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


                                  Form 10-Q/A


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

                        For Quarter Ended June 30, 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. Employer
incorporation or organization)                       Identification Number)

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

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

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

Yes  X            No__
     --

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes  __  No  X
             --


Number of shares of common stock outstanding as of August 3, 2005:    5,390,950
                                                                      =========



Netsmart Technologies, Inc. and Subsidiary

Index

Part I: - Financial Information:

Item 1.  Financial Statements:                                            Page
                                                                          ----


Condensed Consolidated Balance Sheets - June 30, 2005 (Unaudited)
 and December 31, 2004                                                     1-2

Condensed Consolidated Statements of Income - (Unaudited)
 Six Months Ended June 30, 2005 and 2004 and Three Months ended
 June 30, 2005 and 2004                                                     3

Condensed Consolidated Statements of Cash Flows - (Unaudited)
 Six Months Ended June 30, 2005 and 2004                                   4-5

Condensed Consolidated Statement of Stockholders' Equity - (Unaudited)
 Six Months Ended June 30, 2005                                             6

Notes to Condensed Consolidated Financial Statements                       7-12

Item 2.  Management's Discussion and Analysis of
 Financial Condition and Results of Operations                            13-27

Item 3.  Quantitative and Qualitative Disclosures About Market Risk         27

Item 4.  Controls and Procedures                                            27

Part II  Other Information

Item 6.  Exhibits and Reports on Form 8-K                                   28




Item 1.  Financial Statements

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

                                                       June 30,    December 31,
                                                       -------     -----------
                                                         2005         2004
                                                         ----         ----
                                                      Unaudited
                                                      ---------
Assets:
Current Assets:
         Cash and Cash Equivalents                   $16,359,627   $16,411,735
         Accounts Receivable - Net                     9,010,691    11,714,691
         Costs and Estimated Profits in Excess
           of Interim Billings                           831,057       636,985
         Deferred taxes                                1,030,000     1,111,000
         Other Current Assets                            772,305       596,253
                                                      ----------    ----------

         Total Current Assets                         28,003,680    30,470,664
                                                      ----------    ----------

Property and Equipment - Net                           2,427,944     2,546,948
                                                      ----------    ----------

Other Assets:
         Software Development Costs - Net              3,561,024     1,132,453
         Customer Lists - Net                          3,183,411     2,179,237
         Deferred taxes less current portion           1,074,000     1,284,000
         Other Assets                                    104,246        93,599
                                                      ----------    ----------

Total Other Assets                                     7,922,681     4,689,289
                                                      ----------    ----------

Total Assets                                         $38,354,305   $37,706,901
                                                      ==========    ==========



See Notes to Condensed Consolidated Financial Statements.


                                       1




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

                                                                                     June 30,       December 31,
                                                                                     -------        -----------
                                                                                       2005            2004
                                                                                       ----            ----
                                                                                    (Unaudited)
                                                                                     ---------
                                                                                           

Liabilities and Stockholders' Equity:
Current Liabilities:
         Current Portion - Long Term Debt                                          $    666,699    $    666,667
         Current Portion Capital Lease Obligations                                       54,394          64,450
         Accounts Payable                                                             1,469,763       1,572,930
         Accrued Expenses                                                             1,146,917       1,545,127
         Interim Billings in Excess of Costs and Estimated
           Profits                                                                    6,917,950       7,497,773
         Deferred Revenue                                                             1,924,311         907,630
                                                                                    -----------     -----------

         Total Current Liabilities                                                   12,180,034      12,254,577
                                                                                    -----------     -----------

         Long Term Debt - Less current portion                                             --           333,361
         Capital Lease Obligations - Less current portion                                  --            21,532
         Interest Rate Swap at Fair Value                                                 5,008          15,152
         Deferred Rent Payable                                                          475,050         455,427
                                                                                    -----------     -----------

         Total Non Current Liabilities                                                  480,058         825,472
                                                                                    -----------     -----------

Commitments and Contingencies

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

         Common Stock - $.01 Par Value; Authorized 15,000,000 Shares; Issued and
           outstanding 5,599,531 and 5,371,607 shares at June 30, 2005 and
           5,567,124 and 5,339,200
           shares at December 31, 2004                                                   55,995          55,671

         Additional Paid in Capital                                                  30,137,495      29,893,223
         Accumulated Comprehensive loss - Interest Rate Swap                             (5,008)        (15,152)
         Accumulated Deficit                                                         (2,781,287)     (3,593,908)
                                                                                    -----------     -----------
                                                                                     27,407,195      26,339,834
         Less:  cost of shares of Common Stock held
           in treasury - 227,924 shares at June 30, 2005
           and December 31, 2004                                                      1,712,982       1,712,982
                                                                                    -----------     -----------

         Total Stockholders' Equity                                                  25,694,213      24,626,852
                                                                                    -----------     -----------

Total Liabilities and Stockholders' Equity                                         $ 38,354,305    $ 37,706,901
                                                                                    ===========     ===========


See Notes to Condensed Consolidated Financial Statements.

                                       2






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

                                                      Six months ended              Three months ended
                                                          June 30                         June 30
                                                      ----------------              ------------------
                                                   2005              2004         2005               2004
                                                   ----              ----         ----               ----
                                                                                      

Revenues:
  Software and Related
    Systems and Services:
    General                                       $ 8,663,661      $ 8,303,967    $ 4,422,905      $ 4,241,012
    Maintenance Contract
      Services                                      4,445,033        3,968,908      2,290,914        2,051,682
                                                   ----------       ----------     ----------       ----------
    Total Software and Related
      Systems and Services                         13,108,694       12,272,875      6,713,819        6,292,694

  Application Service Provider Services             1,133,046          741,885        577,625          387,071

  Data Center Services                                946,258          997,154        467,853          509,173
                                                   ----------       ----------     ----------       ----------

  Total Revenues                                   15,187,998       14,011,914      7,759,297        7,188,938
                                                   ----------       ----------     ----------       ----------

Cost of Revenues:
  Software and Related
    Systems and Services:
    General                                         4,500,663        4,552,399      2,240,336        2,317,832
    Maintenance Contract
      Services                                      2,111,381        1,992,255      1,050,622        1,006,781
                                                   ----------       ----------     ----------       ----------

    Total Software and Related
      Systems and Services                          6,612,044        6,544,654      3,290,958        3,324,613

    Application Service Provider Services             664,082          439,100        387,234          212,590

  Data Center Services                                449,624          430,692        218,881          216,635
                                                   ----------       ----------     ----------       ----------

  Total Cost of Revenues                            7,725,750        7,414,446      3,897,073        3,753,838
                                                   ----------       ----------     ----------       ----------

Gross Profit                                        7,462,248        6,597,468      3,862,224        3,435,100
                                                   ----------       ----------     ----------       ----------

