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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the period ended July 29, 2000

or

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the transition period from         to

Commission File Number 0-8141

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

|Minnesota                                                      |  | 41-0835746                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer
Identification No.)

5101 Shady Oak Road, Minnetonka, Minnesota 55343-4100(address of principal executive offices)

Telephone (612) 352-4000 Fax (612) 352-4949 Internet www.norstan.com(Registrant's telephone number, facsimile number, Internet address)

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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 / /

On
September 5, 2000, there were 11,334,125 shares outstanding of the registrant's common stock, par value $0.10 per share, its only class of equity securities.

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## 

PART I. FINANCIAL INFORMATION

ITEM 1.

NORSTAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share amounts)

|                             |                                            | Three Months Ended  |       
|---------------------------- | ------------------------------------------ | ------------------- | ------
|
|REVENUES                     |                                            |                     |       
|                             | Communications                             |                     | $     
|                             | Consulting                                 |                     |       
|                             | Financial Services                         |                     |       
|                             |                                            |                     |       
|                             |                                            | Total Revenues      |       
|                             |                                            |                     |       
|COST OF SALES                |                                            |                     |       
|                             | Communications                             |                     |       
|                             | Consulting                                 |                     |       
|                             | Financial Services                         |                     |       
|                             |                                            |                     |       
|                             |                                            | Total Cost of Sales |       
|                             |                                            |                     |       
|GROSS MARGIN                 |                                            |                     |       
|                             | Communications                             |                     |       
|                             | Consulting                                 |                     |       
|                             | Financial Services                         |                     |       
|                             |                                            |                     |       
|                             |                                            | Total Gross Margin  |       
|                             |                                            |                     |       
|                             | Selling, General & Administrative Expenses |                     |       
|                             |                                            |                     |       
|OPERATING INCOME (LOSS)      |                                            |                     | (5,337
|                             | Interest Expense                           |                     |       
|                             | Other Income (Expense), Net                |                     |       
|                             |                                            |                     |       
|INCOME (LOSS) BEFORE TAXES   |                                            |                     | (7,540
|                             | Provision for Income Taxes                 |                     |       
|                             |                                            |                     |       
|NET INCOME (LOSS)            |                                            | $                   | (7,540
|                             |                                            |                     |       
|NET INCOME (LOSS) PER SHARE |                                            |                     |       
|BASIC                        |                                            | $                   | (0.69 
|                             |                                            |                     |       
|DILUTED                      |                                            | $                   | (0.69 
|                             |                                            |                     |       
|WEIGHTED AVERAGE SHARES     |                                            |                     |       
|BASIC                        |                                            |                     | 10,916
|                             |                                            |                     |       
|DILUTED                      |                                            |                     | 10,916
|                             |                                            |                     |       

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

1

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NORSTAN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

|                       |                                                                                   | July 29,
2000              |         | April 30,
1999 |        
|---------------------- | --------------------------------------------------------------------------------- | -------------------------- | ------- | -------------- | -------
|
|ASSETS                 |                                                                                  
|CURRENT ASSETS         |                                                                                   |                            |         |                |        
|                       | Cash                                                                              |                            | $       | 2,741          |        
|                       | Accounts receivable, net of allowances for doubtful
accounts of $4,829 and $5,628 |                            |         | 66,224         |        
|                       | Lease receivables                                                                 |                            |         | 23,259         |        
|                       | Inventories                                                                       |                            |         | 12,559         |        
|                       | Costs and estimated earnings in excess of billings of $18,011 and $14,986         |                            |         | 12,642         |        
|                       | Deferred income taxes                                                             |                            |         | 7,987          |        
|                       | Prepaid expenses, deposits and other                                              |                            |         | 9,818          |        
|                       |                                                                                   |                            |         |                |        
|                       |                                                                                   | TOTAL CURRENT ASSETS       |         |                | 135,230
|                       |                                                                                   |                            |         |                |        
|PROPERTY AND EQUIPMENT |                                                                                   |                            |         |                |        
|                       | Furniture, fixtures and equipment                                                 |                            |         | 105,195        |        
|                       | Less-accumulated depreciation and amortization                                    |                            |         | (66,108        | )      
|                       |                                                                                   |                            |         |                |        
|                       |                                                                                   | NET PROPERTY AND EQUIPMENT |         |                | 39,087 
|                       |                                                                                   |                            |         |                |        
|OTHER ASSETS           |                                                                                   |                            |         |                |        
|                       | Lease receivables, net of current portion                                         |                            |         | 41,550         |        
|                       | Goodwill, net of accumulated amortization of $6,056 and $5,926                    |                            |         | 4,340          |        
|                       | Deferred income taxes                                                             |                            |         | 3,754          |        
|                       | Other                                                                             |                            |         | 6,796          |        
|                       |                                                                                   |                            |         |                |        
|                       |                                                                                   | TOTAL OTHER ASSETS         |         |                | 56,440 
|                       |                                                                                   |                            |         |                |        
|TOTAL ASSETS           |                                                                                   | $                          | 230,757 |                | $      
|                       |                                                                                   |                            |         |                |        

