Infodata Systems (INFD) 10QSB 2004 Q3 Quarterly report (small business)

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2004

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

Commission File Number 0-10416

INFODATA SYSTEMS INC.
(Exact Name of Small Business Issuer in its Charter)
Virginia	16-0954695
(State of Incorporation)	(I.R.S. Employer Identification No.)
13454 Sunrise Valley Dr, Suite 500, Herndon, Virginia	20171-3282
(Address of Principal Executive Office)	(Zip Code)

(Issuer's Telephone Number)   (703) 934-5205

Securities registered under Section 12(b) of the Exchange Act:

Title of Each Class	Name of Each Exchange on Which Registered
None	Not applicable

Securities registered under Section 12(g) of the Exchange Act:

Common Stock-$.03 Par Value

(Title of Class)

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

The number of outstanding shares of the Company's Common Stock, par value $0.03 per share, was 5,184,059 on October 28, 2004.

Transitional Small Business Disclosure Format:      Yes               No     X   

INFODATA SYSTEMS INC. AND SUBSIDIARIES

INDEX

			Page(s)
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)
		Condensed Consolidated Statements of Operations	3
		Three Months Ended September 30, 2004 and 2003
		Condensed Consolidated Statements of Operations	4
		Nine Months Ended September 30, 2004 and 2003
		Condensed Consolidated Balance Sheets	5
		September 30, 2004 and December 31, 2003
		Condensed Consolidated Statements of Cash Flows	6
		Nine Months Ended September 30, 2004 and 2003
		Notes to Condensed Consolidated Financial Statements	7-12
	Item 2.	Management's Discussion and Analysis	13-22
	Item 3.	Controls and Procedures	22
PART II.	OTHER INFORMATION
	Item 6.	Exhibits
		(a)     Exhibits	23
SIGNATURES			23
CERTIFICATIONS			24-26

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PART I.  FINANCIAL INFORMATION

Item 1.

INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts In Thousands, Except Per Share Data)
(Unaudited)

	Three Months Ended September 30,
	2004			2003
Revenues	$	2,566		$	1,981
Cost of revenues		1,395			1,125
Gross profit		1,171			856
Operating expenses:
Selling, general and administrative		919			610
Research and development		150			153
		1,069			763
Operating profit		102			93
Interest income		2			2
Interest expense		(1	)		(1	)
Income before income taxes		103			94
Provision for income taxes		--			--
Net income	$	103		$	94
Net income per share - basic	$	0.02		$	0.02
Weighted average basic shares outstanding		5,151			5,032
Net income per share - diluted	$	0.02		$	0.02
Weighted average diluted shares outstanding		5,949			5,538

The accompanying notes are an integral part of these condensed consolidated financial statements.

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INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts In Thousands, Except Per Share Data)
(Unaudited)

	Nine Months Ended September 30,
	2004			2003
Revenues	$	7,237		$	6,205
Cost of revenues		4,023			3,189
Gross profit		3,214			3,016
Operating expenses:
Selling, general and administrative		2,507			1,993
Research and development		334			713
		2,841			2,706
Operating profit		373			310
Interest income		7			8
Interest expense		(1	)		(2	)
Income before income taxes		379			316
Provision for income taxes (benefit)		(747	)		--
Net income	$	1,126		$	316
Net income per share - basic	$	0.22		$	0.06
Weighted average basic shares outstanding		5,094			5,019
Net income per share - diluted	$	0.19		$	0.06
Weighted average diluted shares outstanding		5,906			5,452

The accompanying notes are an integral part of these condensed consolidated financial statements.

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INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts In Thousands)
(Unaudited)

	September 30, 2004			December 31, 2003
Assets:
Current Assets:
Cash and cash equivalents	$	1,580		$	1,422
Certificates of deposit		103			103
Accounts receivable, net of allowance
of $37 and $38, respectively		2,122			2,141
Deferred tax asset		120			--
Prepaid expenses and other current assets		98			66
Total current assets		4,023			3,732
Property and equipment, net		227			228
Deferred tax asset		627			--
Total assets	$	4,877		$	3,960
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable	$	196		$	190
Accrued expenses		688			803
Other current liabilities		29			34
Deferred rent		57			36
Deferred revenue		415			750
Total current liabilities	$	1,385		$	1,813
Commitments and contingencies		--			--
Shareholders' equity:
Common stock		153			149
Common stock subscribed		45			--
Additional paid-in capital		20,426			20,256
Accumulated deficit		(17,132	)		(18,258	)
Total shareholders' equity		3,492			2,147
Total liabilities and shareholders' equity	$	4,877		$	3,960

The accompanying notes are an integral part of these condensed consolidated financial statements.

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INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Amounts in Thousands)
(Unaudited)

	Nine Months Ended September 30,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	1,126		$	316
Adjustments to reconcile net income to cash
provided by operating activities:
Deferred income tax benefit		(747	)		--
Stock based compensation expense		56			6
Depreciation and amortization		67			58
Changes in operating assets and liabilities:
Accounts receivable		19			(67	)
Prepaid expenses and other current assets		(32	)		(23	)
Accounts payable		6			28
Accrued expenses		(116	)		(85	)
Other current liabilities		22			35
Deferred rent		20			21
Deferred revenue		(335	)		(193	)
Net cash provided by operating activities		86			96
CASH FLOW USED IN INVESTING ACTIVITIES:
Purchases of property and equipment		(92	)		(173	)
Net cash used in investing activities		(92	)		(173	)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net repayments under short-term debt		--			(55	)
Common stock subscribed		45			--
Issuance of common stock		119			4
Net cash provided by (used in) financing activities		164			(51	)
Net increase (decrease) in cash and cash equivalents		158			(128	)
Cash and cash equivalents at beginning of period		1,422			1,298
Cash and cash equivalents at end of period	$	1,580		$	1,170

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2004 and 2003

(Unaudited)

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for such interim periods are not necessarily indicative of the results, which may be expected for a full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003.