Selling, General and
  Administrative Expenses                           4,358,585        3,733,512      2,370,473        1,902,626
Research, Development and Maintenance               1,969,303        1,664,689        898,921          886,081
                                                   ----------       ----------     ----------       ----------

  Total                                             6,327,888        5,398,201      3,269,394        2,788,707
                                                   ----------       ----------     ----------       ----------

Operating Income                                    1,134,360        1,199,267        592,830          646,393

Interest and Other Income                             145,694           64,952         88,405           33,312

Interest and Other Expense                             37,433           77,365         17,796           35,781
                                                   ----------       ----------     ----------       ----------

Income before Income Tax Expense                    1,242,621        1,186,854        663,439          643,924

Income Tax Expense                                    430,000          369,000        214,000          151,000
                                                   ----------       ----------     ----------       ----------

  Net Income                                      $   812,621      $   817,854    $   449,439      $   492,924
                                                   ==========       ==========     ==========       ==========

Earnings Per Share ("EPS")of Common
  Stock:
  Basic EPS                                       $       .15      $       .15    $       .08      $       .09
                                                   ==========       ==========     ==========       ==========

Weighted Average Number of Shares of
  Common Stock Outstanding                          5,354,968        5,325,628      5,371,607        5,336,200
                                                   ==========       ==========     ==========       ==========

Diluted EPS                                       $       .15      $       .15    $       .08      $       .09
                                                   ==========       ==========     ==========       ==========

Weighted Average Number of Shares of
  Common Stock and Common Stock
  Equivalents Outstanding                           5,570,611        5,557,748      5,584,448        5,562,741
                                                   ==========       ==========     ==========       ==========

See Notes to Condensed Consolidated Financial Statements.



                                       3


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


                                                         Six Months ended
                                                             June 30,
                                                       2005            2004
                                                       ----            ----
Operating Activities:
  Net Income                                        $   812,621    $   817,854
                                                    -----------    -----------

  Adjustments to Reconcile Net Income
    to Net Cash Provided by Operating Activities:
    Depreciation and Amortization                       853,017        781,693
    Provision for Doubtful Accounts                     337,000       (122,733)
    Deferred Income Taxes                               291,000        295,000

 Changes in Assets and Liabilities:
  [Increase] Decrease in:
    Accounts Receivable                               2,494,698       (869,824)
    Costs and Estimated Profits in
     Excess of Interim Billings                        (194,072)       278,782
    Other Current Assets                               (144,004)       123,095
    Other Assets                                         (7,730)        14,796

 Increase [Decrease] in
  Accounts Payable                                     (103,167)      (224,875)
  Accrued Expenses                                     (398,210)      (277,964)
  Interim Billings in Excess of
    Costs and Estimated Profits                        (579,823)      (886,784)
  Deferred Revenue                                       22,927        168,558
  Deferred Rent Payable                                  19,623        272,598
                                                    -----------    -----------

 Total Adjustments                                    2,591,259       (447,658)
                                                    -----------    -----------

Net Cash Provided by
  Operating Activities                                3,403,880        370,196
                                                    -----------    -----------

Investing Activities:
  Acquisition of Property and Equipment                (229,501)    (1,200,633)
  Capitalized Software Development                         --         (117,000)
  Business Acquisitions                              (2,914,766)       (16,263)
                                                    -----------    -----------

 Net Cash Used In Investing Activities               (3,144,267)    (1,333,896)
                                                    -----------    -----------


See Notes to Condensed Consolidated Financial Statements.


                                       4



NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
-------------------------------------------------------------------------------
                                                              Six Months ended
                                                                  June 30,
                                                            2005             2004
                                                            ----             ----
                                                                

Financing Activities:
  Payment of Capitalized Lease Obligations              $    (31,588)   $    (31,052)
  Net Proceeds from Stock Options Exercised                   53,196         107,487
  Payments of Term Loan                                     (333,329)       (333,330)
                                                         -----------     -----------

  Net Cash Used in Financing Activities                     (311,721)       (256,895)
                                                         -----------     -----------

  Net (Decrease) in Cash
    and Cash Equivalents                                     (52,108)     (1,220,595)

  Cash and Cash Equivalents -
    Beginning of Period                                   16,411,735      15,920,993
                                                         -----------     -----------

  Cash and Cash Equivalents -
    End of Period                                       $ 16,359,627    $ 14,700,398
                                                         ===========     ===========

Supplemental  Disclosure of Cash Flow Information:
  Cash paid during the period for:
    Interest                                            $     39,437    $     79,662
    Income Taxes                                        $    170,063    $    173,149

Non Cash Investing and Financing Activities:
The fair value of the interest rate swap decreased by $10,144 for the six months
ended June 30, 2005. The fair value of the interest rate swap decreased by
$27,447 for the six months ended June 30, 2004.

During the six months ended June 30, 2005, the Company acquired for $489,238 in
cash and stock 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.

During the six months ended June 30, 2005, the Company acquired for $3,610,682
software, customer lists and other assets of Addiction Management Systems. The
consideration consisted of $2,661,849 in cash and the assumption of $948,833 for
certain liabilities for services to be performed in the future.

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

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

See Notes to Condensed Consolidated Financial Statements.


                                       5




NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-----------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------------------




                                            Additional                Accumulated
                                            ----------                -----------
                                            Paid-in                   Comprehensive
                                            -------                   -------------
                                            Capital                   Loss                                               Total
                                            -------                   ----                                               -----
                         Common Stock       Common      Accumulated   Interest Rate  Comprehensive  Treasury Shares   Stockholders'
                         ------------       ------      -----------   -------------  -------------  ---------------   -------------
                      Shares      Amount    Stock         Deficit     Swap           Income        Shares     Amount     Equity
                      ------      ------    -----         -------     ----           ------        ------     ------     ------
                                                                                           


Balance -
  January 1, 2005     5,567,124  $ 55,671  $29,893,223  $(3,593,908)  $(15,152)    $   --         227,924  $(1,712,982) $24,626,852

Common Stock
 Issued - Exercise
 of Options              12,407       124       53,072          --         --          --             --           --        53,196

Change in Fair
Value of Interest
Rate Swap                   --        --           --           --      10,144       10,144           --           --        10,144

Common Stock
Issued - Business
Acquisition              20,000       200      191,200          --         --           --            --           --       191,400

Net Income                  --        --           --       812,621        --       812,621           --           --       812,621
                      ---------   -------   ----------   ----------    -------      -------       -------   ----------   ----------
                                                                                   $822,765
                                                                                    =======
Balance -
 June 30, 2005        5,599,531  $ 55,995  $30,137,495  $(2,781,287)  $(5,008)                    227,924  $(1,712,982) $25,694,213
                      =========   =======   ==========   ==========    ======                     =======   ==========   ==========


See Notes to Consolidated Financial Statements.

