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NETSMART TECHNOLOGIES, INC.
146 NASSAU AVENUE
ISLIP, NEW YORK 11751

March 3, 2003

Securities and Exchange Commission
450 5th Street, N.W.
Judiciary Plaza

Washington, D.C. 20549

Dear Sirs:

Pursuant to regulations of the Securities and Exchange Commission, submitted
herewith for filing on behalf of Netsmart Technologies, Inc. (the "Company") is
the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

This filing is being effected by direct transmission to the Commission's EDGAR
system.

Very truly yours,

Anthony F. Grisanti
Chief Financial Officer





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

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002

Commission File Number 0-21177

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

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

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

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

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

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

Title of Each Class Outstanding shares as of February 11, 2003
------------------- ------------------------------------------
Common Stock, par value 3,956,633
$.01 per share

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

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

Yes [ ] No [X]

As of June 30, 2002, the last day of our second quarter, the aggregate market
value of the voting and non-voting common equity held by non affiliates was
approximately $7,702,000.

DOCUMENTS INCORPORATED BY REFERENCE

None



PART I

Item 1. Business

Introduction

Netsmart Technologies, Inc. develops, markets and supports Web-enabled,
Windows-based, thin-client, enterprise-wide, open platform software systems to
providers of services in the health and human services market, including mental
health clinics, substance abuse clinics, psychiatric hospitals, public health
agencies, managed care organizations and correctional facilities. We sell our
software products through our wholly owned subsidiary, Creative Socio-Medics
Corporation, either on a license or a subscription basis to health care
providers and we offer our clients software support under maintenance
agreements. The maintenance contracts provide us with a recurring revenue
stream.

We believe that we are one of the largest suppliers of practice management
systems to the behavioral health market, with over 500 contracts in place,
representing approximately 50,000 clinicians, including 24 state agencies and
installations in 43 states.

The cost of a new system to customers is typically in the range of $250,000 to
$1 million. Governmental agencies such as mental health, mental retardation,
child welfare, addiction, correction and public health facilities accounted for
approximately 52% of revenue in 2002, with the remainder from private hospitals,
smaller clinics, group and sole practitioners.

Business Strategy

Our systems provide comprehensive healthcare information technology solutions
including billing, patient tracking and scheduling for inpatient and outpatient
environments, as well as clinical documentation and medical record generation
and management. We direct our marketing effort for these products towards
providers of services in the health and human services market. Our branded suite
of products has integrated point-of-services technologies which also include
smart cards and personal digital assistants, which are commonly referred to as
PDAs.

The health and human services market is always subject to changes in state and
federal regulations as well as new demands required by the population. Some of
the factors which we believe are affecting the market include the following.

HIPAA
- -----
As one of the most established suppliers of practice management solutions
to the behavioral health and substance abuse industry, we believe that we can
benefit as a result of the Health Insurance Portability and Accountability Act,
which is generally known as HIPAA. HIPAA essentially mandates the Health and
Human Services department of the U.S. Government to enact standards regarding
the standardization, privacy and security of health care information that will
begin to take effect in the latter part of 2003.

We believe that this legislation will have the effect of requiring the
under-automated health and human services industry to make the leap to install
automated systems. We believe that our product suite, in conjunction with
products offered by other companies with which we have a marketing arrangement,
enables us to offer comprehensive enterprise-wide solutions for all human
service providers.

Increased Demand
- ----------------
As a result of the recent acts of terrorism, the demand for services in the
mental health and public health services has increased. Anxiety and fear have
gripped many people who are now seeking mental health services. This increased
demand puts more pressure on providers to improve the efficiency of care through
the use of practice management and clinical systems. We believe that the
potential threat of bio terrorism will also put similar pressure on public
health agencies to improve their delivery capabilities in much the same way.

Forward - Looking Statements

Statements in this Form 10-K annual report may be "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, but are not limited to, statements that
express our intentions, beliefs, expectations, strategies, predictions or any
other statements relating to our future activities or other future events or
conditions. These statements are based on current expectations, estimates and
projections about our business based, in part, on assumptions made by
management. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may, and probably will, 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 this Form 10-K annual report, including the risks described
under "Risk Factors," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in other documents which we file with the
Securities and Exchange Commission. In addition, such statements could be
affected by risks and uncertainties related to product demand, market and
customer acceptance, competition, government regulations and requirements,
pricing and development difficulties, as well as general industry and market
conditions and growth rates, and general economic conditions. Any
forward-looking statements speak only as of the date on which they are made, and
we do not undertake any obligation to update any forward-looking statement to
reflect events or circumstances after the date of this Form 10-K.

Organization of the Company

We are a Delaware corporation formed in September 1992 under the name Medical
Services Corp. Our name was changed to Carte Medical Corporation in October
1993, CSMC Corporation in June 1995 and to Netsmart Technologies, Inc. in
February 1996. Our executive offices are located at 146 Nassau Avenue, Islip,
New York 11751, telephone (631) 968-2000. Reference to us and to Netsmart
include our subsidiary, Creative Socio-Medics, unless the context indicates
otherwise. Our website is located at www.csmcorp.com. Neither the Information
contained in our website nor the information contained in any Internet website
is a part of this Form 10-K annual report.

Risk Factors

Because we are particularly dependent upon government contracts, our business
- -----------------------------------------------------------------------------
may be impaired by policies relating to entitlement programs.
- -------------------------------------------------------------

We market our health information systems principally to behavioral health
facilities, many of which are operated by government entities and include
entitlement programs. During 2002, we generated 52% of our revenue from
contracts that are directly or indirectly with government agencies, as compared
with 40% in 2001 and 51% in 2000. Government agencies generally have the right
to cancel contracts at their convenience. Our ability to generate business from
government agencies is affected by funding for entitlement programs, and our
business may be impaired if state agencies reduce this funding.

Changes in government regulation of health care industry may affect the market
- ------------------------------------------------------------------------------
for our systems.
- ----------------

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. We cannot predict the effect on
our business of future regulations by governments and payment practices by
government 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. If that happens, we may not be able to
generate revenues sufficient to cover the costs of developing the modifications.

If we are not able to take advantage of technological advances, our business may
- --------------------------------------------------------------------------------
suffer.
- -------

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.
- -----------------------

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 harm our business.
- ------------------------

Our business is largely dependent upon our senior executive officers, Messrs.
James L. Conway, chief executive officer, Gerald O. Koop, president and Anthony
F. Grisanti, chief financial officer. Although we have employment agreements
with these officers, the employment agreement 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 business may be adversely affected if
any of our key management personnel or other key employees left our employ.

Because we lack patent protection, we cannot assure you that others will not be
- -------------------------------------------------------------------------------
able to use our proprietary information in competition with us.
- ---------------------------------------------------------------

We have no patent or copyright protection for our proprietary software, and we
rely on non-disclosure agreements with our employees. Since our business is
dependent upon our proprietary products, the unauthorized use or disclosure of
this information could harm our business.

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. Our stock price may adversely
affect our ability to make acquisitions for equity or to raise funds for
acquisition through the issues of equity securities. If we fail to make any
acquisitions, our future growth may be limited. As of the date of this Form 10-K
annual report, we do not have any agreement or understanding, either formal or
informal, as to any acquisition.

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
companies' personnel and operations with our own. In addition, the key personnel
of the acquired business may not be willing to work for us, and 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.

We do not anticipate paying dividends on our common stock.
- ----------------------------------------------------------

We presently intend to retain future earnings, if any, in order to provide funds
for use in the operation and expansion of our business and, accordingly, we do
not anticipate paying cash dividends on our Common Stock in the foreseeable
future. We may, however, revisit this policy at any time.

The rights of the holders of common stock may be impaired by the potential
- --------------------------------------------------------------------------
issuance of preferred 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
additional 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 and warrants which may affect the
- --------------------------------------------------------------------------
market price of our common stock.
- ---------------------------------

We may issue stock upon the exercise of options to purchase up to an aggregate
679,702 shares of common stock pursuant to our long-term incentive plans, of
which 664,702 were outstanding at December 31, 2002. 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.

We may issue stock upon the exercise of warrants to purchase up to an aggregate
of 768,544 shares of common stock pursuant to various agreements, of which were
708,544 were outstanding at December 31, 2002. The exercise of these warrants
and the sale of the underlying shares of common stock may have an adverse effect
upon the price of our stock.

Health and Human Services Systems and Services

We develop, market and support computer software which enables health and human
services healthcare organizations to provide a full range of services in a
network computing environment.

Users typically purchase one of several healthcare information systems, in the
form of a perpetual license to use the system, as well as purchasing
professional services, support, and maintenance. In addition, we offer third
party hardware and software pursuant to value added resale arrangements with
third party vendors. The professional services include project management,
training, consulting and software development services, which are provided
either on a time and material basis or pursuant to a fixed-price contract. The
software development services may require the adaptation of health care
information technology systems to meet the specific requirements of the
customer.

Our typical license for a health information system ranges from $10,000 to
$100,000 for a single facility healthcare organization to $250,000 to $1,000,000
for multi-unit care organizations such as those run by state agencies. Revenue
from license fees were approximately $1,753,000, or 7.9% of revenue, for 2002,
$747,000, or 4.1% of revenue, for 2001 and $2,603,000, or 12.9% of revenue, for
2000. A customer's purchase order may also include third party hardware or
software. Revenue from hardware and third party software accounted for
approximately $3,822,000, or 17.3% of revenue, for 2002, $2,390,000, or 13.2% of
revenue, for 2001 and $4,158,000, or 20.6% of revenue, for 2000. Revenue from
turnkey systems labor accounted for approximately $7,418,000, or 33.5% of
revenue, for 2002, $6,568,000, or 36.3% of revenue, for 2001 and $6,502,000, or
32.2% of revenue in 2000.

In addition to our behavioral/public healthcare information systems and related
services, we offer processing services to substance abuse facilities and
maintain a data center facility at which our personnel perform data entry, data
processing and produce operations reports for smaller substance abuse clinics.
Our data center revenue was approximately $1,957,000, or 8.9% of revenue, for
2002, $2,042,000, or 11.3% of revenue, for 2001 and $2,263,000, or 11.2% of
revenue, for 2000.

Maintenance services have generated increasing revenue and have become a more
significant portion of our business since most purchasers of health care
information system licenses also purchase maintenance service. Maintenance
revenue increases as existing customers purchase additional licenses and new
customers purchase their initial software licenses. By agreement with our
customers, we provide telephone help services and maintain and upgrade their
software. Maintenance contracts may require us to make modifications to meet any
new federal and state reporting requirements which become effective during the
term of the maintenance contract. We do not maintain the hardware and third
party software sold to our customers, but we provide a telephone help line
service for certain third party software, which we license to our customers. Our
maintenance revenue was approximately $6,247,000, or 28.2% of revenue, for 2002,
$5,192,000, or 28.7% of revenue, for 2001 and $3,521,000, or 17.5% of revenue,
for 2000. Our small systems revenue was approximately $929,000, or 4.2% of
revenue, for 2002, $1,180,000, or 6.5% of revenue, for 2001 and $1,124,000, or
5.6% of revenue, for 2000.

We currently offer five product modules that provide a range of core application
requirements for behavioral healthcare providers. These products consist of a
suite of complete information technology applications developed by us, together
with software provided by others which enables us to offer enterprise-wide
solutions to the behavioral health industry. We offer the products in a variety
of delivery modes.

* Avatar - Practice Management: This system is a comprehensive
solution providing patient management functions, billing, tracking,
scheduling, and reporting for inpatient treatment facilities.

* Avatar - Clinician Workstation: This workstation provides a
clinician with documentation and medical record management including
assessment, care planning, progress notes and on-line medical
records. The clinician workstation is our electronic medical record
system for behavioral health, which integrates the clinical tools
necessary for an interdisciplinary approach to the delivery of human
services.

* Methadone Clinical System: Pursuant to a joint marketing agreement
with Mallinckrodt Pharmaceutical Specialties, a division of
Mallinckrodt Inc., we offer a solution for dispensing, admissions
and medical records, counselor and reception/security specifically
for methadone clinics. We can integrate Methadone Clinical System
with our other behavioral health products.

* Avatar - Managed Care: The managed care and employee assistance
program modules include such features as service request management,
contact tracking (patients, providers, others), import of
eligibility information by contract, provider search by location,
specialty, contract, hospital privileges, claims adjudication and
payment.

Markets and Marketing

The market for behavioral/public health information systems and related services
consists of both private and publicly operated providers offering hospital or
community-based outpatient behavioral/public healthcare services. These
healthcare providers require a healthcare information system to administer their
programs. We believe that there are at least 15,000 behavioral/public healthcare
providers in the United States, including public and private hospitals, private
and community-based residential facilities and federal, state and local
governmental agencies.

Many long-term behavioral/public healthcare facilities are operated by
government entities and include those operated as part of entitlement programs.
During the years ended December 31, 2002, 2001 and 2000, approximately 52%, 40%
and 51%, respectively, of revenue was generated from contracts with government
agencies. Contracts with government agencies generally include provisions which
permit the contracting agency to cancel the contract for its convenience,
although we have not experienced a termination for convenience in the last five
years.

