##### Table of Contents



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

FORM 10-Q



| |  | CHECKBOX                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
| |  | ------------------------------------------------------------------------------------------
|
| |  | EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2002                      

OR



| |  | BOX               TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
| |  | --------------------------------------------------------------------------
|
| |  | SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM          TO

Commission File No. 0-27694

SCB COMPUTER TECHNOLOGY, INC.

(Exact Name of Registrant as Specified in its Charter)

|                                |  |                                     
|------------------------------- |  | ------------------------------------
|Tennessee                       |  | 62-1201561                          
|                               
|                               
|                               
|                               
|(State or other Jurisdiction of |  | (I.R.S. Employer Identification No.)
|                               
|                               
|                               
|                               
|Incorporation or Organization)  |  |                                     

3800 Forest Hill  Irene Road, Suite 100
Memphis, Tennessee 38125
(Address of Principal Executive Offices)

901-754-6577
(Registrants Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)

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 [  ]

As of March 11, 2002, there were 24,995,324 outstanding shares of the
registrants common stock.





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TABLE OF CONTENTS



|                                                     |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                      
|                                                     | Item 1. Financial Statements                                                                 
|CONDENSED CONSOLIDATED BALANCE SHEETS               
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                     | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                     | Item 3. Quantitative and Qualitative Disclosures about Market Risks                          
|PART II  OTHER INFORMATION                         
|                                                     | Item 1. Legal Proceedings                                                                    
|                                                     | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                                           



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1.Financial Statements

SCB COMPUTER TECHNOLOGY, INC.




CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)
(UNAUDITED)