NOTE B – SIGNIFICANT ACCOUNTING POLICIES

1) Revenue Recognition — The Company recognizes revenue from the sale of software licenses in accordance with Statement of Position No. 97-2, “Software Revenue Recognition,” as amended. Revenue from license arrangements is recognized upon shipment of the product when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and collectibility is probable. If an ongoing vendor obligation exists under the license arrangement, revenue is deferred based on vendor-specific objective evidence of the undelivered element. If vendor-specific objective evidence does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered. Revenue from annual maintenance and support, including third party maintenance, is deferred and recognized ratably over the term of the contract. License revenue from resellers is recognized when product is sold through to the end user and such sell through is reported to the Company. Revenue from consulting and training is recognized when the services are performed and collectibility is deemed probable. Revenue from consulting and professional services contracts is recognized on the percentage-of-completion method for fixed price contracts and on the basis of hours incurred at contract rates for time and materials contracts. Revenue from cost reimbursable contracts (Cost Plus Fixed Fee or Cost Plus Award Fee) is recognized as costs are incurred, plus a proportionate amount of contractual or estimated fee earned. Any amounts paid by customers prior to the actual performance of services are recorded as deferred revenue until earned, at which time the amounts are recognized in accordance with the type of contract. Anticipated losses on contracts are recognized in the accounting period in which they are first determined.

2) Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Infodata Systems Inc. and its wholly owned subsidiaries (collectively referred to herein as the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

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

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4) Earnings Per Share — Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding. Dilutive equivalent shares consist of stock options computed using the treasury stock method.

The following table reconciles the basic and fully diluted shares used to compute earnings per share data for the three and nine-month periods ended September 30, 2004 and 2003:

	Three Months Ended September 30,
	2004		2003
Denominator for basic earning per share,
weighted average shares		5,151,418		5,031,619
Employee Stock Options		797,965		506,046
Denominator for diluted earnings per
share, weighted average shares		5,949,383		5,537,665

	Nine Months Ended September 30,
	2004		2003
Denominator for basic earning per share,
weighted average shares		5,094,267		5,018,952
Employee Stock Options		811,392		433,364
Denominator for diluted earnings per
share, weighted average shares		5,905,659		5,452,316

5) Stock Compensation — Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the estimated fair value of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company has adopted the “disclosure only” alternative described in SFAS 123 and SFAS 148, which require pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been applied.

For the three and nine month periods ended September 30, 2004, in connection with non qualified stock options granted to Advisory Board members, the Company recognized approximately $4,000 and $23,000, respectively, of compensation expense computed based on the fair value method in accordance with the provisions of SFAS 123.

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The following table presents pro forma net income and per share amounts for the three and nine month periods ended September 30, 2004 and 2003, as if the fair value method had been applied to employee stock options granted.

	Three Months Ended September 30,
	2004			2003
Net income as reported	$	103,000		$	94,000
Pro forma compensation (expense)		(46,000	)		(6,000	)
Pro forma net income	$	57,000		$	88,000

	Nine Months Ended September 30,
	2004			2003
Net income as reported	$	1,126,000		$	316,000
Pro forma compensation (expense) benefit		(125,000	)		38,000
Pro forma net income	$	1,001,000		$	354,000

Net income per share:

	Three Months Ended September 30,
	2004		2003
Basic, as reported	$	0.02	$	0.02
Diluted, as reported	$	0.02	$	0.02
Basic, pro forma	$	0.01	$	0.02
Diluted, pro forma	$	0.01	$	0.02

	Nine Months Ended September 30,
	2004		2003
Basic, as reported	$	0.22	$	0.06
Diluted, as reported	$	0.19	$	0.06
Basic, pro forma	$	0.20	$	0.07
Diluted, pro forma	$	0.17	$	0.06

6) Reclassifications — Certain amounts for 2003 have been reclassified to conform to the current period’s presentation.

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7) Income Taxes — During the quarter ended June 30, 2004, the Company adjusted its deferred tax valuation allowance downward by approximately $747,000, which represents an amount that management believes is more likely than not to be realized. This adjustment resulted in an increase in deferred tax assets and the corresponding recognition of an income tax benefit of approximately $747,000, which resulted in an increase in net income of approximately $747,000 in the nine-month period ended September 30, 2004. The valuation allowance has been determined pursuant to the provisions of the Financial Accounting Standards Board Statement of Financial Accounting Standards Number 109,Accounting for Income Taxes, which includes estimation of future taxable income and is adequate to reduce total deferred tax assets to an amount that will more likely than not be realizable. In assessing the Company’s ability to realize its deferred tax assets, management considered all available positive and negative evidence, including historical operating results and forecasts of future taxable income. If estimations and related assumptions used to determine the valuation allowance change in the future, the Company may be required to adjust the valuation allowance against the deferred tax assets, which would result in additional tax expense or benefit. Due to the availability of the Company’s net operating loss carryforwards, which expire in varying years beginning 2012 through 2023, the Company has not recorded any provision for income taxes for the three and nine-month periods ended September 30, 2004 and 2003. As summary of the net deferred tax assets as of September 30, 2004 is as follows:

	September 30, 2004
Net operating loss carryforward and other deferred assets		$	5,229,000
Valuation allowance			(4,482,000	)
Net deferred tax asset as of September 30, 2004		$	747,000

NOTE C – LINE OF CREDIT

On July 30, 2004, the Company renewed its Assignment and Transfer of Receivables Agreement (“Assignment Agreement”) with Commerce Funding Corporation (“Commerce Funding”) for a period of twelve months. The Assignment Agreement will automatically renew for successive one-year periods unless cancelled by the Company thirty days prior to the last day of the existing term. The terms of the Assignment Agreement provide for assignment of the Company’s receivables to Commerce Funding from time to time, and Commerce Funding will, at its sole discretion, make funding available to the Company up to an amount not to exceed $1,000,000. Interest under this Assignment Agreement is to be paid semi-monthly at Prime +1.25 percentage points and Commerce Funding will also charge a processing fee of 0.65% for the first thirty day period based on gross invoice amounts. The Company is required to pay a minimum charge of approximately $1,000 per month for the interest and processing fees that is deductible from the actual interest and processing fees due for the month.

Commerce Funding has full recourse against the Company in the event of non-payment of any receivable assigned by the Company to Commerce Funding. The Company has granted a security interest to Commerce Funding in all receivables owned or hereinafter acquired, including all contract rights, proceeds and returned goods thereof, and all accounts and cash held therein maintained by the Company with any bank or financial institution. The Assignment Agreement can be terminated by either party at their discretion and at any time by giving a thirty-day written notice to the other party. In the event that the Company terminates the Assignment Agreement before the expiration of the term, the Company is required to pay a termination fee of $3,000. Commerce Funding may terminate the Assignment Agreement at any time if the Company commits any event of default. As of September 30, 2004, the Company had not assigned any of its receivables and had no outstanding balance on the line of credit.

NOTE D – COMMITMENTS AND CONTINGENCIES

Costs charged to cost-type U.S. Government contracts are subject to audit by duly authorized representatives of the U.S. Government. Audits have been completed for all periods prior to 2002. In March 2003, the audit for the years 1999 – 2001 was completed and settled. The Company is continuing the process of administratively closing-out several completed contracts that date back as far as 1992. In the opinion of management, adjustments resulting from the completion of future audits and contract closeouts are not expected to have a material impact on the Company’s financial position or results of future operations.

From time to time, the Company is subject to claims arising in the ordinary course of business. In the opinion of management, no such matter, individually or in the aggregate, exists which is expected to have a material effect on the results of operations, cash flows or financial position of the Company.

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NOTE E – SHAREHOLDERS’ EQUITY

During the quarter ended September 30, 2004, certain current and former employees, and directors exercised incentive stock options to purchase 21,176 shares of common stock at a price ranging from $0.12 per share to $1.45 per share, resulting in net proceeds to the Company of approximately $25,000. During the quarter ended June 30, 2004, certain current and former employees exercised incentive stock options to purchase 7,250 shares of common stock at a price ranging from $0.12 per share to $0.925 per share, resulting in net proceeds to the Company of approximately $1,000. During the quarter ended March 31, 2004, certain current and former employees exercised incentive stock options to purchase 12,688 shares of common stock at a price ranging from $0.12 per share to $0.63 per share, resulting in net proceeds to the Company of approximately $3,000.

Effective January 1, 2004 the Company’s Board of Directors authorized the reactivation of the 1997 Employee Stock Purchase Plan (the “1997 Plan”) for all eligible employees to purchase shares of its Common Stock, and established the purchase price at 90% of the lower of the fair market value on the first or the last day of each three-month offering period. Employees may authorize the Company to withhold up to 15% of their compensation during any offering period, subject to certain limitations. The 1997 Plan authorizes up to 400,000 shares to be issued. On April 1, 2004, 42,768 shares were purchased and issued to participants under the 1997 Plan at a price of $0.873 per share for the offering period ended March 31, 2004. On July 1, 2004, 33,824 shares were purchased and issued to participants under the 1997 Plan at a price of $1.530 per share for the offering period ended June 30, 2004. During the quarter ended September 30, 2004, the Company received net proceeds of approximately $45,000, which has been recorded as common stock subscribed. On October 1, 2004, 30,991 shares were purchased and issued to participants under the 1997 Plan at a price of $1.395 per share for the offering period ended September 30, 2004. As of October 1, 2004, 136,164 shares were reserved for future issuance.

NOTE F – SEGMENT REPORTING

In 1998, Infodata adopted SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.” Operating segments are defined as components of an enterprise, about which separate discrete financial information is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and assess performance. The Company is managed along three business segments, the Commercial, Government, and Intelligence business units.

The Company’s management team is focused on selling an array of ECM solutions involving the integration of the Company’s solution offerings, including services and proprietary products, and third-party technologies, to Commercial, Government, and Intelligence Community customers. Sales and marketing efforts are focused on selling both software and services. As such, internal financial reporting that is provided to the chief operating decision-maker is evaluated along these lines of business. Services revenues are derived from specific vertical market solutions by delivering a software services layer that enhances the capabilities of content management systems. License revenues are derived from the licensing of proprietary software products and their associated maintenance and support. Third party revenues include software licenses and hardware with some related services.

Infodata’s management team budgets and evaluates its segment performance on the basis of revenues less direct costs, which includes all direct labor and fringe benefits, other direct costs, and all overhead labor plus related fringe benefits and non-labor overhead costs, that either is caused by or benefits each segment. The Company does not internally report assets on a segment basis.