The
accompanying notes are an integral part of these consolidated balance sheets.

2

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NORSTAN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

|                                                    |                                                                           | July 29,
2000                                                                                                      |                            | April 30,
2000 |        
|--------------------------------------------------- | ------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | -------------------------- | -------------- | -------
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                |                                                                          
|CURRENT LIABILITIES                                 |                                                                           |                                                                                                                    |                            |                |        
|                                                    | Current maturities of long-term debt                                      |                                                                                                                    | $                          | 2,103          |        
|                                                    | Current maturities of discounted lease rentals                            |                                                                                                                    |                            | 20,881         |        
|                                                    | Accounts payable                                                          |                                                                                                                    |                            | 28,310         |        
|                                                    | Deferred revenue                                                          |                                                                                                                    |                            | 20,973         |        
|                                                    | Accrued                                                                   |                                                                                                                    |                            |                |        
|                                                    |                                                                           | Salaries and wages                                                                                                 |                            |                | 6,534  
|                                                    |                                                                           | Warranty costs                                                                                                     |                            |                | 1,791  
|                                                    |                                                                           | Other liabilities                                                                                                  |                            |                | 6,394  
|                                                    | Billings in excess of costs and estimated earnings of $19,759 and $20,624 |                                                                                                                    |                            | 11,528         |        
|                                                    |                                                                           |                                                                                                                    |                            |                |        
|                                                    |                                                                           |                                                                                                                    | TOTAL CURRENT LIABILITIES  |                |        
|                                                    |                                                                           |                                                                                                                    |                            |                |        
|LONG-TERM DEBT, net of current maturities           |                                                                           |                                                                                                                    | 72,053                     |                |        
|DISCOUNTED LEASE RENTALS, net of current maturities |                                                                           |                                                                                                                    | 22,862                     |                |        
|OTHER LIABILITIES                                   |                                                                           |                                                                                                                    | 1,860                      |                |        
|                                                    |                                                                           |                                                                                                                    |                            |                |        
|SHAREHOLDERS' EQUITY                                |                                                                           |                                                                                                                    |                            |                |        
|                                                    |                                                                           | Common stock$.10 par value; 40,000,000 authorized shares; 11,591,550 and 11,239,113 shares issued and outstanding |                            |                | 1,159  
|                                                    |                                                                           | Capital in excess of par value                                                                                     |                            |                | 54,653 
|                                                    |                                                                           | Retained earnings (deficit)                                                                                        |                            |                | (16,222
|                                                    |                                                                           | Unamortized cost of stock                                                                                          |                            |                | (2,389 
|                                                    |                                                                           | Accumulated other comprehensive income (loss)                                                                      |                            |                | (1,733 
|                                                    |                                                                           |                                                                                                                    |                            |                |        
|                                                    |                                                                           |                                                                                                                    | TOTAL SHAREHOLDERS' EQUITY |                |        
|                                                    |                                                                           |                                                                                                                    |                            |                |        
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          |                                                                           | $                                                                                                                  | 230,757                    |                | $      
|                                                    |                                                                           |                                                                                                                    |                            |                |        

The
accompanying notes are an integral part of these consolidated balance sheets.