                                       6





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

(1)  Financial Statements

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

These unaudited, condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for any interim period are not
necessarily indicative of the results of operations to be expected for the
fiscal year. For further information, refer to the consolidated financial
statements and accompanying footnotes included in the Company's annual report on
Form 10-K for the year ended December 31, 2004.


(2)  Earnings Per Share

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

                                                      Six Months Ended                 Three Months Ended
                                                           June 30,                         June 30,
                                                           --------                         --------
                                                   2005               2004           2005               2004
                                                   ----               ----           ----               ----
                                                                                     


Numerator:
  Net income                                  $   812,621       $   817,854      $   449,439       $   492,924
                                                =========         =========        =========         =========

Denominator:
  Weighted average shares                       5,354,968         5,325,628        5,371,607         5,336,200
  Effect of dilutive securities:
    Employee stock options                        215,643           232,120          212,841           226,271
                                                ---------         ---------        ---------         ---------

  Denominator for diluted earnings
    per share-adjusted weighted
    average shares after assumed
    conversions                                 5,570,611         5,557,748        5,584,448         5,562,471
                                                =========         =========        =========         =========

Options to purchase 9,792 shares of the Company's common stock that were
outstanding as of June 30, 2005 were not included in the calculation of diluted
earnings per share for the six and three months ended June 30, 2005 since such
inclusion would have been antidilutive.


(3)  Stock Options and Similar Equity Instruments

At June 30, 2005, the Company had three stock-based employee compensation plans.
As permitted under Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure", which

                                       7





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

                                                      Six Months Ended                 Three Months Ended
                                                           June 30,                         June 30,
                                                           --------                         --------
                                                   2005               2004          2005                2004
                                                   ----               ----          ----                ----
                                                                                    



Net Income as Reported                        $   812,621       $   817,854      $   449,439       $   492,924

Deduct:  Total stock-based employee
compensation expense determined
under fair value-based method for
all awards, net of related tax effect             471,638           361,967          159,806           266,885
                                                ---------         ---------        ---------         ---------

Pro Forma Net Income                          $   340,983       $   455,887      $   289,633       $   226,039
                                                =========         =========        =========         =========

Basic Net Income Per Share as Reported        $       .15       $       .15      $       .08       $       .09
                                                =========         =========        =========         =========

Basic Pro Forma Net Income Per Share          $       .06       $       .09      $       .05       $       .04
                                                =========         =========        =========         =========

Diluted Net Income Per Share as Reported      $       .15       $       .15      $       .08       $       .09
                                                =========         =========        =========         =========

Diluted Pro Forma Net Income Per Share        $       .06       $       .08      $       .05       $       .04
                                                =========         =========        =========         =========

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:
                                                     Six Months Ended
                                                         June 30,
                                                    2005          2004
                                                    ----          ----
Expected Life (Years)                                 5             5
Interest Rate                                         4%         4.00%
Annual Rate of Dividends                              0%            0%
Volatility                                           67%           68%

The weighted average fair value of options at date of grant using the fair value
based method during 2005 and 2004 is estimated at $5.01 and $3.95 respectively.

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." 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


                                       8


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. 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 vest
on or prior to December 31, 2005. The Company will utilize the fair value method
for any future instruments issued or outstanding but not vested after the
implementation date.

In March 2005, the SEC 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, the
transition from non-public to public entity status, 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.


(4)  Income Taxes

The provision for income taxes for the six months ended June 30, 2005, consists
of a current tax provision of $139,000 and a deferred tax provision of
approximately $291,000. The provision for income taxes for the period ended June
30, 2004, consists of a current tax provision of $74,000 and a deferred tax
provision of $295,000. The deferred tax provision for the six months ended June
30, 2005 was $487,000 based upon utilization of available net operating loss
carry forwards offset by a reduction in the deferred tax asset valuation
allowance of $192,000. The provision for income taxes for the three months ended
June 30, 2005, consists of a current tax provision of $60,000 and a deferred tax
provision of approximately $154,000. The provision for income taxes for the
three months ended June 30, 2004 consists of a current provision of $43,000 and
a deferred tax provision of $108,000. The deferred tax provision was $248,000
based upon utilization of available net operating loss carry forwards offset by
a reduction in the deferred tax asset valuation allowance of $140,000.

(5)  Stockholders' Equity

During the six months ended June 30, 2005, options to purchase 12,407 shares
were exercised and the Company received gross proceeds of $53,196.

On April 28, 2005, the Company acquired substantially all of the assets of
Continued Learning LLC (see Acquisition footnote 8).  The total purchase price
of $489,238 consisted of various components of consideration including 20,000
shares of the Company's common stock valued at $191,400.

(6)  Operating Segments

The Company currently classifies its operations into three business segments:
(1) Software and Related Systems and Services, (2) Data Center Services and (3)
Application Service Provider ("ASP") Services. Software and Related Systems and
Services is the design, installation, implementation and maintenance of computer

                                       9



information systems that provide comprehensive healthcare information technology
solutions, including billing, patient tracking and scheduling for inpatient and
outpatient environments, as well as clinical documentation and medical record
generation and management. Data Center Services involves Company personnel
performing data entry and data processing services for customers. ASP Services
involve Company offerings of each of its Avatar suite of products, CareNet
products and InfoScribeR products on a virtual private network or internet
delivery approach, thereby allowing its customers to rapidly deploy products and
pay on a monthly service basis, thus eliminating capital intensive system
requirements. Intersegment sales and sales outside the United States are not
material. Information concerning the Company's business segments are as follows:

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

Six Months Ended June 30, 2005
------------------------------
Revenue                                               $13,108,694          $   946,258         $ 1,133,046       $15,187,998
Income before income taxes                                927,239              266,987              48,395         1,242,621
Total identifiable assets at
  June 30, 2005                                        31,735,430            2,373,467           4,245,409        38,354,306

Six Months Ended June 30, 2004
------------------------------
Revenue                                               $12,272,875          $   997,154         $   741,885       $14,011,914
Income before income taxes                                837,894              341,727               7,233         1,186,854
Total identifiable assets at
  June 30, 2004                                        28,182,770            2,331,048           3,258,489        33,772,307

Three Months Ended June 30, 2005
--------------------------------
Revenue                                               $ 6,713,819          $   467,853         $   577,625       $ 7,759,297
Income before income taxes                                556,626              128,475             (21,662)          663,439

Three Months Ended June 30, 2004
--------------------------------
Revenue                                               $ 6,292,694          $   509,173         $   387,071       $ 7,188,938
Income before income taxes                                443,161              178,300              22,463           643,924

(7)  Reclassifications

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

(8)  Acquisitions

On April 28, 2005, the Company 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, was $489,238
which consisted of cash of $252,917 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,
and assumed liabilities of $44,921. It also provides for a potential additional
payment up to $250,000 if certain revenue targets are met in year one.
The Company 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. The cash portion of the purchase price was paid out of existing working
capital.



