (Filed as an exhibit to the Registrant’s Form 8-K dated
                April 27, 2005.)


10.24
            Letter
                Agreement between Griffin Securities, Inc. and Netsmart Technologies,
                Inc.
                dated as of August 9, 2005. (Filed as an exhibit to the Registrant’s Form
                S-3, File No. 333-129265.)


10.25
            Letter
                Agreement between Griffin Securities, Inc. and Netsmart Technologies,
                Inc.
                dated as of October 11, 2005. (Filed as an exhibit to the Registrant’s
                Form S-3, File No. 333-129265.)


21.1
            Subsidiaries
                of the Registrant


23.1
            Consent
                of Marcum & Kliegman LLP


24
            Powers
                of Attorney (See Signature Page)


31.1
            Certification
                of Chief Executive Officer


31.2
            Certification
                of Chief Financial Officer


32
            Certification
                pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002





46
















**NETSMART
      TECHNOLOGIES, INC.**


**AND
      SUBSIDIARIES**





F-1




**NETSMART
      TECHNOLOGIES, INC.**  **AND
      SUBSIDIARIES**





**INDEX**







**Page
                  to Page**Report
                  of Independent Registered Public Accounting Firm
              F-3Consolidated
                  Balance Sheets
              F-4
                  ........F-5Consolidated
                  Statements of Income
              F-6
                  ........F-7Consolidated
                  Statements of Stockholders' Equity
              F-8Consolidated
                  Statements of Cash Flows
              F-9
                  ........F-11Notes
                  to Consolidated Financial Statements
              F-12
                  .......F-41





**.
      . . . . . . . . . .**




F-2


REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Audit Committee of the


Board
      of
      Directors and Stockholders


of
      Netsmart Technologies, Inc.





We
      have
      audited the accompanying consolidated balance sheets of Netsmart Technologies,
      Inc. and Subsidiaries as of December 31, 2005 and 2004, and the related
      consolidated statements of income, stockholders’ equity and cash flows for each
      of the three years in the period ended December 31, 2005. 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 the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, 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 consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Netsmart
      Technologies, Inc. and Subsidiaries at December 31, 2005 and 2004, and the
      consolidated results of its operations and its cash flows for each of the three
      years in the period ended December 31, 2005, in conformity with generally
      accepted accounting principles (United States).





/s/
      Marcum & Kliegman llp





Marcum
      & Kliegman LLP


Melville,
      New York


February
      10, 2006





F-3


**NETSMART
      TECHNOLOGIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





**December
                  31,****2005**
              
              **2004*****Assets*****:****Current
                  Assets:**Cash
                  and Cash Equivalents
              
              $
              11,445,525
              
              $
              16,411,735Accounts
                  Receivable - Net
              
              
              11,524,811
              
              
              11,714,691Costs
                  and Estimated Profits in Excessof
                  Interim Billings
              
              
              1,811,986
              
              
              636,985Deferred
                  taxes
              
              
              1,594,863
              
              
              1,111,000Other
                  Current Assets
              
              
              1,466,577
              
              
              596,253**Total
                  Current Assets**
              
              
              27,843,762
              
              
              30,470,664**Property
                  and Equipment - Net**
              
              
              2,665,429
              
              
              2,546,948**Other
                  Assets:**Goodwill
              
              
              18,735,751
              
              
              --Capitalized
                  Software Costs - Net
              
              
              6,534,551
              
              
              1,132,453Customer
                  Lists - Net
              
              
              8,110,864
              
              
              2,179,237Deferred
                  Taxes
              
              
              --
              
              
              1,284,000Contract
                  Backlog - Net
              
              
              379,500
              
              
              --Other
                  Assets
              
              
              351,997
              
              
              93,599**Total
                  Other Assets**
              
              
              34,112,663
              
              
              4,689,289**Total
                  Assets**
              
              $
              64,621,854
              
              $
              37,706,901





See
      Notes
      to Consolidated Financial Statements.


F-4


**NETSMART
      TECHNOLOGIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





**December
                  31,****2005**
              
              **2004*****Liabilities
                  and Stockholders’ Equity:*****Current
                  Liabilities:**Current
                  Portion - Long Term Debt
              
              $
              833,369
              
              $
              666,667Current
                  Portion Capital Lease Obligations
              
              
              61,315
              
              
              64,450Accounts
                  Payable
              
              
              2,013,968
              
              
              1,572,930Accrued
                  Expenses
              
              
              2,916,021
              
              
              1,545,127Interim
                  Billings in Excess of Costs and EstimatedProfits
              
              
              7,938,422
              
              
              7,497,773Deferred
                  Revenue
              
              
              10,037,813
              
              
              907,630**Total
                  Current Liabilities**
              
              
              23,800,908
              
              
              12,254,577Long
                  Term Debt - Less current portion
              
              
              1,916,667
              
              
              333,361Capital
                  Lease Obligations - Less current portion
              
              
              9,521
              
              
              21,532Interest
                  Rate Swaps at Fair Value
              
              
              7,812
              
              
              15,152Deferred
                  Tax Liability
              
              
              2,118,603
              
              
              --Deferred
                  Rent Payable
              
              
              482,048
              
              
              455,427**Total
                  Non Current Liabilities**
              
              
              4,534,651
              
              
              825,472**Commitments
                  and Contingencies****Stockholders’
                  Equity:**Preferred
                  Stock - $.01 Par Value, 3,000,000Shares
                  Authorized; None issued and outstanding
              
              
              --
              
              
              --Common
                  Stock - $.01 Par Value; Authorized15,000,000
                  Shares; Issued and outstanding6,719,517
                  and 6,487,943 shares at December 31, 2005,5,567,124
                  and 5,339,200 shares at December 31, 2004
              
              
              67,195
              
              
              55,671Additional
                  Paid-in Capital
              
              
              39,997,558
              
              
              29,893,223Accumulated
                  Comprehensive loss - Interest Rate Swaps
              
              
              (7,812
              )
              
              (15,152
              )Accumulated
                  Deficit
              
              
              (2,004,132
              )
              
              (3,593,908
              )38,052,809
              
              
              26,339,834Less:
                  cost of shares of Common Stock heldin
                  treasury - 231,574 shares at December 31, 2005and
                  227,924 shares at December 31, 2004
              
              
              1,766,514
              
              
              1,712,982**Total
                  Stockholders’ Equity**
              
              
              36,286,295
              
              
              24,626,852Total
                  Liabilities and Stockholders’ Equity
              
              $
              64,621,854
              
              $
              37,706,901




See
      Notes
      to Consolidated Financial Statements.


F-5


**NETSMART
      TECHNOLOGIES, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF INCOME**





**Year
                  ended December **31,******2005**
              
              **2004**
              
              **2003**


**Revenues:**Software
                  and RelatedSystems
                  and Services:Turnkey
                  Systems
              
              $
              20,326,805
              
              $
              16,931,606
              
              $
              17,541,356Maintenance
                  Contract Services
              
              
              13,317,744
              
              
              8,289,525
              
              
              7,069,000Application
                  Service Provider Services
              
              
              2,538,457
              
              
              1,725,473
              
              
              591,202Data
                  Center Services
              
              
              1,795,448
              
              
              2,058,240
              
              
              1,973,492**Total
                  Revenues**
              
              
              37,978,454
              
              
              29,004,844
              
              
              27,175,050**Cost
                  of Revenues:**Software
                  and RelatedSystems
                  and Services:Turnkey
                  Systems
              
              
              11,682,754
              
              
              9,203,071
              
              
              9,250,378Maintenance
                  Contract Services
              
              
              5,421,575
              
              
              4,168,975
              
              
              3,406,183Application
                  Service Provider Services
              
              
              1,611,026
              
              
              926,333
              
              
              377,305Data
                  Center Services
              
              
              887,169
              
              
              849,353
              
              
              1,034,382**Total
                  Cost of Revenues**
              
              
              19,602,524
              
              
              15,147,732
              
              
              14,068,248**Gross
                  Profit**
              
              
              18,375,930
              
              
              13,857,112
              
              
              13,106,802**Selling,
                  General and****Administrative
                  Expenses**
              
              
              11,272,446
              
              
              7,293,865
              
              
              7,968,892**Research,
                  Development and Maintenance**
              
              
              4,547,114
              
              
              3,498,448
              
              
              2,769,811**Total**
              
              
              15,819,560
              
              
              10,792,313
              
              
              10,738,703**Operating
                  Income**
              
              
              2,556,370
              
              
              3,064,799
              
              
              2,368,099**Interest
                  and Other Income**
              
              
              311,496
              
              
              126,379
              
              
              73,800**Interest
                  and Other Expense**
              
              
              (119,090
              )
              
              (129,213
              )
              
              (199,573
              )**Income
                  before Income Tax (Benefit)**
              
              
              2,748,776
              
              
              3,061,965
              
              
              2,242,326**Income
                  Tax (Benefit)**
              
              
              1,159,000
              
              
              309,000
              
              
              (786,575
              )**Net
                  Income**
              
              $
              1,589,776
              
              $
              2,752,965
              
              $
              3,028,901





See
      Notes
      to Consolidated Financial Statements.


F-6


**NETSMART
      TECHNOLOGIES, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF INCOME**





**Year
                  ended December****31,****2005**
              
              **2004**
              
              **2003****Earnings
                  Per Share (“EPS”) of Common Stock****Basic
                  EPS**
              
              $
              .28
              
              $
              .52
              
              $
              .69**Weighted
                  Average Number of Shares of****Common
                  Stock Outstanding**
              
              
              5,684,191
              
              
              5,331,700
              
              
              4,418,364**Diluted
                  EPS**
              
              $
              .27
              
              $
              .50
              
              $
              .64**Weighted
                  Average Number of Shares of****Common
                  Stock and Common Stock****Equivalents
                  Outstanding**
              
              
              5,935,405
              
              
              5,536,731
              
              
              4,752,068





See
      Notes
      to Consolidated Financial Statements.





F-7


**NETSMART
      TECHNOLOGIES, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**







**Accumulated****Comprehensive****Additional**
              
              
              
              
              
              **Loss**
              
              
              
              
              
              
              
              **Total****Common
                  Stock**
              
              **Paid-in**
              
              **Unearned**
              
              **Accumulated**
              
              **Interest
                  Rate**
              
              **Comprehensive**
              
              **Treasury**
              
              **Stockholders’****Shares**
              
              **Amount**
              
              **Capital**
              
              **Compensation**
              
              **Deficit**
              
              **Swap**
              
              **Income**
              
              **Shares**
              
              **Amount**
              
              **Equity****Balance
                  - January 1, 2003**
              
              
              4,046,430
              
              $
              40,464
              
              $
              21,411,777
              
              $
              (14,400
              )
              $
              (9,375,774
              )
              $
              (107,713
              )
              
              
              
              $
              89,797
              
              $
              (648,112
              )
              $
              11,306,242Common
                  Stock Issued - Exercise of Options
              
              
              668,197
              
              
              6,682
              
              
              1,793,574
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              133,961
              
              
              (1,011,337
              )
              
              788,919Common
                  Stock Issued - Exercise of Warrants
              
              
              713,620
              
              
              7,136
              
              
              5,712,972
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              5,720,108Common
                  Stock Issued - Acquisition
              
              
              100,000
              
              
              1,000
              
              
              527,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              528,000Cost
                  Related to Warrant Extension
              
              
              --
              
              
              --
              
              
              6,336
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              6,336Change
                  in Fair Value of Interest Rate Swap
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              48,645
              
              
              48,645
              
              
              --
              
              
              --
              
              
              48,645Amortization
                  of Warrants Issued for Services
              
              
              --
              
              
              --
              
              
              --
              
              
              14,400
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              14,400Dividends
              
              
              --
              
              
              --
              
              
              (441,447
              )
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (441,447
              )Net
                  Income
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              3,028,901
              
              
              --
              
              
              3,028,901
              
              
              --
              
              
              --
              
              
              3,028,901$
              3,077,546**Balance
                  - December 31, 2003**
              
              
              5,528,247
              
              
              55,282
              
              
              29,010,212
              
              
              --
              
              
              (6,346,873
              )
              
              (59,068
              )
              
              
              
              
              223,758
              
              
              (1,659,449
              )
              
              21,000,104Common
                  Stock Issued - Exercise of Options
              
              
              38,877
              
              
              389
              
              
              166,011
              
              
              --
              
              
              --
              
              
              --
              
              $
              --
              
              
              4,166
              
              
              (53,533
              )
              
              112,867Change
                  in Deferred Tax Asset ValuationAllowance
              
              
              --
              
              
              --
              
              
              717,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              717,000Change
                  in Fair Value of Interest Rate Swap
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              43,916
              
              
              43,916
              
              
              --
              
              
              --
              
              
              43,916Net
                  Income
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              2,752,965
              
              
              --
              
              
              2,752,965
              
              
              --
              
              
              --
              
              
              2,752,965$
              2,796,881**Balance
                  - December 31, 2004**
              
              
              5,567,124
              
              
              55,671
              
              
              29,893,223
              
              
              --
              
              
              (3,593,908
              )
              
              (15,152
              )
              
              
              
              
              227,924
              
              
              (1,712,982
              )
              
              24,626,852Common
                  Stock Issued - Exercise of Options
              
              
              206,658
              
              
              2,067
              
              
              852,173
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              3,650
              
              
              (53,532
              )
              
              800,708Common
                  Stock Issued - Private Placement
              
              
              490,000
              
              
              4,900
              
              
              4,488,204
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              4,493,104Cost
                  Related to Private Placement
              
              
              --
              
              
              --
              
              
              (377,976
              )
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (377,976
              )Common
                  Stock Issued - Acquisitions
              
              
              455,735
              
              
              4,557
              
              
              5,101,934
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              5,106,491Change
                  in Fair Value of Interest Rate Swaps
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              7,340
              
              
              7,340
              
              
              --
              
              
              --
              
              
              7,340Tax
                  Benefit from Exercise of Options
              
              
              --
              
              
              --
              
              
              40,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              40,000Net
                  Income
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              1,589,776
              
              
              --
              
              
              1,589,776
              
              
              --
              
              
              --
              
              
              1,589,776$
              1,589,776**Balance
                  - December 31, 2005**
              
              
              6,719,517
              
              $
              67,195
              
              $
              39,997,558
              
              $
              --
              
              $
              2,004,132
              
              $
              (7,812
              )
              
              
              
              
              231,574
              
              $
              (1,766,514
              )
              $
              36,286,295





See
      Notes
      to Consolidated Financial Statements.