3

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NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
UNAUDITED
(In thousands)

|                                        |                                                                                       | Three Months Ended                        |                                                   
|--------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------
|
|OPERATING ACTIVITIES                    |                                                                                       |                                           |                                                   
|                                        | Net income (loss)                                                                     |                                           | $                                                 
|                                        | Adjustments to reconcile net income (loss) to net cash used for operating activities: |                                           |                                                   
|                                        |                                                                                       | Restructuring costs paid                  |                                                   
|                                        |                                                                                       | Depreciation and amortization             |                                                   
|                                        |                                                                                       | Deferred income taxes                     |                                                   
|                                        |                                                                                       | Changes in operating items:               |                                                   
|                                        |                                                                                       |                                           | Accounts receivable                               
|                                        |                                                                                       |                                           | Inventories                                       
|                                        |                                                                                       |                                           | Costs and estimated earnings in excess of billings
|                                        |                                                                                       |                                           | Prepaid expenses, deposits and other              
|                                        |                                                                                       |                                           | Accounts payable                                  
|                                        |                                                                                       |                                           | Deferred revenue                                  
|                                        |                                                                                       |                                           | Accrued liabilities                               
|                                        |                                                                                       |                                           | Income taxes payable/receivable                   
|                                        |                                                                                       |                                           | Billings in excess of costs and estimated earnings
|                                        |                                                                                       |                                           |                                                   
|                                        |                                                                                       | Net cash used for operating activities    |                                                   
|                                        |                                                                                       |                                           |                                                   
|INVESTING ACTIVITIES                    |                                                                                       |                                           |                                                   
|                                        | Additions to property and equipment, net                                              |                                           |                                                   
|                                        | Investment in lease contracts                                                         |                                           |                                                   
|                                        | Collections from lease contracts                                                      |                                           |                                                   
|                                        | Other, net                                                                            |                                           |                                                   
|                                        |                                                                                       |                                           |                                                   
|                                        |                                                                                       | Net cash used for investing activities    |                                                   
|                                        |                                                                                       |                                           |                                                   
|FINANCING ACTIVITIES                    |                                                                                       |                                           |                                                   
|                                        | Borrowings of long-term debt                                                          |                                           |                                                   
|                                        | Repayments of long-term debt                                                          |                                           |                                                   
|                                        | Borrowings of discounted lease rentals                                                |                                           |                                                   
|                                        | Repayments of discounted lease rentals                                                |                                           |                                                   
|                                        | Proceeds from sale of common stock                                                    |                                           |                                                   
|                                        |                                                                                       |                                           |                                                   
|                                        |                                                                                       | Net cash provided by financing activities |                                                   
|                                        |                                                                                       |                                           |                                                   
|EFFECT OF EXCHANGE RATE CHANGES ON CASH |                                                                                       |                                           | (2                                                
|                                        |                                                                                       |                                           |                                                   
|NET INCREASE IN CASH                    |                                                                                       |                                           | 2,712                                             
|CASH, BEGINNING OF PERIOD               |                                                                                       |                                           | 29                                                
|                                        |                                                                                       |                                           |                                                   
|CASH, END OF PERIOD                     |                                                                                       | $                                         | 2,741                                             
|                                        |                                                                                       |                                           |                                                   

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

4

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NORSTAN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JULY 29, 2000

UNAUDITED

The information furnished in this report is unaudited and reflects all adjustments which are normal recurring adjustments and, which in the opinion of management, are necessary to
fairly present the operating results for the interim periods. The operating results for the interim periods presented are not necessarily indicative of the operating results to be expected for the
full fiscal year. This report should be read in conjunction with the Company's most recent "Annual Report on Form 10-K."

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

FOREIGN CURRENCY

For the Company's foreign operations, assets and liabilities are translated at exchange rates as of the balance sheet date, and revenues and expenses are
translated at average exchange rates prevailing during the period. Translation adjustments are recorded as a separate component of shareholders' equity.

SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosure of cash flow information is as follows (in thousands):

Three Months EndedJuly 29,
2000

July 31,
1999Cash paid for:Interest

$
3,572

$
2,068Income taxes

$
32

$
119


RECENTLY ISSUED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998 and
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging ActivitiesDeferral of the Effective Date of SFAS No. 133" to require adoption at the beginning of the Company's
fiscal year ending April 30, 2002. The standard requires every derivative to be recorded on the balance sheet as either an asset or liability measured at fair value with changes in the derivative's
fair value recognized in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is not expected to have a material effect on the Company's financial position or results of
operations.