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The tables below present information about reported segments for the three and nine month periods ended September 30, 2004 and 2003, as well as a reconciliation to reported income before income taxes (in thousands).

	Three Months Ended September 30, 2004												Three Months Ended September 30, 2003
	Commercial			Government			Intelligence			Total			Commercial			Government			Intelligence			Total
Revenues
Services		$	252		$	641		$	1,216		$	2,109		$	104		$	403		$	983		$	1,490
License fees			415			42			--			457			438			36			--			474
Third party products			--			--			--			--			--			--			17			17
Total revenues		$	667		$	683		$	1,216		$	2,566		$	542		$	439		$	1,000		$	1,981
Direct costs			200			333			862			1,395			143			307			675			1,125
Segment profit			467			350			354			1,171			399			132			325			856
Research and development												(150	)											(153	)
Other costs not allocated
to segments, primarily
selling, general and
administrative												(919	)											(610	)
Interest, net												1												1
Income before income taxes											$	103											$	94

	Nine Months Ended September 30, 2004												Nine Months Ended September 30, 2003
	Commercial			Government			Intelligence			Total			Commercial			Government			Intelligence			Total
Revenues
Services		$	596		$	1,621		$	3,662		$	5,879		$	596		$	1,130		$	2785		$	4,511
License fees			1,197			159			--			1,356			1,571			106			--			1,677
Third party products			2			--			--			2			--			--			17			17
Total revenues		$	1,795		$	1,780		$	3,662			7,237		$	2,167		$	1,236		$	2,802		$	6,205
Direct costs			488			941			2,594			4,023			552			792			1,845			3,189
Segment profit			1,307			839			1,068			3,214			1,615			444			957			3,016
Research and development												(334	)											(713	)
Other costs not allocated
to segments, primarily
selling, general and
administrative												(2,507	)											(1,993	)
Interest, net												6												6
Income before income taxes											$	379											$	316

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Item 2.    Management’s Discussion and Analysis or Plan of Operation

FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-QSB RELATING TO PRODUCT AND SERVICE DEVELOPMENT, FUTURE CONTRACTS, REVENUE, NET INCOME AND THE ADEQUACY OF WORKING CAPITAL ARE BASED ON CURRENT EXPECTATIONS THAT INVOLVE UNCERTAINTIES AND RISKS ASSOCIATED WITH NEW PRODUCT AND SERVICE OFFERINGS INCLUDING, BUT NOT LIMITED TO, MARKET CONDITIONS, SUCCESSFUL PRODUCT DEVELOPMENT, SERVICE INTRODUCTION AND ACCEPTANCE, THE INTRODUCTION OF COMPETITIVE PRODUCTS, ECONOMIC CONDITIONS AND THE TIMING OF ORDERS AND CONTRACT INITIATION. THE COMPANY’S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM CURRENT EXPECTATIONS. READERS ARE CAUTIONED NOT TO PUT UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS ANY INTENT OR OBLIGATION TO UPDATE PUBLICLY THESE FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

Company Overview

Founded in 1968, Infodata Systems Inc. (“Infodata” or the “Company”) is a global provider of open, enterprise-class content management solutions. The Company designs, develops and implements solutions by means of a unique Content Management Services Layer (“CMSL”) that helps organizations address the complexity of bringing content together with critical business processes to solve the problems around regulatory compliance mandates and the management and security of content across its lifecycle. The Company serves three markets with compliance-driven product and service offerings: Commercial, Government, and the Intelligence Community. Within these markets, Infodata has approximately 6,000 customers encompassing 500 of the global 1000, 50% of tier one Life Science firms, and various Government and Intelligence agencies and organizations.

Compliance mandates are encouraging the adoption of Enterprise Content Management (“ECM”) systems to control content in an enterprise-wide repository that provides services such as library check-in/check-out, versioning, and workflow. However, even with ECM systems, there is a gap between the needs of the end user and the ECM system. Within this gap, customers demand functionality that specifically addresses how content is managed across its lifecycle according to business processes and compliance regulations.

Infodata’s business includes a system integration services capability in which the Company assists regulated businesses and government agencies in constructing and/or augmenting ECM environments. The Company’s solution approach involves the integration of its own market-leading propriety technology with other leading-edge solution environments, as many of our customer engagements often lead to the sale of our own proprietary technologies.

The Company is targeting expansion of its market position by delivering compliance-driven solutions via its CMSL, which is designed to enhance the capabilities of content management systems for regulatory compliance. The Company believes that the CMSL is potentially valuable to those organizations that have content management systems and require an open approach to allow for significant improvement in interoperability between commercial-off-the-shelf applications.

Infodata’s suite of proprietary products works along with the CMSL to promote effective and efficient workflow processing while fostering regulatory compliance. Infodata’s products are designed to add robustness to any ECM environment and seamlessly interact from within the CMSL. The value to the customer is customization to solve their particular problem.

Infodata also has a solution services group that offers a number of services intended to enable customers to maximize the benefits of their ECM system, and customize and integrate their ECM solutions within their enterprise infrastructure.