F-8


**NETSMART
      TECHNOLOGIES, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003****Operating
                  Activities:**Net
                  Income
              
              $
              1,589,776
              
              $
              2,752,965
              
              $
              3,028,901Adjustments
                  to Reconcile Net Incometo
                  Net Cash Provided by Operating Activities:Depreciation
                  and Amortization
              
              
              2,451,456
              
              
              1,624,393
              
              
              1,233,592Costs
                  Related to Issuanceof
                  warrants and options
              
              
              --
              
              
              --
              
              
              20,736Provision
                  for Doubtful Accounts
              
              
              465,004
              
              
              (204,000
              )
              
              1,046,094Tax
                  Benefit from Exercise of Options
              
              
              40,000
              
              
              --
              
              
              --Deferred
                  Income Taxes
              
              
              805,431
              
              
              122,000
              
              
              (900,000
              )Loss
                  on Retirement of Property and Equipment
              
              
              --
              
              
              --
              
              
              18,632Changes
                  in Assets and Liabilities:[Increase]
                  Decrease in:Accounts
                  Receivable
              
              
              953,963
              
              
              (3,506,210
              )
              
              (1,991,720
              )Costs
                  and Estimated Profits inExcess
                  of Interim Billings
              
              
              (840,448
              )
              
              1,180,150
              
              
              2,040,387Other
                  Current Assets
              
              
              (686,023
              )
              
              (54,795
              )
              
              (344,881
              )Other
                  Assets
              
              
              (258,856
              )
              
              28,431
              
              
              69,389Increase
                  [Decrease] in:Accounts
                  Payable
              
              
              (3,274,348
              )
              
              243,165
              
              
              163,620Accrued
                  Expenses
              
              
              (681,174
              )
              
              (43,046
              )
              
              645,226Deferred
                  Rent Payable
              
              
              26,621
              
              
              455,427
              
              
              --Interim
                  Billings in Excess ofCosts
                  and Estimated Profits
              
              
              440,649
              
              
              234,488
              
              
              1,287,055Deferred
                  Revenue
              
              
              945,721
              
              
              (197,705
              )
              
              (223,784
              )Total
                  Adjustments
              
              
              387,996
              
              
              (117,702
              )
              
              3,064,346**Net
                  Cash Provided by Operating Activities**
              
              
              1,977,772
              
              
              2,635,263
              
              
              6,093,247**Investing
                  Activities:**Acquisition
                  of Property andEquipment
              
              
              (458,092
              )
              
              (1,328,050
              )
              
              (1,633,226
              )Capitalized
                  Software Development
              
              
              (42,000
              )
              
              (185,000
              )
              
              (179,500
              )Business
                  Acquisitions - Net of $4,218,614of
                  Acquired Cash in 2005
              
              
              (12,554,994
              )
              
              (16,263
              )
              
              (1,047,845
              )**Net
                  Cash Used In Investing Activities**
              
              $
              (13,055,086
              )
              $
              (1,529,313
              )
              $
              (2,860,571
              )




See
      Notes
      to Consolidated Financial Statements.


F-9


**NETSMART
      TECHNOLOGIES, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003****Financing
                  Activities:**Payment
                  of Capitalized Lease Obligations
              
              $
              (60,327
              )
              $
              (61,416
              )
              $
              (47,678
              )Proceeds
                  from Term Loan
              
              
              2,500,000
              
              
              --
              
              
              --Repayment
                  of Promissory NoteAssumed
                  in Acquisition
              
              
              (494,413
              )Dividend
                  Paid
              
              
              --
              
              
              --
              
              
              (441,447
              )Net
                  Proceeds from Stock Options andWarrants
                  Exercised
              
              
              800,708
              
              
              112,867
              
              
              6,509,027Net
                  Proceeds from Private Placement
              
              
              4,115,128
              
              
              --
              
              
              --Payments
                  of Term Loans
              
              
              (749,992
              )
              
              (666,659
              )
              
              (583,325
              )**Net
                  Cash Provided by (Used in)****Financing
                  Activities**
              
              
              6,111,104
              
              
              (615,208
              )
              
              5,436,577**Net
                  (Decrease) Increase in Cash****and
                  Cash Equivalents**
              
              
              (4,966,210
              )
              
              490,742
              
              
              8,669,253**Cash
                  and Cash Equivalents -****Beginning
                  of Year**
              
              
              16,411,735
              
              
              15,920,993
              
              
              7,251,740**Cash
                  and Cash Equivalents -****End
                  of Year**
              
              $
              11,445,525
              
              $
              16,411,735
              
              $
              15,920,993**Supplemental
                  Disclosure of Cash Flow Information:**Cash
                  paid during the years for:Interest
              
              $
              107,810
              
              $
              132,635
              
              $
              159,940Income
                  Taxes
              
              $
              338,254
              
              $
              237,879
              
              $
              93,639





**Supplemental
      Disclosures of Non-Cash Investing and Financing
      Activities:**





Year
      Ended December 31, 2005:





The
      fair
      value of the interest rate swaps decreased by $7,340 for the year ended December
      31, 2005.





During
      2005, the Company acquired for $489,238 in cash and stock, the software,
      customer lists and other assets of ContinuedLearning LLC. The consideration
      consisted of $252,917 in cash plus 20,000 shares of common stock, valued at
      $191,400, based upon the average weighted stock price of $9.57 for the period
      commencing three days before and ending three days after the acquisition was
      agreed to and announced. The consideration also included the assumption of
      $44,921 for certain liabilities for services to be performed in the future.
      The
      agreement also included contingent consideration of $250,000 if certain revenue
      targets are met within one year of the closing of the acquisition, which closed
      on April 28, 2005. Based upon results thus far, the Company has provided for
      the
      full $250,000 of this contingent consideration and has adjusted the related
      balance sheet accounts accordingly. The $250,000 additional provision is
      included in accrued expenses.





F-10


During
      2005, the Company acquired for $3,610,682, the software, customer lists and
      other assets of Addiction Management Systems. The consideration consisted of
      $2,641,945 in cash plus legal fees of $19,904 and the assumption of $948,833
      for
      certain liabilities for services to be performed in the future.





During
      2005, the Company acquired 100% of the equity interest in CMHC Systems, Inc.
      (“CMHC”). The purchase price totaled approximately $19,565,956 as follows:
      435,735 shares of Netsmart’s common stock (valued at $4,915,091), $12,994,758 in
      cash plus additional cash consideration currently estimated at $792,024 required
      by the “working capital adjustment”, calculated and payable in accordance with
      the merger agreement, and acquisition costs of $864,083. The value of the
      435,735 shares of common stock was based upon the average weighted stock price
      of $11.28 for the period commencing three days before and ending three days
      after the acquisition was agreed to and announced.





During
      2005, the Company received 3,650 shares of its common stock as consideration
      for
      the exercise of certain stock options. The value of the shares received was
      $53,533, which was the market value of the common stock on the date of
      exercise.





Year
      Ended December 31, 2004:





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





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





The
      fair
      value of the interest rate swap decreased by $43,916 for the year ended December
      31, 2004. At December 31, 2004, it is valued at $15,152.





Year
      ended December 31, 2003:





During
      2003, the Company acquired equipment in the amount of $183,326 in connection
      with a capital lease.





During
      2003, the Company received 133,961 shares of its common stock as consideration
      for the exercise of certain stock options. The value of the shares received
      was
      $1,011,337, which was the market value of the common stock on the dates of
      exercise.





During
      2003, the Company accrued $721,003 of fixed assets related to its new
      facility.





During
      2003, the Company issued 100,000 shares of its common stock in connection with
      the acquisition of CareNet. See Note 5. These shares were valued at $528,000,
      which was based upon the average stock price three days before and ending three
      days after the acquisition was agreed to and announced. The Company also issued
      a $500,000 three-year promissory note and assumed contract obligations and
      vacation liabilities totaling $68,068.





The
      fair
      value of the interest rate swap decreased by $48,645 for the year ended December
      31, 2003. At December 31, 2003, it is valued at $59,068.





See
      Notes
      to Consolidated Financial Statements





F-11


**NETSMART
      TECHNOLOGIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







***[1]
      The Company***





Netsmart
      Technologies, Inc. and subsidiaries (the “Company”) licenses, customizes and
      installs its proprietary software products, operates a service bureau (“Data
      Center Services”) and provides Application Service Provider (“ASP”) Services and
      enters into long term maintenance agreements with behavioral health and public
      health organizations, methadone clinics and other substance abuse facilities
      throughout the United States. The Company currently classifies it operations
      in
      four business segments: (1) Software and Related Systems and Services - NY
      (2)
      Software and Related Systems and Services - Ohio (3) Data Center Services and
      (4) Application Service Provider Services (“ASP”). Software and Related Systems
      and Services for both the NY and Ohio segments refer to the design,
      installation, implementation and maintenance of computer information systems
      that provide comprehensive healthcare information technology solutions including
      billing, patient tracking and scheduling for inpatient and out patient
      environments, as well as clinical documentation and medical record generation
      and management. Within these segments are large turnkey and small turnkey
      components. The large turnkey components consist mostly of the Avatar suite
      of
      products. When the Company is engaged in a fixed price arrangement, these
      installations will usually extend over a six-month to a multi-year time period;
      these installations are performed in the New York segment. The duration of
      the
      implementation is dependant on the size and complexity of the customer
      organization and the specifics of the implementation. The small turnkey
      components are usually completed within a six-month period. Small turnkey
      contracts performed in the New York segment are mostly related to the Avatar
      methadone related products. The small turnkey contracts in the Ohio segment
      are
      for system installations for behavioral healthcare information management
      software for mental health, substance abuse, and addiction services agencies,
      developmental disability centers and behavioral health-related managed care
      organizations. Revenue for these segments is recognized based on the nature
      of
      the product sold. See note 2.





The
      Data
      Center Services involve Company personnel performing data entry and data
      processing services for customers. ASP services involve the Company offering
      several of it software products on a virtual private network or internet
      delivery approach, thereby allowing its customers to utilize the Company’s
      products and pay on a monthly service basis.





***[2]
      Summary of Significant Accounting Policies***





***Principles
      of Consolidation -*** The
      Consolidated Financial Statements include Netsmart Technologies, Inc.
      (“Netsmart”), and its wholly-owned subsidiaries, Netsmart New York, Inc.,
      (“NTST-NY”) formerly Creative Socio-Medics Corp. (“CSM”) and Netsmart Ohio,
      Inc., (“NTST-Ohio”), formerly CMHC Systems, Inc. In addition, the results of
      operations from the CareNet acquisition is included from July 2003, the results
      of operations from the ContinuedLearning LLC (“CL”) acquisition is included from
      April 28, 2005, the results of operations from the Addictions Management
      Systems, Inc. (“AMS”) acquisition is included from June 20, 2005 and the results
      of operations of the NTST- Ohio acquisition is included from October 1, 2005
      (see note 5). All intercompany transactions are eliminated in
      consolidation.





***Estimates
      -*** The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenue and expenses during
      the


F-12
 
  **NETSMART
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**





***[2]
      Summary of Significant Accounting Policies -
      [Continued]***





reporting
      period. Critical estimates include management’s judgements associated with: the
      application of the percentage of completion method to the recognition of
      revenue, determination of an allowance for doubtful accounts receivable,
      deferred income tax valuation allowance, the application of purchase accounting
      to the Company’s acquisitions and the capitalization, impairment analysis,
      depreciation and amortization of certain long-term assets. 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 $8,218,000 and $1,053,000 at December 31, 2005 and 2004,
      respectively.





***Concentration
      of Credit Risk -*** The
      Company extends credit to customers which results in accounts receivable and
      costs and estimated profits in excess of interim billings arising from its
      normal business activities. The Company does not require collateral or other
      security to support financial instruments subject to credit risk. 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. If the financial condition of the
      Company’s customers were to deteriorate, resulting in an impairment of their
      ability to make payments, additional allowances might be required. In addition,
      since the Company evaluates each account and invoice on a case-by-case basis,
      the provision could vary from period to period.