In addition to these major behavioral/public healthcare providers, there are a
larger number of sole practitioners, group practices and smaller clinics which
may also require behavioral/public healthcare facilities. We intend to market
our Internet-based systems to these potential customers.

We believe that the demand for information technology solutions is increasing as
a result of new federal initiatives for data standards as well as continuous
pressure from managed care providers to reduce healthcare delivery costs while
expanding the availability of services.

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

We coordinate our marketing effort with the state agencies and other major users
of our systems. Our state agency clients formed a User Group Association,
presently consisting of state organizations or agencies from 26 states. The
association's members work with us to assess and determine future requirements
in both patient managed care coordination and regulatory reporting.

No customer accounted for 10% or more of our revenue in 2002, 2001 and 2000.

We had a backlog of orders, including ongoing maintenance and data center
contracts for our behavioral health information systems of $25.3 million at
December 31, 2002 and $16.5 million at December 31, 2001. A substantial amount
of the 2002 backlog is expected to be filled during 2003.

Product Development

We incurred product development costs relating to our health and human services
information systems of approximately $1,318,000 in 2002, $1,335,000 in 2001 and
$1,360,000 in 2000, all of which was company-sponsored. In 2001, we incurred
capitalized software development costs of approximately $167,000 associated with
our acquisition of software products from Advanced Institutional Management
Software, Inc. In 2000, we incurred capitalized software development costs of
approximately $219,000 in connection with the development of our web portal
services and application service provider solutions for healthcare providers.
During 2000, we also incurred capitalized software development costs of $334,000
associated with our acquisition of the Connex suite of managed care and employee
assistance program information systems. Included in these costs is $100,000 of
valued assigned to the 15,528 shares of our common stock which we issued to
acquire the Connex suite.

Competition

The healthcare software industry is highly competitive. Although we believe that
we can provide a health care facility or managed care organization with software
to enable it to perform its services more effectively, other software companies
provide comparable systems and also have the staff and resources to develop
competitive systems.

According to independent consulting reports, healthcare information technology
is an $18 billion industry served by numerous vendors. The dominant health care
information technology vendors have achieved annual sales of more than $1
billion by focusing on solutions for large medical/surgical health care
providers, such as large hospital systems and health maintenance organizations,
and, have not focused on the behavioral/public healthcare industry. We believe
that most of the presently available healthcare management software does not
meet the specific needs of the behavioral/public healthcare industry, and that
the functionality of our information systems are designed to meet the needs of
this market. However, the behavioral health information systems business is
serviced by a number of companies, some of which are better capitalized with
larger infrastructure than we, and we may not be able to continue to compete
effectively with such companies.

We have an established customer base of more than 500 clients nationwide,
including substantial private and government providers of healthcare services.
These 500 contracts represent approximately 50,000 clinicians, including 26
state agencies and installations in 43 states.

Government Regulations and Contracts

The federal and state governments have adopted numerous regulations relating to
the health care industry, including regulations relating to the payments to
health care providers for various services. The adoption of new regulations can
have a significant effect upon the operations of health care providers and
insurance companies. Although our business is aimed at meeting certain of the
problems resulting from government regulations and from efforts to reduce the
cost of health care, we cannot predict the effect of future regulations by
governments and payment practices by government agencies or health insurers,
including reductions in the funding for or scope of entitlement programs. Any
change in the structure of health care in the United States can have a material
effect on companies, such as us, that provide services to the health care
industry, including those providing software. Although we believe that the
likely direction which may result from the current study of the health care
industry would be an increased trend to managed care programs, thereby
increasing the importance of automation, our business may not benefit from any
changes in the industry structure. Even if the industry does evolve toward more
healthcare being provided by managed care organizations, it is possible that
there will be substantial concentration in a few very large organizations, which
may seek to develop their own software or obtain software from other sources. To
the extent that the health care industry evolves with greater
government-sponsored programs and less privately run organizations, our business
may be adversely affected. Furthermore, to the extent that each state changes
its own regulations in the health care field, it may be necessary for us to
modify our behavioral health information systems to meet any new record-keeping
or other requirements imposed by changes in regulations, and we may not be able
to generate revenues sufficient to cover the costs of developing the
modifications.

A significant amount of our business has been with government agencies,
including specialized care facilities operated by, or under contract with,
government agencies. The decision on the part of a government agency to enter
into a contract is dependent upon a number of factors, including economic and
budgetary problems affecting the local area, and government procurement
regulations, which may include the need for approval by more than one agency
before a contract is signed. In addition, government agencies generally include
provisions in their contracts which permit the contracting agency to cancel the
contract at its convenience. We have not experienced a termination for
convenience in the last five years.

Intellectual Property Rights

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

Employees

As of December 31, 2002, we had 145 employees, including 4 executive, 11 sales
and marketing, 121 technical and 9 clerical and administrative employees.

Executive Officers

Information concerning our executive officers is included in Item 11,
Directors and Executive Officers for the Registrant.

Item 2. Property

We lease office space at the following locations:

Location Purpose Space Annual Rental Expiration
- -------- ------- ----- ------------- ----------

146 Nassau Avenue Executive 18,000 $327,000, plus 4% 12/31/03
Islip, New York offices square feet annual increases


1335 Dublin Road Offices 3,500 $56,000 11/30/03
Columbus, Ohio square feet


5120 Shoreham Place Offices 2,800 $72,000 07/31/05
San Diego, California square feet

We believe that our space is adequate for our immediate needs and that, if
additional space is required, it would be readily available on commercially
reasonable rates.

Item 3. Legal Proceedings

In October 2000, the Company's subsidiary, Creative Socio-Medics, commenced an
action against the City of Richmond, in the Supreme Court of the State of New
York, County of Suffolk, which action was subsequently removed to the United
States District Court for the Eastern District of New York, for failure to pay
more than $1 million pursuant to a contract between the Company and Richmond.
Richmond advised the court that it intended to move to dismiss the complaint for
lack of personal jurisdiction in New York and improper venue. In November 2000,
Richmond filed a complaint in the Circuit Court for the City of Richmond,
Richmond, Virginia, alleging, among other things, that the contract with
Creative Socio-Medics was procured through fraudulent misrepresentations
concerning the nature of the work to be performed and the price for the services
and that Creative Socio-Medics failed to perform its obligations under the
agreement, seeking damages of $373,000 and a finding that it owes no additional
amounts to Creative Socio-Medics. The parties entered into a stipulation staying
the Richmond action until a determination of Richmond's jurisdictional
challenges to the New York action. On August 21, 2002, the United States
District Court for the Eastern District of New York denied Richmond's motion to
dismiss the Company's complaint for lack of personal jurisdiction in New York on
the basis of improper venue. The Company believes it has valid claims against
Richmond and intends to vigorously pursue those claims. We also believe that the
allegations contained in Richmond's complaint are without merit and we intend to
vigorously defend against those claims.

The Company is involved in other litigation through the normal course of
business. The Company believes that the resolution of these matters will not
have a material adverse effect on the Company's consolidated financial position
and results of operations.

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

On January 9, 2003, we held a special meeting of stockholders.

The following proposals were approved as follows:

Votes For Votes Against Abstain Broker Non-Votes

Amendment to the 2001
Long Term Incentive Plan 1,605,099 106,583 9,189 1,810,906

Approval of the selection
of Marcum & Kliegman LLP
as independent auditors
for 2002 3,481,645 3,666 7,621 38,845



Part II

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

Our common stock is traded on The Nasdaq SmallCap Market under the symbol NTST.
Set forth below is the reported high and low sales prices of our Common Stock
for each quarterly period during 2002 and 2001.

Quarter Ended High Low
------------- ---- ---

March 31, 2002 3.45 2.40
June 30, 2002 2.89 2.08
September 30, 2002 4.60 1.70
December 31, 2002 7.03 4.10

March 31, 2001 2.84 2.08
June 30, 2001 2.27 2.06
September 30, 2001 2.11 1.68
December 31, 2001 3.06 1.69


As of December 31, 2002, there were approximately 2,310 beneficial owners of our
common stock. The closing price of our common stock was $4.68 per share on
February 10, 2003. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.

We have not paid any cash dividends to the holders of our common stock since our
organization.

During 2002, the Company issued warrants to purchase 200,000 shares in
connection with a financial advisory agreement whereby the Company will pay
consulting fees in addition to the issuance of warrants. These warrants, which
expire over various times ranging from one to two years, were valued at $.24 per
warrant, which represented the costs of the services based upon the contractual
agreement. Either party may terminate the agreement. The warrants have the
following exercise price, vesting dates and expiration date for the number of
shares set forth below:

Shares Exercise Price Vesting Date Expiration Date
------ -------------- ------------ ---------------

50,000 $2.70 April 10, 2002 March 31, 2003
30,000 $4.00 June 1, 2002 May 31, 2003
30,000 $5.00 September 1, 2002 February 28, 2004
30,000 $6.00 November 1, 2002 April 30, 2004
30,000 $7.00 January 1, 2003 December 31, 2004
30,000 $8.00 February 28, 2003 January 31, 2005


The issuance of the foregoing securities is exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended, or Regulation D of the
Securities and Exchange Commission thereunder.




Equity Compensation Plan Information
------------------------------------

The following table sets forth information relating to our compensation plans as
of December 31, 2002.



Number of securities
--------------------
remaining available for
-----------------------
future issuance under
---------------------
Number of securities to Weighted-average equity compensation
------------------------ ----------------- -------------------
be issued upon exercise exercise price of plans (excluding
------------------------ ------------------ ----------------
of outstanding options, outstanding options, securities reflected in
------------------------ --------------------- -----------------------
Plan Category warrants and rights warrants and rights column (a)
- ------------- ------------------- ------------------- ----------
(a) (b) (c)
Equity compensation plans
approved by security
holders 589,702 $1.739 15,000
Equity compensation plans
not approved by security
holders 843,544 $8.931 --
---------- ------ -------
Total 1,433,246 $5.97 15,000

Certain warrants issued pursuant to an equity compensation plan which was not
approved by the stockholders were issued pursuant to the financial advisory
agreement described above in this Item 5.

In addition to the options available for grant in equity compensation plans that
were approved by the stockholders, in January 2003, at a special meeting of
stockholders, the stockholders approved an increase of 370,000 in the number of
shares of common stock issuable pursuant to our 2001 Long-Term Incentive Plan,
of which options to purchase 217,500 shares were granted on January 27, 2003.






Item 6. Selected Financial Data

The selected consolidated financial data set forth below for the five years in
the period ended December 31, 2002 has been derived from the company's audited
consolidated financial statements. This information should be read in
conjunction with the audited consolidated financial statements and notes
thereto.

Year Ended December 31,
-----------------------

2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands except per share data)
Selected Statements
of Operations Data:

Revenue $22,126 $ 18,119 $ 20,171 $ 21,252 $ 13,165

Income from Continuing
Operations before interest
and other financing costs 1,095 399 2,141 1,895 759

Income (Loss) from Discontinued
Operations -- -- 70 180 (217)

Net Income 1,195(1) 315 2,386(2) 1,825 196

Per Share Data - Diluted:
Continuing Operations .29 .08 .61 .47 .12
Discontinued Operations -- -- .02 .05 (.08)
Net Income (loss) .29 .08 .63 .52 .04

Weighted average number
of shares outstanding 4,153 3,872 3,771 3,516 2,865

Selected Balance
Sheet Data:
Working Capital 9,656 7,903 5,858 2,012 10

Total Assets 22,275 18,007 15,301 13,972 10,289

Long Term Debt
Including Current Portion 1,750 2,250 -- -- --

Total Liabilities 10,968 8,060 5,997 8,617 7,005

Accumulated Deficit (9,376) (10,571) (10,886) (13,272) (15,097)

Stockholders' Equity 11,306 9,948 9,303 5,355 3,284


- ----------
(1) Includes benefit of net operating loss in the amount of $400,000.

(2) Includes benefit of net operating loss in the amount of $494,000.

All per share infomration has been retroactively adjusted for the one-for-
three reverse stock split which became effective September 1998.




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

Results of Operations

A significant portion of our revenue is derived from fixed price software
development contracts and licenses. We principally recognize this revenue on the
estimated percentage of completion basis. Since the billing schedules under the
contracts differ from the recognition of revenue, at the end of any period,
these contracts generally result in either costs and estimated profits in excess
of billing or billing in excess of cost and estimated profits. The largest
component of our revenue is determined using the percentage of completion method
which is based upon the time spent by our technical personnel on a project. As a
result, during the third and fourth quarters, when many of our employees are on
vacation and holidays, our revenue could be affected.