|                                        |                                                                      |                                            |        |                                      |        |             |        |           |        |        |  | 
|--------------------------------------- | -------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------------------------------ | ------ | ----------- | ------ | --------- | ------ | ------ |  | 
|                                        |                                                                      |                                            |        |                                      |        | January 31, |        | April 30,
|                                        |                                                                      |                                            |        |                                      |        | 2002        |        | 2001     
|                                        |                                                                      |                                            |        | ASSETS                               |        |             |        |           |        |        |  | 
|                                       
|                                       
|                                       
|                                       
|Current assets:                         |                                                                      |                                            |        |                                      |        |             |        |          
|                                       
|                                       
|                                       
|                                       
|                                        | Cash and cash equivalents                                            |                                            | $      | 307                                  |        |             | $      | 575       |       
|                                       
|                                       
|                                       
|                                       
|                                        | Accounts receivable,
net of allowance of $208 and $624, respectively |                                            |        | 14,622                               |        |             |        | 19,605    |       
|                                       
|                                       
|                                       
|                                       
|                                        | Current portion of leases                                            |                                            |        | 4,417                                |        |             |        | 7,312     |       
|                                       
|                                       
|                                       
|                                       
|                                        | Other current assets                                                 |                                            |        | 7,432                                |        |             |        | 8,221     |       
|                                        |                                                                      |                                            |        |                                      |        |             |        |          
|                                        |                                                                      | Total current assets                       |        |                                      | 26,778 |             |        |           | 35,713 |       
|                                       
|                                       
|                                       
|                                       
|Investment in leasing activities        |                                                                      |                                            | 864    |                                      |        |             | 2,543  |          
|                                       
|                                       
|                                       
|                                       
|Fixed assets:                           |                                                                      |                                            |        |                                      |        |             |        |          
|                                       
|                                       
|                                       
|                                       
|                                        | Furniture, fixtures and equipment                                    |                                            |        | 30,306                               |        |             |        | 32,964    |       
|                                       
|                                       
|                                       
|                                       
|                                        | Accumulated depreciation                                             |                                            |        | (20,133                              | )      |             |        | (17,989   | )     
|                                        |                                                                      |                                            |        |                                      |        |             |        |          
|                                        |                                                                      |                                            | Net    |                                      |        | 10,173      |        |           |        | 14,975 | 
|                                       
|                                       
|                                       
|                                       
|Goodwill (net)                          |                                                                      |                                            |       |                                      |        |             | 4,604  |          
|                                       
|                                       
|                                       
|                                       
|Other assets (primarily deferred taxes) |                                                                      |                                            | 8,285  |                                      |        |             | 8,779  |          
|                                        |                                                                      |                                            |        |                                      |        |             |        |          
|                                        |                                                                      | Total assets                               |        | $                                    | 46,100 |             |        | $         | 66,614 |       
|                                        |                                                                      |                                            |        |                                      |        |             |        |          
|                                        |                                                                      |                                            |        | LIABILITIES AND SHAREHOLDERS EQUITY |        |             |        |           |        |        |  | 
|                                       
|                                       
|                                       
|                                       
|Current liabilities:                    |                                                                      |                                            |        |                                      |        |             |        |          
|                                       
|                                       
|                                       
|                                       
|                                        | Accounts payable                                                     |                                            | $      | 1,753                                |        |             | $      | 948       |       
|                                       
|                                       
|                                       
|                                       
|                                        | Accrued expenses                                                     |                                            |        | 5,432                                |        |             |        | 9,993     |       
|                                       
|                                       
|                                       
|                                       
|                                        | Current portion of long-term debt                                    |                                            |        | 6,591                                |        |             |        | 11,484    |       
|                                       
|                                       
|                                       
|                                       
|                                        | Current portion of non-recourse debt                                 |                                            |        | 3,663                                |        |             |        | 5,912     |       
|                                       
|                                       
|                                       
|                                       
|                                        | Deferred revenue                                                     |                                            |        | 1,083                                |        |             |        | 959       |       
|                                        |                                                                      |                                            |        |                                      |        |             |        |          
|                                        |                                                                      | Total current liabilities                  |        |                                      | 18,522 |             |        |           | 29,296 |       
|                                       
|                                       
|                                       
|                                       
|Long-term debt                          |                                                                      |                                            | 10,812 |                                      |        |             | 20,085 |          
|                                       
|                                       
|                                       
|                                       
|Non-recourse debt                       |                                                                      |                                            | 1,740  |                                      |        |             | 3,813  |          
|                                       
|                                       
|                                       
|                                       
|Other liabilities                       |                                                                      |                                            | 125    |                                      |        |             |       |          
|                                       
|                                       
|                                       
|                                       
|Shareholders equity                    |                                                                      |                                            | 14,901 |                                      |        |             | 13,420 |          
|                                        |                                                                      |                                            |        |                                      |        |             |        |          
|                                        |                                                                      | Total liabilities and shareholders equity |        | $                                    | 46,100 |             |        | $         | 66,614 |       
|                                        |                                                                      |                                            |        |                                      |        |             |        |          

See accompanying notes to condensed consolidated financial statements.

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SCB COMPUTER TECHNOLOGY, INC.




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
(UNAUDITED)