The
      Company’s behavioral health information systems are marketed to specialized care
      facilities, many of which are operated by various state and local government
      entities and include entitlement programs. During the years ended December
      31,
      2005, 2004 and 2003, approximately 44%, 49% and 57% respectively, of the
      Company’s revenue were generated from contracts directly or indirectly with
      government agencies.





No
      one
      customer accounted for more than 10% of revenue for the years ended December
      31,
      2005 and 2004. During the year ended December 31, 2003, one customer accounted
      for approximately $2,861,000 or 10.5% of revenue.





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, 2005 and
      2004, cash and cash equivalent balances of $11.3 million and $16.3 million
      respectively, were held at a financial institution in excess of federally
      insured limits.





***Revenue
      Recognition -*** The
      Company presents its revenue in four different categories: Software and Related
      Systems and Services- Turnkey, Software and Related Systems and Services-
      Maintenance, ASP Services and Data Center Services, as follows:





Software
      and Related Systems and Services- Turnkey





The
      Company recognizes large turnkey revenue from long-term (six months or longer),
      fixed price contracts for financial statement purposes under the percentage
      of
      completion method when significant modification of the software package is
      required to meet the customer specifications. The percentage of completion
      method takes into account progress towards completion of a contract using time
      spent by technical personnel on a particular project as the measuring standard.
      Revisions in cost estimates and


F-13




**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





***[2]
      Summary of Significant Accounting Policies -
      [Continued]***





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.





The
      Company recognizes small turnkey revenue from short-term (less than six months),
      fixed price contracts for financial statement purposes under the completed
      contract method. Payments received in advance by customers are deferred until
      earned and represented as deferred revenue in the accompanying balance
      sheet.





The
      Company also enters into multiple element arrangements contracts which do not
      require significant customization and modification, in which it bundles a
      software license, one year’s maintenance and sometimes training. In accordance
      with Statement of Position 97-2 “Software Revenue Recognition”, as amended,
      revenue is allocated using the residual method. The Company sells both annual
      maintenance contracts and training separately, with long established pricing
      to
      its customers. Annual maintenance contracts are generally sold at a fee based
      upon a percentage of the underlying software license. The Company also sells
      training separately with established per diem rates for its trainers.
      Accordingly, the Company uses vendor specific objective evidence to ascertain
      the fair values of all undelivered elements in a multiple element arrangement.
      The residual amount is allocated to the software license. Each of these
      components is recognized when persuasive evidence of an arrangement exists,
      delivery has occurred, the fee is fixed and determinable and collectibility
      is
      probable.





The
      Company also derives revenue from the sale of third party hardware and software
      which is recognized based upon the terms of each contract. These sources of
      revenue, which do not require significant customization or modification, are
      recognized when persuasive evidence of an arrangement exists, delivery has
      occurred, the fee is fixed and determinable and collectibility is
      probable.





Software
      and Related Systems and Services- Maintenance




Maintenance
      contract revenue consists of services provided to customers for telephone help
      services, as well as maintaining and upgrading the software, including ongoing
      enhancements. The Company’s maintenance contracts may require it to make
      modifications to meet any new federal or state reporting requirements which
      become effective during the term of the maintenance contract. Maintenance
      contract revenue sold under separate contractual arrangements is recognized
      on a
      straight-line basis over the life of the respective contract.





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





ASP
      Services




ASP
      Services consist of the Company’s offering of its Avatar suite of products,
      including CareNet, Continued Learning and InfoScriber products, on a virtual
      private network or internet delivery approach. This service allows the Company’s
      customers to rapidly deploy its products and pay on a monthly service basis
      instead of making a capital intensive investment in the purchase of the system
      at their own facility. ASP Services contract revenue, sold under separate
      contractual arrangements, is recognized on a straight-line basis over the life
      of the respective contract.





F-14




**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
  ***[2]
        Summary of Significant Accounting Policies -
        [Continued]***





Data
      Center Services


Information
      processing revenue, which represents Data Center Services, is recognized in
      the
      period in which the service is provided. The Data Center provides software
      which
      performs clinical and billing services for outpatient facilities, including
      mental health, alcohol and substance abuse facilities. Data Center services
      include statistical reporting, data entry, electronic billing and submission.
      The Company bills its clients on a transaction basis or on a fixed monthly
      fee
      arrangement. Revenue is recognized as the services are performed.





***Property
      and Equipment and Depreciation and Amortization -*** Property
      and equipment is stated at cost less accumulated depreciation and amortization.
      Depreciation of property and equipment is computed using 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 are as follows:


Equipment
              3-7
                  YearsFurniture
                  and Fixtures
              5-10
                  YearsLeasehold
                  Improvements
              Life
                  of the Lease


***Capitalized
      Software 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 Company
      capitalizes only those costs directly attributable to the development of the
      software. The establishment of technological feasibility and the ongoing
      assessment of recoverability of capitalized computer software development costs
      requires considerable judgment by management with respect to certain external
      factors, including, but not limited to, technological feasibility, anticipated
      future gross revenue, estimated economic life and changes in software and
      hardware technology. Prior to reaching technological feasibility these costs
      are
      expensed as incurred and included in research development and maintenance.
      Activities undertaken after the products are available for general release
      to
      customers to correct errors or keep the product updated are expensed as incurred
      and included in research, development and maintenance. Amortization of
      capitalized computer software development costs commences when the related
      products become available for general release to customers. Amortization is
      provided on a product by product basis and is included in the applicable cost
      of
      revenue. The annual amortization is the greater of the amount computed using
      (a)
      the ratio that current gross revenue for a product bears to the total of current
      and anticipated future gross revenue for that product or (b) the straight-line
      method over the remaining estimated economic life of the product. The estimated
      life of these products range from 3 to 8 years.





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





F-15
 
  **NETSMART
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


***[2]
      Summary of Significant Accounting Policies -
      [Continued]***





The
      amounts allocated to purchased software development costs related to the
      NTST-Ohio, CL and AMS acquisitions in 2005 (see note 5), totaled $3,300,000,
      $692,020 and $2,050,700, respectively.





Capitalized
      software development costs applicable to operations are as follows:




Year
                  ended December 31,
              
              2005
              
              2004
              
              2003Beginning
                  of Year
              
              $
              1,132,453
              
              $
              1,087,116
              
              $
              382,387Capitalized
              
              
              6,084,720
              
              
              334,872
              
              
              1,062,575Amortization
              
              
              (682,622
              )
              
              (289,535
              )
              
              (357,846
              )***Net***
              
              $
              6,534,551
              
              $
              1,132,453
              
              $
              1,087,116




***Customer
      Lists*** -
      Customer lists represent a listing of customers obtained through the
      acquisitions of CSM, Johnson Computing System, (“Johnson”), Advanced
      Institutional Management Systems (“AIMS”), CareNet, NTST-Ohio, CL, AMS (see note
      5), and other to which the Company can market its products. Customer lists
      are
      being amortized on a straight line method over an estimated useful life of
      20
      years for the NTST -Ohio list, 12 years for the NTST - NY and Johnson lists,
      9
      years for the CareNet list, 8 years for the AMS list, 7 years for the AIMS
      list,
      3 years for the CL lists and 6 years for the other list. The amount allocated
      to
      customer lists related to the NTST-Ohio, AMS and CL acquisitions are $5,300,000,
      $1,396,902 and $5,218, respectively.





Customer
      lists at December 31, 2005 and 2004 are as follows:


December
                  31,2005
              
              2004Customer
                  Lists
              
              $
              12,983,419
              
              $
              6,281,299Less:
                  Accumulated Amortization
              
              
              (4,872,555
              )
              
              (4,102,062
              )***Net***
              
              $
              8,110,864
              
              $
              2,179,237




Amortization
      expense amounted to $770,493, $606,352 and $537,242, respectively, for the
      years
      ended December 31, 2005, 2004 and 2003 and is included in selling, general
      and
      administrative expenses.





Future
      amortization of customer lists are approximately $1,052,000, $741,000, $633,000,
      $593,000 and $567,000 for the years ending December 31, 2006, 2007, 2008, 2009
      and 2010 respectively, and $4,523,000 thereafter.





***Contract
      Backlog*** -
      Contract backlog represents profit to be earned on customer contracts and
      purchase orders that have not been fully completed as of the acquisition date
      of
      NTST- Ohio, but are expected to be completed at some future point. As a result,
      there are still revenue and profits to be earned on these orders.





F-16


**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




***[2]
      Summary of Significant Accounting Policies -
      [Continued]***





Contract
      backlog costs are being amortized over a one-year period commencing October
      1,
      2005 through September 30, 2006. Contract backlog costs at December 31, 2005
      are
      as follows:


Contract
                  backlog
              
              $
              502,000Less:
                  Accumulated Amortization
              
              
              (122,500
              )Net
              
              $
              379,500




Amortization
      expense amounted to $122,500 for the year ended December 31, 2005. Future
      amortization of contract backlog costs is $379,500 in 2006.





Pursuant
      to Statement of Financial Accounting Standards (“SFAS”) No. 144, "Accounting for
      the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
      of", the Company evaluates its long-lived assets for financial impairment,
      and
      continues to evaluate them as events or changes in circumstances indicate that
      the carrying amount of such assets may not be fully recoverable.





The
      Company evaluates the recoverability of long-lived assets by measuring the
      carrying amount of the assets against the estimated undiscounted future cash
      flows associated with them. At the time such evaluations indicate that the
      future undiscounted cash flows of certain long-lived assets are not sufficient
      to recover the carrying value of such assets, the assets are adjusted to their
      fair values.





***Goodwill***





Goodwill
      in the amount of $18,735,751 resulted from the acquisition of NTST-Ohio (See
      note 5). Goodwill is not amortized but is tested for impairment at least on
      an
      annual basis or more frequently if events or changes in circumstances indicate
      that the asset might be impaired. We determined that there was no impairment
      of
      goodwill at December 31, 2005





***Stock
      Options and Similar Equity Instruments*** - At
      December 31, 2005, the Company had three stock-based employee compensation
      plans
      as well as outstanding inducement options granted to certain former employees
      of
      NTST-Ohio, which are described more fully in note 13. As permitted under SFAS
      No. 148, “Accounting for Stock-Based Compensation--Transition and Disclosure”,
      which amended SFAS No. 123, “Accounting for Stock-Based Compensation”, the
      Company has elected to continue to follow the intrinsic value method in
      accounting for its stock-based employee compensation arrangements as defined
      by
      Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued
      to Employees”, and related interpretations including Financial Accounting
      Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain
      Transactions Involving Stock Compensation”, an interpretation of APB No. 25. No
      stock-based employee compensation cost is reflected in net income, as all
      options granted under those plans had an exercise price equal to the market
      value of the underlying common stock on the date of grant. The following table
      illustrates the effect on net income and earnings


F-17




**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


***[2]
      Summary of Significant Accounting Policies -
      [Continued]***





per
      share
      if the Company had applied the fair value recognition provisions of SFAS No.
      123
      to stock-based employee compensation:


Year
                  endedDecember
                  31,2005
              
              2004
              
              2003Net
                  Income as Reported
              
              $
              1,589,776
              
              $
              2,752,965
              
              $
              3,028,901Deduct:
                  Total stock-based employee compensationexpense
                  determined under the fair value-basedmethod
                  for all awards, net of related tax effect
              
              
              1,724,201
              
              
              1,368,139
              
              
              857,768Pro
                  Forma Net (Loss) Income
              
              $
              (134,425
              )
              $
              1,384,826
              
              $
              2,171,133Basic
                  Net Income Per Share as Reported
              
              $
              .28
              
              $
              .52
              
              $
              .69Basic
                  Pro Forma Net (Loss) Income Per Share
              
              $
              (.02
              )
              $
              .26
              
              $
              .49Diluted
                  Net Income Per Share as Reported
              
              $
              .27
              
              $
              .50
              
              $
              .64Diluted
                  Pro Forma Net (Loss) Income Per Share
              
              $
              (.02
              )
              $
              .25
              
              $
              .46




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


2005
              
              2004
              
              2003Expected
                  Life (Years)
              
              
              5
              
              
              5
              
              
              5Interest
                  Rate
              
              
              4.00
              %
              
              4.00
              %
              
              4.00
              %Annual
                  Rate of Dividends
              
              
              0
              %
              
              0
              %
              
              0
              %Volatility
              
              
              65
              %
              
              68
              %
              
              66
              %




The
      weighted average fair value of options at date of grant using the fair value
      based method during 2005, 2004 and 2003 is estimated at $5.39, $3.95, and $2.38,
      respectively.





In
      December 2004, FASB issued SFAS No. 123 (Revised), “Share-Based Payments
      (Revised 2004)”. See New Accounting Pronouncements.





***Earnings
      Per Share -*** Basic
      earnings per share of common stock is computed by dividing net income by the
      weighted average number of shares of common stock outstanding during the period.
      Diluted earnings per share reflects the amount of earnings for the period
      available to each share of common stock outstanding during the reporting period,
      giving effect to all potentially dilutive shares of common stock from the
      potential exercise of stock options and warrants.