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No. 101 is effective for the Company's fiscal quarter ending April 30, 2001. SAB No. 101 is not expected to have a
material effect on the Company's financial position or results of operations.

5

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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 disclosures of contingent assets and liabilities as of the date of the financial statements. Estimates also affect the reported amounts of
revenues and expenses during the periods presented. Estimates are used for such items as allowances for doubtful accounts, inventory reserves, depreciable lives of property and equipment, warranty
reserves and others. Ultimate results could differ from those estimates.

EARNINGS PER SHARE DATA

The Company reports net income (loss) per share pursuant to the requirements of the Statement of Financial Accounting Standards No. 128 "Earnings per Share"
("SFAS No. 128"). SFAS No. 128 requires presentation of basic and diluted earnings (loss) per share (EPS). Basic EPS is computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted EPS reflects potential dilution from outstanding stock options and other securities using the treasury stock method.

A
reconciliation of EPS calculations under SFAS No. 128 is as follows (in thousands, except per share amounts):

Three Months EndedJuly 29,
2000

July 31,
1999Net income (loss)

$
(7,540
)
$
882Weighted average common shares outstandingBasic


10,916


10,708Effect of stock option and benefit plans





18Weighted average common shares outstandingDiluted


10,916


10,726Net income (loss) per shareBasic

$
(0.69
)
$
0.08Diluted

$
(0.69
)
$
0.08


COMPREHENSIVE INCOME

The Company reports comprehensive income and its components pursuant to the requirements of SFAS No. 130, "Reporting Comprehensive Income". This statement
establishes standards for the reporting of comprehensive income and its components. For the Company, comprehensive income consists of net income (loss) adjusted for foreign currency translation
adjustments. Comprehensive income (loss), as defined by SFAS No. 130, was a loss of approximately $7.5 million for the three months ended July 29, 2000 and income of $515,000 for the similar period
ended July 31, 1999.

RESTRUCTURING CHARGES

During the second quarter of fiscal 2000, the Company recorded a restructuring charge of approximately $2.0 million related to its Consulting business. The
emphasis of the restructuring was to

6

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consolidate branch offices and reduce certain general and administrative costs. Norstan Consulting has transitioned to a project-based business model in which the physical presence of geographic
branches
has become far less important than the ability to move skilled consulting resources to customer engagements. The $2.0 million charge consisted of noncancelable lease obligations for branch offices to
be closed ($1.0 million), software and other asset write-offs ($800,000), and severance costs ($200,000).

During
fiscal year 1999, the Company recorded a restructuring charge of $1.5 million relating to a workforce reduction. This resource reduction in the communications business was made
to bring the Company's expense structure in line with anticipated growth. The restructuring charge related to the costs of severance and other employment termination benefits.

During
the fiscal quarters ended July 29, 2000 and July 31, 1999, payments totaling $197,000 and $697,000 were charged against the restructuring reserves which were established as
part of the above-described restructuring charges. At July 29, 2000, a reserve of approximately $440,000 remained for future payments to be made related to the most recent restructuring charge.

WRITEDOWN OF GOODWILL

During the fourth quarter of fiscal year 2000, the Company recorded a charge of $32.2 million to write down goodwill created in connection with its consulting
business acquisitions, principally as a result of
significant operating losses and negative cash flows incurred in the Consulting business segment during fiscal 2000.

VENDOR AGREEMENTS

Norstan has been a distributor of Siemens communication equipment since 1976 and is Siemens' largest independent distributor in North America. The term of the
current distributor agreement with Siemens, signed in January 1999, is five years. Norstan and Siemens have also renewed an agreement through July 27, 2003 under which Norstan is an authorized agent
for the refurbishment and sale of previously owned Siemens equipment.

INCOME TAXES

The Company did not record any income tax benefit related to the current quarter's loss. For the three months ended July 31, 1999, the Company's effective
income tax rate was 46.0%, which differed from the federal statutory rate primarily due to state income taxes and the effect of nondeductible goodwill amortization.