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Infodata is attempting to expand its network of strategic partnerships and alliances, such as EMC/Documentum (NYSE: EMC), First Consulting Group (NASDAQ: FCGI), Liquent (NYSE: IHI), and IBM (NYSE: IBM) that act as resellers of Infodata’s proprietary products in delivering content management solutions to customers. Although the Company has limited resources, management’s vision is to continue to develop and expand the Company’s offerings by building adaptors to various ECM platforms and Java Data Base Connections (“JDBC”) compliant databases such as Oracle, SQL Server and DB2. The Company has released an Alpha version of its Annotation Suite 2.0, which is based on the Company’s proprietary AnnoDoc^® technology, and plans to release a Beta and full version in the fourth quarter of 2004. The Annotation Suite 2.0 works with both EMC/Documentum and IBM’s content manager server platform, the two ECM market leaders. This expanded functionality is designed to further enhance the abilities of the CMSL to provide a substantially broader solutions offering for enterprise grade annotation functionality for strict regulatory environments, electronic delivery of documents and digital rights management. As sales efforts around the CMSL become successful in the future, management will continue to make conservative investments in research and development to expand the Company’s proprietary applications.

The Company is focused on expanding its sales pipeline of prospects in the Commercial, Government, and Intelligence markets. The sales and marketing effort is focused on selling both software and solutions. The software sales team is comprised of inside sales, channel sales and named account sales. This sales team is selling products that often lead to services work. The solutions sales team is comprised of business development managers who are selling the Company’s solution offerings, which often lead to product sales. Business development efforts are focused on three areas: technology partners for ECM, large systems integration partners that have practices or specific delivery needs around content management, and direct customer sales efforts surrounding large customer proposal efforts.

The Company’s future operating results may vary significantly and are difficult to predict due to a number of factors, many of which are beyond its control. These factors include the demand for the Company’s services and proprietary products, the level of product and price competition, the length of the sales cycles, the delay or deferral of customer implementation, the success of the direct and indirect sales force and the Company’s channel partners, unilateral funding decisions by government and intelligence customers, the mix of products and services sold, the timing of hiring of new employees and/or consultants, the ability of the Company to control costs and general domestic economic and political conditions which could have an adverse effect on the Company’s ability to meet its operating goals.

Significant Estimates and Critical Accounting Policies

The preparation of condensed consolidated financial statements requires management to make judgments based upon estimates and assumptions that are inherently uncertain and affect reported amounts. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following represent significant estimates and critical accounting policies:

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Revenue Recognition – Long-Term Contracts — A portion of the Company’s revenues are derived from long-term contracts. Revenues on time and material contracts with a maximum price per labor hour or not to exceed limit are based on the level of effort billed to the customer up to the maximum price or not to exceed limit. Revenues on long-term cost reimbursable (Cost Plus Fixed Fee and Cost Plus Award Fee) contracts are recognized based upon allowable costs incurred using provisional (estimated) indirect rates, which are adjusted to actual upon audit by government representatives, plus a proportional amount of contractual or estimated fee earned. Revenues on long-term fixed-price contracts are generally recognized using the percentage-of-completion method of accounting. Such revenues are recorded based on the percentage which costs incurred in the applicable reporting period bear to the most recent estimates of total costs to complete each contract. Estimating future costs and, therefore, revenues and profits on cost reimbursable and fixed price contracts, is a process requiring a high degree of management judgment, including management’s assumptions regarding future operations of the Company as well as general economic conditions. In the event of a change in total estimated contract cost or profit, the cumulative effect of such change is recorded in the period the change in estimate occurs. Frequently, the period of performance of a contract extends over a long period of time and, as such, revenue recognition and profitability from a particular contract may be adversely affected to the extent that estimated cost to complete or award fee estimates are revised, delivery schedules are delayed or progress under a contract is otherwise impeded. Accordingly, revenues and gross profits from year to year can fluctuate significantly. In the event that cost estimates indicate a loss on a contract, the total amount of such loss is recorded in the period in which the loss is first estimated.

Certain contracts include award fee provisions for increased or decreased revenue and profit based on actual performance against established targets. Estimated award fees are included in contract revenue at the time the amounts can be reasonably determined and are reasonably assured based on historical experience and other objective criteria. Should the Company fail to perform sufficiently under such contracts, previously recognized revenues could be reversed and/or future period revenues could be reduced.

Software Revenue Recognition — The Company recognizes revenue from the sale of software licenses in accordance with Statement of Position No. 97-2, “Software Revenue Recognition”, as amended. Revenue from license arrangements is recognized upon shipment of the product when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and collectibility is deemed probable. If an ongoing vendor obligation exists under the license arrangement, revenue is deferred based on vendor-specific objective evidence of the undelivered element. If vendor-specific objective evidence does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered. Revenue from annual maintenance and support, including third party software maintenance, is deferred and recognized ratably over the term of the contract.

Deferred Tax Assets — Deferred tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences of revenue and expense items for financial statement and income tax purposes. A valuation allowance is provided to reduce related assets to an amount that is more likely than not realizable. The Company determines its valuation allowance pursuant to the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards Number 109,Accounting for Income Taxes,which requires the Company to weigh all positive and negative evidence including past operating results and forecasts of future taxable income. If forecasts of taxable income change in the future, the Company may be required to adjust the valuation allowance against deferred tax assets, which would result in additional income tax expense or benefit.

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CONDENSED CONSOLIDATED RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003

Revenues

Founded in 1968, Infodata is a global provider of open, enterprise-class content management solutions. The Company designs, develops and implements solutions that help organizations solve problems around regulatory compliance mandates and the secure management of content across its lifecycle. The Company serves three markets with consistent compliance-driven product and service offerings: Commercial, Government, and the Intelligence Community. Around the full lifecycle of content, the Company markets and delivers pointed solutions, which include its proprietary products as well as domain expertise in many third-party technologies. As such, internal financial reporting that is provided to the chief operating decision-maker is evaluated along these lines of business. The solution offerings are services, proprietary products and third party products. Services revenues are derived from specific vertical market solutions by delivering a software services layer that enhances the capabilities of content management systems. License revenues are derived from the licensing of proprietary software products and their associated maintenance and support. Third party revenues include software licenses and hardware with some related services.