The
      computation of diluted earnings per share does not assume conversion, exercise
      or contingent


F-18


**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




***[2]
      Summary of Significant Accounting Policies -
      [Continued]***





issuance
      of securities that would have an antidilutive effect on earnings per share
      (i.e.
      improving earnings per share). The dilutive effect of outstanding options and
      warrants and their equivalents are reflected in diluted earnings per share
      by
      the application of the treasury stock method. Options and warrants will have
      a
      dilutive effect only when the average market price of the common stock during
      the period exceeds the exercise price of the options or warrants. The Company
      had potentially dilutive options and warrants outstanding of 30,000, 300,780
      and
      0 during the years ended December 31, 2005, 2004 and 2003, respectively, that
      were not included in the calculation of diluted earnings per share because
      they
      were anti dilutive.





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


Year
                  ended December 31,2005
              
              2004
              
              2003**Numerator:**Net
                  Income
              
              $
              1,589,776
              
              $
              2,752,965
              
              $
              3,028,901**Denominator:**Weighted
                  average shares
              
              
              5,684,191
              
              
              5,331,700
              
              
              4,418,364Effect
                  of dilutive securities:Employee
                  stock options
              
              
              244,416
              
              
              205,031
              
              
              333,704Stock
                  warrants
              
              
              6,798
              
              
              --
                  _
              
              
              --Dilutive
                  potential common shares
              
              
              251,214
              
              
              205,031
              
              
              333,704Denominator
                  for diluted earnings pershare-adjusted
                  weighted average sharesafter
                  assumed conversions
              
              
              5,935,405
              
              
              5,536,731
              
              
              4,752,068


***Advertising
      -*** Advertising
      costs are expensed as incurred. Advertising expense amounted to $395,476,
      $392,575 and $328,199 for the years ended December 31, 2005, 2004 and 2003,
      respectively.





***Financial
      Instruments -*** SFAS No.
      133, “Accounting for Derivative Instruments and Hedging Activities” as amended,
      requires the recognition of all derivative instruments as either assets or
      liabilities on the balance sheet measured at fair value. Generally, increases
      or
      decreases in the fair value of a derivative instrument will be recognized as
      gains or losses in earnings in the period of change. If the derivative
      instrument is designated and qualifies as a cash flow hedge, the change in
      fair
      value of the derivative instrument will be recorded as a separate component
      of
      stockholders’ equity.





The
      Company entered into interest rate swaps to hedge exposure related to changes
      in
      the LIBOR rate. Before entering into a derivative transaction for hedging
      purposes, it is determined that a high degree of initial effectiveness exists
      between the change in value of the hedged item and the change in the value
      of
      the determinative instrument from movement in interest rates. High effectiveness
      means that the change in the value of the derivative instrument will effectively
      offset the change in the fair value of the hedged item. The effectiveness of
      each hedged item is measured throughout the hedged period. Any hedge
      ineffectiveness as defined by SFAS No. 133 is recognized in the income
      statement.


F-19


**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





***[2]
      Summary of Significant Accounting Policies -
      [Continued]***





***New
      Accounting Pronuncements*** *-* In
      December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (“SFAS No.
      123R”). SFAS No. 123R eliminates the alternative to use APB No. 25’s intrinsic
      value method of accounting that was provided in SFAS No 123 as originally
      issued. SFAS No. 123R requires entities to recognize the cost of employee
      services in exchange for awards of equity instruments based on the grant-date
      fair value of those awards (with limited exceptions). That cost will be
      recognized over the period during which the employee is required to provide
      the
      service in exchange for the award. No compensation cost is recognized for equity
      instruments for which employees do not render the requisite service. SFAS No.
      123R requires entities to initially measure the cost of employee services
      received in exchange for an award of liability instruments based on its current
      fair value; the fair value of the award will be remeasured at each reporting
      date through the settlement date. Changes in fair value during the requisite
      service period will be recognized as compensation cost over that period. The
      grant date fair value of employee share options and similar instruments will
      be
      estimated using option-pricing models adjusted for the unique characteristics
      of
      those instruments. SFAS No. 123R is effective as of the beginning of the
      Company’s interim reporting period that begins on January 1, 2006. Based upon
      the employee options outstanding as of December 31, 2005, the transitional
      provisions of SFAS No. 123R will not have a material effect on the Company’s
      consolidated financial position or results of operations as substantially all
      outstanding equity instruments vested on or prior to December 31, 2005; there
      is
      approximately $237,000 of future costs, utilizing the fair value method, that
      will be expensed over a three year period from 2006 through 2010. Additionally,
      the Company will utilize the fair value method for any future instruments issued
      after the implementation date.





In
      March
      2005, the Securities and Exchange Commission issued Staff Accounting Bulletin
      No. 107, “Share Based Payments” (“SAB 107”). The interpretations in SAB 107
      express views of the staff regarding the interaction between SFAS 123R and
      certain SEC rules and regulations and provide the Staff’s views regarding the
      valuation of share-based payment arrangements for public companies. In
      particular, SAB 107 provides guidance related to share-based payment
      transactions with non-employees, valuation methods (including assumptions such
      as expected volatility and expected term), the accounting for certain redeemable
      financial instruments issued under share-based payment arrangements, the
      classification of compensation expense, non-GAAP financial measures, first-time
      adoption of SFAS 123R in an interim period, capitalization of compensation
      cost
      related to share-based payment arrangements, the accounting for income tax
      effects of share-based payment arrangements upon adoption of SFAS 123R, the
      modification of employee share options prior to adoption of SFAS 123R, and
      disclosures in Management’s Discussion and Analysis subsequent to adoption of
      SFAS 123R.





In
      May
      2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (SFAS
      154). SFAS 154 requires retrospective application to prior periods’ financial
      statements of changes in accounting principle. It also requires that the new
      accounting principle be applied to the balances of assets and liabilities as
      of
      the beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings for


F-20


**NETSMART
      TECHNOLOGIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







***[2]
      Summary of Significant Accounting Policies -
      [Continued]***





that
      period rather than being reported in an income statement. The statement will
      be
      effective for accounting changes and corrections of errors made in fiscal years
      beginning after December 15, 2005. The Company does not expect the adoption
      of
      SFAS 154 to have a material effect on its consolidated financial position or
      results of operations.





In
      June
      2005, the Emerging Issues Task Force (“EITF”) reached consensus on Issue No.
      05-6, “Determining the Amortization Period for Leasehold Improvements” (“EITF
      05-6”). EITF 05-6 provides guidance on determining the amortization period for
      leasehold improvements acquired in a business combination or acquired subsequent
      to lease inception. The guidance in EITF 05-6 will be applied prospectively
      and
      is effective for periods beginning after June 29, 2005. EITF 05-6 did not have
      any impact on the Company’s consolidated financial position or results of
      operations.





***[3]
      Accounts Receivable***





Accounts
      receivable is shown net of allowance for doubtful accounts of $350,291 and
      $423,720 at December 31, 2005 and 2004, respectively. The changes in the
      allowance for doubtful accounts are summarized as follows:


Year
                  Ended December 31,2005
              
              2004Beginning
                  Balance
              
              $
              423,720
              
              $
              1,126,236Provision
                  (credit) for Doubtful Accounts
              
              
              465,004
              
              
              (204,000
              )Charge-offs
              
              
              (538,433
              )
              
              (498,516
              )Ending
                  Balance
              
              $
              350,291
              
              $
              423,720





***[4]
      Costs, estimated profits, and billings on uncompleted contracts are summarized
      as follows:***


December
                  31,2005
              
              2004Costs
                  Incurred on Uncompleted Contracts
              
              $
              5,389,787
              
              $
              10,663,115Estimated
                  Profits
              
              
              3,028,931
              
              
              5,657,902Total
              
              
              8,418,718
              
              
              16,321,017Billings
                  to Date
              
              
              14,545,154
              
              
              23,181,805***Net***
              
              $
              (6,126,436
              )
              $
              (6,860,788
              )




F-21





**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


***[4]
      Costs, estimated profits, and billings on uncompleted contracts are summarized
      -
      [Continued]***





Included
      in the accompanying consolidated balance sheet under the following
      captions:


Costs
                  and estimated profits in excess of interim billings
              
              $
              1,811,986
              
              $
              636,985Interim
                  billings in excess of costs and estimated profits
              
              
              (7,938,422
              )
              
              (7,497,773
              )***Net***
              
              $
              (6,126,436
              )
              $
              (6,860,788
              )





***[5]
      Acquisitions***





CL





On
      April
      28, 2005, the Company acquired substantially all of the assets, including
      computer software, customer lists and computer equipment, of CL, a company
      that
      offered a comprehensive family of web-based training products and services,
      including its Learning Management System. The total purchase price, including
      acquisition costs and a recognition of a probable additional payment, was
      $739,238 which consisted of cash of $252,917, which was paid out of existing
      working capital including legal fees of $18,632, and broker fees of $10,000,
      20,000 shares of the Company’s common stock valued at $191,400, assumed
      liabilities of $44,921 and an accrual for a probable additional payment of
      $250,000. The purchase agreement provides for the potential additional payment
      of up to $250,000 if certain revenue targets are met in year one. Based upon
      the
      attainment of certain revenue targets as of December 31, 2005, the Company
      recognized the full $250,000 of this additional payment at December 31, 2005.
      The Company also entered into a two year employment agreement at an annual
      salary of $100,000 per year with the principal of CL, whereby the principal
      can
      receive an additional $300,000 in cash, to be accounted for as compensation
      expense, if certain revenue targets are met within a two-year period. As of
      December 31, 2005, these revenue targets have not been met and consequently,
      no
      additional compensation expense has been recognized.





The
      cost
      of the CL acquisition was allocated as follows: $692,020 to purchased software,
      $5,218 to customer lists, $17,000 to computer hardware, and $25,000 to a
      covenant not to compete. The Company is amortizing the purchased software over
      a
      six-year life, the customer lists and computer hardware over a three-year life,
      and the covenant not to compete over a two-year life. Amortization expense
      for
      the covenant not to compete was $8,333 for the year ended December 31,
      2005.





AMS





On
      June
      20, 2005, the Company acquired the assets of AMS. The total purchase price,
      including acquisition costs, was $3,610,682 which consisted of cash of
      $2,641,945, legal fees of $19,904 and assumed liabilities for services to be
      provided of $948,833.





The
      cost
      of the AMS acquisition was allocated as follows: $2,050,700 to purchased
      software, $1,396,902 to customer lists, $127,698 to accounts receivable, $32,048
      to inventory, and $3,334 to a security deposit. The Company is amortizing the
      purchased software and the customer lists over an eight-year life.





F-22





**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




***[5]
      Acquisitions - [Continued]***





NTST-Ohio





On
      September 28, 2005, the Company acquired 100% of the equity interest of
      NTST-Ohio (formerly CMHC Systems, Inc.) a company that offers a full suite
      of
      behavioral healthcare information management software for mental health,
      substance abuse, and addiction services agencies, developmental disability
      centers, and behavioral health-related managed care organizations. The primary
      reason for this acquisition was to acquire a significant customer base (over
      400
      clients) which provided a large recurring revenue stream, and included a
      workforce with significant domain knowledge.





The
      Company believes that due to the factors above and the potential long range
      benefits of the combined company that the purchase price paid fairly represents
      the value of NTST-Ohio. The purchase price totaled approximately $19,565,956
      as
      follows: 435,735 shares of the Company’s common stock (valued at $4,915,091),
      $12,994,758 in cash plus additional cash consideration recorded in accrued
      expenses as of December 31, 2005, estimated at $792,024 as required by the
      “working capital adjustment”, calculated and payable in accordance with the
      merger agreement, and acquisition costs of $864,083.





The
      Company also renegotiated and assumed the NTST-Ohio facility lease in Dublin,
      Ohio. This facility is leased from a Partnership whose general partner is the
      former majority stockholder of CMHC and currently a 5.3% stockholder of the
      Company. This lease has a total square footage of 34,230, is non cancelable
      and
      expires on September 30, 2010. The annual rent is $377,172 and is subject to
      annual real estate tax assessments.





John
      Paton, the former majority stockholder of CMHC Systems, entered into an
      employment agreement with the Company pursuant to which Mr. Paton is to receive,
      in addition to the amounts he received as a former security holder of CMHC,
      a
      base salary at the rate of $150,000 per annum for the fifteen month term of
      the
      agreement.





F-23
 
  **NETSMART
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


***[5]
      Acquisitions - [Continued]***





The
      following table summarizes the estimated fair value of the assets acquired
      and
      liabilities assumed at the date of the acquisition of NTST-Ohio.





**At
      September 30, 2005**


($
      in
      thousands)


Cash
              
              $
              4,218Other
                  current assets
              
              
              2,879Property
                  and equipment - net
              
              
              464Capitalized
                  software cost
              
              
              3,300Customer
                  lists
              
              
              5,300Goodwill
              
              
              18,736Contract
                  backlog
              
              
              502Deferred
                  tax asset - long term
              
              
              1,381Other
                  assets
              
              
              26Total
                  assets acquired
              
              
              36,807Deferred
                  revenue
              
              
              8,134Other
                  current liabilities
              
              
              5,898Deferred
                  tax liability - long term
              
              
              3,171Long-term
                  debt
              
              
              38Total
                  liabilities assumed
              
              
              17,241Net
                  assets acquired
              
              $
              19,566





Included
      in other current liabilities of $5,898,000 is a promissory note which NTST-Ohio
      issued in April 2005 in the amount of $500,000. This note accrued interest
      at a
      rate of 14% per annum and was due on October 31, 2005. This promissory note
      was
      paid in full in October 2005.