                                       10



The cost of the ContinuedLearning acquisition was allocated as follows: $404,606
to purchased software, $42,632 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.

On June 20, 2005, the Company 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.

The cost of the AMS acquisition was allocated as follows: $2,173,681 to
purchased software, $1,273,921 to customer lists, $127,698 accounts receivable,
$32,048 to inventory, and $3,334 to a security deposit. The Company is
amortizing the purchased software over an eight-year life and the customer lists
over a ten-year life.

The results of each acquisition were included in the consolidated results of
operations as of the dates of the acquisitions.

The Company accounted for both of the ContinuedLearning and AMS acquisitions
pursuant to the purchase method of accounting as required under Statement of
Financial Accounting Standards No. 141 "Business Combination".

(9) New Pronouncements

FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations" (FIN 47) In March 2005, the FASB issued FIN 47, which is effective
for the company on December 31, 2005. FIN 47 clarifies that the phrase
"conditional asset retirement obligation," as used in FASB Statement No. 143,
"Accounting for Asset Retirement Obligations" (FAS 143), refers to a legal
obligation to perform an asset retirement activity for which the timing and/or
method of settlement are conditional on a future event that may or may not be
within the control of the company. The obligation to perform the asset
retirement activity is unconditional even though uncertainty exists about the
timing and/or method of settlement. Uncertainty about the timing and/or method
of settlement of a conditional asset retirement obligation should be factored
into the measurement of the liability when sufficient information exists. FAS
143 acknowledges that in some cases, sufficient information may not be available
to reasonably estimate the fair value of an asset retirement obligation. FIN 47
also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The company does not
expect that adoption of FIN 47 will have a significant effect on its financial
position or results of operations.

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 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. We do not expect the adoption of SFAS 154 to have a
material effect on our consolidated financial position of results of operations.

In June 2005, the 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 is not expected to have a

                                       11


material impact on the Company's unaudited interim condensed consolidated
financial statements.

(10) Subsequent Events

On July 14, 2005, at the annual meeting of stockholders, the stockholders
approved an increase of 400,000 in the number shares available under the
Netsmart 2001 Long-Term Incentive Plan. These 400,000 additional options were
granted to officers and employees on July 14, 2005 with an exercise price of
$9.85 per share for each option, which was equal to the fair market value at the
date of grant, in accordance with the terms of the 2001 Long-Term Incentive
Plan. The options granted vest over different periods; however, they will all be
fully vested by December 31, 2005.


                                       12


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

Overview

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

Software and Related Systems and Services is the design, installation,
implementation and maintenance of computer information systems that provide
comprehensive healthcare information technology solutions, including billing,
patient tracking and scheduling for inpatient and outpatient environments, as
well as clinical documentation and medical record generation and management.
Data Center Services involves our personnel performing data entry and data
processing services for customers. Application Service Provider Services
involves 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, was $489,238 which consisted of
cash of $252,917 including legal fees of $18,632 and brokers fees of $10,000,
20,000 shares of the Company's common stock valued at $191,400 and assumed
liabilities of $44,921.  It also provides for a potential additional payment of
$250,000 if certain revenue targets are met in year one. We also entered into an
employment agreement 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. The cash portion of
the purchase price was paid out of existing working capital.

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.


Six Months Ended June 30, 2005 and 2004

Results of Operations

Our total revenue for the six months ended June 30, 2005 (the "June 2005
period") was $15,188,000, an increase of $1,176,000, or 8%, from our revenue for
the six months ended June 30, 2004 (the "June 2004 period"), which was
$14,012,000.

Revenue from contracts with state and local government agencies represented 48%
of revenue in the June 2005 and June 2004 periods.

Fixed price software development contracts, which include labor, licenses and

                                       13


third party resale components, accounted for 33% and 35% of consolidated revenue
for the June 2005 period and the June 2004 period, 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 such 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
43% of our consolidated revenue for the June 2005 period compared to 41% of
consolidated revenue for the June 2004 period. This increase was the result of
increases in maintenance and ASP revenue. We recognize revenue for fixed price
contracts on the estimated percentage of completion basis. Since the billing
schedules under the contracts differ from the recognition of revenue, at the end
of any period, these contracts generally result in either costs and estimated
profits in excess of billing or billing in excess of costs and estimated
profits. Revenue from fixed price software development contracts is determined
using the percentage of completion method, which is based upon the time spent by
our technical personnel on a project.

Software and Related Systems and Services

Our Software and Related Systems and Services revenue for the June 2005 period
was $13,109,000, an increase of $836,000, or 7%, from our revenue for the June
2004 period, which was $12,273,000. Software and Related Systems and Services
revenue is comprised of turnkey systems labor revenue, revenue from sales of
third party hardware and software license revenue, maintenance revenue and
revenue from small turnkey systems.

The largest component of Software and Related Systems and Services revenue was
turnkey systems labor revenue, which increased $301,000 or 6% to $5,009,000 in
the June 2005 period from $4,708,000 in the June 2004 period. 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 increased
staff working on turnkey labor contracts. Additionally, approximately $76,000,
or 25%, of the total turnkey systems labor increase was the result of a 3%
increase in the average daily billing rate from the June 2005 period to the June
2004 period. Revenue from third party hardware and software increased 12% to
$2,294,000 in the June 2005 period, from $2,045,000 in the June 2004 period.
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 other software and related
systems and services revenue. During the June 2005 period, the increase in third
party hardware and software was partially the result of an increase in database
software sales to two customers. License revenue decreased 5% to $989,000 in the
June 2005 period, from $1,044,000 in the June 2004 period. 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 sold and performed on fewer contracts containing license revenue in the June
2005 period than in the June 2004 period. We are actively pursuing courses of
action designed to retain or increase our customer base, including offering
price incentives or payment plans on a customer-by-customer basis. These price
incentives with respect to our license revenue have contributed to the decrease
in our license revenue. Maintenance revenue increased 12% to $4,445,000 in the
June 2005 period from $3,969,000 in the June 2004 period. As turnkey systems are
completed, they are transitioned to the maintenance division, thereby increasing
our installed base. Revenue from the sales of our small turnkey division
decreased 27% to $372,000 in the June 2005 period from $507,000 in the June 2004
period. We sold and performed on fewer small turnkey contracts in the June 2005
period than in the June 2004 period. Small turnkey division sales relate to
turnkey contracts that are less than $50,000 and are usually completed within
one month. On June 20, 2005, we acquired AMS. AMS typically has the type of
contracts included in the small turnkey division revenue.

Gross profit increased 13% to $6,497,000 in the June 2005 period from $5,728,000
in the June 2004 period. Our gross margin percentage increased to 50% in the
June 2005 period from 47% in the June 2004 period. Our gross margin increased as
a result of improved labor efficiency on our fixed price contracts and
maintenance division. This increase was partially offset by a decrease in our
license revenue.