For the quarter ended September 30, 2004, total revenues increased by approximately $585,000, or 29.5%, to approximately $2,566,000, up from approximately $1,981,000 for the quarter ended September 30, 2003. Revenues for each period consisted of the following:

Three Months Ended
(Dollar Amounts in Thousands)

	September 30, 2004		September 30, 2003		Increase (Decrease) %
Commercial
Services	$	252	$	104		142.3	%
License fees		415		438		(5.3	%)
Third party products		--		--		--
Total Commercial Revenue	$	667	$	542		23.1	%
Government
Services	$	641	$	403		59.1	%
License fees		42		36		16.7	%
Third party products		--		--		--
Total Government Revenue	$	683	$	439		55.6	%
Intelligence
Services	$	1,216	$	983		23.7	%
License fees		--		--		--
Third party products		--		17		(100.0	%)
Total Intelligence Revenue	$	1,216	$	1,000		21.6	%
Total Revenues	$	2,566	$	1,981		29.5	%

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For the quarter ended September 30, 2004, total revenues for the Commercial segment were approximately $667,000, an increase of approximately $125,000, or 23.1%, over total revenues of approximately $542,000 for the quarter ended September 30, 2003. The increase was primarily the result of higher service revenues resulting from a subcontract to provide systems integration consulting to a pharmaceutical company, which was partially offset by a decrease in license fee revenue when compared to the same quarter last year.

In the Government segment, total revenues were approximately $683,000 for the quarter ended September 30, 2004, an increase of approximately $244,000, or 55.6%, over total revenues of approximately $439,000 for the quarter ended September 30, 2003. The increase was primarily the result of higher services revenue attributable to the American Red Cross contract, which accounted for approximately $581,000, or 22.7% of the Company’s total revenues in the current quarter. This increase was partially offset by a decrease in services revenue from the Federal Deposit Insurance Corporation contract of approximately $212,000, or 8.3%, of the Company’s total revenues in the current quarter.

For the quarter ended September 30, 2004, total revenues for the Intelligence segment were approximately $1,216,000, an increase of approximately $216,000, or 21.6%, over total revenues of approximately $1,000,000 for the quarter ended September 30, 2003. The increase was primarily the result of management’s efforts to optimize revenues through the recruitment and improved utilization of personnel on various existing and new prime contract and subcontract vehicles. The Intelligence segment’s revenues accounted for approximately 47.4% of the Company’s total revenues for the quarter ended September 30, 2004, and approximately 50.5% of the Company’s total revenues for the comparable quarter last year. Prime contracts with one U.S. Government intelligence customer accounted for approximately $411,000, or 16.0% of the Company’s total revenue for the quarter ended September 30, 2004, compared to approximately $574,000, or 29.0% of the Company’s total revenues in the same quarter last year. The Company is also a subcontractor to prime government contractors for the same U.S. Government intelligence customer. Revenues under the subcontracts accounted for approximately $710,000, or 27.7% of the Company’s total revenues for the quarter ended September 30, 2004, compared to approximately $306,000 or 15.4% of the Company’s total revenues for same quarter last year. During the quarter ended September 30, 2004 one subcontract accounted for approximately $337,000 or 13.1% of the Company’s total revenues, compared to $192,000, or 9.7% of the Company’s total revenues for the same quarter last year.

Gross Profit

Gross profit for the quarter ended September 30, 2004, increased by approximately $315,000, to approximately $1,171,000, up from approximately $856,000 for the quarter ended September 30, 2003. The gross margin was 45.6% and 43.2% for the quarters ended September 30, 2004 and 2003, respectively. The higher margin for the quarter ended September 30, 2004, was primarily the result of higher services revenues from contracts with better margins when compared to the same quarter last year.

Selling, General and Administrative Expenses

For the quarter ended September 30, 2004, selling, general and administrative expenses were approximately $919,000, an increase of approximately $309,000, or 50.7%, over approximately $610,000 for the quarter ended September 30, 2003. The increase was primarily the net result of an increase in costs associated with sales, marketing and management personnel, as the Company continued to execute on its previously announced plan to invest for future growth.

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Research and Development Expenses

Research and development expenses for the quarter ended September 30, 2004, decreased approximately $3,000, or 2.0%, to approximately $150,000, down from approximately $153,000 for the quarter ended September 30, 2003. During the second half of 2003, the Company initiated a research and development strategy to conservatively reorganize the R&D team and expertise; transition current team members to onsite development and leverage core proprietary software understanding; leverage on site development to create additional product enhancements; and, leverage a development model that is funded by solving a customer problem. As sales efforts around the CMSL become successful in the future, management will continue to make conservative investments in research and development to expand the Company’s proprietary applications.

Operating Profit

For the quarter ended September 30, 2004, operating profit was approximately $102,000, or 4.0% of total revenues, compared to approximately $94,000, or 4.7% of total revenues for the quarter ended September 30, 2003. The increase in operating profit was primarily due to the increase in gross profit in the current quarter.

Interest Income and Expense

Interest income was approximately $2,000, for the quarters ended September 30, 2004, and 2003. Interest expense was approximately $1,000, for the quarters ended September 30, 2004, and 2003.