Realization
of the net deferred tax asset is dependent on the Company's ability to generate sufficient future taxable income. Although realization is not assured, the Company believes
that it is more likely than not that the recorded asset will be realized.

CAPITAL RESOURCES

As of July 29, 2000, the Company had an $85.0 million revolving credit agreement with certain banks. Sublimits exist related to the Company's support of its
leasing activities. Borrowings under this agreement bear interest at rates based on the banks' reference rate, as well as LIBOR or CD based options. Interest rates on borrowings outstanding as of July
29, 2000 ranged from 7.1% to 12.0%. Total consolidated borrowings under this agreement at July 29, 2000 and April 30, 2000 were $71.2 million

7

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and $66.8 million, respectively. There were no borrowings on account of the Company's leasing activities at July 29, 2000 and April 30, 2000. Annual commitment fees on the unused portions of the
credit facility are 0.25%. Under the agreement, the Company is required to maintain minimum levels of EBITDA and achieve certain other financial ratios.

As
of July 29, 2000, the Company was in violation of certain covenants under this credit agreement. The Company has been provided a temporary forbearance period until September 25,
2000 with respect to these covenant violations. In addition, borrowing capacity has been reduced to $78.0 million as of July 31, 2000. The Company expects to repay borrowings under this agreement with
anticipated proceeds from the new financing arrangements discussed below.

On
August 14, 2000, the Company received a letter of commitment from a new banking group for funding of up to $80.0 million. The commitment includes $50.0 million available under a
revolving credit agreement (subject to borrowing base limitations related to eligible accounts receivable, inventories and lease receivables) and $30.0 million in the form of a term note. Under this
credit facility, the first $10.0 million borrowed under the revolving line will bear interest at 2.25% above the banks' reference rate. Additional revolver borrowings in excess of $10.0 million will
bear interest at between 1.0% and 1.5% above the banks' reference rate depending on the Company's EBITDA for applicable periods. The rate of interest charged on the term loan will be 6.0% above the
greater of 9.0% and the banks' reference rate. The revolving credit agreement will be effective through the third anniversary of the agreements' initial closing date. The term note will mature on the
first anniversary of the initial closing date. Under the agreement, the Company will be required to comply with various financial and other covenants.

Management
of the Company believes that a combination of cash expected to be generated from operations, and borrowing capacity available under the new financing arrangements discussed
above will be adequate to meet the anticipated liquidity and capital resource requirements of its business through at least April 30, 2001.

BUSINESS SEGMENTS

The Company delivers its products and services through three business segments, Communications, Consulting and Financial Services. The Company's interim
disclosures under the requirements of SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," are as follows (in thousands):

For the Quarter EndedJuly 29, 2000

July 31, 1999Revenues

Operating
Income (Loss)

Revenues

Operating
Income (Loss)Communications

$
76,437

$
(1,413
)
$
84,950

$
4,376Consulting


11,861


(4,905
)

28,996


(1,792
)Financial Services


2,349


981


2,258


937Totals

$
90,647

$
(5,337
)
$
116,204

$
3,521


8

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## 

ITEM 2.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Norstan is a single-source provider of leading-edge technology solutions and world-class technology services including converged voice and data infrastructure,
information technology, networking, internet conferencing, communication solutions and e-business solutions to more than 18,000 business clients worldwide. To address the complex communication
requirements of its customers, Norstan provides a broad range of products and services through three business segments; Communications, Consulting and Financial Services which accounted for 84.3%,
13.1% and 2.6% of Norstan's revenues for the fiscal quarter ended July 29, 2000, respectively. Within the Communications business segment; Communication Solutions offers a comprehensive portfolio of
technology solutions including IP Telephony, traditional PBXs, unified messaging, long distance and conferencing and call center solutions; Communication Services provides a full array of customer
support services including maintenance and support services, systems modifications and managed communication services; Advanced Services Group provides unified media and converged infrastructure
solutions, Voice-Over Data Networking and IP Telephony services and Conferencing Solutions offers audio and video bridging services, internet conferencing, webcasting, consulting services and
conferencing products. The Consulting business segment provides e-business solutions including e-commerce consulting services, e-business integration services, knowledge management
consulting services, customer relationship management solutions and infrastructure services. The Financial Services segment supports the sales process by providing customized financing alternatives.