                                       14


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 $946,000 in the June 2005 period from $997,000 in
the June 2004 period, representing a decrease of $51,000, or 5%. This decrease
was the result of one customer discontinuing the use of our services.

Gross profit decreased 12% to $497,000 in the June 2005 period from $566,000 in
the June 2004 period. Our gross margin percentage decreased to 52% in the June
2005 period from 57% in the June 2004 period. This decrease was the result of
the decrease in revenue, as well as an increase in costs of approximately
$19,000. The increase in costs was substantially the result of an increase in
communications costs of $25,000, which was partially offset by a decrease in
supplies costs of approximately $7,000.

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 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 $1,133,000 in the June 2005 period from $742,000 in the
June 2004 period, representing an increase of $391,000 or 53%. The components of
the ASP revenue are as follows:

                                       June 2005 period      June 2004 period
                                       ----------------      ----------------
          Avatar                             $  525,000            $  240,000
          CareNet                               442,000               391,000
          ContinuedLearning                      23,000                   --
          Infoscriber                           143,000               111,000
                                              ---------             ---------
          Total                              $1,133,000            $  742,000
                                              =========             =========

Avatar ASP revenue increased in the June 2005 period by 119% as compared to the
June 2004 period. This increase was substantially the result of increased usage
from our existing customer base, as well as the addition of one new customer in
the June 2005 period.

CareNet revenue increased in the June 2005 period by 13% as compared to the June
2004 period. Approximately 29% of the revenue increase is associated with the
original CareNet customer base acquired in June 2003, with the balance of the
increase resulting from sales to new customers.

Infoscriber revenue increased in the June 2005 period by 29% as compared to the
June 2004 period. This increase is the result of an increase in our client base.

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 $23,000 for the June 2005 period.

Gross profit for the June 2005 period was $469,000 and for the June 2004 period
was $303,000. The gross margin percentage was 41% in the June 2005 and June 2004
periods. Although revenue increased, the gross profit and gross margin

                                       15


percentage did not increase proportionally due to the increased costs associated
with the Continued Learning acquisition which amounted to $117,000 in the June
2005 period. 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 $4,359,000 in the June 2005
period, reflecting an increase of $625,000, or 17%, from $3,734,000 in the June
2004 period. Approximately 49% or $305,000 of this increase was related to an
increase in bad debts as a result of one customer filing for bankruptcy. The
remaining increases were: sales and marketing salaries and fringe benefits,
which increased by $228,000; sales and marketing consulting costs, which
increased by $117,000; sales conferences, which increased by $47,000; other
consulting which increased by $171,000, of which $59,000 related to Sarbanes
Oxley compliance efforts and $53,000 related to strategic planning efforts; and
$57,000 which related to increased amortization related to the ContinuedLearning
and AMS acquisitions. The cost increases were partially offset by reductions in:
trade shows, which decreased by $36,000; advertising and promotion, which
decreased by $60,000; investment banker fees, which decreased by $66,000;
depreciation, which decreased by $69,000; accounting costs, which decreased by
$40,000; and provision for bonuses, which decreased by $33,000.

We incurred research, development and maintenance expenses of $1,969,000 in the
June 2005 period, an increase of 18% from $1,665,000 in the June 2004 period.
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 a substantial increase in our research, development and
maintenance expenses. The increase in research, development and maintenance
expense is also the result of continuing investment in product enhancement and
extensions. These extensions include the development of new software modules
which addresses Federal reporting requirements, as well as continued investment
in core products. These amounts have been appropriately accounted for in
accordance with SFAS No. 86, "Accounting for the Cost of Computer Software to be
Sold, Leased, or Otherwise Marketed."

Interest and other expense was $37,000 in the June 2005 period, a decrease of
$40,000, or 52%, from the $77,000 in the June 2004 period.  This decrease is the
result of the completion of the amortization of the financing costs associated
with our loan agreement, which was amortized over a three year period, as well
as reduced borrowing under our loan agreement during the June 2005 period.

Interest income was $146,000 in the June 2005 period, an increase of $81,000, or
125%, from the $65,000 in the June 2004 period.  This increase is the result of
maintaining higher cash balances during the June 2005 period 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 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 $2.9 million at
June 30, 2005. In the June 2005 period, we recorded a current income tax expense
of $139,000, 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 $291,000. In the June 2004 period, we
recorded a current income tax expense of $74,000, 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 $295,000.
The deferred tax provision was $487,000 based upon utilization of available net
operating loss carry forwards offset by a reduction in the deferred tax asset
valuation allowance of $192,000.

As a result of the foregoing factors, in the June 2005 period we had net income

                                       16


of $813,000, or $.15 per share basic and diluted. For the June 2004 period, we
had net income of $818,000, or $.15 per share basic and diluted.

Three Months Ended June 30, 2005 and 2004

Results of Operations

Our total revenue for the three months ended June 30, 2005 (the "June 2005
quarter") was $7,759,000, an increase of $570,000, or 8%, from our revenue for
the three months ended June 30, 2004 (the "June 2004 quarter"), which was
$7,189,000.

Revenue from contracts with state and local government agencies represented 45%
of revenue in the June 2005 quarter and 48% of revenue in the June 2004 quarter.
This decrease is the result of a substantial completion of one state and two
county contracts.

Fixed price software development contracts, which include labor, licenses and
third party resale components, accounted for 29% and 37% of consolidated revenue
for the June 2005 quarter and the June 2004 quarter, 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 43% of our consolidated revenue for the
June 2005 quarter compared to 41% of consolidated revenue for the June 2004
quarter. This increase was the result of increases in maintenance and ASP
revenue. We recognize revenue for fixed price contracts on the estimated
percentage of completion basis. Since the billing schedules under the contracts
differ from the recognition of revenue, at the end of any 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 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.

Software and Related Systems and Services

Our Software and Related Systems and Services revenue for the June 2005 quarter
was $6,714,000, an increase of $421,000, or 7%, from our revenue for the June
2004 quarter, which was $6,293,000. Software and Related Systems and Services
revenue is comprised of turnkey systems labor revenue, revenue from sales of
third party hardware and software license revenue, maintenance revenue and
revenue from small turnkey systems.