Net Income

Based on the above, net income for the quarter ended September 30, 2004, amounted to approximately $103,000, or $0.02 per share diluted, compared to approximately $94,000, or $0.02 per share diluted, in the comparable period last year.

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CONDENSED CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

Revenues

For the nine-month period ended September 30, 2004, total revenues increased by approximately $1,032,000, or 16.6%, to approximately $7,237,000, up from approximately $ 6,205,000 for the nine-month period ended September 30, 2003. Revenues for each period consisted of the following:

Nine Months Ended
(Dollar Amounts in Thousands)

	September 30, 2004		September 30, 2003		Increase (Decrease) %
Commercial
Services	$	596	$	596		0.0	%
License fees		1,197		1,571		(23.8	%)
Third party products		2		--		--
Total Commercial Revenue	$	1,795	$	2,167		(17.2	%)
Government
Services	$	1,621	$	1,130		43.5	%
License fees		159		106		50.0	%
Third party products		--		--		--
Total Government Revenue	$	1,780	$	1,236		44.0	%
Intelligence
Services	$	3,662	$	2,785		31.5	%
License fees		--		--		--
Third party products		--		17		(100.	0%)
Total Intelligence Revenue	$	3,662	$	2,802		30.7	%
Total Revenues	$	7,237	$	6,205		16.6	%

For the nine months ended September 30, 2004, total revenues for the Commercial segment were approximately $1,795,000, a decrease of approximately $372,000, or 17.2%, from total revenues of approximately $2,167,000 for the nine months ended September 30, 2003. The higher revenues for the nine months ended September 30, 2003 was primarily the result of higher license fee revenues due to a single large sale of AnnoDoc^® software to a pharmaceutical company in the quarter ended March 31, 2003.

In the Government segment, total revenues were approximately $1,780,000 for the nine months ended September 30, 2004, an increase of approximately $544,000, or 44.0%, over total revenues of approximately $1,236,000 for the nine months ended September 30, 2003. The increase was primarily the result of higher services revenue attributable to the American Red Cross contract, which accounted for approximately $1,164,000, or 16.1% of the Company’s total revenues in the nine months ended September 30, 2004. This increase was partially offset by a decrease in services revenue from the Federal Deposit Insurance Corporation contract of approximately $685,000, or 9.5%, of the Company’s total revenues in the current quarter.

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For the nine months ended September 30, 2004, total revenues for the Intelligence segment were approximately $3,662,000, an increase of approximately $860,000, or 30.7%, over total revenues of approximately $2,802,000 for the nine months ended September 30, 2003. The increase was primarily the result of management’s efforts to optimize revenues through the recruitment and improved utilization of personnel on various existing and new prime contract and subcontract vehicles. The Intelligence segment’s revenues accounted for approximately 50.6% of the Company’s total revenues for the nine-month period ended September 30, 2004, and approximately 45.2% of the Company’s total revenues in the comparable nine-month period last year. Prime contracts with one U.S. Government intelligence customer accounted for approximately $1,465,000, or 20.2% of the Company’s total revenue for the nine-month period ended September 30, 2004, compared to approximately $1,826,000 or 29.4% of the Company’s total revenues in the same nine-month period last year. The Company is also a subcontractor to prime government contractors for the same U.S. Government intelligence customer. Revenues under the subcontracts accounted for approximately $1,747,000 or 24.1% of the Company’s total revenues for the nine-month period ended September 30, 2004, compared to approximately $820,000 or 13.2% of the Company’s total revenues for same nine-month period last year. During the nine-month period ended September 30, 2004 one subcontract accounted for approximately $866,000 or 12.0% of the Company’s total revenues, compared to $452,000, or 7.3% of the Company’s total revenues for the same nine-month period last year.

Gross Profit

Gross profit increased by approximately $198,000, or 6.6%, up from approximately $3,016,000 for the nine months ended September 30, 2003, to approximately $3,214,000 for the nine months ended September 30, 2004. Gross margin as a percent of revenues decreased from 48.6% for the nine months ended September 30, 2003, to 44.4% for the nine months ended September 30, 2004. The decrease in gross margin for the nine months ended September 30, 2004, was primarily the result of a decrease in revenues from license fees, which was partially offset by an increase in services revenues, which generate proportionally lower margin.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased approximately $514,000, or 25.8%, from approximately $1,993,000 for the nine months ended September 30, 2003, to approximately $2,507,000 for the nine months ended September 30, 2004. The increase was primarily the net result of an increase in costs associated with sales, marketing and management personnel, as the Company continued to execute on its previously announced plan to invest for future growth.

Research and Development Expenses

Research and development expenses decreased approximately $379,000, or 53.2%, from approximately $713,000 for the nine months ended September 30, 2003, to approximately $334,000 for the nine months ended September 30, 2004. During the second half of 2003, the Company initiated a research and development strategy to conservatively reorganize the R&D team and expertise; transition current team members to onsite development and leverage core proprietary software understanding; leverage on site development to create additional product enhancements; and, leverage a development model that is funded by solving a customer problem. As sales efforts around the CMSL become successful in the future, management will continue to make conservative investments in research and development to expand the Company’s proprietary applications.

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Interest Income and Expense

Interest income decreased approximately $1,000, or 12.5%, down from approximately $8,000 for the nine months ended September 30, 2003, to approximately $7,000 for the nine months ended September 30, 2004. The reduction in interest income was primarily due to lower interest rates compared to the same period in 2003. The Company incurred $1,000 and $2,000 of interest expense for the nine months ended September 30, 2004 and 2003, respectively.