Years Ended December 31, 2002 and 2001

Our revenue for 2002 was $22,126,000, an increase of $4,007,000, or 22%, from
our revenue for 2001, which was $18,119,000. The largest component of revenue
was turnkey systems labor revenue, which increased to $7,418,000 in 2002, from
$6,568,000 in 2001, reflecting a 13% increase. This increase was substantially
the result of an increase in spending for the information systems in the human
services marketplace and our ability to provide the staff necessary to generate
additional revenue. Revenue from third party hardware and software increased to
$3,822,000 in 2002, from $2,390,000 in 2001, which represents an increase of
60%. Sales of third party hardware and software are made in connection with the
sales of turnkey systems. These sales are typically made at lower gross margins
than our human services revenue. The data center (service bureau) revenue
decreased to $1,957,000 in 2002, from $2,042,000 in 2001, reflecting a decrease
of 4%. This decrease was the result of work performed for one particular client
during 2001. License revenue increased to $1,753,000 in 2002, from $747,000 in
2001, reflecting an increase of 135%. 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. This increase was
substantially the result of an increase in spending for information systems in
the human services marketplace. Maintenance revenue increased to $6,247,000 in
2002, from $5,192,000 in 2001, reflecting an increase of 20%. As turnkey systems
are completed, they are transitioned to the maintenance division, thereby
increasing our installed base. Revenue from the sales of our small turnkey
division decreased to $929,000 in 2002, from $1,180,000 in 2001, reflecting a
decrease of 21%. We are experiencing a decline in small turnkey systems as a
result of a redirection of our sales efforts to larger turnkey sales.

Revenue from contracts from government agencies represented 52% of revenue in
2002 and 40% of revenue in 2001. This reflects an increase in new government
contracts.

Gross profit increased to $7,582,000 in 2002 from $6,118,000 in 2001, reflecting
an increase of 24%. Our gross margin percentage remained constant at 34%.
Although license and maintenance revenue, which are highly margined revenue
components, increased in 2002, our gross margin percentage did not increase.
This is because the mix of our revenue components for 2002 included a larger
amount of third party hardware and software revenue than 2001. Our third party
hardware and software revenue yields margins significantly less than our margins
from human services revenue.

Selling, general and administrative expenses were $5,168,000 in 2002, reflecting
an increase of 18% from the $4,384,000 in 2001. This increase was substantially
in the area of general insurance, investor relations and provisions for bonuses.

We incurred product development expenses of $1,318,000 in 2002, a decrease of 1%
from the $1,335,000 in 2001. During 2002, we continued to invest in improved
functionality and technology in our products, but at a lesser extent than in
2001.

Interest and other expenses was $262,000 in 2002, an increase of $75,000, or
40%, from the $187,000 in 2001. This increase was substantially the result of
interest associated with the $2,500,000 term loan, which we made in June 2001
and an other than temporary decline in the value of a security.

Interest and other income consisted of interest income of $46,000 in 2002 and
interest income of $42,000 and other income of $30,000 in 2001. Interest income
is generated from short-term investments made with a substantial portion of the
proceeds received from the term loan.

We have a net operating loss tax carry forward of approximately $9 million. In
2002, we recorded current income tax expense of $84,000, which related to
various state and local taxes. In addition, we recognized a partial deferred tax
benefit in the amount of $400,000 principally related to our net operating loss
carry forward. In 2001 we recorded an income tax benefit of $31,000. This
benefit was based upon an overaccrual of state and federal taxes in 2000 as well
as the recognition of an additional $6,000 benefit of our operating loss carry
forward.

As a result of the foregoing factors, in 2002, we had a net income of
$1,195,000, or $.32 per share (basic) and $.29 per share (diluted). For 2001, we
had net income of $315,000, or $.09 per share (basic) and $.08 per share
(diluted).

Years Ended December 31, 2001 and 2000

Our revenue for 2001 was $18,119,000, a decrease of $2,052,000, or 10%, from our
revenue for 2000, which was $20,171,000. The largest component of revenue was
turnkey systems labor revenue, which increased to $6,568,000 in 2001, from
$6,502,000 in 2000, reflecting a 1% increase. Although there was a general
decline in the sales of turnkey systems, due to an industry wide slowdown in
information technology purchasing activity, we were able to generate additional
labor revenue for customization and enhancements services for our existing
client base. Revenue from third party hardware and software decreased to
$2,390,000 in 2001, from $4,158,000 in 2000, which represents a decrease of 43%.
Sales of third party hardware and software are made in connection with the sales
of turnkey systems and were affected by the decline in the sales of turnkey
systems. These sales are typically made at lower gross margins than our
behavioral health systems and services revenue. The data center (service bureau)
revenue decreased to $2,042,000 in 2001, from $2,263,000 in 2000, reflecting a
decrease of 10%. This decrease is substantially the result of work performed for
one particular client during 2000 as well as a smaller client base during 2001.
License revenue decreased to $747,000 in 2001, from $2,603,000 in 2000,
reflecting a decrease of 71%. License revenue is generated as part of a sale of
a human services health information system pursuant to a contract or purchase
order that includes delivery of the system and maintenance and is affected by
the decline in revenue from turnkey systems. Maintenance revenue increased to
$5,192,000 in 2001, from $3,521,000 in 2000, reflecting an increase of 48%. As
turnkey systems are completed, they are transitioned to the maintenance
division. Included in 2001 is $935,000 of maintenance revenue related to
contracts for AIMS software. We acquired the rights to the AIMS software,
including its installed customer base, in May 2001. Revenue from the sales of
our small turnkey division increased to $1,180,000 in 2001, from $1,124,000 in
2000, reflecting an increase of 5%.

Revenue from contracts from government agencies represented 40% of revenue in
2001 and 51% of revenue in 2000. This decrease reflects a reduction in new
government contracts.

Gross profit decreased to $6,118,000 in 2001 from $8,215,000 in 2000, reflecting
a decrease of 26%. Our gross margin percentage decreased to 34% in 2001 from 41%
in 2000. This decrease was substantially the result of a decrease in our license
and data center revenue mentioned above. In addition, the gross margin
associated with the AIMS maintenance revenue is currently lower than the gross
margin experienced with our other maintenance revenue.

Selling, general and administrative expenses were $4,384,000 in 2001, reflecting
a decrease of 7% from the $4,715,000 in 2000. This decrease was substantially in
the area of bonus provisions and costs related to issuance and extensions of
warrants and was partially offset by an increase in sales and marketing costs.

We incurred product development expenses of $1,335,000 in 2001, a decrease of 2%
from the $1,360,000 in 2000. During 2001, we continued to invest in improved
functionality and technology in our products, but at a lesser extent than in
2000.

Interest expense was $187,000 in 2001, an increase of $26,000, or 16%, from the
$161,000 in 2000. This increase was substantially the result of interest
associated with the $2,500,000 term loan arrangement, which we entered into in
June 2001.

Interest and other income consisted of interest income of $42,000 and other
income of $30,000.

We have a net operating loss tax carry forward of approximately $11 million. In
2001 we recorded an income tax benefit of $31,000. This benefit was based upon
an overaccrual of state and federal taxes in 2000. In 2000, we provided for
income taxes in the amount of $157,000. The 2000 provision was based upon
federal alternative minimum tax calculations as well as for certain state taxes.
In addition, we recognized a partial tax benefit in the amount of $494,000
principally related to our net operating loss carry forwards. We recognized an
additional $6,000 benefit of our operating loss carry forwards in 2001.

As a result of the foregoing factors, in 2001, we had a net income of $315,000,
or $.09 per share (basic) and $.08 per share (diluted). For 2000, we had net
income of $2,386,000, or $.71 per share (basic) and $.63 per share (diluted).

Liquidity and Capital Resources

We had working capital of $9.7 million at December 31, 2002 as compared to
working capital of $7.9 million at December 31, 2001. The increase in working
capital was substantially the result of our net income after adding back
depreciation and amortization and partially offset by the acquisition of
equipment.

In June 2001, we entered into a financing arrangement with Fleet Bank. This
financing provides us with a five-year term loan of $2.5 million, as well as a
two year $1.5 million revolving line of credit. The term loan bears interest at
a fixed rate of 7.95% per annum and the revolving line of credit is priced at
the prime rate. Under our revolving line of credit, we can borrow up to 75% of
eligible receivables up to a maximum of $1.5 million. The maximum available to
us at December 31, 2002 under the borrowing base formula was $1.5 million. The
proceeds of the term loan are designated for acquisitions as well as for product
enhancements specific to California requirements. The revolving line of credit
is available for general working capital needs. We did not use the revolving
line of credit from inception through December 31, 2002. We have made principal
payments on the $2.5 million term loan and the amount outstanding at December
31, 2002 is $1.75 million.

Based on our outstanding contracts and our continuing business, we believe that
our cash flow from operations, the availability under our financing agreement
and our cash on hand will be sufficient to enable us to continue to operate
without additional funding. It is possible that we may need additional funding
if we go forward with certain acquisitions or if our business does not develop
as we anticipate or if our expenses, including our software development costs
relating to our expansion of our product line and our marketing costs for
seeking to expand the market for our products and services to include smaller
clinics and facilities and sole group practitioners exceed our expectation.

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. If we fail to make any acquisitions our
future growth may be limited to only internal growth. As of the date of this
Form 10-K annual report, we did not have any agreements or understandings with
respect to any material acquisitions, and we cannot give any assurance that we
will be able to complete any material acquisitions.

Forward-Looking Statements

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



Netsmart Technologies, Inc.
Quarterly Summary
Unaudited

The following table sets forth certain unaudited quarterly results of operations
for each of the quarters in the years ended December 31, 2002 and 2001. All
quarterly information was obtained from unaudited financial statements not
otherwise contained in this report. We believe that all necessary adjustments
have been made to present fairly the quarterly information when read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this report. The operating results for any quarter are not
necessary indicative of the results for any future period.

In thousands, except per share data amounts

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
2002 (a)

Total revenue $ 4,830 $ 5,447 $ 6,044 $ 5,805
Gross profit 1,685 1,843 1,880 2,174
Net income 103 142 202 748

Per share amounts:
Net earnings - Basic: $ .03 $ .04 $ .05 $ .19
======== ======== ======== ========

Net earnings - Diluted: $ .03 $ .04 $ .05 $ .18
======== ======== ======== ========

2001

Total revenue $ 4,575 $ 4,665 $ 4,575 $ 4,304
Gross profit 1,482 1,577 1,486 1,573
Net income 65 70 50 130

Per share amounts:
Net earnings - Basic: $ 0.02 $ 0.02 $ 0.01 $ 0.04
======== ======== ======== ========

Net earnings - Diluted: $ 0.02 $ 0.02 $ 0.01 $ 0.03
======== ======== ======== ========

(a) Includes the benefit of a net operating loss in the amount of $400 in the
fourth quarter of 2002.

Earnings per share for each quarter are computed using the weighted-average
number of shares outstanding during that quarter, while earnings per share for
the full year are computed using the weighted-average number of shares
outstanding during the year. Thus, the sum of the earnings per share for the
four quarters' earnings per share may not equal the full-year earnings per
share.



Item 8. Financial Statements and Supplementary Data

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

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

On May 7, 2002, the audit committee of the board of directors recommended, and
the board of directors approved, the dismissal of Eisner LLP (formerly Richard
A. Eisner & Company, LLP), as our independent public accountants and the
selection of Marcum & Kliegman LLP to serve as our independent public accountant
for the year ending December 31, 2002. The selection of Marcum & Kliegman LLP
was approved by our stockholders.

At no time since its engagement has Marcum & Kliegman LLP had any direct or
indirect financial interest in or any connection with the Registrant or any of
its subsidiaries other than as independent accountants.

The Company's financial statements for the years ended December 31, 2001 and
2000 were audited by Eisner LLP, whose report on such financial statements did
not include any qualification, disclaimer, modification or explanatory
paragraph. There were no disagreements with Eisner LLP during the years ended
December 31, 2001 or 2000 or during the period subsequent to December 31, 2001
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure.

Part III

Item 10. Directors and Executive Officers of the Registrant.

Our directors and executive officers are as follows:

Name Age Position
- ---- --- --------

James L. Conway 55 Chief executive officer and director
Gerald O. Koop 64 President and director
Anthony F. Grisanti 53 Chief financial officer, treasurer and secretary
John F. Phillips 65 Vice president and director
Joseph G. Sicinski(1&2) 70 Director
Edward D. Bright 66 Chairman of the board and director
Francis J. Calcagno(1&2) 53 Director
John S.T. Gallagher(1&2) 72 Director

- ----------
(1) Member of the compensation committee.
(2) Member of the audit committee.


Mr. James L. Conway has been our chief executive office since April
1998, a director since January 1996 and president from January 1996 until
January 2001. From 1993 until April 1998, he was president of a Long Island
based manufacturer of specialty vending equipment for postal, telecommunication
and other industries. He was previously vice president and treasurer of ITT
Credit Corporation.



Mr. Gerald O. Koop has been one of our directors since June 1998 and
president since January 2001. He has held management positions with Creative
Socio-Medics for more than the past five years, most recently as its chief
executive officer, a position he has held since 1996.

Mr. John F. Phillips has been one of our directors and president of
Creative Socio-Medics since June 1994, when Creative Socio-Medics was acquired,
and our vice president since June 1994.