SUMMARY

During the quarter ended July 29, 2000, the Company reported a net loss of $7.5 million or $0.69 per common share, as compared to net income of $882,000 or
$0.08 per common share for the quarter ended July 31, 1999.

9

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SELECTED CONSOLIDATED FINANCIAL DATA

|                                           |                                 | DOLLAR AMOUNTS AS A PERCENTAGE OF REVENUES |      |       |     
|------------------------------------------ | ------------------------------- | ------------------------------------------ | ---- | ----- | ----
|
|
|REVENUES                                   |                                 |                                            |      |       |     
|                                           | Communications                  |                                            | 84.3 | %     | 73.1
|                                           | Consulting                      |                                            | 13.1 | %     | 25.0
|                                           | Financial Services              |                                            | 2.6  | %     | 1.9 
|                                           |                                 |                                            |      |       |     
|                                           |                                 | Total Revenues                             |      | 100.0 | %   
|COST OF SALES                              |                                 | 74.7                                       | %    | 68.7  | %   
|                                           |                                 |                                            |      |       |     
|GROSS MARGIN                               |                                 | 25.3                                       | %    | 31.3  | %   
|SELLING, GENERAL & ADMINISTRATIVE EXPENSES |                                 | 31.2                                       | %    | 28.3  | %   
|                                           |                                 |                                            |      |       |     
|OPERATING INCOME (LOSS)                    |                                 | (5.9                                       | )%   | 3.0   | %   
|                                           | Interest Expense and Other, Net |                                            | (2.4 | )%    | (1.6
|                                           |                                 |                                            |      |       |     
|INCOME (LOSS) BEFORE TAXES                 |                                 | (8.3                                       | )%   | 1.4   | %   
|                                           | Provision for Income Taxes      |                                            | 0.0  | %     | 0.6 
|                                           |                                 |                                            |      |       |     
|NET INCOME (LOSS)                          |                                 | (8.3                                       | )%   | 0.8   | %   
|                                           |                                 |                                            |      |       |     

The
following table sets forth, for the periods indicated, the gross margin percentages for Communications, Consulting and Financial Services.

Three Months EndedJuly 29,
2000

July 31,
1999GROSS MARGIN PERCENTAGESCommunications

24.5
%
28.2
%Consulting

21.9
%
37.3
%Financial Services

70.3
%
69.1
%


RESULTS OF OPERATIONS

REVENUES.Revenues decreased 22.0% to $90.6 million in the first quarter of fiscal year 2001 as compared to $116.2
million for the first quarter of fiscal year 2000.

Revenues
from Communications decreased 10.0% to $76.4 million for the first quarter ended July 29, 2000 as compared to $85.0 million for the similar period last year. This
decrease was the result of weaker sales in Siemens, conferencing and voice processing products which were somewhat offset by increases in call center and IP telephony solution sales.

Revenues
from Consulting decreased 59.1% to $11.9 million in the first quarter ended July 29, 2000 from $29.0 million in the similar period last year. This decrease is the result of
significantly lower volume at Norstan Consulting which has reduced its workforce by approximately two-thirds over the past year as it has transitioned its business to a national practice focusing on
e-business, customer relationship management and strategic advisory service practices. This decrease was only somewhat offset by an increase in Connaissance Consulting revenues.

10

---

Revenues from Financial Services increased $91,000 or 4.0% in the first quarter of fiscal year 2001 as compared to the similar quarter last year.

GROSS MARGIN.The Company's gross margin decreased $13.4 million to $23.0 million for the quarter ended July 29, 2000
as compared to $36.4 million for the similar quarter last year. As a percent of total revenues, gross margin was 25.3% for the three month period ended July 29, 2000 as compared to 31.3% for the
similar period ended July 31, 1999.

The
gross margin for Communications decreased to 24.5% during the first quarter of fiscal year 2001 as compared to 28.2% for the same period in fiscal year 2000. This decrease was the
result of continued competitive price pressure on communications equipment and by increased product costs.