|                                                   |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|-------------------------------------------------- |  | ------------ | ------ | ----------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------- | -
|                                                   |  | Three Months |        | Nine Months
|                                                   |  | Ended        |        | Ended      
|                                                   |  | January 31,  |        | January 31,
|                                                   |  |              |        |            
|                                                   |  | 2002         |        | 2001        |  | 2002 |        | 2001
|Revenue                                            |  | $            | 24,647 |             |  | $    | 31,139 |      |  | $ | 80,965 |  |  | $ | 100,150 |  
|                                                  
|                                                  
|                                                  
|                                                  
|Cost of services                                   |  |              | 18,515 |             |  |      | 21,519 |      |  |   | 60,032 |  |  |   | 70,738  |  
|                                                   |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|Gross profit                                       |  |              | 6,132  |             |  |      | 9,620  |      |  |   | 20,933 |  |  |   | 29,412  |  
|                                                  
|                                                  
|                                                  
|                                                  
|Selling, general and administrative expenses       |  |              | 5,282  |             |  |      | 8,195  |      |  |   | 17,503 |  |  |   | 27,585  |  
|                                                  
|                                                  
|                                                  
|                                                  
|Impairment and other charges (recoveries)          |  |              |       |             |  |      | (289   | )    |  |   |       |  |  |   | 38,378  |  
|                                                   |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|Income (loss) from operations                      |  |              | 850    |             |  |      | 1,714  |      |  |   | 3,430  |  |  |   | (36,551 | )
|                                                  
|                                                  
|                                                  
|                                                  
|Other income                                       |  |              | 68     |             |  |      | 103    |      |  |   | 401    |  |  |   | 1,385   |  
|                                                  
|                                                  
|                                                  
|                                                  
|Net interest expense                               |  |              | 345    |             |  |      | 989    |      |  |   | 1,383  |  |  |   | 3,072   |  
|                                                   |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|Income (loss) before income taxes                  |  |              | 573    |             |  |      | 828    |      |  |   | 2,448  |  |  |   | (38,238 | )
|                                                  
|                                                  
|                                                  
|                                                  
|Income tax expense (benefit)                       |  |              | 226    |             |  |      | 327    |      |  |   | 967    |  |  |   | (5,548  | )
|                                                   |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|Net income (loss)                                  |  | $            | 347    |             |  | $    | 501    |      |  | $ | 1,481  |  |  | $ | (32,690 | )
|                                                   |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|Net income (loss) per share  basic                |  | $            | 0.01   |             |  | $    | 0.02   |      |  | $ | 0.06   |  |  | $ | (1.31   | )
|                                                   |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|Net income (loss) per share  diluted              |  | $            | 0.01   |             |  | $    | 0.02   |      |  | $ | 0.06   |  |  | $ | (1.31   | )
|                                                   |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|Weighted average number of common
shares  basic   |  |              | 24,985 |             |  |      | 25,045 |      |  |   | 24,985 |  |  |   | 25,045  |  
|                                                   |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|Weighted average number of common
shares  diluted |  |              | 25,187 |             |  |      | 25,045 |      |  |   | 25,149 |  |  |   | 25,045  |  
|                                                   |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  

See accompanying notes to condensed consolidated financial statements.

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SCB COMPUTER TECHNOLOGY, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)
(UNAUDITED)

|                                                 |                                                                                          |                                        |      |                   |        |      |       |         |        |  
|------------------------------------------------ | ---------------------------------------------------------------------------------------- | -------------------------------------- | ---- | ----------------- | ------ | ---- | ----- | ------- | ------ | -
|                                                 |                                                                                          |                                        |      | Nine Months Ended
|                                                 |                                                                                          |                                        |      | January 31,      
|                                                 |                                                                                          |                                        |      |                  
|                                                 |                                                                                          |                                        |      | 2002              |        | 2001
|Operating Activities                             |                                                                                          |                                        |      |                   |        |      |       |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Net income (loss)                                                                        |                                        | $    | 1,481             |        |      | $     | (32,690 | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Adjustments to reconcile net income (loss) to
net cash provided by operating activities: |                                        |      |                   |        |      |       |         |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Bad debt expense (recovery)                                                              |                                        |      | (12               | )      |      |       | 1,145   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Depreciation                                                                             |                                        |      | 6,707             |        |      |       | 7,250   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Amortization                                                                             |                                        |      | 122               |        |      |       | 1,749   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Deferred income taxes                                                                    |                                        |      | 967               |        |      |       | (8,225  | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Impairment and other charges                                                             |                                        |      |                  |        |      |       | 38,378  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Loss on disposal of assets                                                               |                                        |      |                  |        |      |       | 34      |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Gain on sale of businesses                                                               |                                        |      | (396              | )      |      |       | (1,366  | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Changes in operating assets and liabilities:                                             |                                        |      |                   |        |      |       |         |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Accounts receivable                    |      |                   | 2,483  |      |       |         | 4,277  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Other assets                           |      |                   | (602   | )    |       |         | 9,835  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Accounts payable                       |      |                   | 896    |      |       |         | (3,183 | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Accrued expenses and other liabilities |      |                   | (4,570 | )    |       |         | (8,794 | )
|                                                 |                                                                                          |                                        |      |                   |        |      |       |        
|                                                 | Net cash provided by operating activities                                                |                                        |      | 7,076             |        |      |       | 8,410   |       
|                                                 |                                                                                          |                                        |      |                   |        |      |       |        
|Investing Activities                             |                                                                                          |                                        |      |                   |        |      |       |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Purchases of fixed assets                                                                |                                        |      | (185              | )      |      |       | (1,250  | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Payments received from leasing activities                                                |                                        |      | 1,909             |        |      |       | 7,115   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Sale of businesses, net of liabilities paid at closing                                   |                                        |      | 9,420             |        |      |       | 9,028   |       
|                                                 |                                                                                          |                                        |      |                   |        |      |       |        
|                                                 | Net cash provided by investing activities                                                |                                        |      | 11,144            |        |      |       | 14,893  |       
|                                                 |                                                                                          |                                        |      |                   |        |      |       |        
|Financing Activities                             |                                                                                          |                                        |      |                   |        |      |       |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Borrowings on long-term debt                                                             |                                        |      | 10,000            |        |      |       |        |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Payments on long-term debt                                                               |                                        |      | (29,816           | )      |      |       | (16,846 | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Payments on non-recourse debt                                                            |                                        |      | (4,322            | )      |      |       | (7,069  | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Net borrowings under line of credit                                                      |                                        |      | 5,650             |        |      |       |        |       
|                                                 |                                                                                          |                                        |      |                   |        |      |       |        
|                                                 | Net cash used in financing activities                                                    |                                        |      | (18,488           | )      |      |       | (23,915 | )     
|                                                 |                                                                                          |                                        |      |                   |        |      |       |        
|Net decrease in cash and cash equivalents        |                                                                                          |                                        | (268 | )                 |        |      | (612  | )      
|                                                
|                                                
|                                                
|                                                
|Cash and cash equivalents at beginning of period |                                                                                          |                                        | 575  |                   |        |      | 1,813 |        
|                                                 |                                                                                          |                                        |      |                   |        |      |       |        
|Cash and cash equivalents at end of period       |                                                                                          | $                                      | 307  |                   |        | $    | 1,201 |        
|                                                 |                                                                                          |                                        |      |                   |        |      |       |        
|Supplemental Disclosures of Cash Flow            |                                                                                          |                                        |      |                   |        |      |       |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Interest paid                                                                            |                                        | $    | 1,945             |        |      | $     | 4,195   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Income taxes paid                                                                        |                                        | $    | 276               |        |      | $     |        |       