Mr. Joseph G. Sicinski has been one of our directors since June 1998. He
is president and a director of the Trans Global Services, Inc., a technical
staffing company, a position he held with Trans Global and its predecessor since
September 1992. From April 1998 until December 2001, he was also chief executive
officer of Trans Global.

Mr. Edward D. Bright has been our chairman of the board and a director
since April 1998. From April 1998 until 1999, Mr. Bright was chairman,
secretary, treasurer and a director of Consolidated Technology Group Ltd., a
public company now known as The Sagemark Companies, Ltd. In 2000, Mr. Bright was
reelected chairman of the board and a director of Sagemark. From January 1996
until April 1998, Mr. Bright was an executive officer of or advisor to Creative
Socio-Medics Corp., our wholly-owned subsidiary.

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

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

Directors are elected for a term of one year.

None of our officers and directors are related.

During 2002, the following were late filings:

John Phillips - 38 days late for a filing due December 10, 2002 and 36
days late for a filing due December 12, 2002.

Our board of directors has two committees - the audit committee and the
compensation committee.

The audit committee consists of three independent directors, Messrs.
Francis J. Calcagno, who is chairman of the committee, John S.T. Gallagher and
Joseph G. Sicinski. The responsibilities of the audit committee is to oversee
our financial reporting process, report the results of its activities to the
board, approve the selection of the independent auditors, review our periodic
filings with the independent auditors prior to filing, and review and respond to
any matters raised by the independent auditors in their management letter. The
board of directors has determined that at least one member of the audit
committee, Mr. Calcagno, is an audit committee financial expert. Mr. Calcagno is
an independent director as defined in the rule of the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.

The compensation committee, which is composed of Messrs. Calcagno,
Gallagher and Sicinski, serves as the stock option committee for our stock
option plans and the employee stock purchase plan, and it reviews and approves
any employment agreements with management and changes in compensation for our
executive officers.

Excluding actions by unanimous written consent, during 2002, the board
of directors held two meetings, the compensation committee held one meeting, and
the audit committee held four meetings. The audit committee met with our
independent accountants and chief financial officer prior to filing of this Form
10-K annual report to review the 2002 audited financial statements with the
independent auditors. During 2002, all of our directors attended at least 80% of
the meetings of the board and any committee of which they are members.

We pay a monthly fee of $1,250 to Mr. Calcagno, $750 to Mr. Sicinski and
$2,000 to Mr. Gallagher and we pay the chairman of the board a monthly fee of
$1,500.

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

Item 11. Executive Compensation.

Set forth below is information with respect to compensation paid or
accrued by us for 2002, 2001 and 2000 to our chief executive officer and to each
of our other officers whose salary and bonus for 2002 exceeded $100,000.

SUMMARY COMPENSATION TABLE

Annual Long-Term
------ ---------
Compensation Compensation
------------ ------------
(Awards)
--------
Options, SARs
-------------
Name and Principal Position Year Salary Bonus (Number)
- --------------------------- ---- ------ ----- --------
James L. Conway, CEO 2002 $193,151 $120,000 20,000
2001 182,239 61,261 --
2000 177,120 102,515 21,000
Gerald O. Koop, president 2002 170,807 170,408 20,000
2001 160,959 97,874 --
2000 156,480 139,269 21,000
John F. Phillips, vice 2002 170,807 60,000 15,000
president 2001 160,959 41,041 --
2000 156,480 83,973 18,750
Anthony F. Grisanti, chief 2002 148,463 106,000 16,000
financial officer 2001 139,679 65,821 --
2000 135,840 104,656 18,750



The bonuses for Mr. Koop includes accrued commissions of $165,408 for 2002,
$82,874 for 2001 and $94,568 for 2000. These commissions will be paid in
installments through 2003.

In January 2001, we entered into employment agreements with Messrs.
James L. Conway, John F. Phillips, Gerald O. Koop and Anthony F. Grisanti for a
term of three years for Messrs. Conway and Grisanti and two years for Messrs.
Koop and Phillips. We believe that these officers are vital to our business.
Each of the officers has the right to extend the term for an additional year.
Following termination of the employment term, or earlier at the discretion of
the officer, each of the officers has the right to continue as a part-time
consultant for a term of five years for annual compensation of $75,000. Pursuant
to these employment agreements, these officers received the following salaries
in 2002: Mr. Conway - $178,751, Mr. Koop - $156,407, Mr. Phillips - $156,407,
and Mr. Grisanti - $134,063. The agreements provide for annual increases
associated with cost of living indexes. The agreements provide that the
executives are eligible to participate in a bonus pool to be determined annually
by the board, based on the executive's performance. The agreements also provide
each of these officers with an automobile allowance, which is included under
"Salary", and insurance benefits. In the event of the officer's dismissal or
resignation or a material change in his duties or in the event of a termination
of employment by the executive or by us as a result of a change of control, the
officer may receive severance payments of between 30 and 36 months'
compensation.

Option Exercises and Outstanding Options

The following table sets forth information concerning the exercise of
options during the year ended December 31, 2002 and the year-end value of
options held by our officers named in the Summary Compensation Table. No stock
appreciation rights have been granted.


Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
(All options were fully exercisable at year end)



Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Value Options at Options at
Name Upon Exercise Realized Fiscal Year End Fiscal Year End
---- ------------- -------- --------------- ---------------

James L. Conway 21,000 $62,769 68,250 $ 43,380
Gerald O. Koop 21,000 $62,769 100,000 321,900
John F. Phillips 30,000 $140,100 83,750 269,591
Anthony F. Grisanti 5,052 $18,339 34,750 88,310


The determination of "in the money" options at December 31, 2002, is
based on the closing price of the common stock on the Nasdaq SmallCap Market on
December 31, 2002, which was $4.67 per share.

The options held by Mr. Conway include warrants, exercisable at $12.00
per share, held by Mr. Conway (34,000 shares) and Mr. Conway's wife (14,250
shares). Mr. Conway disclaims beneficial interest in securities held by his
wife. These warrants are scheduled to expire on April 30, 2003, unless they are
extended by the Company.

Information relating to securities issued under equity compensation
plans is disclosed in response to "Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters".


Item 12. Security Ownership of Certain Beneficial Owners and Management.

Set forth below is information as of January 1, 2003, as to each person
owning of record or known by us, based on information provided to us by the
persons named below and filings with the Securities and Exchange Commission, to
own beneficially at least 5% of our common stock, each director, each officer
listed in the Summary Compensation Table and all officers and directors as a
group.

Percent of
----------
Outstanding Common
------------------
Name and Address Shares Stock
- ---------------- ------ -----

John F. Phillips 221,427 5.5%
146 Nassau Avenue
Islip, New York 11751
Edward D. Bright 198,172 4.9%
Gerald O. Koop 179,665 4.4%
James L. Conway 178,717 4.4%
Anthony F. Grisanti 134,815 3.4%
Joseph G. Sicinski 25,000 *
Francis J. Calcagno 5,000 *
John S.T. Gallagher 20,000 *
All directors and officers as a 962,796 22.0%
group (seven individuals)

- -------------
* Less than 1%.

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

The number of shares owned by our directors and officers shown in the
table includes shares of common stock which are issuable upon exercise of
options and warrants that are exercisable at December 31, 2002 or will become
exercisable within 60 days after that date. Set forth below is the number of
shares issuable upon exercise of those options and warrants for each of our
directors and the officers named in the Summary Compensation Table.

Name Number
---- ------
John F. Phillips 83,750
Edward D. Bright 96,250
Gerald O. Koop 100,000
James L. Conway 68,250
Anthony F. Grisanti 34,750
All officers and directors as a group 413,000

The options and warrants held by Mr. Conway include warrants,
exercisable at $12.00 per share, to purchase 34,000 held by Mr. Conway and
14,250 shares held by Mr. Conway's wife, as to which he disclaims beneficial
ownership. These warrants are scheduled to expire on April 30, 2003.



Item 13. Certain Relationships and Related Transactions.

In August 2001, we entered into an exclusive investment banking
agreement Dominick & Dominick, Inc., of which Mr. Francis J. Calcagno, one of
our directors, is a senior managing director. Mr. Calcagno was not a director at
the time we entered into this agreement with Dominck & Dominick. Dominick &
Dominick holds warrants to purchase 100,000 shares of common stock at an
exercise price of $5.45 per share. These warrants were issued pursuant to a
nonexclusive investment banking agreement dated September 8, 1999. During 2002,
this non exclusive investment banking agreement was terminated.

We entered into a consulting agreement with Mr. Bright dated January 1,
2001, pursuant to which Mr. Bright is to devote 50% of his time to our business
for a period of two years, with Mr. Bright having the right to extend the term
for an additional year. Following the completion of the term, or earlier at the
discretion of Mr. Bright, Mr. Bright continues as a consultant for an additional
five years. Mr. Bright receives compensation at the annual rate of $75,000
during the consulting term, and we provide him with an automobile allowance and
insurance benefits. Mr. Bright is eligible, at the discretion of the board, to
participate in a bonus pool which may be established by the board. In the event
that Mr. Bright's consultant relationship is terminated as a result of a change
of control, we are to pay him as severance pay between 30 and 36 months
compensation. We paid Mr. Bright total compensation of $87,000 for 2002, in
addition to a bonus of $5,000.

Item 14. Controls and Procedures

Within the 90-day period prior to the filing of this annual report, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures to Exchange Act Rule 13a-14. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of these disclosure controls and procedures were
effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.



Sarbanes-Oxley Act Section 302 Certifications
---------------------------------------------

I, James L. Conway certify that:

1. I have reviewed this annual report on Form 10-K of Netsmart Technologies,
Inc. ("NTST");

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of NTST
as of, and for, the periods presented in this annual report;

4. NTST's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for NTST and have:

a. designed such disclosure controls and procedures to ensure that
material information relating to NTST, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b. evaluated the effectiveness of NTST's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. NTST's other certifying officer and I have disclosed, based on our most
recent evaluation, to NTST's auditors and the audit committee of NTST's board of
directors:

a. all significant deficiencies n the design or operation of internal
controls which could adversely affect NTST's ability to record, process,
summarize and report financial data and have identified for NTST's auditors any
material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in NTST's internal controls; and

6. NTST's other certifying officer and I have indicated in this annual report
whether there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: February 21, 2003

By: /s/ James L. Conway
------------------
James L. Conway

Chief Executive Officer


I, Anthony F. Grisanti certify that:

1. I have reviewed this annual report on Form 10-K of Netsmart Technologies,
Inc. ("NTST");

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of NTST
as of, and for, the periods presented in this annual report;

4. NTST's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for NTST and have:

a. designed such disclosure controls and procedures to ensure that
material information relating to NTST, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b. evaluated the effectiveness of NTST's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. NTST's other certifying officer and I have disclosed, based on our most
recent evaluation, to NTST's auditors and the audit committee of NTST's board of
directors:

a. all significant deficiencies n the design or operation of internal
controls which could adversely affect NTST's ability to record, process,
summarize and report financial data and have identified for NTST's auditors any
material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in NTST's internal controls; and

6. NTST's other certifying officer and I have indicated in this annual report
whether there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: February 21, 2003

By: /s/ Anthony F. Grisanti
-----------------------
Anthony F. Grisanti

Chief Financial Officer


Sarbanes-Oxley Act Section 906 Certifications
---------------------------------------------

In connection with this annual report on Form 10-K of Netsmart Technologies,
Inc., for the period ended December 31, 2002, I James L. Conway, Chief
Executive Officer of Netsmart Technologies, Inc., hereby certify pursuant to
18 U.S.C.ss.1350, as adopted pursuant toss.906 of the Sarbanes-Oxley Act of
2002, that:

1. this Form 10-K for the period ended December 31, 2002 fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and

2. the information contained in this Form 10-K for the period ended December 31,
2002 fairly presents, in all material respects, the financial condition and
results of operations of Netsmart Technologies, Inc.

Date: February 21, 2003

By: /s/ James L. Conway
-------------------
James L. Conway

Chief Executive Officer

In connection with this annual report on Form 10-K of Netsmart Technologies,
Inc. for the period ended December 31, 2002, I, Anthony F. Grisanti, Chief
Financial Officer of Netsmart Technologies, Inc., hereby certify pursuant
to 18 U.S.C.ss. 1350, as adopted pursuant toss. 906 of the Sarbanes-Oxley
Act of 2002, that:

1. this Form 10-K for the period ended December 31, 2002 fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and

2. the information contained in this Form 10-K for the period ended December 31,
2002 fairly presents, in all material respects, the financial condition and
results of operations of Netsmart Technologies, Inc.