None
      of
      the goodwill or amortization of the contract backlog, capitalized software
      or
      customer list will be deductible on the Company’s tax return. For financial
      statement purposes the Company is amortizing the contract backlog over one
      year,
      the capitalized software over four years and the customer list over 20 years.
      The goodwill is not amortized and will be reviewed each year to determine if
      any
      impairment adjustment will be required.





The
      following unaudited proforma condensed consolidated statements of operations
      assumes the CL, the AMS and the NTST-Ohio acquisitions occurred on January
      1,
      2004. Shares related to the private


F-24
 
  **NETSMART
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


***[5]
      Acquisitions - [Continued]***





placement
      (see note 9) are included in the weighted average per share calculations. In
      the
      opinion of management, all adjustments necessary to present fairly such
      unaudited proforma statements have been made. These proforma amounts may not
      be
      indicative of what would have occurred had the acquisitions been completed
      on
      January 1, 2004 or results which may occur in the future.


Years
                  EndedDecember
                  31,2005
              
              2004Unaudited
              
              Unaudited(in
                  thousands except share and per share amounts)Revenue
              
              $
              57,667
              
              $
              55,299Net
                  Income
              
              
              1,657
              
              
              942Net
                  Income Per Share;Basic
              
              $
              .26
              
              $
              .15Diluted
              
              $
              .25
              
              $
              .15Weighted
                  Average Numberof
                  Shares of CommonStock
                  Outstanding
              
              
              6,387,381
              
              
              6,277,435Weighted
                  Average Numberof
                  Shares of CommonStock
                  and Common StockEquivalents
                  Outstanding
              
              
              6,638,595
              
              
              6,482,466





The
      results of the acquisitions of CL and AMS were included in the actual
      consolidated results of operations commencing with the respective date of the
      acquisitions. With respect to the NTST-Ohio acquisition which closed on
      September 28, 2005, the results of operations of NTST-Ohio were included in
      the
      actual results of operations of the Company commencing October 1,
      2005.





The
      Company accounted for the CL, AMS and NTST-Ohio acquisitions pursuant to the
      purchase method of accounting as required under SFAS No. 141 “Business
      Combination”.





Purchase
      price allocations are subject to change. Changes could include a reallocation
      of
      intangible assets which would likely have the effect of increasing or decreasing
      future amortization expense, since the intangible assets are initially assigned
      varied lives. Additionally, the lives assigned to the identifiable intangible
      assets represent management’s best estimates of the time periods in which it
      will continue to receive benefits from these assets. The useful lives may need
      to be adjusted in the future based upon changes to the expected useful lives
      of
      such assets.





F-25


**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





***[5]
      Acquisitions - [Continued]***





CareNet





On
      June
      25, 2003, the Company acquired substantially all of the assets of the CareNet
      segment ("CareNet") of Shuttle Data Systems Corporation, d/b/a Adia Information
      Management Corp. ("Adia"), pursuant to an asset purchase agreement dated June
      25, 2003, among the Company, Adia and Steven Heintz, Jr., the president and
      majority shareholder of Adia. The principal assets acquired were the
      intellectual property and customer contracts of CareNet. The total purchase
      price, including acquisition costs, was $2,003,913 which consisted of 100,000
      shares of the Company’s common stock valued at $528,000, $838,740 in cash and a
      three-year promissory note in the principal amount of $500,000 payable in 36
      equal monthly installments of principal plus interest at the average prime
      rate
      plus 1% as defined in the note agreement. Adia has received certain piggyback
      registration rights with respect to these 100,000 shares. The cash portion
      of
      the purchase price was paid out of existing working capital. The Company also
      assumed certain contractual obligations and liabilities totaling $68,068 and
      incurred $69,105 in legal and accounting costs which are included in the
      purchase price.





The
      cost
      of the acquisition was allocated to purchased software in the amount of
      $883,075, customer lists in the amount of $1,097,138, and computer hardware
      in
      the amount of $23,700. The Company is amortizing the purchased software over
      an
      eight-year life and the customer lists over a nine-year life.





In
      addition, in connection with the acquisition, the Company entered into a three
      year non-compete and non-solicitation agreement with Steven Heintz, Jr. and
      Jennifer Lindbert for which they were paid an aggregate fee of $140,000, which
      fee was paid in cash out of existing working capital and is included in “other
      assets” on the consolidated balance sheet. The covenant not to compete is being
      amortized over the three-year life. Amortization expense for the years ended
      December 31, 2005, 2004 and 2003 was $46,667, $46,667 and $23,333
      respectively.





The
      Company accounted for this acquisition pursuant to the purchase method of
      accounting. For accounting purposes the Company recorded the assets and related
      liabilities of CareNet effective as of June 30, 2003. The Company incorporated
      the operations of CareNet into its operations commencing July 1,
      2003.





F-26





**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
  ***[6]
        Property and Equipment***





Property
      and equipment consist of the following:


December
                  31,2005
              
              2004Equipment,
                  Furniture and Fixtures
              
              $
              3,843,666
              
              $
              2,980,440Leasehold
                  Improvements
              
              
              632,989
              
              
              556,893Totals
                  - At Cost
              
              
              4,476,655
              
              
              3,537,333Less:
                  Accumulated Depreciationand
                  Amortization
              
              
              1,811,226
              
              
              990,385***Net***
              
              $
              2,665,429
              
              $
              2,546,948




Depreciation
      and amortization expense amounted to $820,841, $681,839, and $315,171,
      respectively for the years ended December 31, 2005, 2004 and 2003.





***[7]
      Long Term Debt***





Long-term
      debt at December 31, 2005 consists of the following:


Term
                  loan payable, bank - due in monthly installmentsof
                  $41,667 (a)
              
              $
              2,416,667Term
                  loan payable, bank - due in monthly installmentsof
                  $41,666. (b)
              
              
              250,036Note
                  payable, Adia - due in monthly installments of$13,889.
                  (c)
              
              
              83,333Total
                  Long-Term Debt
              
              
              2,750,036Less:
                  Current Portion
              
              
              833,369Long-Term
                  Debt, Less Current Portion
              
              $
              1,916,667


(a)
      On
      October 7, 2005, the Company entered into a revolving credit and term loan
      agreement with Bank of America pursuant to which the bank has agreed to make
      loans to the Company consisting of (i) a $2,500,000 revolving credit loan and
      (ii) a $2,500,000 term loan (collectively, the “Loans”).





F-27


**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




***[7]
      Long Term Debt - [Continued]***





The
      Loans
      are secured by a security interest in the Company’s personal property, including
      a pledge of the stock of the Company’s wholly-owned subsidiaries. The Loans are
      guaranteed by the Company’s significant wholly-owned subsidiaries, NTST-NY and
      NTST-Ohio, whose assets represent substantially all of the assets of the
      Company.





On
      October 7, 2005, the Company borrowed the full amount of the $2,500,000 term
      loan. The Company has not borrowed any amounts under the Revolving Credit Loan.
      The term loan bears interest at LIBOR plus 2.25%. The Company has entered into
      an interest rate swap agreement with the bank for the amount outstanding under
      the term loan whereby it converted the variable rate on the term loan to a
      fixed
      rate of 7.1% in order to reduce the interest rate risk associated with these
      borrowings (Note 12). The revolving credit facility will bear interest at a
      rate
      per annum to be elected by the Company, equal to either (1) the LIBOR rate
      plus
      2% or (2) the Bank’s prime rate. The financing agreement contains certain
      covenants including limitations on the Company’s ability to incur liens,
      maintain a minimum tangible net worth of $2,250,000 and requires the maintenance
      of certain financial ratios. The Company was not in compliance with a certain
      covenant at December 31, 2005. As a result, the Company and the Bank entered
      into a First Amendment and Waiver (“the Amendment”) to the term loan, pursuant
      to which the Bank agreed to amend the terms of the Tangible Net Worth covenant
      contained in the Loan Agreement and waive any non-compliance by the Company.
      As
      a result of the Amendment, as of December 31, 2005, the Company was in
      compliance with the financial covenants of this agreement.





(b)
      The
      Company has a five-year term loan with Bank of America with an original
      principal balance of $2.5 million which matures in June 2006. The term loan
      is
      paid in equal monthly installments during the term of the loan plus interest.
      The term loan bears interest at LIBOR plus 2.5%. In addition, the Company
      entered into an interest rate swap agreement on the term loan at 7.95% for
      five
      years (note 12). The financing agreement contains certain covenants including
      limitations on the Company’s ability to incur liens, enter into change of
      control transactions, maintain a minimum net worth at $9,000,000 and requires
      the maintenance of certain financial ratios. The borrowing is collateralized
      by
      a first priority security interest and lien on all the assets of the Company.
      As
      of December 31, 2005, the Company was in compliance with the financial covenants
      of this agreement.





(c)
      In
      connection with the acquisition of CareNet (see note 5), the Company issued
      a
      three year promissory note to Adia in the principal amount of $500,000 payable
      in 36 equal monthly installments of principal plus interest at the prime rate
      plus 1% on the date of issuance adjusted on each note anniversary date (5.25%
      at
      December 31, 2005).





Maturities
      of long-term debt at December 31, 2005 are as follows:


For
                  the Year EndingDecember
                  31,
              
              Amount2006
              
              $
              833,3692007
              
              
              500,0002008
              
              
              500,0002009
              
              
              500,0002010
              
              
              416,667Total
              
              $
              2,750,036
 F-28
  **NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


***[8]
      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.” This method gives consideration to the future tax consequences
      associated with differences between financial statement and tax bases of assets
      and liabilities.





During
      the years ended December 31, 2005 and 2004, the Company utilized approximately
      $2.9 million and $2.8 million, respectively of net operating loss carryforwards.
      At December 31, 2005, the Company has remaining net operating loss carryforwards
      of approximately $5,261,000 expiring through 2025. Pursuant to Section 382
      of
      the Internal Revenue Code regarding substantial changes in Company ownership,
      utilization of this net operating loss carryforward is limited. Approximately
      $2,279,000 can be used in 2006 and $830,000 can be used in each of 2007, 2008
      and 2009 and the remaining $492,000 can be used in 2010; unused amounts can
      be
      carried forward. In addition, the $717,000 tax benefit related to approximately
      $1,800,000 of net operating losses generated in 2000 on exercise of
      non-qualified compensatory stock options and warrants was credited to
      paid-in-capital in 2004.





The
      Company’s provision for taxes for the year ended December 31, 2005 includes
      certain state and local taxes.





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





December
                  31,
              
              TotalAmount2020
              
              $
              1,851,0002021
              
              
              1,626,0002022
              
              
              9,0002023
              
              
              709,0002024
              
              
              9,0002025
              
              
              1,057,000$
              5,261,000




Provision
      for income taxes consists of the following:




Year
                ended December 31,2005
            
            2004
            
            2003Current:Federal
            
            $
            63,000
            
            $
            56,000
            
            $
            24,000State
            
            
            261,000
            
            
            131,000
            
            
            89,425324,000
            
            
            187,000
            
            
            113,425Deferred:Federal
            
            
            642,000
            
            
            104,000
            
            
            (900,000
            )State
            
            
            193,000
            
            
            18,000
            
            
            --835,000
            
            
            122,000
            
            
            (900,000
            )Total
            
            $
            1,159,000
            
            $
            309,000
            
            $
            (786,575
            )


F-29




**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


***[8]
      Income Taxes - [Continued]***





The
      difference between income taxes at the statutory Federal income tax rate and
      income taxes reported in the income statement is as follows:


Year
                  ended December 31,2005
              
              2004
              
              2003Income
                  taxes at the federal statutory rate
              
              
              34
              %
              
              34
              %
              
              34
              %State
                  and local income taxes net of Federal taxes
              
              
              6
              
              
              3
              
              
              3Nondeductible
                  expenses
              
              
              1
              
              
              2
              
              
              2Federal
                  Alternative Minimum Tax
              
              
              1
              
              
              2
              
              
              2Decrease
                  in valuation allowance
              
              
              --
              
              
              (31
              )
              
              (76
              )42
              %
              
              10
              %
              
              (35
              )%





Significant
      components of the Company’s deferred taxes are comprised of the
      following:


December
                  31,2005
              
              2004Deferred
                  Tax Asset:Net
                  operating loss carryforward
              
              $
              2,024,000
              
              $
              1,605,000Allowance
                  for doubtful accounts
              
              
              175,000
              
              
              169,000Accrued
                  vacation and bonuses
              
              
              384,000
              
              
              317,000Alternative
                  minimum tax credit carryforward
              
              
              241,000
              
              
              147,000Other
              
              
              241,000
              
              
              157,000Total
                  deferred tax assets
              
              
              3,065,000
              
              
              2,395,000Deferred
                  Tax Liabilities:Net
                  book value - intangible assets
              
              
              (3,589,000
              )
              
              --Net
                  deferred tax (liability) assets
              
              $
              (524,000
              )
              $
              2,395,000


The
      deferred taxes are presented in the Consolidated Balance Sheet as
      follows:


December
                  31,2005
              
              2004Current
                  asset
              
              $
              1,595,000
              
              $
              1,111,000Long
                  term asset
              
              
              --
              
              
              1,284,000Long
                  term liability
              
              
              (2,119,000
              )
              
              --Net
                  deferred tax (liability) assets
              
              $
              (524,000
              )
              $
              2,395,000
  During
      2004, the Company reduced the valuation allowance to zero based upon its belief
      that it is more likely than not that the entire net operating loss carry forward
      will be utilized.