Consulting's
gross margin decreased to 21.9% as compared to 37.3% during the first quarter of fiscal 2001 as compared to the similar period in fiscal 2000. This decease was primarily
the result of lower than planned utilization of consultants and lower average billing rates as the transition of Consulting's business practices progresses. Both utilization and billing rates are
expected to improve as the new consulting practices are established.

Gross
margin as a percent of revenues for Financial Services was 70.3% for the three month period ended July 29, 2000 as compared to 69.1% for the similar period last year.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.Selling, general and administrative expenses decreased 13.8% to $28.3
million in the first quarter of fiscal year 2001 as compared to $32.8 million in the similar period last year. As a percent of revenues, selling, general and administrative expenses increased to 31.2%
for the three month period ended July 29, 2000, as compared to 28.3% for the same period last year. This increase was due to lower revenue volume in the Communications and Consulting business
segments. While the Company has taken measures to remove a significant amount of costs from the business in recent quarters, additional investments are also being made in building its Advance
Solutions Group practice, new channel partner relationships and its e-commerce presence, vibestech.com.

INTEREST EXPENSE.Interest expense was $2.0 million and $1.4 million for the three month periods ended July 29, 2000
and July 31, 1999, respectively. This increase was primarily the result of higher average borrowing levels during the quarter related to working capital requirements.

INCOME TAXES.The Company did not record any income tax benefit related to the current quarter's loss. For the three
months ended July 31, 1999, the Company's effective income tax rate was 46.0%, which differed from the federal statutory rate primarily due to state income taxes and the effect of nondeductible
goodwill amortization.

NET INCOME (LOSS).In the first quarter of fiscal 2001, the Company reported a net loss of $7.5 million or $0.69 per
share, as compared to net income of $882,000 or $0.08 per share for the first quarter of fiscal 2000.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used for operating activities decreased significantly in the first quarter of fiscal year 2001 as compared to the similar period last year as a result
of improved asset management. Net cash used for investing activities increased in the first quarter of fiscal year 2001 as compared to the similar period in fiscal year 2000 as a result of increases
in investments in lease contracts and other items. Net cash provided by financing activities decreased in the comparable quarters as a result of an increase in net borrowings of discounted lease
rentals somewhat offset by a decrease in net borrowings of long-term debt.

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CAPITAL EXPENDITURES.The Company used $1.7 million for capital expenditures during the three months ended July 29,
2000, as compared to $2.8 million in the similar period last year. These expenditures were primarily for capitalized costs incurred in connection with obtaining or developing internal use software,
computer equipment and system integration.

INVESTMENT IN LEASE CONTRACTS.The Company has also made a significant investment in lease contracts with its
customers. The additional investment made in lease contracts in the first quarter of fiscal year 2001 totaled $7.6 million. Net lease receivables decreased to $64.8 million at July 29, 2000
from $67.7 million at April 30, 2000.

The
Company utilizes its lease receivables and corresponding underlying equipment to borrow funds from financial institutions on a nonrecourse basis by discounting the stream of
future lease payments. Proceeds from discounting are presented on the consolidated balance sheet as discounted lease rentals. Discounted lease rentals totaled $43.7 million at July 29, 2000 as
compared to $44.8 million at April 30, 2000. Interest rates on these credit agreements at July 29, 2000 ranged from approximately 6.0% to 10.0%, while payments are due in varying monthly installments
through November 2005. Payments due to financial institutions are made from monthly collections of lease receivables from customers.

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CAPITAL RESOURCES.As of July 29, 2000, the Company had an $85.0 million revolving credit agreement with certain banks.
Sublimits exist related to the Company's support of its leasing activities. Borrowings under this agreement bear interest at rates based on the banks' reference rate, as well as LIBOR or CD based
options. Interest rates on borrowings outstanding as of July 29, 2000 ranged from 7.1% to 12.0%. Total consolidated borrowings under this agreement at July 29, 2000 and April 30, 2000 were $71.2
million and $66.8 million, respectively. There were no borrowings on account of the Company's leasing activities at July 29, 2000 and April 30, 2000. Annual commitment fees on the unused portions of
the credit facility are 0.25%. Under the agreement, the Company is required to maintain minimum levels of EBITDA and achieve certain other financial ratios.