The largest component of Software and Related Systems and Services revenue was
turnkey systems labor revenue, which increased $199,000 or 8% to $2,641,000 in
the June 2005 quarter from $2,442,000 in the June 2004 quarter. 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 the result of
increased staff working on turnkey labor contracts. Additionally, approximately
$45,000, or 23%, of the total turnkey systems labor increase was the result of a
3% increase in the average daily billing rate from the June 2005 quarter to the
June 2004 quarter. Revenue from third party hardware and software increased 2%
to $1,189,000 in the June 2005 quarter, from $1,164,000 in the June 2004
quarter. 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 other software
and related systems and services revenue. License revenue increased 18% to
$487,000 in the June 2005 quarter, from $414,000 in the June 2004 quarter.
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. The increase in license revenue in the June 2005 quarter
is the result of increased sales to our customer base related to customer user
count increases. We are actively pursuing courses of action designed to retain

                                       17


or increase our customer base, including offering price incentives or payment
plans on a customer-by-customer basis. The reductions from these price
incentives with respect to our license revenue have partially offset the
increase in license revenue associated with sales to our customer base related
to user count increases. Maintenance revenue increased 12% to $2,291,000 in the
June 2005 quarter from $2,052,000 in the June 2004 quarter. As turnkey systems
are completed, they are transitioned to the maintenance division, thereby
increasing our installed base. Revenue from the sales of our small turnkey
division decreased 52% to $106,000 in the June 2005 quarter from $220,000 in the
June 2004 quarter. We sold and performed on fewer small turnkey contracts in the
June 2005 quarter than in the June 2004 quarter. Small turnkey division sales
relate to turnkey contracts that are less than $50,000 and are usually completed
within one month. On June 20, 2005, we acquired AMS which typically has the type
of contracts included in the small turnkey division revenue.

Gross profit increased 15% to $3,423,000 in the June 2005 quarter from
$2,968,000 in the June 2004 quarter. Our gross margin percentage increased to
51% in the June 2005 quarter from 47% in the June 2004 quarter. Our gross margin
increased as a result of improved labor efficiency on our fixed price contracts
and maintenance division as well as an increase in our license revenue.


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 $468,000 in the June 2005 quarter from $509,000 in
the June 2004 quarter, representing a decrease of $41,000, or 8%. This decrease
was the result of one customer discontinuing the use of our services.

Gross profit decreased 15% to $249,000 in the June 2005 quarter from $293,000 in
the June 2004 quarter. Our gross margin percentage decreased to 53% in the June
2005 quarter from 57% in the June 2004 quarter. This decrease was substantially
the result of the decrease in revenue.

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 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 $578,000 in the June 2005 quarter from $387,000 in the
June 2004 quarter, representing an increase of $191,000 or 49%. The components
of the ASP revenue are as follows:

                                       June 2005 period      June 2004 period
                                       ----------------      ----------------
          Avatar                             $ 265,000             $ 127,000
          CareNet                              216,000               207,000
          ContinuedLearning                     23,000                   --
          Infoscriber                           74,000                53,000
                                              --------              --------
          Total                              $ 578,000             $ 387,000
                                              ========              ========

Avatar ASP revenue increased in the June 2005 quarter by 109% as compared to the
June 2004 quarter. This increase was substantially the result of increased usage
from our existing customer base, as well as the addition of one new customer in
the June 2005 quarter.

                                       18



CareNet revenue increased in the June 2005 quarter by 4% as compared to the June
2004 quarter. Approximately 33% of the revenue increase is associated with the
original CareNet customer base acquired in June 2003, with the balance of the
increase resulting from sales to new customers.

Infoscriber revenue increased in the June 2005 quarter by 37% as compared to the
June 2004 quarter. This increase is the result of an increase in our client
base.

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 $23,000 for the June 2005 quarter.

Gross profit for the June 2005 quarter was $190,000 and for the June 2004
quarter was $174,000. The gross margin percentage was 33% in the June 2005
quarter and 45% in the June 2004 quarter. The decrease in gross margin
percentage is the result of increased costs associated with the
ContinuedLearning acquisition, which amounted to $117,000 in the June 2005
quarter. 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 $2,370,000 in the June 2005
quarter, reflecting an increase of $467,000, or 25%, from $1,903,000 in the June
2004 quarter. Approximately 65% or $305,000 of this increase was related to an
increase in bad debts as a result of one customer filing for bankruptcy. The
remaining increases were: sales and marketing salaries and fringe benefits,
which increased by $108,000; sales and marketing consulting costs, which
increased by $57,000; sales conferences and trade shows, which increased by
$47,000; other consulting costs, which increased by $80,000 of which $19,000
related to Sarbanes Oxley compliance efforts and $18,000 related to strategic
planning efforts; legal fees, which increased by $22,000; recruitment costs,
which increased by $21,000; and $45,000 which related to increased amortization
related to the ContinuedLearning and AMS acquisitions. The cost increases were
partially offset by reductions in: reserve for bad debts - other, which
decreased by $99,000 advertising and promotion expenses which decreased by
$61,000; investment banker fees, which decreased by $29,000; accounting costs
which decreased by $40,000; and provision for bonuses, which decreased by
$13,000.

We incurred research, development and maintenance expenses of $899,000 in the
June 2005 quarter, an increase of 1% from $886,000 in the June 2004 quarter.
During the latter part of 2004, we invested in infrastructure that is designed
to improve the way we support our customers and products. These infrastructure
costs relate to product version control, which includes design, programming,
testing, documentation and quality control of our products. These research,
development and maintenance expense are also the result of continuing investment
in product enhancement and extensions. These extensions include the development
of new software modules which addresses Federal reporting requirements, as well
as continued investment in core products. These amounts have been appropriately
accounted for in accordance with SFAS No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed."

Interest and other expense was $18,000 in the June 2005 quarter, a decrease of
$18,000, or 50%, from the $36,000 in the June 2004 quarter. This decrease is the
result of the completion of the amortization of the financing costs associated
with our loan agreement, which was amortized over a three year period, as well
as reduced borrowing under our loan agreement during the June 2005 quarter.

Interest income was $88,000 in the June 2005 quarter, an increase of $55,000, or
167%, from the $33,000 in the June 2004 quarter. This increase is the result of

                                       19


maintaining higher cash balances during the June 2005 quarter 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 the
term loan, as well as cash generated from operations and the proceeds of the
exercise of options and warrants.

We have a net operating loss tax carry forward of approximately $2.9 million at
June 30, 2005. In the June 2005 quarter, we recorded a current income tax
expense of $60,000, 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 $154,000. In the June 2004 quarter, we
recorded a current income tax expense of $43,000, 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 $108,000.
The deferred tax provision was $248,000 based upon utilization of available net
operating loss carry forwards offset by a reduction in the deferred tax asset
valuation allowance of $140,000.

As a result of the foregoing factors, in the June 2005 quarter we had net income
of $449,000, or $.08 per share basic and diluted. For the June 2004 quarter, we
had net income of $493,000, or $.09 per share basic and diluted.


Liquidity and Capital Resources

We had working capital of approximately $15.8 million at June 30, 2005 as
compared to working capital of approximately $18.2 million at December 31, 2004.
This decrease of approximately $2.4 million in working capital was the result of
the following: $2,915,000 for the acquisitions of ContinuedLearning and AMS,
$994,000 in current liabilities assumed with respect to the acquisitions of
ContinuedLearning and AMS, $260,000 for the acquisition of equipment and a
decrease in the current portion of the deferred tax asset in the amount of
$81,000. These decreases were partially offset by our net income, after adding
back depreciation and amortization, which totaled $1,666,000 and $53,000 in net
proceeds from the exercise of stock options. The remaining increase in working
capital of $139,000 was due to changes in other current assets and liabilities.