Date: February 21, 2003

By: /s/Anthony F. Grisanti
----------------------
Anthony F. Grisanti

Chief Financial Officer

Part IV

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



1. Financial Statements
Report of Marcum & Kliegman LLP
Report of Eisner LLP

Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Income for the Years Ended December
31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements

2. Financial Statement Schedules None
None

3. Reports on Form 8-K None
None

4. Exhibits

3.1(1) Restated Certificate of Incorporation, as amended
3.2(1) By-Laws
10.1(2) Employment Agreement dated January 1, 2001, between
the Registrant and James L. Conway.
10.2(2) Employment Agreement dated January 1, 2001, between
the Registrant and John F. Phillips.
10.3(2) Employment Agreement dated January 1, 2001, between
the Registrant and Gerald O. Koop.
10.4(2) Employment Agreement dated January 1, 2001, between
the Registrant and Anthony F. Grisanti.
10.5(2) Consulting Agreement dated January 1, 2001, between
the Registrant and Edward D. Bright
10.6(1) 1993 Long-Term Incentive Plan.
10.7(3) 1998 Long-Term Incentive Plan.
10.8(4) 1999 Long-Term Incentive Plan.
10.9(5) 2001 Long-Term Incentive Plan.
10.10(4) 1999 Employee Stock Purchase Plan
10.11(2) Agreement dated June 1, 2001, between the Registrant and
Fleet Bank.
21.1(2) Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent
25.1 Powers of attorney (See Signature Page)

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

(2) Filed as an exhibit to the Registrant's Form 10K annual report for the year
ended December 31, 2001 and incorporated herein.

(3) Filed as an appendix to the Registrant's proxy statement dated September
30, 1999, relating to its 1999 Annual Meeting of Stockholders and incorporated
herein by reference.

(4) Filed as an appendix to the Registrant's proxy statement dated November 9,
2000, relating to its 2000 Annual Meeting of Stockholders and incorporated
herein by reference.

(5) Filed as an appendix to the Registrant's proxy statement dated November 14,
2002, relating to its 2002 Special Meeting of Stockholders held on January 9,
2003 and incorporated herein by reference.




NETSMART TECHNOLOGIES, INC.
AND SUBSIDIARIES




NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------

Page to Page
------------

Independent Auditors' Report - Marcum & Kliegman LLP...............F-3

Independent Auditors' Report - Eisner, LLP.........................F-4

Consolidated Balance Sheets........................................F-5......F-6

Consolidated Statements of Income..................................F-7......F-8

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

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

Notes to Consolidated Financial Statements ........................F-13.....F-30


. . . . . . . . . . .




INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders of
Netsmart Technologies, Inc.

We have audited the accompanying consolidated balance sheet of
Netsmart Technologies, Inc. and subsidiaries as of December 31, 2002 and the
related consolidated statements of income, stockholders' equity and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Netsmart Technologies, Inc. and its subsidiaries as of December 31, 2002, and
the consolidated results of their operations and their consolidated cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.

/s/*
- ---------------------
Marcum & Kliegman LLP

Woodbury, New York
February 3, 2003



INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders of
Netsmart Technologies, Inc.

We have audited the accompanying consolidated balance sheet of
Netsmart Technologies, Inc. and subsidiaries as of December 31, 2001 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the two year period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of
Netsmart Technologies, Inc. and its subsidiaries as of December 31, 2001, and
the consolidated results of their operations and their consolidated cash flows
for each of the years in the two year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.

/s/*
- --------------
Eisner LLP
(formerly Richard A. Eisner & Company LLP)

New York, New York
February 15, 2002



NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------

December 31,
2002 2001
---- ----
Assets:

Current Assets:

Cash and Cash Equivalents $ 7,251,740 $ 3,837,226
Accounts Receivable - Net 7,058,855 5,876,970
Costs and Estimated Profits in Excess
of Interim Billings 3,857,522 3,783,356
Deferred taxes 900,000 500,000
Other Current Assets 196,577 128,232
----------- ----------

Total Current Assets 19,264,694 14,125,784
----------- ----------

Property and Equipment - Net 364,306 366,356
----------- ----------

Other Assets:

Software Development Costs - Net 382,387 686,301
Customer Lists - Net 2,141,855 2,618,145
Other Assets 121,419 210,787
----------- ----------

Total Other Assets 2,645,661 3,515,233
----------- ----------

Total Assets $22,274,661 $18,007,373
========== ==========

See Notes to Consolidated Financial Statements.




NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------

December 31,

2002 2001
---- ----


Liabilities and Stockholders' Equity:
Current Liabilities:
Current Portion - Long Term Debt $ 500,000 $ 500,000
Current Portion Capital Lease Obligations 9,886 28,905
Accounts Payable 1,166,145 688,682
Accrued Expenses 922,417 359,908
Interim Billings in Excess of Costs and Estimated
Profits 5,914,970 3,959,230
Deferred Revenue 1,095,412 685,569
------------ -----------

Total Current Liabilities 9,608,830 6,222,294
------------ -----------

Capital Lease Obligations - Less current portion 1,864 12,519
Long Term Debt - Less current portion 1,250,012 1,750,004
Interest Rate Swap at Fair Value 107,713 74,875
------------ -----------

Total Non Current Liabilities 1,359,589 1,837,398
------------ -----------

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 4,046,430 shares
at December 31, 2002, 3,719,247 shares at
December 31, 2001 40,464 37,192

Additional Paid in Capital 21,411,777 20,856,166
Unearned Compensation (14,400) --
Accumulated Comprehensive loss - Interest Rate Swap (107,713) (74,875)
Accumulated Deficit (9,375,774) (10,570,992)
---------- ----------
11,954,354 10,247,491

Less: cost of shares of Common Stock held
in treasury - 89,797 at December 31, 2002 and
28,038 shares at December 31, 2001 648,112 299,810
---------- ----------

Total Stockholders' Equity 11,306,242 9,947,681
---------- ----------

Total Liabilities and Stockholders' Equity $22,274,661 $ 18,007,373
========== ==========

See Notes to Consolidated Financial Statements.





NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------

Year ended December 31,

2002 2001 2000
---- ---- ----

Revenues:
Software and Related
Systems and Services:
General $13,921,449 $10,885,337 $14,387,256
Maintenance Contract
Services 6,247,336 5,191,986 3,520,717
---------- ---------- ----------
Total Software and Related
Systems and Services 20,168,785 16,077,323 17,907,973

Data Center Services 1,957,392 2,042,098 2,262,676
---------- ---------- ----------

Total Revenues 22,126,177 18,119,421 20,170,649
---------- ---------- ----------

Cost of Revenues:
Software and Related
Systems and Services:
General 10,184,637 7,367,949 8,645,275
Maintenance Contract
Services 3,348,217 3,614,336 2,285,663
---------- ---------- ----------

Total Software and Related
Systems and Services 13,532,854 10,982,285 10,930,938

Data Center Services 1,011,602 1,018,950 1,024,523
---------- ---------- ----------

Total Cost of Revenues 14,544,456 12,001,235 11,955,461
---------- ---------- ----------

Gross Profit 7,581,721 6,118,186 8,215,188
---------- ---------- ----------

Selling, General and
Administrative Expenses 5,168,184 4,384,291 4,714,829
Research and Development 1,318,124 1,334,577 1,359,781
---------- ---------- ----------

Total 6,486,308 5,718,868 6,074,610
---------- ---------- ----------

Income from Continuing Operations
before Interest Expense 1,095,413 399,318 2,140,578

Interest and Other Income 46,115 71,742 --

Interest and Other Expense 262,310 186,638 161,386
---------- ---------- ----------

Income from Continuing Operations
before Income Tax (Benefit) 879,218 284,422 1,979,192

Income Tax (Benefit) (316,000) (31,000) (336,827)
---------- --------- ----------

Income from Continuing Operations 1,195,218 315,422 2,316,019
---------- --------- ----------

See Notes to Consolidated Financial Statements.




NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------

Year ended December 31,

2002 2001 2000
---- ---- ----

Discontinued Operations:
Gain on Sale of Discontinued Operations -- -- 70,000
--------- ---------- ---------

Net Income $1,195,218 $ 315,422 $2,386,019
========= ========== =========

Earnings Per Share of Common Stock:
Basic:
Income from Continuing Operations $ .32 $ .09 .69
Income from Discontinued Operations -- -- .02
--------- ---------- ---------

Net Income $ .32 $ .09 $ .71
========= ========== =========

Weighted Average Number of Shares of
Common Stock Outstanding 3,748,537 3,618,260 3,367,005
========= ========= =========

Diluted:
Income from Continuing Operations $ .29 $ .08 $ .61
Income from Discontinued Operations -- -- .02
--------- --------- ---------

Net Income $ .29 $ .08 $ .63
========= ========= =========

Weighted Average Number of Shares of
Common Stock and Common Stock
Equivalents Outstanding 4,153,484 3,871,876 3,770,992
========= ========= =========

See Notes to Consolidated Financial Statements.






NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------

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



Balance -
January 1, 2000 2,988,738 $29,887 $18,657,579 $ -- $(13,272,433) $ -- $ -- 5,333 $ (60,000) $ 5,355,033

Common Stock
Issued -
Exercise of
Options 328,321 3,283 378,258 -- -- -- -- 22,705 (239,810) 141,731

Common Stock
Issued -
Exercise of
Warrants 192,105 1,921 1,137,709 -- -- -- -- -- -- 1,139,630

Common Stock
Issued -
Acquisition 15,528 155 99,845 -- -- -- -- -- -- 100,000

Issuance and
Extension of
Warrants -- -- 181,000 -- -- -- -- -- -- 181,000

Net Income -- -- -- -- 2,386,019 -- 2,386,019 2,386,019
--------- ------ ---------- ------ ---------- ------- --------- ------ ------- ----------
$2,386,019
=========
Balance -
December 31, 2000 3,524,692 35,246 20,454,391 -- (10,886,414) -- $ -- 28,038 (299,810) 9,303,413

Common Stock
Issued -
Exercise of
Options 14,555 146 21,688 -- -- -- -- -- -- 21,834

Common Stock
Issued -
Acquisition 180,000 1,800 374,400 -- -- -- -- -- -- 376,200

Issuance and
Extension of
Warrants -- -- 5,687 -- -- -- -- -- -- 5,687

Change in Fair
Value of
Interest Rate
Swap -- -- -- -- -- (74,875) (74,875) -- -- (74,875)

Net Income -- -- -- -- 315,422 -- 315,422 -- -- 315,422
--------- ------ ---------- ------ ---------- ------- --------- ------ ------- ----------
$ 240,547
=========
Balance -
December 31, 2001 3,719,247 37,192 20,856,166 -- (10,570,992) (74,875) 28,038 (299,810) 9,947,681

Common Stock
Issued -
Exercise of
Options 327,183 3,272 501,938 -- -- --$ -- 61,759 (348,302) 156,908

Issuance of
Warrants and
Options -- -- 53,673 (14,400) -- -- -- -- -- 39,273

Change in Fair
Value of
Interest Rate
Swap -- -- -- -- -- (32,838) (32,838) -- -- (32,838)

Net Income -- -- -- -- 1,195,218 -- 1,195,218 -- -- 1,195,218
--------- ------ ---------- ------ ---------- ------- --------- ------ ------- ----------
$1,162,380

Balance -
December 31, 2002 4,046,430 $40,464 $21,411,777 $(14,400) $(9,375,774) $(107,713) 89,797 $(648,112) $11,306,242

See Notes to Consolidated Financial Statements.







NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------

Year ended December 31,

2002 2001 2000
---- ---- ----

Operating Activities:
Income from Continuing Operations $ 1,195,218 $ 315,422 $ 2,316,019
--------- ---------- ---------
Adjustments to Reconcile Income
from Continuing Operations to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 1,036,721 1,010,821 717,776
Costs Related to Issuance
of warrants and options for services 39,273 5,687 181,000
Provision for Doubtful Accounts 370,000 340,000 330,000

Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (1,551,885) (1,528,372) 771,136
Costs and Estimated Profits in
Excess of Interim Billings (74,166) 284,899 184,817
Deferred Taxes (400,000) (6,000) (494,000)
Other Current Assets (68,345) 16,710 22,574
Other Assets 89,368 (124,574) 76,259

Increase [Decrease] in:
Accounts Payable 477,463 (118,616) (1,754,789)
Accrued Expenses 562,509 (794,739) (88,901)
Interim Billings in Excess of
Costs and Estimated Profits 1,955,740 413,547 (400,150)
Deferred Revenue 409,843 77,125 519,898
--------- --------- ---------

Total Adjustments 2,846,521 (423,512) 65,620
--------- --------- ---------

Net Cash Provided (Used In)
by Operating Activities 4,041,739 (108,090) 2,381,639
--------- --------- ---------

Investing Activities:
Acquisition of Property and
Equipment (254,467) (120,765) (223,491)
Net Cost of AIMS Acquisition -- (589,914) --
Software Development Costs -- -- (536,100)
Cash Provided by Discontinued Operations -- -- 220,000
--------- --------- ---------

Net Cash Used In Investing Activities (254,467) (710,679) (539,591)
--------- --------- ---------

See Notes to Consolidated Financial Statements.




NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------

Year ended December 31,
----------------------
2002 2001 2000
---- ---- ----
Financing Activities:
Payment of Short-Term Notes -- -- (882,404)
Proceeds from Term Loan -- 2,500,000
Payment of Capitalized Lease Obligations (29,674) (34,790) (27,047)
Net Proceeds from Warrant Exercise -- -- 1,139,630
Net Proceeds from Stock Option Exercise 156,908 21,834 141,731
Payments of Term Loan (499,992) (249,996) --
--------- --------- ---------
Net Cash (Used in) Provided by
Financing Activities (372,758) 2,237,048 371,910
--------- --------- ---------

Net Increase in Cash
and Cash Equivalents 3,414,514 1,418,279 2,213,958

Cash and Cash Equivalents -
Beginning of Year 3,837,226 2,418,947 204,989
---------- --------- ---------

Cash and Cash Equivalents -
End of Year $7,251,740 $3,837,226 $2,418,947
========== ========== ==========

Supplemental Disclosure of Cash Flow Information:
Cash paid during the years for:
Interest $ 167,542 $ 135,566 $ 172,556
Income Taxes $ 41,517 $ 87,859 $ 157,173


Supplemental Disclosures of Non-Cash Investing and Financing Activities:

Year ended December 31, 2002:

During 2002, stock options to purchase 327,183 shares of common stock were
exercised and proceeds of $505,210 includes $348,302, representing the market
value of the Company's common stock which was received for the exercise price of
certain of these options.

The fair value of the interest rate swap calculated at December 31, 2002 was
$107,713.

Year ended December 31, 2001:

The Company issued 180,000 shares of common stock related to the AIMS
acquisition. These shares were valued at $376,200 which was the market value at
the date of grant. The Company also recorded a liability of $194,986 for
contract obligations assumed.

The fair value of the interest rate swap calculated at December 31, 2001 was
$74,875.



Year ended December 31, 2000:

The Company issued 15,528 shares of common stock to acquire the Connex suite of
managed care and employee assistance program information systems software. These
shares were valued at $100,000 which was the market value on date of issuance.

During 2000, stock options to purchase 328,321 shares of common stock were
exercised and proceeds of $381,541 includes $239,810, representing the market
value of 22,705 shares of the Company's common stock which was received for the
exercise price of certain of these options.

During 2000, the Company entered into a capitalized lease obligation to purchase
equipment in the amount of $13,249.

See Notes to Consolidated Financial Statements



NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #1
- --------------------------------------------------------------------------------

[1] The Company

Netsmart Technologies, Inc. and subsidiaries (the "Company") licenses and
installs its proprietary software products, operates an established service
bureau and enters into long term maintenance agreements with behavioral health
and public health organizations, methadone clinics and other substance abuse
facilities throughout the United States.

During 2001, the Company acquired the intellectual property, customer contracts
and certain other assets of Advanced Institutional Management Systems ("AIMS").
The acquisition was accounted for under the purchase method of accounting. The
principal assets acquired were the AIMS customer base and the rights to AIMS
Correctional and Public Health Systems software. The purchase price consisted of
180,000 shares of the Company's common stock, valued at $376,200 and $500,000
cash. In addition, the Company may issue up to 100,000 additional shares of
common stock, based on revenue derived through April 2004 from new contracts for
the AIMS systems. The value of such shares, if issued, will be charged to
operations. The Company also assumed certain contract obligations. The Company
has allocated $194,986 of assumed contract obligations to the purchase price.
The cost of the acquisition was $1,161,100, of which $167,000 was allocated to
software development and $994,100 to customer lists. The Company is amortizing
the purchased software over a three-year life and the customer lists over a
seven-year life.

[2] Summary of Significant Accounting Policies

Principles of Consolidation - The consolidated financial statements include
Netsmart Technologies, Inc. ("Netsmart"), and its wholly-owned subsidiary,
Creative Socio-Medics Corp. ("CSM"). In addition, the results of operations from
the AIMS acquisition is included from May 2001. All intercompany transactions
are eliminated in consolidation. Netsmart owned an 80% interest in a joint
venture, PsyMedX. No minority interest related to the joint venture has been
recorded, since the joint venture partner was in breach of the joint venture
agreement and in 2001 ceased to exist.

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

Cash and Cash Equivalents - The Company considers all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents totaled approximately $2,064,000 and $2,035,000 at December 31, 2002
and 2001 respectively.

Concentration of Credit Risk - The Company extends credit to customers which
results in accounts receivable arising from its normal business activities. The
Company does not require collateral or other security to support financial
instruments subject to credit risk. The Company routinely assesses the financial
strength of its customers and based upon factors surrounding the credit risk of
the customers believes that its accounts receivable credit risk exposure is
limited.

The Company's behavioral health information systems are marketed to specialized
care facilities, many of which are operated by government entities and include
entitlement programs. During the years ended December 31, 2002, 2001 and 2000,
approximately 52%, 40% and 51% respectively, of the Company's revenue were
generated from contracts directly or indirectly with government agencies.

During the years ended December 31, 2002, 2001 and 2000, no one customer
accounted for more than 10% of revenue.



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

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

The Company places its cash and cash equivalents with high credit quality
financial institutions. The amount on deposit in any one institution that
exceeds federally insured limits is subject to credit risk. At December 31, 2002
and 2001, cash and cash equivalent balances of $7.1 million and $3.6 million
respectively, were held at a financial institution in excess of federally
insured limits.

Revenue Recognition - The Company recognizes revenue principally from the
licensing of its software and from consulting and maintenance services rendered
in connection with such licensing activities. Information processing revenue is
recognized in the period in which the service is provided. Maintenance contract
revenue is recognized on a straight-line basis over the life of the respective
contract. The Company also derives 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. No revenue is
recognized prior to obtaining a binding commitment from the customer.

Software development revenue from time-and-materials contracts are recognized as
services are performed. 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 on the
estimated percentage-of-completion method. Using the units-of-work-performed
method to measure progress towards completion, revisions in cost estimates and
recognition of losses on these contracts are reflected in the accounting period
in which the facts become known. Revenue from software package license
agreements without significant vendor obligations is recognized upon delivery of
the software. Contract terms provide for billing schedules that differ from
revenue recognition and give rise to costs and estimated profits in excess of
billings, and billings in excess of costs and estimated profits.

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.

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

Estimated useful lives are as follows:

Equipment 3-5 Years
Furniture ures 5 Years
Leasehold ments 2-5 Years

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



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

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

for a product bear 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 5 years.

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

During 2000, the Company acquired the Connex suite of managed care and employee
assistance program information systems. The acquisition price consisted of
approximately $47,000 in cash and 15,528 shares of Netsmart's common stock
valued at $100,000. The purchase price was allocated to computer software in the
amount of $147,000. During 2000, the Company made additional enhancements to the
purchased software in the amount of $270,000. As of December 31, 2002, the
Company has invested approximately $417,000 on this effort of which $170,000 was
unamortized.

Information related to capitalized software costs applicable to continuing
operations is as follows:

Year ended December 31, 2002 2001 2000
----------------------- ---- ---- ----

Beginning of Year $ 686,301 $ 822,645 $ 310,722
Capitalized -- 167,000 636,100
Amortization (303,914) (303,344) (124,177)
--------- -------- --------

Net $ 382,387 $ 686,301 $ 822,645
========= ======== ========

Customer Lists - Customer lists represent a listing of customers obtained
through the acquisitions of CSM, Johnson and AIMS to which the Company can
market its products. Customer lists are being amortized on the straight-line
method over an estimated useful life of 12 years for the CSM and Johnson lists
and 7 years for the AIMS list.

Customer lists at December 31, 2002 and 2001 are as follows:
December 31,
------------
2002 2001
---- ----

Customer Lists $5,100,323 $5,100,323
Less: Accumulated Amortization 2,958,468 2,482,178
----------- -----------

Net $2,141,855 $2,618,145
========== ==========

Amortization expense amounted to $476,290, $440,787 and $334,276, respectively,
for the years ended December 31, 2002, 2001 and 2000.

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

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




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

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

provisions of these interpretations that are applicable to the Company were
implemented on a prospective basis as of January 1, 2002, which had no material
effect on the Company's consolidated financial position or results of
operations.

Stock Options and Similar Equity Instruments - At December 31, 2002, the Company
had three stock-based employee compensation plans, which are described more
fully in Note 13. As permitted under SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure", which amended SFAS No. 123 ("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:

Year ended
December 31,

2002 2001 2000
---- ---- ----



Net Income as Reported $1,195,218 $ 315,422 $2,386,019

Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards, net of related tax effect 123,952 473,749 94,022
--------- --------- ---------

Pro Forma Net Income (Loss) $1,071,266 $ (158,327) $2,291,997
========= ========= =========

Basic Net Income Per Share as Reported $ .32 $ .09 $ .71
========= ========= =========

Basic Pro Forma Net Income (Loss) Per Share $ .29 $ (.04) $ .68
========= ========= =========

Diluted Net Income Per Share as Reported $ .29 $ .08 $ .63
========= ========= =========

Diluted Pro Forma Net Income (Loss) Per Share $ .26 $ (.04) $ .61
========= ========= =========

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:

2002 2001 2000
---- ---- ----
Expected Life (Years) 5 5 5
Interest Rate 4.00% 4.00% 5.50%
Annual Rate of Dividends 0% 0% 0%
Volatility 63% 60% 57%






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

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

The weighted average fair value of options at date of grant using the fair value
based method during 2002, 2001 and 2000 is estimated at $1.42, $1.45 and $1.50
respectively

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

The computation of diluted earnings per share does not assume conversion,
exercise or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e. improving earnings per share). The dilutive
effect of outstanding options and warrants and their equivalents are reflected
in dilutive earnings per share by the application of the treasury stock method.
Options and warrants will have a dilutive effect only when the average market
price of the common stock during the period exceeds the exercise price of the
options or warrants. The Company had potentially dilutive options and warrants
outstanding of 729,702, 723,385 and 974,275 during the years ended December 31,
2002, 2001 and 2000, respectively.

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

Year ended December 31,
----------------------
2002 2001 2000
---- ---- ----



Numerator:
Income from continuing operations $1,195,218 $ 315,422 $2,316,019

Discontinued operations:
Gain on sale of discontinued operations -- -- 70,000
--------- --------- ---------
Net income available to common stockholders $1,195,218 $ 315,422 $2,386,019
========= ========= =========

Denominator:
Weighted average shares 3,748,537 3,618,260 3,367,005
--------- --------- ---------
Effect of dilutive securities:
Employee stock options 395,668 253,616 403,987
Stock warrants 9,279 -- --
--------- --------- --------
Dilutive potential common shares 404,947 253,616 403,987
--------- --------- --------

Denominator for diluted earnings per
share-adjusted weighted average shares
after assumed conversions 4,153,484 3,871,876 3,770,992
========= ========= =========

Advertising - Advertising costs are expensed as incurred. Advertising expense
amounted to $139,110, $290,146 and $226,024 for the years ended December 31,
2002, 2001 and 2000, respectively.

Reclassification - Certain prior years' amounts have been reclassified to
conform to the current year's presentation.




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

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

Financial Instruments - Effective June 2001 the Company adopted SFAS No. 133,
"Accounting for Derivative instruments and Hedging Activities" as amended. SFAS
No. 133 requires the recognition of all derivative instruments as either assets
or liabilities on the balance sheet measured at fair value. Generally, increases
or decreases in the fair value of derivative instrument will be recognized as
gains or losses in earnings in the period of change. If the derivative
instrument is designated and qualifies as a cash flow hedge, the change in fair
value of the derivative instrument will be recorded as a separate component of
stockholders' equity.

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

New Accounting Pronouncements - In June 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets". The provisions of these interpretations
that are applicable to the Company were implemented on a prospective basis as of
January 1, 2002, which had no material effect on the Company's consolidated
financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 requires that gains and losses from extinguishment of debt be
classified as extraordinary items only if they meet the criteria in Accounting
Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the provisions of
Opinion No. 30 will distinguish transactions that are part of an entity's
recurring operations from those that are unusual and infrequent that meets the
criteria for classification as an extraordinary item. The Company is required to
adopt SFAS No. 145 no later than the first quarter of fiscal 2003, although
early adoption is allowed. The adoption of this standard is not expected to have
a material effect on the Company's consolidated financial position and results
of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The adoption of this
standard is not expected to have a material effect on the Company's consolidated
financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45, ("FIN 45") "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires a company, at the time it
issues a guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantee and elaborates on existing disclosure
requirements related to guarantees and warranties. The initial recognition
requirements of FIN 45 are



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

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

effective for guarantees issued or modified after December 31, 2002 and adoption
of the disclosure requirements are effective for the Company as of December 31,
2002. The Company does not expect that the adoption of the recognition
requirements of FIN 45 will have a material effect on its consolidated financial
position or results of operations.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company does not expect the adoption of FIN
46 will have a material effect on its consolidated financial position or results
of operations.