As
of July 29, 2000, the Company was in violation of certain covenants under this credit agreement. The Company has been provided a temporary forbearance period until September 25,
2000 with respect to these covenant violations. In addition, borrowing capacity has been reduced to $78.0 million as of July 31, 2000. The Company expects to repay borrowings under this agreement with
anticipated proceeds from the new financing arrangements discussed below.

On
August 14, 2000, the Company received a letter of commitment from a new banking group for funding of up to $80.0 million. The commitment includes $50.0 million available under a
revolving credit agreement (subject to borrowing base limitations related to eligible accounts receivable, inventories and lease receivables) and $30.0 million in the form of a term note. Under this
credit facility, the first $10.0 million borrowed under the revolving line will bear interest at 2.25% above the banks' reference rate. Additional revolver borrowings in excess of $10.0 million will
bear interest at between 1.0% and 1.5% above the banks' reference rate depending on the Company's EBITDA for applicable periods. The rate of interest charged on the term loan will be 6.0% above the
greater of 9.0% and the banks' reference rate. The revolving credit agreement will be effective through the third anniversary of the agreements' initial closing date. The term note will mature on the
first anniversary of the initial closing date. Under the agreement, the Company will be required to comply with various financial and other covenants.

Management
of the Company believes that a combination of cash expected to be generated from operations, and borrowing capacity available under the new financing arrangements discussed
above will be adequate to meet the anticipated liquidity and capital resource requirements of its business through at least April 30, 2001.

FORWARD-LOOKING STATEMENTS

From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects,
product pricing, management of growth, integration of acquisitions, technological developments, new products and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements including those made in this document. In order to comply with the terms of the Private Securities Litigation Reform Act, the Company notes that a variety of
factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements.

The
risks and uncertainties that may affect the operations, performance, developments and results of the Company's business include the following: national and regional economic
conditions; pending and future legislation affecting the IT and telecommunications industries; the Company's business in Canada; stability of foreign governments; market acceptance of the Company's
products and services; the Company's continued ability to provide integrated communication solutions for customers in a dynamic industry; and other competitive factors.

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Because these and other factors could affect the Company's operating results, past financial performance should not necessarily be considered as a reliable indicator of future
performance, and investors should not use historical trends to anticipate future period results.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

In the ordinary course of business, the Company is exposed to foreign currency and interest rate risks. These risks primarily relate to the sale of products to
foreign customers and changes in interest rates on obligations under the Company's long-term debt obligations, discounted lease rentals, capital leases and other long-term debt obligations.

The
potential loss from a hypothetical 10% adverse change in foreign currency rates on the Company's foreign installment contracts at July 29, 2000 would not materially affect the
Company's consolidated financial position, results of operations or cash flows.

The
Company's current unsecured revolving long-term credit agreement carries interest rate risk that is generally related to either the banks' reference rate, LIBOR or CD rates or
commercial paper based borrowing options. If any of those rates or options were to change while the Company was borrowing under the agreement, interest expense would increase or decrease accordingly.
As of July 29, 2000, total consolidated borrowings under this agreement were $71.2 million.

The
Company has no earnings or cash flow exposure due to market risks on its discounted lease rentals or its capital lease and other long-term debt obligations as a result of the
fixed-rate nature of these obligations. However, interest rate changes would affect the fair market value of the lease rentals, capital leases and other long-term debt obligations. At July 29, 2000,
the Company had fixed rate lease rentals of $43.7 million and capital lease and other long-term debt obligations of $3.0 million.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is involved in legal actions in the ordinary course of its business. Although the outcome of any such legal action cannot be predicted, in the
opinion of management there is no legal proceeding pending against or involving the Company for which the outcome is likely to have a material adverse effect upon the consolidated financial position
or results of operations of the Company.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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SIGNATURES

Pursuant to the requirements 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.

|                         |  | NORSTAN, INC.Registrant
|------------------------ |  | -----------------------
|Date: September 11, 2000 |  | By                     
|                         |  |                        
|Date: September 11, 2000 |  | By                     
|                         |  |                        

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