In June 2001, we entered into a term loan agreement with Fleet Bank, which was
subsequently acquired by the Bank of America ("B of A"). 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 B of A 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 June 30, 2005 is $500,000.

The terms of our term loan agreement require compliance with certain covenants,
including maintaining a minimum net equity of $9 million, minimum cash reserves
of $500,000, maintenance of certain financial ratios, limitations on capital
expenditures and indebtedness and prohibition of the payment of cash dividends.
As of June 30, 2005, we were in compliance with the financial covenants of the
loan agreement.

On February 27, 2003, our Board of Directors authorized the purchase of up to
$100,000 of our common stock at any time that the market price is less than
$3.50 per share. Purchases of stock may be made from time to time, depending on
market conditions, in open market or in privately negotiated transactions, at
prices deemed appropriate by management. There is no set time limit on the
purchases. We expect to fund any stock repurchases from our operating cash flow.
As of June 30, 2005, we have not made any stock repurchases.

We issued a note payable to Shuttle Data Systems Corporation, d/b/a Adia
Information Management Corp. in connection with the acquisition of the CareNet
Segment. 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 June 30, 2005 is $167,000.

                                       20




In the June 2004 period, we capitalized software development costs of $117,000
relating to our RAD Plus 2004 product. We did not capitalize any software
development costs in the June 2005 period.

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. Although we are in discussions
with several potential acquisitions and have entered into a non-binding letter
of intent related to one potential acquisition, there are no assurances that we
will be able to complete that potential acquisition or any other material
acquisitions.

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


Off-Balance Sheet Arrangements

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

Contractual Obligations

The following table summarizes, as of June 30, 2005, our obligations and
commitments to make future payments under debt, capital leases and operating
leases:

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


Long Term Debt(1)                        $  666,699     $  666,699      $      --        $      --       $     --

Capital Lease Obligations(2)                 54,394         54,394             --               --             --

Operating Leases(3)                       6,614,184        849,897       1,543,057        1,283,927       2,937,303
Total Contractual Cash
Obligations                              $7,335,277     $1,570,990      $1,543,057       $1,283,927      $2,937,303

(1) See Note 7 to Netsmart's Consolidated Financial Statements for the years
ended December 31, 2004, 2003 and 2002, which describes the Company's financing
agreement.
(2) See Note 10 to Netsmart's Consolidated Financial Statements for
the years ended December 31, 2004, 2003 and 2002, which describes the Company's
Capital Lease Obligation.
(3) See Note 12 to Netsmart's Consolidated Financial Statements for the years
ended December 31, 2004, 2003 and 2002 which describes the Company's Operating
Lease Obligations.


                                       21


Critical Accounting Policies and Estimates

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

         Revenue Recognition
         Capitalized Software Development Costs
         Impairment of Customer Lists


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

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

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

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

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

                                       22


future gross revenue, estimated economic life and changes in software and
hardware technology. Prior to reaching technological feasibility these costs are
expensed as incurred and included in research, development and maintenance.
Activities undertaken after the products are available for general release to
customers to correct errors or keep the product updated are expensed as incurred
and included in research, development and maintenance. Amortization of
capitalized computer software development costs commences when the related
products become available for general release to customers. Amortization is
provided on a product by product basis. The annual amortization is the greater
of the amount computed using (a) the ratio that current gross revenue for a
product bears to the total of current and anticipated future gross revenue for
that product or (b) the straight-line method over the remaining estimated
economic life of the product. The estimated life of these products range from 3
to 8 years.

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

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

ISSUES AND UNCERTAINTIES
This Quarterly Report on Form 10-Q contains statements that are forward-looking.
These statements are based on current expectations and assumptions that are
subject to risks and uncertainties. Actual results could differ materially
because of issues and uncertainties such as those listed below under "Risk
Factors" and elsewhere in this report, which, among others, should be considered
in evaluating our financial outlook.

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 the June 2005 period, we generated 48%
of our revenue from contracts that are directly or indirectly with government
agencies, as compared with 48% in the June 2004 period. 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

                                       23


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.

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 new technology
would have a significant adverse effect upon our business.

Because of our size, 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. The software industry in general,
and the health information software business in particular, are 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 system.

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, Gerald O. Koop, our president, and
Anthony F. Grisanti, our chief financial officer. Although we have employment
agreements with these officers, the employment agreements do not guarantee that
the officers will continue with us, and each of these officers has the right to
terminate his employment with us on 90 days notice. Our agreements with Messrs.
Conway and Grisanti are scheduled to expire on December 31, 2006. In addition,
Mr. Koop's employment agreement is scheduled to expire on December 31, 2005,
following which he is expected to continue to work with us for a six-year period
pursuant to our Executive Retirement, Non-Competition & Consulting Plan dated
April 1, 2004. Our business may be adversely affected if any of our key
management personnel or other key employees left our employ.

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 our
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.

                                       24


We cannot guarantee that in the future, third parties will not claim that we
infringed on 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 us.

Government programs may suggest or mandate initiatives that could impact our
----------------------------------------------------------------------------
ability to sell our products.
-----------------------------

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 does compete with the private for profit Health Information Systems
vendor community.

The covenants in our loan agreement 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 agreement contains 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 the 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 agreement were accelerated, the lender could proceed
against those consolidated assets. Our loan agreement also requires 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 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 on Netsmart. In addition, we are a party to a loan
agreement which prohibits us from paying cash dividends without the prior
consent of our lender.

Our growth may be limited if we cannot make acquisitions.
---------------------------------------------------------

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 or our 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.

If we make any acquisitions, they may disrupt or have a negative impact on our
------------------------------------------------------------------------------
business.
---------

If we make acquisitions, we could have difficulty integrating the acquired
company's personnel and operations with our own. In addition, the key personnel
of the acquired business may not be willing to work for us, and/or our officers
may exercise their rights to terminate their employment with us. We cannot
predict the affect 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.

                                       25


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, Gerald Koop and
Anthony Grisanti provide that in the event there is a change in control of
Netsmart, the employee has the option to terminate his employment agreement.
Upon such termination, each of Messrs. Conway, Koop and Grisanti has the right
to receive a lump sum payment equal to his compensation for a forty-eight 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 certain 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 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 the common stock, our listing on The
Nasdaq SmallCap Market may be impaired.

Shares may be issued pursuant to options 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, of which options to purchase
720,218 shares were outstanding at June 30, 2005. On July 14, 2005, the
shareholders approved a 400,000 increase in the number shares available under
the Netsmart 2001 Long-Term Incentive Plan. These 400,000 additional options
were granted to officers and employees on July 14, 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 stock.