See accompanying notes to condensed consolidated financial statements.

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SCB COMPUTER TECHNOLOGY, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JANUARY 31, 2002

1  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of SCB
Computer Technology, Inc. (the Company) have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments (which consist of normal recurring
adjustments) considered necessary for the fair presentation of the financial
position of the Company as of January 31, 2002, and the results of operations
and cash flows for the nine-month periods ended January 31, 2002 and January
31, 2001. Operating results for the period ended January 31, 2002, are not
necessarily indicative of the results that may be expected for the fiscal year
ending April 30, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Companys annual
report on Form 10-K for the fiscal year ended April 30, 2001, filed with the
Securities and Exchange Commission.

2  EARNINGS PER SHARE

The following is a reconciliation of the numerators and denominators used to
calculate net income (loss) per share in the condensed consolidated statements
of operations (in thousands):

|                                                                                                      |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ----------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------- | -
|                                                                                                      |  | Three Months |        | Nine Months
|                                                                                                      |  | Ended        |        | Ended      
|                                                                                                      |  | January 31,  |        | January 31,
|                                                                                                      |  |              |        |            
|                                                                                                      |  | 2002         |        | 2001        |  | 2002 |        | 2001
|Net income (loss)                                                                                     |  | $            | 347    |             |  | $    | 501    |      |  | $ | 1,481  |  |  | $ | (32,690 | )
|                                                                                                      |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|Denominator for basic earnings per
share  weighted average shares                                    |  |              | 24,985 |             |  |      | 25,045 |      |  |   | 24,985 |  |  |   | 25,045  |  
|                                                                                                      |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|Effect of dilutive securities-stock options                                                           |  |              | 202    |             |  |      |       |      |  |   | 164    |  |  |   |        |  
|                                                                                                      |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|Denominator for diluted earnings per
share  adjusted weighted average
shares and assumed conversions |  |              | 25,187 |             |  |      | 25,045 |      |  |   | 25,149 |  |  |   | 25,045  |  
|                                                                                                      |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|Net income (loss) per share  basic                                                                   |  | $            | 0.01   |             |  | $    | 0.02   |      |  | $ | 0.06   |  |  | $ | (1.31   | )
|                                                                                                      |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  
|Net income (loss) per share  diluted                                                                 |  | $            | 0.01   |             |  | $    | 0.02   |      |  | $ | 0.06   |  |  | $ | (1.31   | )
|                                                                                                      |  |              |        |             |  |      |        |      |  |   |        |  |  |   |         |  