Income Tax Benefit

During the quarter ended June 30, 2004, the Company recorded an income tax benefit of approximately $747,000. No provision or benefit was recorded in the comparable period last year. Management determined that, based on the Company’s return to sustained profitability and anticipated profitability and taxable earnings for the foreseeable future, the Company’s deferred tax valuation allowance should be adjusted downward by approximately $747,000, representing an amount that management believes is more likely than not to be realizable. This adjustment resulted in an increase in deferred tax assets, and a corresponding income tax benefit of $747,000 and increase in net income of approximately $747,000, in the in the nine-month period ended September 30, 2004.

Net Income

Based on the above, net income for the nine months ended September 30, 2004, amounted to approximately $1,126,000, or $0.19 per share diluted, compared to approximately $316,000, or $0.06 per share diluted, in the comparable period last year.

Liquidity and Capital Resources

At September 30, 2004, the Company had cash and cash equivalents of approximately $1,580,000 and net working capital of approximately $2,638,000. As of December 31, 2003, the Company had cash and cash equivalents of approximately $1,422,000 and working capital of approximately $1,919,000. When compared to December 31, 2003, the increase for the nine months ended September 30, 2004 in cash and cash equivalents of approximately $158,000 and in working capital of approximately $719,000 was primarily the result of the Company’s net income for the nine months ended September 30, 2004 and the adjustment to the current portion of the deferred tax asset.

For the nine months ended September 30, 2004, net cash provided by operating activities was approximately $86,000, which was primarily the combined result of the Company’s net income of approximately $1,126,000, non-cash adjustments to net income of approximately $123,000, which was primarily offset by the recognition of a non-cash income tax benefit of approximately $747,000 and a decrease in deferred revenue of approximately $335,000. For the nine months ended September 30, 2003, net cash provided by operating activities was approximately $96,000, which was primarily the net result of the Company’s net income of approximately $316,000, which was partially offset by a decrease in deferred revenue of approximately $193,000. During the nine months ended September 30, 2004, net cash of approximately $92,000 was used in investing activities for the purchase of property and equipment, compared to approximately $173,000 in the same period last year. For the nine months ended September 30, 2004, net cash provided by financing activities was approximately $164,000, which was provided by proceeds from participants under the 1997 Employee Stock Purchase Plan during the offering periods ended March 31, 2004, June 30, 2004 and September 30, 2004, and from the issuance of common stock related to stock option exercises. For the nine months ended September 30, 2003, net cash used in financing activities was approximately $51,000, which was used primarily for repayment of the outstanding balance on the line of credit.

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On July 30, 2004, the Company renewed its Assignment and Transfer of Receivables Agreement (“Assignment Agreement”) with Commerce Funding Corporation (“Commerce Funding”) for a period of twelve months. The Assignment Agreement will automatically renew for successive one-year periods unless cancelled by the Company thirty days prior to the last day of the existing term. The terms of the Assignment Agreement provide for assignment of the Company’s receivables to Commerce Funding from time to time, and Commerce Funding will, at its sole discretion, make funding available to the Company up to an amount not to exceed $1,000,000. Interest under this Assignment Agreement is to be paid semi-monthly at Prime +1.25 percentage points and Commerce Funding will also charge a processing fee of 0.65% for the first thirty day period based on gross invoice amounts. The Company is required to pay a minimum charge of approximately $1,000 per month for the interest and processing fees that is deductible from the actual interest and processing fees due for the month.

Commerce Funding has full recourse against the Company in the event of non-payment of any receivable assigned by the Company to Commerce Funding. The Company has granted a security interest to Commerce Funding in all receivables owned or hereinafter acquired, including all contract rights, proceeds and returned goods thereof, and all accounts and cash held therein maintained by the Company with any bank or financial institution. The Assignment Agreement can be terminated by either party at their discretion and at any time by giving a thirty-day written notice to the other party. In the event that the Company terminates the Assignment Agreement before the expiration of the term, the Company is required to pay a termination fee of $3,000. Commerce Funding may terminate the Assignment Agreement at any time if the Company commits any event of default. As of September 30, 2004, the Company had not assigned any of its receivables and had no outstanding balance on the line of credit.

Contingencies

Costs charged to cost-type U.S. Government contracts are subject to audit by the Defense Contract Audit Agency or other duly authorized representatives of the U.S. Government. Audits have been completed for all periods prior to 2002. In March 2003, the audit for the years 1999 – 2001 was completed and settled. The Company is continuing the process of administratively closing-out several completed contracts that date back as far as 1992. In the opinion of management, adjustments resulting from the completion of future audits are not expected to have a material impact on the Company’s financial position or results of future operations.

From time to time, the Company is subject to claims arising in the ordinary course of business. In the opinion of management, no such matter, individually or in the aggregate, exists which is expected to have a material effect on the results of operations, cash flows or financial position of the Company.

Item 3.   Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2004. As a result of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Based on that evaluation, there was no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2004, that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 6. Exhibits

(a) Exhibits

The following Exhibits are filed herewith:

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

SIGNATURES

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

	INFODATA SYSTEMS INC.
Date:  November 12, 2004	By:	/s/  Edwin A. Miller
		Edwin A. Miller President and CEO (Principal Executive Officer)
	By:	/s/  Norman F. Welsch
		Norman F. Welsch Chief Financial Officer and Corporate Secretary (Principal Financial Officer)
	By:	/s/  Laura L. Sullivan
		Laura L. Sullivan Controller (Principal Accounting Officer)

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