Forward-Looking Statements

Statements in this Form 10-Q quarterly report may be "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include, but are not limited to, statements
that express our intentions, beliefs, expectations, strategies, predictions or
any other statements relating to our future activities or other future events or
conditions. These statements are based on current expectations, estimates and
projections about our business based, in part, on assumptions made by
management. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in the forward-looking statements due to numerous
factors, including those described above and those risks discussed from time to
time in our Form 10-K annual report for the year ended December 31, 2004,
including the risks described under "Risk Factors" and in other documents which
we file with the Securities and Exchange Commission. In addition, such
statements could be affected by risks and uncertainties related to product
demand, market and customer acceptance, competition, government regulations and
requirements, pricing and development difficulties, as well as general industry

                                       26


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-Q.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Most of our cash and cash equivalents, which are invested in money market
accounts and commercial paper, are at variable rates of interest. If short-term
market interest rates decrease by 10% from the levels at June 30, 2005, the
effect on our net income would be a decrease of approximately $27,000 per year.


Item 4. Controls and Procedures

Evaluation and Disclosure Controls and Procedures


Based on their evaluation as of the end of the period covered by this Form 10-Q,
our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures, as required by Exchange
Act Rule 13a-15. 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 that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report.


Changes in Internal Controls

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

Limitations on the Effectiveness of Controls

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

                                       27




PART II  OTHER INFORMATION

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

On July 14, 2005 we held our 2005 annual meeting of stock holders.

The following individuals were elected as directors:

Name                              Votes For                  Withheld
----                              ---------                  --------
James L. Conway                   4,982,667                   174,049
John F. Phillips                  4,938,352                   218,364
Gerald O. Koop                    4,889,157                   267,559
Joseph G. Sicinski                4,921,867                   234,849
Francis Calcagno                  4,020,048                 1,136,668
John S.T. Gallagher               4,921,867                   234,849
Yacov Shamash                     4,924,872                   231,844

The following proposals were approved as follows:

                                                   Votes For         Votes Against        Abstain         Broker Non Votes
                                                   ---------         -------------        -------         ----------------
                                                                                           

Proposal to increase the number
of shares available under the Company's
2001 Long-Term Incentive Plan                      2,324,944         883,949                6,360         1,941,463

Approval of amendments to the 2001
Long Term Incentive Plan                           2,324,944         883,949                6,360         1,941,463

Approval of the selection of
Marcum & Kliegman LLP as the
Company's independent certified
Accountants for 2005                               5,143,871           2,745               10,100


Item 6.    Exhibits


         Exhibit No.     Description
         -----------     -----------
         10.1            Asset Purchase Agreement dated June 17, 2005 between
                         Addiction Management Systems, Inc. and Creative
                         Socio-Medics Corp. (incorporated by reference to
                         Exhibit 10.1 to Form 8-K dated June 21, 2005).
         10.2            2001 Long-Term Incentive Plan, as amended (incorporated
                         by reference to Exhibit 10.1 to Form 8-K dated June
                         16, 2005).
         10.3            Amendment No. 1 to Employment Agreement dated June 16,
                         2005, between the Registrant and James L. Conway
                         (incorporated by reference to Exhibit 10.2 to Form 8-K
                         dated June 16, 2005).
         10.4            Amendment No. 1 to Employment Agreement dated June 16,
                         2005 between the Registrant and Anthony F. Grisanti
                         (incorporated by reference to Exhibit 10.3 to Form 8-K
                         dated June 16, 2005).
         10.5            Asset Purchase Agreement dated April 27, 2005 between
                         ContinuedLearning LLC and Creative Socio-Medics Corp.
                         (incorporated by reference to Exhibit 10.2 to Form 8-K
                         dated April 27, 2005).


                                       28


         10.6            Employment Agreement dated April 27, 2005 between
                         Netsmart Technologies, Inc. and A. Sheree Graves
                         (incorporated by reference to Exhibit 10.2 to Form 8-K
                         dated April 27, 2005).
         31.1            Certification of Chief Executive Officer pursuant to
                         Section 302 of the Sarbanes-Oxley Act of 2002.
         31.2            Certification of Chief Financial Officer pursuant to
                         Section 302 of the Sarbanes-Oxley Act of 2002.
         32.1            Certification of Chief Executive Officer and Chief
                         Financial Officer pursuant to 8 U.S.C. section 1350
                         as adopted pursuant to Section 906 of the
                         Sarbanes-Oxley Act of 2002.



                                       29



                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.



NETSMART TECHNOLOGIES, INC.




/s/ James L. Conway           Chief Executive Officer          December 8, 2005
--------------------         (Principal Executive Officer)
James L. Conway




/s/ Anthony F. Grisanti        Chief Financial Officer         December 8, 2005
-------------------------     (Principal Financial and
Anthony F. Grisanti             Accounting Officer)



                                       30



                                Index of Exhibits



         Exhibit No.     Description
         -----------     -----------
         10.1            Asset Purchase Agreement dated June 17, 2005 between
                         Addiction Management Systems, Inc. and Creative
                         Socio-Medics Corp. (incorporated by reference to
                         Exhibit 10.1 to Form 8-K dated June 21, 2005).
         10.2            2001 Long-Term Incentive Plan, as amended (incorporated
                         by reference to Exhibit 10.1 to Form 8-K dated June
                         16, 2005).
         10.3            Amendment No. 1 to Employment Agreement dated June 16,
                         2005, between the Registrant and James L. Conway
                         (incorporated by reference to Exhibit 10.2 to Form 8-K
                         dated June 16, 2005).
         10.4            Amendment No. 1 to Employment Agreement dated June 16,
                         2005 between the Registrant and Anthony F. Grisanti
                         (incorporated by reference to Exhibit 10.3 to Form 8-K
                         dated June 16, 2005).
         10.5            Asset Purchase Agreement dated April 27, 2005 between
                         ContinuedLearning LLC and Creative Socio-Medics Corp.
                         (incorporated by reference to Exhibit 10.2 to Form 8-K
                         dated April 27, 2005).
         10.6            Employment Agreement dated April 27, 2005 between
                         Netsmart Technologies, Inc. and A. Sheree Graves
                         (incorporated by reference to Exhibit 10.2 to Form 8-K
                         dated April 27, 2005).
         31.1            Certification of Chief Executive Officer pursuant to
                         Section 302 of the Sarbanes-Oxley Act of 2002.
         31.2            Certification of Chief Financial Officer pursuant to
                         Section 302 of the Sarbanes-Oxley Act of 2002.
         32.1            Certification of Chief Executive Officer and Chief
                         Financial Officer pursuant to 8 U.S.C. section 1350
                         as adopted pursuant to Section 906 of the
                         Sarbanes-Oxley Act of 2002.


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