3  DISPOSITION OF NON-CORE OPERATIONS

On June 20, 2001, Partners Resources Inc., a wholly-owned subsidiary of the
Company, sold substantially all the assets of its Enterprise Resource Planning
(ERP) business unit for $10.5 million in cash. The Company used $8.5 million
of the sale proceeds to reduce its debt and $2.0 million for working capital
and to pay expenses related to the transaction. There was no significant gain
or loss recognized on the transaction. During fiscal 2001, the ERP business
unit contributed $20.5 million of revenues and $1.4 million of operating
income. For the nine months ended January 31, 2002 and 2001, the ERP business
unit generated revenues of approximately $1.7 million and $16.8 million,
respectively, and income (loss) from operations of approximately $0.1 million
and $(0.9) million, respectively.

On May 2, 2000, the Company sold substantially all the assets of Technology
Management Resources, Inc. (TMR), a wholly owned subsidiary of the Company,
for a price of $9,675,000 in cash plus the assumption of certain liabilities,
and realized a gain of approximately $1,400,000. The Company retained
approximately $1,500,000 in working capital of TMR which was not
5Table of Contentsincluded in the transaction. Of the proceeds from the sale, the Company used
$7,000,000 to repay a loan obtained for the Global Services, Inc. acquisition
and $1,000,000 to permanently reduce the outstanding balance under the credit
facility.On November 30, 2000, the Company sold substantially all of the assets of
Proven Technology, Inc., a wholly owned subsidiary of the Company, and
substantially all the assets of the Global Services business unit of PRI for a
combined price of 60,000 shares of common stock, par value $.01 per share, of
the Company plus the assumption of certain liabilities, and recognized a loss
of approximately $1.0 million. The shares of common stock obtained by the
Company will be held in treasury for future use.4  LONG-TERM DEBTOn July 27, 2001, the Company obtained a five-year, $27.5 million credit
facility with a financial institution that consists of a $17.5 million
revolving loan and a $10.0 million term loan (the primary term loan). The
Company used $15.8 million from the new credit facility to retire its
short-term debt with one lender and $1.0 million to refinance its short-term
debt with another lender into a three-year, $4.0 million term loan (the
secondary term loan). The credit facility contains various financial
covenants based on monthly operating results and capital expenditures. The
availability under the revolving loan is limited to 85% of billed accounts
receivable plus 70% of unbilled accounts receivable.The revolving loan bears interest at prime plus a margin (1.25%), and the
primary term loan bears interest at prime plus a margin (2.75%). At April 30,
2002, if the Company has achieved certain financial covenants, the
aforementioned interest margins will be reduced to 1.0% and 2.25% on the
revolving loan and the primary term loan, respectively. The primary term loan
is being amortized at the rate of $350,000 of principal plus accrued interest
per month. At April 30, 2002, the required primary term loan amortization will
be reduced to $275,000 of principal plus accrued interest per month if certain
financial covenants are met. At January 31, 2002, $6.8 million and $7.9 million
were outstanding on the revolving loan and the primary term loan, respectively.The secondary term loan bears interest at prime plus a margin (2.0%). The
secondary term loan is being amortized at the rate of $70,000 of principal plus
accrued interest per month. Additionally, since the Company achieved certain
financial covenants during the first nine months of fiscal 2002, the primary
lender advanced the Company $1.0 million to repay part of the secondary term
loan. At January 31, 2002, $2.6 million was outstanding on the secondary term
loan.5  SEGMENT INFORMATIONThe Companys two business segments are (1) core operations consisting of
information technology professional staffing, outsourcing, and consulting, and
(2) non-core operations consisting primarily of computer hardware and specialty
software sales, computer equipment leasing, and enterprise resource planning
(ERP) which was sold effective as of June 1, 2001. Accordingly, the Company is
presenting the following segment information related to the two business
segments as follows (in thousands):