F-30


**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




***[8]
      Income Taxes - [Continued]***





The
      change in the valuation allowance for deferred tax assets are summarized as
      follows:


Year
                  Ended December 31,2005
              
              2004
              
              2003Beginning
                  Balance
              
              $
              --
              
              $
              1,731,000
              
              $
              4,010,000Change
                  in Allowance
              
              
              --
              
              
              (1,731,000
              )
              
              (2,279,000
              )Ending
                  Balance
              
              $
              --
              
              
              --
              
              $
              1,731,000





***[9]
      Stockholders’ Equity***





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 determine the rights and preferences of the preferred
      stock when issued. The Board of Directors has authorized the issuance of Series
      A, Series B and Series D preferred stock. No shares of any series of preferred
      stock were outstanding on December 31, 2005.





***Common
      Stock Issuances -*** On April
      28, 2005, the Company issued 20,000 shares of its common stock in connection
      with the acquisition of CL. On September 28, 2005, the Company issued 435,735
      shares of its common stock in connection with the acquisition of NTST-Ohio.
      On
      June 25, 2003 the Company issued 100,000 shares of its common stock in
      connection with the acquisition of CareNet. See note 5 for information relating
      to these acquisitions.





The
      Company sold to investors, pursuant to a private placement agreement, an
      aggregate 490,000 shares of common stock and warrants to purchase 122,504 shares
      of common stock. The Company received $4,493,104 in gross proceeds and paid
      commissions of $275,000 and $102,976 in other professional costs related to
      the
      private placement. The Company also issued a warrant to purchase 24,500 shares
      to the placement agent. The private placement agreement required the Company
      to
      file a registration statement within 30 days of the closing of the private
      placement, and to use its reasonable best efforts to have such registration
      statement declared effective within 90 days of the closing. Generally, the
      private placement agreement further provides for a penalty to be paid to the
      investors should the Company fail to meet its registration obligations. Such
      penalty is payable to the investors in cash at the rate of 2.5% of the gross
      proceeds per month, up to a maximum penalty of 20% of the gross proceeds. The
      Company has accounted for the proceeds of the private placement as equity in
      accordance with View A of EITF 05-04, “The Effect of a Liquidated Damages Clause
      on a Freestanding Financial Instrument Subject to Issue No. 00-19”. Any
      potential penalties incurred pursuant to the registration rights agreement
      will
      be recorded in earnings when and if incurred as per SFAS 5, “Accounting for
      Contingencies.” As of December 31, 2005, the Company has not incurred any
      penalties relating to this private placement.





F-31




**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


***[9]
      Stockholders’ Equity - [Continued]***





***Treasury
      Stock*** - During
      2005, options to purchase 206,658 shares were exercised and the Company received
      gross proceeds of $854,240. Pursuant to option grants, employees have the right
      to pay for the exercise price of the options by delivering “mature” shares of
      common stock owned by them. Included in the 2005 exercise of options were 12,250
      options owned by a Company officer. These options were exercised by the delivery
      of 3,650 shares of the Company’s common stock, which were valued at $53,532,
      which was based upon the market price of the common stock on the dates of
      exercise in accordance with the cashless exercise provisions of the Company’s
      stock option plans.





During
      2004, options to purchase 38,877 shares were exercised and the Company received
      gross proceeds of $166,400. Pursuant to the option grants, employees have the
      right to pay for the exercise price of the options by delivering “mature” shares
      of common stock owned by them. Included in the 2004 exercise of options were
      12,250 options owned by a Company officer. These options were exercised by
      the
      delivery of 4,166 shares of the Company’s common stock, which were valued at
      $53,533, which was based upon the market price of the common stock on the dates
      of exercise in accordance with the cashless exercise provisions of the Company’s
      stock option plans.





During
      2003, stock options to purchase 668,197 shares were exercised and the Company
      received gross proceeds of $1,800,256. Included in the gross proceeds received
      from the exercise of the options was the delivery of 133,961 shares of the
      Company’s common stock, which were valued at $1,011,337, which was based upon
      the market price of the common stock on the dates of the exercise in accordance
      with the cashless exercise provisions fo the Company’s stock option
      plans.





Included
      in the 2003 option exercises were 350,280 options owned by certain of the
      Company’s officers and members of the Board of Directors. Pursuant to the option
      grants, employees have the right to pay for the exercise price of the options
      by
      delivering “mature” shares of common stock owned by them. These options were
      exercised by delivery of 97,718 shares of the Company’s common stock valued at
      $682,965, which was based upon the market price of the common stock on the
      date
      of exercise in accordance with the cashless exercise provisions of the Company’s
      stock option plans.





On
      February 27, 2003, the Board of Directors authorized management to purchase
      up
      to $100,000 of the Company’s common stock at any time the market price of the
      common stock is less than $3.50 per share. Purchases of stock will be made
      from
      time to time, depending on market conditions, in the open market or in privately
      negotiated transactions, at prices deemed appropriate by management. There
      is no
      set time limit on the purchases. The Company expects to fund any stock
      repurchases from its operating cash flow. As of December 31, 2005, the Company
      had not made any stock repurchases.


F-32


**NETSMART
      TECHNOLOGIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





***[9]
      Stockholders’ Equity - [Continued]***





***Stock
      Options and Warrants -*** See note
      13 for information relating to the Company’s 1998, 1999 and 2001 Long-Term
      Incentive Plans.





During
      2005, the Company announced the completion of a private placement of units
      consisting of an aggregate 490,000 shares of its common stock and warrants
      to
      purchase 147,003 shares of common stock, which include 24,500 warrants issued
      to
      the placement agent. The warrants have an exercise price of $11 per share.
      The
      Company received net proceeds of approximately $4.1 million.





During
      2005, the Company granted 30,000 inducement options to employees of NTST-Ohio
      to
      encourage the recipients to continue to remain in the employ of NTST-Ohio after
      the acquisition. The options were granted at a price of $14.77 which was equal
      to the fair market value at the date of grant. The options vest over a period
      of
      three years.





During
      2003, warrants to purchase 713,620 shares were exercised and the Company
      received net proceeds of $5,720,108.





On
      December 21, 2000, the stockholders of the Company approved the 1999 Employee
      Stock Purchase Plan. The plan reserves 150,000 shares of common stock. The
      plan
      provides eligible employees with the opportunity to purchase shares of common
      stock at a discounted price through regular payroll deductions. No shares have
      been issued as of December 31, 2005 under this plan.





Dividends
      - In July 2003, the Company’s Board of Directors approved a cash dividend of
      $.10 per share of common stock which was paid in September 2003 to all
      stockholders of record on August 20, 2003. The amount charged to additional
      paid-in capital in August 2003, based upon the shares outstanding on August
      20,
      2003, the record date of the dividend, was $441,447.





***[10]
      Capital Lease Obligations***





Future
      minimum payments under capital lease obligations as of December 31, 2005 are
      as
      follows:


Year
                  endingDecember
                  31,2006
              
              $
              65,3162007
              
              
              9,695Total
                  Minimum Payments
              
              
              75,011Less
                  Amount Representing Interest at 8.7% Per annum
              
              
              4,175***Balance***
              
              $
              70,836





Capital
      lease obligations are collateralized by equipment which has a cost of $214,426
      at December 31, 2005 and $183,326 at December 31, 2004 and accumulated
      amortization of $162,119 and $91,663 at December 31, 2005 and 2004,
      respectively. Amortization of $70,456 in 2005 and $61,109 in 2004 and 38,534
      in
      2003, respectively, has been included in depreciation expense.




F-33


**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
  ***[11]
        Fair Value of Financial Instruments***





The
      carrying amount of cash and cash equivalents, accounts receivable, accounts
      payable and the note payable to Adia approximate the fair value of these
      instruments because of their short maturities or floating interest
      rates.





The
      bank
      debt (see note 7), including current maturities, has a carrying value of
      $2,666,703 and an estimated fair value of $2,661,000. Estimated fair value
      is
      based on the expected current rates offered to the Company for instruments
      of
      the same or similar maturities, after considering the effect of the interest
      rate swap.





***[12]
      Commitments and Contingencies***





***Leases***





The
      Company leases space for its executive offices and facilities under a
      cancellable operating lease expiring October 2014. In addition, the Company
      leases seven sales and service offices under non cancelable operating leases
      expiring at various times through January 2008. The Company leases space for
      NTST-Ohio under a non-cancellable operating lease expiring September 2010.
      The
      lease provides for a fixed monthly rent of approximately $31,000. This facility
      is leased from a Partnership whose general partner is a 5.3% stockholder of
      the
      Company. The amount paid in connection with this facility was $110,823 for
      the
      period from commencement of the lease to December 31, 2005.





In
      December 2003, the Company relocated its Islip, New York headquarters facility
      to a larger facility in Great River, New York. The lease is for a ten year
      and
      ten month period. The lease provides for a fixed monthly rent of $45,700 and
      includes an annual escalation increase of 3%. There are no lease payments
      required during the first ten months of the lease and the Company has the option
      of canceling the lease after six years. However, upon cancellation, certain
      unamortized costs must be reimbursed to the landlord. Future maturities of
      this
      lease were considered for the entire ten year and ten month period.





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


Year
                  endingDecember
                  31,2006
              
              $
              1,481,0002007
              
              
              1,177,0002008
              
              
              1,101,0002009
              
              
              1,008,0002010
              
              
              925,000Thereafter
              
              
              2,732,000Total
              
              $
              8,424,000




Rent
      expense amounted to $1,009,700, $833,000 and $519,000 respectively, for the
      years ended December 31, 2005, 2004 and 2003.





F-34




**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


***[12]
      Commitments and Contingencies - [Continued]***





***Employment
      Agreements***





In
      April
      2004, the Company entered into revised employment agreements with Messrs. James
      L. Conway and Anthony F. Grisanti. The terms and conditions of the revised
      contracts are identical in all material respects to the previous contracts
      except that (i) the term of each individual’s contract was extended by one year,
      so that Messrs. Conway and Grisanti’s contract will expire on December 31, 2006
      and (ii) the revised contracts do not provide for a five-year consulting period
      following each individual’s respective term of employment during which such
      individual would have been entitled to compensation of $75,000 per year. Messrs.
      Conway and Grisanti’s contracts also provide for an option to extend their
      contracts for one additional year so that upon the exercise of such option,
      their contracts would expire on December 31, 2007. Mr. Koop, the former
      President, was party to a revised employment agreement that was identical to
      the
      agreements with Messrs. Conway and Grisanti except as to the expiration date,
      which was December 31, 2005. The minimum aggregate base compensation for its
      three officers is $650,000 for 2005. The minimum aggregate base compensation
      for
      Messrs. Conway and Grisanti is $573,000 for each of 2006 and 2007, subject
      to
      annual increases equal to the greater of 5% or the increase in the cost of
      living index. The agreements also provide the officers with an automobile
      allowance. In the event of a change of control, the executive may receive
      severance payments equal to 48 months compensation.





The
      Company also has a consulting agreement with a former Director, which provides
      for annual fees of $75,000 through December 31, 2007. The agreement also
      provides the former Director with an automobile allowance. In the event of
      a
      change of control, the former Director may receive severance payments of 36
      months compensation.





Effective
      April 1, 2004, the Company adopted an Executive Retirement, Non-Competition
      and
      Consulting Plan which was subsequently amended August 5, 2004 retroactively
      effective to April 1, 2004, pursuant to which, following their retirement,
      selected officers will be entitled to receive a minimum payment of approximately
      $85,000 per year for a period of six years, provided, that such officers (i)
      provide a minimum amount of consulting days each month and (ii) agree to certain
      covenants not to compete. The annual payments are subject to 10% increases
      up to
      a maximum of $136,893 per year. Pursuant to the Executive Retirement,
      Non-Competition and Consulting Plan, the selected officers are also entitled
      to
      receive health benefits for life, provided that there are no breaches of the
      covenants not to compete. Each of Messrs. Conway, Koop and Grisanti are entitled
      to receive benefits under the plan.





The
      Company was a party to an employment agreement with John Phillips, a former
      Vice
      President who currently serves as a director of the Company. Mr. Phillip’s
      employment contract expired on December 31, 2003 and he retired effective April
      1, 2004. Pursuant to the terms of the Company’s Executive Retirement,
      Non-Competition and Consulting Plan, Mr. Phillips will receive $85,000 per
      year
      for each of the next six years; provided that he complies with the
      non-competition covenants of the plan.