[3] Accounts Receivable

Accounts receivable is shown net of allowance for doubtful accounts of $530,640
and $357,994 at December 31, 2002 and 2001 respectively. The changes in the
allowance for doubtful accounts are summarized as follows:

Year Ended December 31,
----------------------
2002 2001 2000
---- ---- ----

Beginning Balance $ 357,994 $ 370,222 $ 305,226
Provision for Doubtful Accounts 370,000 340,000 330,000
Charge-offs (197,354) (352,228) (265,004)
------- ------- -------

Ending Balance $ 530,640 $ 357,994 $ 370,222
======= ======= =======

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

December 31,
-----------
2002 2001
---- ----

Costs Incurred on Uncompleted Contracts $ 18,599,730 $ 16,065,533
Estimated Profits 10,501,200 8,803,818
---------- ----------

Total 29,100,930 24,869,351
Billings to Date 31,158,378 25,045,225
---------- ----------

Net $ (2,057,448) $ (175,874)
========== ==========

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

Costs and estimated profits in
excess of interim billings $ 3,857,522 $ 3,783,356
Interim billings in excess of
costs and estimated profits (5,914,970) (3,959,230)
--------- ----------

Net $ (2,057,448) $ (175,874)
========= ==========




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

[5] Discontinued Operations

During 1998 the Company discontinued its CarteSmart division which included its
interest in a joint venture. On June 30, 1998, the Company sold this division,
with an option to purchase the Company's interest in the joint venture if the
other party to the venture did not elect to acquire the Company's interest, to
Granite Technologies, Inc. ("Granite"), a corporation formed by the former
management of the division. Granite issued to the Company its $500,000
promissory note and an equity interest in Granite equal to 20% at the time of
transaction. Granite also agreed to pay certain royalties to the Company. The
note was subject to cancellation if the other party to the joint venture elected
to purchase the Company's interest. As the Company had virtually no influence
over the financing and operating policies of Granite, the interest in Granite
was accounted for using the cost method. During 2000, the Company's 20% interest
in Granite was diluted to 13% as a result of additional equity issued by Granite
to third parties.

During 2001, Granite was purchased by The Finx Group, Inc. ("Finx") and the
Company received 496,124 restricted shares of Finx for its 13% interest in
Granite. The Finx shares are traded on the OTC Bulletin Board. During 2001, the
Company advanced Granite $39,490 for working capital purposes. In December 2001,
Finx repaid the advance with 79,661 shares of its common stock. At December 31,
2001, the Company valued its aggregate holding in Finx, consisting of 575,785
shares at $69,490. At December 31, 2002, the Company reassessed its value in the
Finx stock and reduced it by $57,974 to $11,516. The adjustment was charged as
an other-than-temporary decline to interest and other expenses. The Finx shares
are included in other assets.

In October 1998, the other party to the joint venture exercised its right to
purchase the Company's interest in the joint venture for a $500,000 note. The
Company has been paid in full from installment payments on this note over a
period ranging from November 1998 through December 2000. The Company recognized
gain on the sale of discontinued operations as it continually revalued this note
throughout the payment period.

[6] Property and Equipment

Property and equipment consist of the following:

December 31,
-----------
2002 2001
---- ----

Equipment, Furniture and Fixtures $1,417,042 $1,191,975
Leasehold Improvements 305,862 294,152
--------- ---------

Totals - At Cost 1,722,904 1,486,127
Less: Accumulated Depreciation
and Amortization 1,358,598 1,119,771
--------- ---------

Net $ 364,306 $ 366,356
========= =========

Depreciation and amortization expense amounted to $256,517, $266,690, and
$259,323, respectively for the years ended December 31, 2002, 2001 and 2000.

[7] Bank Financing

Bank Financing - In June 2001, the Company entered into a financing agreement
with a bank. This improved credit facility and medium term financing replaces
the Company's asset based borrowing facility. The new financing provides the
Company with a five-year term loan of $2.5 million and a two year $1.5 million
revolving line of credit. The term loan is paid in equal monthly installments
during the term of the loan plus interest. Proceeds from the term loan are
available for acquisitions and to upgrade certain software systems to meet
requirements in California. Funds drawn down from the revolving line of credit
are to be used for working capital purposes. The term loan bears



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

[7] Bank Financing - [Continued]

interest at the Company's option, to be equal to either (i) LIBOR plus 2.5% or
(ii) the Prime Rate. The revolving line of credit will bear interest, at the
Company's option, to be equal to either (i) LIBOR plus 2.0% or (ii) the Prime
Rate, and incur an annual facility fee of 0.5%. On July 12, 2001, the Company
entered into an interest rate swap agreement on the term loan at 7.95% for five
years (Note 12). The financing agreement contains certain covenants including
limitations on the Company's ability to incur liens, enter into change of
control transactions, maintain a minimum net worth at $9,000,000 and requires
the maintenance of certain financial ratios. The interest rate on the previous
facility was prime plus 2%. As of December 31, 2002, the Company owes
approximately $1,750,000 on the term loan, of which $500,000 is classified as a
current liability and the balance is classified as a long term liability. The
Company has not utilized any borrowing availability on the $1.5 million
revolving line of credit. The borrowing is collateralized by a first priority
security interest and lien on all the assets of the Company.

[8] Income Taxes

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

During the year ended December 31, 2002, the Company utilized approximately $1.6
million of net operating loss carryforwards. At December 31, 2002 the Company
has remaining net operating loss carryforwards of approximately $9,045,000
expiring by 2021. Pursuant to Section 382 of the Internal Revenue Code regarding
substantial changes in Company ownership, utilization of approximately
$6,500,000 of this net operating loss carryforward is limited to approximately
$1,360,000 per year, plus any prior years' amounts not utilized. In addition,
the tax benefit of approximately $1,800,000 of net operating losses generated in
2000 on exercise of non-qualified compensatory stock options and warrants will
be credited to paid-in-capital as utilized.

The Company's provision for taxes for the year ended December 31, 2002 includes
certain state and local taxes.

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

December 31, Amount
- ----------- ------
2015 $ 1,305,000
2016 2,413,000
2017 2,664,000
2018 716,000
2019 133,000
2020 1,810,000
2021 4,000
---------
$ 9,045,000
=========



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

[8] Income Taxes - [Continued]

Provision for income taxes consists of the following:

Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Current:
Federal $ -- $ (43,280) $ 43,280
State 84,000 18,280 113,893
--------- -------- ---------
84,000 (25,000) 157,173
--------- -------- ---------

Deferred:
Federal (400,000) -- (442,000)
State -- (6,000) (52,000)
--------- -------- ---------
(400,000) (6,000) (494,000)
--------- -------- ---------

Total $ (316,000) $ (31,000) (336,827)
========= ======== =========

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

Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----

Income taxes at the federal statutory rate 34% 34 34%
State and local income taxes net of Federal taxes 5% 5 5%
Nondeductible expenses 6% 9 5%
Federal Minimum Tax -- -- 2%
Stock Option Deduction -- -- (46)%
Decrease in valuation allowance (82)% (14)% (25)%
Overaccrual from prior year (45)% --
Other 1% -- 8%
----- ----- -----

(36)% (11)% (17)%
====== ===== =====

Significant components of the Company's deferred tax assets are comprised of the
following:
December 31,
------------
2002 2001
---- ----

Net operating loss carryforward $ 3,704,000 $ 4,178,000
Allowance for doubtful accounts 211,000 136,000
Accrued vacation and bonuses 202,000 122,000
Alternative minimum tax credit carryforward 43,000 43,000
Benefit of stock based compensation awards 502,000 502,000
Other 262,000 --
---------- ----------

Total deferred tax assets 4,924,000 4,981,000

Valuation allowance (4,024,000) (4,481,000)
---------- ----------

Net deferred tax assets $ 900,000 $ 500,000
========== ===========

The valuation allowance decreased by $457,000 at December 31, 2002 The Company
believes that it is more likely than not, to use at least a portion of its net
operating loss carryforward.



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

[8] Income Taxes - [Continued]

The change in the valuation allowance for deferred tax assets are summarized as
follows:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----

Beginning Balance $ 4,481,000 $ 4,520,000 $ 5,425,000
Change in Allowance (457,000) (39,000) (905,000)
--------- ---------- ----------

Ending Balance $ 4,024,000 $ 4,481,000 $ 4,520,000
========= ========== ==========

[9] Stockholders' Equity

The Company's Board of Directors is authorized to issue preferred stock from
time to time without stockholder action, in one or more distinct series. The
Board of Directors is authorized to determine the rights and preferences of the
preferred stock when issued. The Board of Directors has authorized the issuance
of Series A, Series B and Series D preferred Stock. No shares of any series of
preferred stock were outstanding on December 31, 2002.

Common Stock Issuances - During 2000, Series B Common Stock Purchase Warrants to
purchase an aggregate of 192,105 shares of Common Stock at $6 per share were
exercised. The Company received $1.1 million from the exercise of the warrants.

Treasury Stock - During 2002, stock options to purchase 327,183 shares were
exercised and the Company received gross proceeds of $505,210. Pursuant to the
option grants, employees have the right to pay for the exercise price of the
options by delivering shares of common stock owned by them. During 2002, the
Company received 61,759 shares having a value of $348,302, as the exercise price
of the options. During 2000, stock options to purchase 328,321 shares were
exercised, and the Company received gross proceeds of $381,541. Pursuant to the
option grants, employees have the right to pay for the exercise price of the
option by delivering shares of common stock owned by them. During 2000, the
Company received 22,705 shares, having a value of $239,810, as the exercise
price of the options.

Stock Options - See Note 13 for information relating to the Company's 1998, 1999
and 2001 Long-Term Incentive Plans.

On December 21, 2000, the stockholders of the Company approved the 1999 Employee
Stock Purchase Plan. The plan reserves 150,000 shares of common stock. The plan
provides eligible employees with the opportunity to purchase shares of common
stock at a discounted price through regular payroll deductions. No options have
been issued as of December 31, 2002 under this plan.

[10] Capital Lease Obligations

Future minimum payments under capital lease obligations as of December 31, 2002
are as follows:

Year ending
- -----------
December 31,
- -----------
2003 10,808
2004 1,801
------

Total Minimum Payments 12,609
Less Amount Representing Interest at
12.6% Per annum 859
------

Balance $ 11,750
======



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

[10] Capital Lease Obligations - [Continued]

Capital lease obligations are collateralized by equipment which has a cost of
$40,000 at December 31, 2002 and 2001 and accumulated amortization of $28,000
and $20,000 at December 31, 2002 and 2001 respectively. Amortization of $8,000
in each of 2002, 2001 and 2000, respectively, has been included in depreciation
expense.

[11] Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, accounts receivable, and
accounts payable approximate the fair value of these instruments because of
their short maturities.

Long-term debt, including current maturities, has a carrying value of
approximately $1,750,000 and an estimated fair value of $1,800,000. Estimated
fair value is based on the expected current rates offered to the Company for
instruments of the same or similar maturities, after considering the effect of
the interest rate swap.

[12] Commitments and Contingencies

Leases
- ------

The Company leases space for its executive offices and facilities under non
cancellable operating leases expiring December 31, 2003. In addition the Company
leases three sales and service offices under non cancelable operating leases
expiring at various times through July 2005.

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

Year ending
- -----------
December 31,
- -----------

2003 $ 473,000
2004 77,000
2005 43,000
-------

Total $ 593,000
----- =======


Rent expense amounted to $455,000, $482,000 and $464,000 respectively, for the
years ended December 31, 2002, 2001 and 2000.

Employment Agreements
- ---------------------

In January 2001, the Company entered into employment agreements with its four
executive officers for terms of two or three years with the right of the
employee to extend the agreement for an additional year. The aggregate base
compensation for these officers for 2003 is $657,000, subject to annual
increases equal to the greater of 5% or the increase in the cost of living
index. Each of the officers also has the right, at any time on 90 days notice,
to terminate his full time employment and continue as a consultant at an annual
salary of $75,000 for five years following the expiration or termination of his
employment. The agreements also provide the officers with an automobile
allowance. In the event of a change of control, the executive may receive
severance payments of between 30 and 36 months' compensation.

The Company also has a consulting agreement with a Director, which provides for
annual fees of $75,000 through December 31, 2003. The agreement also provides
the Director with an automobile allowance. In the event of a change of control,
the Director may receive severance payments of between 30 and 36 months
compensation.



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

[12] Commitments and Contingencies - [Continued]

Interest Rate Swap
- ------------------

In June 2001 the Company entered into an interest rate swap with a bank, which
expires on June 1, 2006. The swap transaction was entered into to protect the
Company from upward movement in interest rates relating to outstanding bank debt
(See Note 7) and calls for a fixed rate of 7.95%. When the one-month LIBOR rate
is below the fixed rate then the Company is obligated to pay the bank for the
difference in rates. When the one-month LIBOR rate is above the fixed rate then
the bank is obligated to pay the Company for the difference in rates. At
December 31, 2002 and 2001 the fair value of the swap of $107,713 and $74,875,
respectively, is recorded as a non-current liability. The swap transaction has
been accounted for as a hedge, and accordingly, the change in the fair value of
the swap of $32,838 and $74,875 during the years ended December 31, 2002 and
2001, respectively, has been recorded as part of comprehensive income.