|                                                      |              |   |                    |       |                     |   |                  |     |  |   |        |       | 
|----------------------------------------------------- | ------------ | - | ------------------ | ----- | ------------------- | - | ---------------- | --- |  | - | ------ | ----- | 
|                                                      |              |   | Three Months Ended
|                                                      |              |   | January 31, 2002  
|                                                      |              |   |                   
|                                                      |              |   | Core Operations    |       | Non-Core Operations |   | Total Operations
|Revenue                                               |              | $ | 23,368             |       |                     | $ | 1,279            |     |  | $ | 24,647 |      
|                                                     
|                                                     
|                                                     
|                                                     
|Cost of services                                      |              |   | 17,445             |       |                     |   | 1,070            |     |  |   | 18,515 |      
|                                                      |              |   |                    |       |                     |   |                  |     |  |   |        |      
|                                                      | Gross profit |   |                    | 5,923 |                     |   |                  | 209 |  |   |        | 6,132 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Selling, recruiting and field administrative expenses |              |   | 2,463              |       |                     |   | 55               |     |  |   | 2,518  |      
|                                                     
|                                                     
|                                                     
|                                                     
|Corporate administrative expenses                     |              |   |                   |       |                     |   |                 |     |  |   | 2,764  |      
|                                                      |              |   |                    |       |                     |   |                  |     |  |   |        |      
|Income from operations                                |              | $ | 3,460              |       |                     | $ | 154              |     |  | $ | 850    |      
|                                                      |              |   |                    |       |                     |   |                  |     |  |   |        |      

|                 |  |                    |        |                         |  |                  |       |  |  |   |        | 
|---------------- |  | ------------------ | ------ | ----------------------- |  | ---------------- | ----- |  |  | - | ------ | 
|                 |  | Three Months Ended
|                 |  | January 31, 2001  
|                 |  |                   
|                 |  | Core Operations    |        | Non-Core Operations (a) |  | Total Operations
|Revenue          |  | $                  | 23,869 |                         |  | $                | 7,270 |  |  | $ | 31,139 | 
|                
|                
|                
|                
|Cost of services |  |                    | 17,739 |                         |  |                  | 3,780 |  |  |   | 21,519 | 
|                 |  |                    |        |                         |  |                  |       |  |  |   |        | 

6



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##### Table of Contents



|                                             |  |                    |       |                         |  |                  |       |  |  |   |       |  
|-------------------------------------------- |  | ------------------ | ----- | ----------------------- |  | ---------------- | ----- |  |  | - | ----- | -
|                                             |  | Three Months Ended
|                                             |  | January 31, 2001  
|                                             |  |                   
|                                             |  | Core Operations    |       | Non-Core Operations (a) |  | Total Operations
|Gross profit                                 |  |                    | 6,130 |                         |  |                  | 3,490 |  |  |   | 9,620 |  
|                                            
|                                            
|                                            
|                                            
|Selling, general and administrative expenses |  |                    | 2,758 |                         |  |                  | 2,704 |  |  |   | 5,462 |  
|                                            
|                                            
|                                            
|                                            
|Corporate expenses                           |  |                    |      |                         |  |                  |      |  |  |   | 2,733 |  
|                                            
|                                            
|                                            
|                                            
|Impairment and other charges (recoveries)    |  |                    | (289  | )                       |  |                  |      |  |  |   | (289  | )
|                                             |  |                    |       |                         |  |                  |       |  |  |   |       |  
|Income from operations                       |  | $                  | 3,661 |                         |  | $                | 786   |  |  | $ | 1,714 |  
|                                             |  |                    |       |                         |  |                  |       |  |  |   |       |  