F-35




**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 ***[12]
        Commitments and Contingencies - [Continued]***





Future
      minimum payments related to consulting and Executive Retirement, Non-Competition
      and Consulting agreements for the next five years are as follows:




Year
                  EndingDecember
                  31,
              
              Amount2006
              
              
              169,0002007
              
              
              160,0002008
              
              
              85,0002009
              
              
              85,0002010
              
              
              21,000Total
              
              $
              520,000


***Interest
      Rate Swap***





In
      June
      2001, the Company entered into an interest rate swap with a bank, which expires
      on June 1, 2006. In October, 2005, the Company entered into another interest
      rate swap with a bank, which expires on October 6, 2010. The swap transactions
      were entered into to protect the Company from upward movement in interest rates
      relating to outstanding bank debt (see note 7) and calls for a fixed rate of
      7.95% for the 2001 transaction and 7.1% for the 2005 transaction. When the
      one-month LIBOR rate is below the fixed rate then the Company is obligated
      to
      pay the bank for the difference in rates. When the one-month LIBOR rate is
      above
      the fixed rate then the bank is obligated to pay the Company for the difference
      in rates. At December 31, 2005 and 2004 the fair value of the swaps of $7,812
      and $15,152, respectively, is recorded as a non-current liability. The swap
      transactions have been accounted for as a hedge, and accordingly, the change
      in
      the fair value of the swaps of $7,340, $43,916 and $48,645 during the years
      ended December 31, 2005, 2004, and 2003, respectively, has been recorded as
      part
      of comprehensive income.





***Letter
      of Credit***





The
      Company relocated its Islip, New York headquarters to a larger facility in
      Great
      River, New York. Included in the terms and conditions of the Great River lease
      is the requirement that the Company provide to the landlord a letter of credit
      in the amount of $292,980, which represents approximately six months rent.
      This
      letter of credit was provided to the landlord on October 31, 2003, and will
      be
      reduced as follows:





$195,320
      for months 35 through 46 of the lease.


$146,490
      for months 47 through 58 of the lease.


$97,660
      for months 59 to the expiration of the lease.





***[13]
      Stock-Based Compensation***





***Long
      Term Incentive Plans -*** The
      Company has three long-term incentive plans, the 1998 Long-Term Incentive Plan
      (the “1998 Plan”), as amended, the 1999 Long-Term Incentive Plan (the “1999
      Plan”) and the 2001 Long-Term Incentive Plan (the “2001 Plan”), as amended. The
      2001 Plan was approved by the


F-36




**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


***[13]
      Stock-Based Compensation - [Continued]***





stockholders
      on March 7, 2002 and originally provided for the issuance of 180,000 shares
      of
      common stock. In January 2003, the 2001 Plan was amended and approved by the
      stockholders to provide for an increase in the number of shares subject to
      the
      plan from 180,000 to 550,000. In May 2004, the 2001 Plan was further amended
      and
      approved by the stockholders to provide an increase in the number of shares
      subject to the plan from 550,000 to 950,000. In July, 2005, the plan was amended
      and approved by the stockholders to provide an increase in the number of shares
      subject to the plan from 950,000 to 1,350,000. The maximum shares issuable
      by
      the Company are 790,000, 300,000 and 1,350,000 shares of Common Stock pursuant
      to the 1998 Plan, the 1999 Plan and the 2001 Plan, respectively. The options,
      when granted vest ratably over one year except
      for the 400,000 options granted in July
      2005, which vested prior to December 31, 2005. These 400,000 options were
      granted at an exercise of $9.85 which was equal to the fair market value at
      the
      date of grant. At December 31, 2005 there were 0, 10,500 and 3 shares available
      for further issuance under the 1998 Plan, the 1999 Plan and 2001 Plan,
      respectively.





The
      1998
      Plan, the 1999 Plan and the 2001 Plan (collectively, the “Plans”) are
      administered by the Compensation Committee of the board of directors. Officers
      and other key employees, consultants and directors (other than non-employee
      directors) are eligible to receive options or other equity-based incentives
      under the Plans.





The
      2001
      Plan provides that each non-employee director automatically receives a
      nonqualified stock option to purchase 6,000 shares of common stock and the
      chairman of the audit committee and the compensation committee will receive
      a
      nonqualified stock option to purchase 7,500 shares of common stock on April
      1 of
      each year. However, if there are not sufficient shares available under the
      applicable Plan, the non-employee director will receive a lesser number of
      shares. In April 2005, the Company granted 8,292 options, under its 2001 Plan,
      to its non-employee directors. These options were granted at a price of $9.57
      which was equal to the fair market value of the options at the date of grant.
      These options were fully vested by December 31, 2005. The balance of the
      automatic nonqualified options to its non-employee directors, which amounted
      to
      17,208, were issued and included in the 400,000 options issued in July
      2005.





A
      summary
      of the activity under the Plans and the NTST-Ohio inducement options (see note
      9) are as follows:


2005
              
              2004
              
              2003Weighted
              
              
              
              Weighted
              
              
              
              WeightedAverage
              
              
              
              Average
              
              
              
              AverageExercise
              
              
              
              Exercise
              
              
              
              ExerciseShares
              
              Price
              
              Shares
              
              Price
              
              Shares
              
              PriceOutstanding
                  - Beginning ofYear
              
              
              724,333
              
              $
              6.476
              
              
              365,755
              
              $
              4.111
              
              
              664,702
              
              $
              2.276Granted
                  During the Year
              
              
              438,292
              
              
              10.181
              
              
              397,455
              
              
              8.438
              
              
              381,000
              
              
              4.754Canceled
                  During the Year
              
              
              (10,500
              )
              
              1.81
              
              
              --
              
              
              --
              
              
              (11,750
              )
              
              1.724Exercised
                  During the Year
              
              
              (206,658
              )
              
              4.134
              
              
              (38,877
              )
              
              4.280
              
              
              (668,197
              )
              
              2.694Outstanding
                  - End of Year
              
              
              945,467
              
              $
              8.758
              
              
              724,333
              
              $
              6.476
              
              
              365,755
              
              $
              4.111Exercisable
                  - End of Year
              
              
              915,467
              
              $
              8.561
              
              
              525,606
              
              $
              5.734
              
              
              226,253
              
              $
              3.721





F-37


**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


***[13]
      Stock-Based Compensation - [Continued]***





The
      following table summarizes stock option information as of December 31,
      2005:


Options
                  OutstandingWeightedAverage
                  Remaining
              
              OptionsExercise
                Prices
              
              Number
                  Outstanding
              
              Contractual
                  Life
              
              Exercisable$13.29
              
              
              1,500
              
              
              3.25Years
              
              
              1,500$14.77
              
              
              30,000
              
              
              4.83Years
              
              
              --$9.85
              
              
              400,000
              
              
              4.50Years
              
              
              400,000$9.57
              
              
              8,292
              
              
              4.25Years
              
              
              8,292$8.49
              
              
              299,280
              
              
              3.42Years
              
              
              299,280$8.20
              
              
              81,875
              
              
              3.50Years
              
              
              81,875$6.61
              
              
              8,000
              
              
              2.58Years
              
              
              8,000$4.93
              
              
              69,378
              
              
              2.08Years
              
              
              69,378$4.37
              
              
              7,500
              
              
              7.50Years
              
              
              7,500$4.37
              
              
              31,642
              
              
              2.50Years
              
              
              31,642$2.50
              
              
              3,000
              
              
              1.25Years
              
              
              3,000$2.38
              
              
              5,000
              
              
              1.50Years
              
              
              5,000Totals
              
              
              945,467
              
              
              3.81Years
              
              
              915,467





***Warrants
      Issued as Compensation -*** In 2001,
      the term of the Company’s $12 Series B Common Stock Purchase Warrants for
      448,544 shares, was extended to January 31, 2002. In January 2002, the term
      of
      the 448,544 $12 warrants was further extended to July 31, 2002. In July 2002,
      the term of the warrants was further extended to January 31, 2003. In January
      2003, the term of the warrants was further extended to April 30, 2003. In April
      2003, the Company agreed to extend the term of these warrants to July 31, 2003.
      The Company re-measured the fair value of the warrants at the dates of
      extension. No financing costs were recorded associated with the warrant
      extension made in January 2003, as there was no material change in their fair
      value. The Company charged $1,125 to operations related to the warrant extension
      made in April 2003. In July 2003, the Company agreed to extend the term of
      these
      same warrants from July 31, 2003 to October 31, 2003. The Company re-measured
      the fair value of the warrants at the date of extension and charged $5,211
      of
      financing costs to operations in July 2003. On October 23, 2003, the Company
      reduced the exercise price of the warrants from $12.00 per share to $10.00
      per
      share and through October 31, 2003, 423,620 warrants were exercised and the
      Company received gross proceeds of $4,236,200 less $59,592 of costs. The
      remaining 24,924 warrants expired unexercised.





During
      2003, 120,000 warrants that were issued in 1999 were exercised and the Company
      received gross proceeds of $629,000.





During
      2002, the Company issued warrants to purchase 200,000 shares in connection
      with
      a financial advisory agreement whereby the Company would pay consulting fees
      in
      addition to the issuance of warrants. These warrants, which expired over various
      times ranging from one to two years, were valued at $.24 per warrant, which
      represented the costs of the services based upon the contractual agreement.
      The
      warrants


F-38




**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




***[13]
      Stock-Based Compensation - [Continued]***





had
      the
      following exercise price, vesting dates and expiration date for the number
      of
      shares set forth below:


Shares
              
              Exercise
                  Price
              
              Vesting
                  Date
              
              Expiration
                  Date50,000
              
              $2.69
              
              April
                  10, 2002
              
              March
                  31, 200330,000
              
              $4.00
              
              June
                  1, 2002
              
              May
                  31, 200330,000
              
              $5.00
              
              September
                  1, 2002
              
              February
                  28, 200430,000
              
              $6.00
              
              November
                  1, 2002
              
              April
                  30, 200430,000
              
              $7.00
              
              January
                  1, 2003
              
              December
                  31, 200430,000
              
              $8.00
              
              February
                  28, 2003
              
              January
                  31, 2005




The
      $48,000 value of the warrants was being charged to operations over the vesting
      period. As a result, $33,600 was charged to operations in 2002 and $14,400
      was
      charged to operations in 2003. During 2003, 170,000 of these warrants were
      exercised and the Company received gross proceeds of $914,500 and 30,000
      warrants with an exercise price of $4.00 expired.





During
      2005, the Company announced the completion of a private placement of units
      consisting of an aggregate 490,000 shares of its common stock and warrants
      to
      purchase 147,003 shares of common stock, which include 24,500 warrants issued
      to
      the placement agent. The warrants have an exercise price of $11 per share and
      will expire in October 2010. The Company received net proceeds of approximately
      $4.1 million.





A
      summary
      of warrant activity is as follows:


2005
              
              2004
              
              2003Weighted
              
              
              
              Weighted
              
              
              
              WeightedAverage
              
              
              
              Average
              
              
              
              AverageExercise
              
              
              
              Exercise
              
              
              
              ExerciseShares
              
              Price
              
              Shares
              
              Price
              
              Shares
              
              PriceOutstanding
                  - Beginningof
                  Year
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              768,544
              
              $
              9.17Granted
                  During the Year
              
              
              147,003
              
              $
              11.00
              
              
              --
              
              
              --
              
              
              --
              
              
              --Expired
                  During the Year
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (54,924
              )
              $
              6.72Exercised
                  During the Year
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (713,620
              )
              $
              8.10Outstanding
                  - End of Year
              
              
              147,003
              
              $
              11.00
              
              
              --
              
              
              --
              
              
              --
                  _
              
              $
              --_Exercisable
                  - End of Year
              
              
              147,003
              
              $
              11.00
              
              
              --
              
              
              --
              
              
              --_
              
              $
              --_





F-39


**NETSMART
      TECHNOLOGIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







***[14]
      Operating Segments***





The
      Company currently classifies its operations in four business segments: (1)
      Software and Related Systems and Services -NY (2) Software and Related Systems
      and Services - Ohio (3) Data Center Services and (4) Application Service
      Provider Services (“ASP”). Software and Related Systems and Services for both
      the NY and Ohio segments refer to the design, installation, implementation
      and
      maintenance of computer information systems that provide comprehensive
      healthcare information technology solutions including billing, patient tracking
      and scheduling for inpatient and out patient environments, as well as clinical
      documentation and medical record generation and management. Within these
      segments are large turnkey and small turnkey components. The large turnkey
      components consist mostly of the Avatar suite of products. When the Company
      is
      engaged in a fixed price arrangement, these installations will usually extend
      over a six-month to a multi-year time period. The duration of the implementation
      is dependant on the size and complexity of the customer organization and the
      specifics of the implementation. The small turnkey components are usually
      completed within a six-month period. Small turnkey contracts performed in the
      New York segment are mostly related to the Avatar methadone related products.
      The small turnkey contracts in the Ohio segment are for system installations
      for
      behavioral healthcare information management software for mental health,
      substance abuse, and addiction services agencies, developmental disability
      centers and behavioral health-related managed care organizations.





The
      Data
      Center Services involve Company personnel performing data entry and data
      processing services for customers. ASP services involve the Company offering
      several of it software products on a virtual private network or internet
      delivery approach, thereby allowing its customers to utilize the Company’s
      products and pay on a monthly service basis.