[13] Stock-Based Compensation

Long Term Incentive Plans - The Company has three long-term incentive plans, the
1998 Long-Term Incentive Plan (the "1998 Plan"), as amended, the 1999 Long-Term
Incentive Plan (the "1999 Plan") and the 2001 Long-Term Incentive Plan (the
"2001 Plan"). The 2001 Plan was approved by the stockholders on March 7, 2002
and provides for the issuance of 180,000 shares of common stock. In January
2003, the 2001 Plan was amended and approved by the stockholders to provide for
an increase in the number of shares subject to the plan from 180,000 to 550,000.
The 1999 Plan was approved by the stockholders in December 2000 and provides for
the issuance of 300,000 shares of common stock. The Company may issue 790,000,
300,000 and 550,000 shares of Common Stock pursuant to the 1998 Plan, the 1999
Plan and the 2001 Plan respectively. The options, when granted vest ratably over
one year. At December 31, 2002 there were 11,500, 2,000 and 1,500 shares
available for further issuance under the 1998 Plan, the 1999 Plan and 2001 Plan,
respectively, exclusive of any options available for grant as a result of the
increase in the 2001 Plan.

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

The Plans provides that each non-employee director automatically receives a
nonqualified stock option to purchase 5,000 shares of common stock on April 1 of
each year. However, if there are not sufficient shares available under the
applicable Plan, the non-employee director will receive a lesser number of
shares.

During 2002, pursuant to an arrangement with a consultant, the Company issued a
non-qualified stock option to purchase 10,000 shares of stock at an exercise
price of $2.75, which was the fair market value of the stock at the date of
grant. The options were valued at $.57 per option based upon the Black-Scholes
calculation, which had an interest rate of 4% and a volatility rate of .48.
These options had a term of one year, however, they were exercised during 2002.
The Company recognized a charge to income under the Black-Scholes formula in the
amount of $5,673.

During 2000, pursuant to an employment contract with a newly hired executive,
the Company issued a non-qualified stock option to purchase 75,000 shares of
stock at an exercise price of $6.50 per share.




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

[13] Stock-Based Compensation - [Continued]

A summary of the activity under the Plans is as follows:


2002 2001 2000
------------------- ------------------ -------------------
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning of
Year 793,385 $1.917 809,718 $1.908 783,041 $1.176
Granted During the Year 198,500 2.505 3,500 1.900 375,000 2.748
Canceled During the Year -- -- (5,278) 1.810 (20,002) 1.250
Exercised During the Year (327,183) 1.544 (14,555) 1.500 (328,321) 1.167
------- ----- ------- ----- ------- -----

Outstanding - End of Year 664,702 $2.276 793,385 $1.917 809,718 $1.908
======= ===== ======= ===== ======= =====

Exercisable - End of Year 575,451 $2.242 789,885 $1.917 434,718 $1.183
======= ===== ======= ===== ======= =====

The following table summarizes stock option information as of December 31, 2002:

Options Outstanding
-------------------
Weighted
--------
Average Remaining Options
----------------- -------
Exercise Prices Number Outstanding Contractual Life Exercisable
- --------------- ------------------ ---------------- -----------

$6.50 75,000 2.25 Years 75,000
$2.50 165,503 4.25 Years 82,752
$2.38 8,000 4.5 Years 4,000
$2.40 5,000 4.5 Years 2,500
$1.90 3,500 3.83 Years 3,500
$1.81 160,699 3 Years 160,699
$1.50 72,500 .42 Years 72,500
$1.00 174,500 .83 Years 174,500
------- --------- -------

Totals 664,702 2.41 Years 575,451
======= ========== =======

Warrants Issued as Compensation - In December 1999, the Company's $6 and $12
Series B Common Stock Purchase Warrants totaling 287,500 and 448,544,
respectively, were extended to February 29, 2000. These warrants had a previous
expiration date of December 31, 1999. The Company recognized a financing cost of
$81,000 with respect to this extension in 1999. In February 2000, these warrants
were further extended to April 30, 2000 and the Company recognized additional
financing costs of $125,000 in 2000. At the end of April 2000, 192,105 of the $6
warrants were exercised and 95,395 expired. During the course of 2001 the
448,544 $12 warrants were extended to January 31, 2002. In January 2002, the
448,544 $12 warrants were further extended to July 31, 2002. In July 2002, the
$12 warrants were further extended to January 31, 2003. There was no financing
costs associated with the warrant extensions in 2001 and 2002 because of the
variance between the $12 exercise price and the current market value of the
Company's stock at the date of the warrant extension.





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

[13] Stock-Based Compensation - [Continued]

During 2002, the Company issued warrants to purchase 200,000 shares in
connection with a financial advisory agreement whereby the Company will pay
consulting fees in addition to the issuance of warrants. These warrants, which
expire over various times ranging from one to two years, were valued at $.24 per
warrant, which represented the costs of the services based upon the contractual
agreement. Either party may terminate the agreement. The warrants have the
following exercise price, vesting dates and expiration date for the number of
shares set forth below:

Shares Exercise Price Vesting Date Expiration Date
------ -------------- ------------ ---------------
50,000 $2.70 April 10, 2002 March 31, 2003
30,000 $4.00 June 1, 2002 May 31, 2003
30,000 $5.00 September 1, 2002 February 28, 2004
30,000 $6.00 November 1, 2002 April 30, 2004
30,000 $7.00 January 1, 2003 December 31, 2004
30,000 $8.00 February 28, 2003 January 31, 2005

The $48,000 value of the warrants is being charged to operations over the
vesting period. As a result, $33,600 was charged to operations in 2002 and
$14,400 will be charged to operations in the quarter ending March 31, 2003.

In October 2001, the Company issued warrants to purchase 40,000 shares in
connection with a public and investor relations agreement whereby the Company
will pay a monthly fee in addition to the issuance of the warrants. The warrants
have an exercise price of $2.50 for the first 5,000 shares; $3.00 for the next
5,000 shares; $3.50 for 15,000 shares and $4.00 for the final 15,000 shares.
These warrants were valued at an average price of $.14 per warrant based upon
the Black-Scholes calculation, which had an interest rate of 5.5% and a
volatility rate of .6. These warrants expired on October 28, 2002.

A summary of warrant activity is as follows:

2002 2001 2000
----------------- ----------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----



Outstanding - Beginning
of Year 608,544 $10.11 568,544 $10.57 790,044 $ 9.35
Granted During the Year 648,544 $ 9.89 488,544 $11.30 514,544 $11.13
Expired During the Year (488,544) $11.30 (448,544) $12.00 (543,939) $10.95
Exercised During the Year -- -- -- -- (192,105) $ 6.00
------- ----- ------- ----- ------- -----

Outstanding - End of Year 768,544 $ 9.17 608,544 $10.11 568,544 $10.57
======= ===== ======= ===== ======= =====

Exercisable - End of Year 708,544 $ 9.31 578,544 $10.44 568,544 $10.57
======= ===== ======= ===== ======= =====




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

[13] Stock-Based Compensation - [Continued]

The following table summarizes warrant information as of December 31, 2002:

Weighted
--------
Average Remaining
-----------------
Exercise Prices Shares Contractual Life
- --------------- ------ ----------------

$12.00 448,544 .08 Years
$ 8.00 30,000 2.08 Years
$ 7.00 30,000 2.00 Years
$ 6.00 30,000 1.33 Years
$ 5.45 100,000 1.75 Years
$ 5.00 30,000 1.17 Years
$ 4.20 20,000 1.75 Years
$ 4.00 30,000 .42 Years
$ 2.69 50,000 .25 Years
------- ----------

Total 768,544 .61 Years
======= ==========

The Company applies Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", and related interpretations, for
stock options issued to employees in accounting for its stock options plans.
There was no compensation cost recognized for stock based employee compensation
awards for 2002, 2001and 2000.




NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #17

[14] Operating Segments

The Company currently classifies its operations into two business segments: (1)
Software and Related Systems and Services and (2) Data Center Services. Software
and Related Systems and Services is the design, installation, implementation and
maintenance of computer information systems 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
involve Company personnel performing data entry and data processing services for
customers. Intersegment sales and sales outside the United States are not
material. Information concerning the Company's business segments is as follows:

Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----

Revenues:
- --------
Software and Related Systems and Services $20,168,785 $16,077,323 $17,907,973
Data Center Services 1,957,392 2,042,098 2,262,676
---------- ---------- ----------

Total Revenues $22,126,177 $18,119,421 $20,170,649
-------------- ========== ========== ==========

Gross Profit:
- ------------
Software and Related Systems and Services $ 6,635,931 $ 5,095,038 $ 6,977,035
Data Center Services 945,790 1,023,148 1,238,153
---------- ---------- ----------

Total Gross Profit $ 7,581,721 $ 6,118,186 $ 8,215,188
------------------ ========== ========== ==========

Income (loss) From Continuing Operations before
- -----------------------------------------------
Income Taxes:
------------
Software and Related Systems and Services $ 481,242 $ (242,072) $ 1,208,445
Data Center Services 397,976 526,494 770,747
---------- ---------- ----------

Total Income From Continuing
----------------------------
Operations before Income Taxes $ 879,218 $ 284,422 $ 1,979,192
------------------------------ ========== ========== ==========

Depreciation and Amortization:
- -----------------------------
Software and Related Systems and Services $ 866,115 $ 847,369 $ 579,900
Data Center Services 170,606 163,452 137,876
---------- ---------- ----------

Total Depreciation and Amortization $ 1,036,721 $ 1,010,821 $ 717,776
----------------------------------- ========== ========== ==========

Capital Expenditures:
- --------------------
Software and Related Systems and Services $ 248,201 $ 116,951 $ 850,893
Data Center Services 6,266 3,814 21,947
---------- ---------- ----------

Total Capital Expenditures $ 254,467 $ 120,765 $ 872,840
-------------------------- ========== ========== ==========

Identifiable Assets:
- -------------------
Software and Related Systems and Services $20,411,376 $16,104,973 $12,659,935
Data Center Services 1,863,285 1,902,400 2,146,778
---------- ---------- ----------

Total Identifiable Assets $22,274,661 $18,007,373 $14,806,713
------------------------- ========== ========== ==========





NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #18
- --------------------------------------------------------------------------------
[15] Legal Proceedings

In October 2000, the Company's subsidiary, CSM, commenced an action against the
City of Richmond, in the Supreme Court of the State of New York, County of
Suffolk, which action was subsequently removed to the United States District
Court for the Eastern District of New York, for failure to pay more than $1
million pursuant to a contract between the Company and Richmond. Richmond
advised the court that it intended to move to dismiss the complaint for lack of
personal jurisdiction in New York and improper venue. In November 2000, Richmond
filed a complaint in the Circuit Court for the City of Richmond, Richmond,
Virginia, alleging, among other things, that the contract with CSM was procured
through fraudulent misrepresentations concerning the nature of the work to be
performed and the price for the services and that CSM failed to perform its
obligations under the agreement, seeking damages of $373,000 and a finding that
it owes no additional amounts to CSM. The parties entered into a stipulation
staying the Richmond action until a determination of Richmond's jurisdictional
challenges to the New York action. On August 21, 2002, the United States
District Court for the Eastern District of New York denied Richmond's motion to
dismiss the Company's complaint for lack of personal jurisdiction in New York on
the basis of improper venue. The Company believes it has valid claims against
Richmond and intends to vigorously pursue those claims. The Company also
believes that the allegations contained in Richmond's complaint are without
merit and intends to vigorously defend against those claims. The outcome of this
case is not expected to have a material effect on the Company's consolidated
financial position or results of operations.

The Company is involved in other litigation through the normal course of
business. The Company believes that the resolution of these matters will not
have a material adverse effect on the Company's consolidated financial position
and results of operations.

[16] Subsequent Event

On January 27, 2003, the Company granted 217,500 options under the 2001 Plan,
following stockholder approval of the amendment to the 2001 Plan to increase the
number of shares of common stock subject to the plan to employees at a price of
$4.93, which was the fair market value at the date. The options vest 50% after
six months and 100% after one year.




SIGNATURES

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

NETSMART TECHNOLOGIES, INC.


Dated: March 3, 2003 By: /s/*
-------------------------------
James L. Conway, Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Each person whose
signature appears below hereby authorizes Edward D. Bright, James L.
Conway and Anthony F. Grisanti or any of them acting in the absence of the
others, as his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to this report, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission.

Signature Title Date
--------- ----- ----

/s/* Chief Executive Officer March 3, 2003
- -------------------- and Director (Principal
James L. Conway Executive Officer)

/s/* Chief Financial Officer March 3, 2003
- -------------------- (Principal Financial and
Anthony F. Grisanti Accounting Officer)

/s/* Director March 3, 2003
- --------------------
Edward D. Bright

Director March _, 2003
- --------------------
John F. Phillips


/s/* President and Director March 3, 2003
- --------------------
Gerald O. Koop


/s/* Director March 3, 2003
- --------------------
Joseph G. Sicinski


/s/* Director March 3, 2003
- --------------------
Francis J. Calcagno


/s/* Director March 3, 2003
- --------------------
John S.T. Gallagher