ASP
      services was established as a result of the CareNet acquisition in June 2003.
      Prior to the acquisition of CareNet, the Company’s ASP operations were
      immaterial and were included in Software and Related Systems and Services.
      NTST-Ohio is a new segment resulting from their acquisition in September 2005.
      NTST-Ohio offers a full suite of behavioral healthcare information management
      software for mental health, substance abuse, and addiction services agencies,
      developmental disability centers, and behavioral health-related managed care
      organizations. Intersegment sales and sales outside the United States are not
      material. Information concerning the Company’s business segments is as
      follows:





F-40





**NETSMART
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


Sotware
                  and Related Systems and Services-NY
              
              Data
                  Center
              
              Application
                  Service Provider
              
              Software
                  and Related Systems and Services-Ohio
              
              TotalYear
                  Ended December 31, 2005RevenueLarge
                  Turnkey
              
              
              17,599,035
              
              
              
              
              
              
              
              
              
              
              
              17,599,035Small
                  Turnkey
              
              
              1,041,866
              
              
              
              
              
              
              
              
              1,685,904
              
              
              2,727,770Maintenance
              
              
              9,784,488
              
              
              
              
              
              
              
              
              3,533,256
              
              
              13,317,744Other
              
              
              -
              
              
              1,795,448
              
              
              2,538,457
              
              
              
              
              
              4,333,905Total
              
              
              28,425,389
              
              
              1,795,448
              
              
              2,538,457
              
              
              5,219,160
              
              
              37,978,454Gross
                  ProfitTurnkey
              
              
              8,434,026
              
              
              
              
              
              
              
              
              210,025
              
              
              8,644,051Maintenance
              
              
              5,402,433
              
              
              
              
              
              
              
              
              2,493,736
              
              
              7,896,169Other
              
              
              
              
              
              908,279
              
              
              927,431
              
              
              
              
              
              1,835,710Total
              
              
              13,836,459
              
              
              908,279
              
              
              927,431
              
              
              2,703,761
              
              
              18,375,930Income
                  before Income Taxes
              
              
              2,151,923
              
              
              328,414
              
              
              (116,027
              )
              
              328,414
              
              
              2,748,776Depreciation
                  and Amortization
              
              
              1,489,017
              
              
              110,479
              
              
              401,835
              
              
              450,125
              
              
              2,451,456Capital
                  Expenditures
              
              
              3,755,207
              
              
              6,445
              
              
              863,605
              
              
              9,121,675
              
              
              13,746,932Identifiable
                  Assets
              
              
              26,219,605
              
              
              1,909,546
              
              
              3,221,333
              
              
              33,271,370
              
              
              64,621,854Goodwill
              
              
              
              
              
              
              
              
              
              
              
              18,735,751
              
              
              18,735,751Year
                  Ended December 31, 2004RevenueLarge
                  Turnkey
              
              
              16,003,646
              
              
              
              
              
              
              
              
              -
              
              
              16,003,646Small
                  Turnkey
              
              
              927,960
              
              
              
              
              
              
              
              
              
              
              
              927,960Maintenance
              
              
              8,289,525
              
              
              
              
              
              
              
              
              
              
              
              8,289,525Other
              
              
              
              
              
              2,058,240
              
              
              1,725,473
              
              
              
              
              
              3,783,713Total
              
              
              25,221,131
              
              
              2,058,240
              
              
              1,725,473
              
              
              -
              
              
              29,004,844Gross
                  Profit
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              -Turnkey
              
              
              7,728,535
              
              
              
              
              
              
              
              
              
              
              
              7,728,535Maintenance
              
              
              4,120,550
              
              
              
              
              
              
              
              
              
              
              
              4,120,550Other
              
              
              
              
              
              1,208,887
              
              
              799,140
              
              
              
              
              
              2,008,027Total
              
              
              11,849,085
              
              
              1,208,887
              
              
              799,140
              
              
              -
              
              
              13,857,112Income
                  before Income Taxes
              
              
              2,095,722
              
              
              784,353
              
              
              181,890
              
              
              -
              
              
              3,061,965Depreciation
                  and Amortization
              
              
              1,247,962
              
              
              113,676
              
              
              262,755
              
              
              -
              
              
              1,624,393Capital
                  Expenditures
              
              
              950,094
              
              
              12,144
              
              
              93,501
              
              
              -
              
              
              1,055,739Identifiable
                  Assets
              
              
              31,291,838
              
              
              2,775,036
              
              
              3,640,027
              
              
              -
              
              
              37,706,901Year
                  Ended December 31, 2003RevenueLarge
                  Turnkey
              
              
              16,773,201
              
              
              
              
              
              
              
              
              -
              
              
              16,773,201Small
                  Turnkey
              
              
              768,155
              
              
              
              
              
              
              
              
              
              
              
              768,155Maintenance
              
              
              7,069,000
              
              
              
              
              
              
              
              
              
              
              
              7,069,000Other
              
              
              
              
              
              1,973,492
              
              
              591,202
              
              
              -
              
              
              2,564,694Total
              
              
              24,610,356
              
              
              1,973,492
              
              
              591,202
              
              
              -
              
              
              27,175,050Gross
                  Profit
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              -Turnkey
              
              
              8,290,978
              
              
              
              
              
              
              
              
              
              
              
              8,290,978Maintenance
              
              
              3,662,817
              
              
              
              
              
              
              
              
              
              
              
              3,662,817Other
              
              
              
              
              
              939,110
              
              
              213,897
              
              
              
              
              
              1,153,007Total
              
              
              11,953,795
              
              
              939,110
              
              
              213,897
              
              
              -
              
              
              13,106,802Income
                  before Income Taxes
              
              
              1,700,571
              
              
              476,959
              
              
              64,796
              
              
              -
              
              
              2,242,326Depreciation
                  and Amortization
              
              
              1,012,367
              
              
              103,285
              
              
              117,940
              
              
              -
              
              
              1,233,592Capital
                  Expenditures
              
              
              2,546,295
              
              
              151,390
              
              
              2,006,683
              
              
              -
              
              
              4,704,368Identifiable
                  Assets
              
              
              29,530,139
              
              
              2,607,681
              
              
              2,495,569
              
              
              -
              
              
              34,633,389
 F-41


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.Dated:
              March 31, 2006
            By:
            /s/
              James L. ConwayJames
              L. Conway, 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. Each person whose signature appears
      below
      hereby authorizes James L. Conway and Anthony F. Grisanti (or any of them acting
      in the absence of the others), as his true and lawful attorney-in-fact and
      agent, with full power of substitution and resubstitution for him and in his
      name, place and stead, in any and all capacities to sign any and all amendments
      to this report, and to file same, with all exhibits thereto and other documents
      in connection therewith, with the Securities and Exchange
      Commission.


Signature
              
              Title
              
              Date/s/
James
                L. Conway
              
              Chief
                  Executive Officer
              
              March 31,
                  2006James
                  L. Conway
              
              and
                  Director (PrincipalExecutive
                  Officer)/s/
Anthony
                F. Grisanti
              
              Chief
                  Financial Officer
              
              March
                  31, 2006Anthony
                  F. Grisanti
              
              (Principal
                  Financial andAccounting
                  Officer)Director
              
              March
                  31, 2006John
                  F. PhillipsPresident
                  and Director
              
              March
                  31, 2006Gerald
                  O. Koop/s/
Joseph
                G. Sicinski
              
              Director
              
              March
                  31, 2006Joseph
                  G. Sicinski/s/
Francis
                J. Calcagno
              
              Director
              
              March
                  31, 2006Francis
                  J. Calcagno/s/
John
                S.T. Gallagher
              
              Director
              
              March
                  31, 2006John
                  S.T. Gallagher/s/
Yacov
                  Shamash
              
              Director
              
              March
                  31, 2006Dr.
                  Yacov Shamash








EXHIBIT
      INDEX





Exhibits


3.1
            Restated
                Certificate of Incorporation, as amended (Filed as an exhibit to
                the
                Registrant’s registration statement on Form S-1, File No. 333-2550, which
                was declared effective by the Commission on August 13, 1996, and
                incorporated herein by reference.)


3.2
            By-Laws
                (Filed as an exhibit to the Registrant’s registration statement on Form
                S-1, File No. 333-2550, which was declared effective by the Commission
                on
                August 13, 1996, and incorporated herein by
                reference.)


10.1
            Employment
                Agreement dated April 1, 2004, between the Registrant and James L.
                Conway
                (Filed as an exhibit to the Registrant’s 10-Q dated May 5,
                2004.)


10.2
            Consulting
                Agreement dated April 1, 2004, between the Registrant and John F.
                Phillips
                (Filed as an exhibit to the Registrant’s 10-Q dated May 5,
                2004.)


10.3
            Employment
                Agreement dated April 1, 2004, between the Registrant and Gerald
                O. Koop
                (Filed as an exhibit to the Registrant’s 10-Q dated May 5,
                2004.)


10.4
            Employment
                Agreement dated April 1, 2004, between the Registrant and Anthony
                F.
                Grisanti (Filed as an exhibit to the Registrant’s 10-Q dated May 5,
                2004.)


10.6
            1993
                Long-Term Incentive Plan (Filed as an exhibit to the Registrant’s
                registration statement on Form S-1, File No. 333-2550, which was
                declared
                effective by the Commission on August 13, 1996, and incorporated
                herein by
                reference.)


10.7
            1998
                Long-Term Incentive Plan (Filed as an appendix to the Registrant’s proxy
                statement dated September 30, 1999, relating to its 1999 Annual Meeting
                of
                Stockholders and incorporated herein by
                reference.)


10.8
            1999
                Long-Term Incentive Plan (Filed as an appendix to the Registrant’s proxy
                statement dated November 9, 2000, relating to its 2000 Annual Meeting
                of
                Stockholders and incorporated herein by
                reference.)


10.9
            2001
                Long-Term Incentive Plan - Amended (Filed as an exhibit to the
                Registrant’s 8-K dated June 16,
                2005.)


10.10
            1999
                Employee Stock Purchase Plan (Filed as an appendix to the Registrant’s
                proxy statement dated November 9, 2000, relating to its 2000 Annual
                Meeting of Stockholders and incorporated herein by
                reference.)


10.11
            Agreement
                dated June 1, 2001, between the Registrant and Fleet Bank (Filed
                as an
                exhibit to the Registrant’s 10-K/A dated August 21,
                2003.)


10.12
            AIMS
                Acquisition Agreement (Filed as an exhibit to the Registrant’s 8-K dated
                May 10, 2001.)


10.13
            Agreement
                dated June 25, 2003, among Registrant, Creative Socio-Medics Corp.,
                Shuttle Data Systems Corp., d/b/a/ ADIA Information Management Corp.
                and
                Steven Heintz, Jr. (Filed as an exhibit to the Registrant’s 8-K dated July
                8, 2003.)


10.14
            Lease
                agreement dated as of December 22, 2003, between Registrant and Spacely
                LLC. (Filed as an exhibit to the Registrant’s 10-K dated March 23,
                2004.)


10.15
            Amended
                Executive Retirement, Non Competition and Consulting Plan. (Filed
                as an
                exhibit to the Registrant’s 10-Q dated August 9,
                2004.)


10.16
            Merger
                Agreement dated September 20, 2005, between CMHC Systems, Inc., Hayes
                Acquisition Corp., a newly-formed wholly-owned subsidiary of the
                Registrant, and John Paton, solely in the capacity of Securities
                Holders
                Representative. (Filed as an exhibit to the Registrant’s Form 8-K dated
                September 19, 2005.)


10.17
            Revolving
                Credit and Term Loan Agreement with Netsmart Technologies, Inc. and
                the
                Bank of America, N.A. (Filed as an exhibit to the Registrant’s Form 8-K
                dated October 7, 2005.)


10.18
            Asset
                Purchase Agreement dated June 17, 2005 between Addiction Management
                Systems, Inc. and Creative Socio-Medics Corp. (Filed as an exhibit
                to the
                Registrant’s Form 8-K dated June 21,
                2005.)


10.20
            Amendment
                No. 1 to Employment Agreement dated June 16, 2005, between the Registrant
                and James L. Conway. (Filed as an exhibit to the Registrant’s Form 8-K
                dated June 16, 2005.)


10.21
            Amendment
                No. 1 to Employment Agreement dated June 16, 2005 between the Registrant
                and Anthony F. Grisanti. (Filed as an exhibit to the Registrant’s Form 8-K
                dated June 16, 2005.)


10.22
            Asset
                Purchase Agreement dated April 27, 2005 between ContinuedLearning
                LLC and
                Creative Socio-Medics Corp. (Filed as an exhibit to the Registrant’s Form
                8-K dated April 27, 2005.)


10.23
            Employment
                Agreement dated April 27, 2005 between Netsmart Technologies, Inc.
                and A.
                Sheree Graves. (Filed as an exhibit to the Registrant’s Form 8-K dated
                April 27, 2005.)


10.24
            Letter
                Agreement between Griffin Securities, Inc. and Netsmart Technologies,
                Inc.
                dated as of August 9, 2005. (Filed as an exhibit to the Registrant’s Form
                S-3, File No. 333-129265.)


10.25
            Letter
                Agreement between Griffin Securities, Inc. and Netsmart Technologies,
                Inc.
                dated as of October 11, 2005. (Filed as an exhibit to the Registrant’s
                Form S-3, File No. 333-129265.)


21.1
            Subsidiaries
                of the Registrant


23.1
            Consent
                of Marcum & Kliegman LLP


24
            Powers
                of Attorney (See Signature Page)


31.1
            Certification
                of Chief Executive Officer


31.2
            Certification
                of Chief Financial Officer


32
            Certification
                pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002