|                                                      |              |   |                   |        |                         |   |                  |     |  |   |        |        | 
|----------------------------------------------------- | ------------ | - | ----------------- | ------ | ----------------------- | - | ---------------- | --- |  | - | ------ | ------ | 
|                                                      |              |   | Nine Months Ended
|                                                      |              |   | January 31, 2002 
|                                                      |              |   |                  
|                                                      |              |   | Core Operations   |        | Non-Core Operations (b) |   | Total Operations
|Revenue                                               |              | $ | 75,654            |        |                         | $ | 5,311            |     |  | $ | 80,965 |       
|                                                     
|                                                     
|                                                     
|                                                     
|Cost of services                                      |              |   | 55,613            |        |                         |   | 4,419            |     |  |   | 60,032 |       
|                                                      |              |   |                   |        |                         |   |                  |     |  |   |        |       
|                                                      | Gross profit |   |                   | 20,041 |                         |   |                  | 892 |  |   |        | 20,933 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Selling, recruiting and field administrative expenses |              |   | 8,420             |        |                         |   | 727              |     |  |   | 9,147  |       
|                                                     
|                                                     
|                                                     
|                                                     
|Corporate administrative expenses                     |              |   |                  |        |                         |   |                 |     |  |   | 8,356  |       
|                                                      |              |   |                   |        |                         |   |                  |     |  |   |        |       
|Income from operations                                |              | $ | 11,621            |        |                         | $ | 165              |     |  | $ | 3,430  |       
|                                                      |              |   |                   |        |                         |   |                  |     |  |   |        |       

|                                             |  |                   |         |                         |  |                  |        |   |  |   |         |  
|-------------------------------------------- |  | ----------------- | ------- | ----------------------- |  | ---------------- | ------ | - |  | - | ------- | -
|                                             |  | Nine Months Ended
|                                             |  | January 31, 2001 
|                                             |  |                  
|                                             |  | Core Operations   |         | Non-Core Operations (b) |  | Total Operations
|Revenue                                      |  | $                 | 75,705  |                         |  | $                | 24,445 |   |  | $ | 100,150 |  
|                                            
|                                            
|                                            
|                                            
|Cost of services                             |  |                   | 55,929  |                         |  |                  | 14,809 |   |  |   | 70,738  |  
|                                             |  |                   |         |                         |  |                  |        |   |  |   |         |  
|Gross profit                                 |  |                   | 19,776  |                         |  |                  | 9,636  |   |  |   | 29,412  |  
|                                            
|                                            
|                                            
|                                            
|Selling, general and administrative expenses |  |                   | 7,968   |                         |  |                  | 10,374 |   |  |   | 18,342  |  
|                                            
|                                            
|                                            
|                                            
|Corporate expenses                           |  |                   |        |                         |  |                  |       |   |  |   | 9,243   |  
|                                            
|                                            
|                                            
|                                            
|Impairment and other charges                 |  |                   | 29,458  |                         |  |                  | 8,920  |   |  |   | 38,378  |  
|                                             |  |                   |         |                         |  |                  |        |   |  |   |         |  
|Loss from operations                         |  | $                 | (17,650 | )                       |  | $                | (9,658 | ) |  | $ | (36,551 | )
|                                             |  |                   |         |                         |  |                  |        |   |  |   |         |  



---

|(a) |  | The non-core operations for the fiscal quarter ended January 31, 2001,
include revenues of approximately $5.2 million and income from operations
of approximately $0.5 million of the ERP business unit which was sold
effective as of June 1, 2001.                                                                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | The non-core operations for the nine months ended January 31, 2002 and
2001, include revenues of approximately $1.7 million and $16.8 million,
respectively, and income (loss) from operations of approximately $0.1
million and $(0.9) million, respectively, of the ERP business unit which
was sold effective as of June 1, 2001.

The following sets forth the assets and liabilities of the non-core operations
(in thousands):

|                                 |  |             |       |      |  |   |        | 
|-------------------------------- |  | ----------- | ----- | ---- |  | - | ------ | 
|                                 |  | As of      
|                                 |  | January 31,
|                                 |  |            
|                                 |  | 2002        |       | 2001
|Investment in leasing activities |  | $           | 5,281 |      |  | $ | 17,141 | 
|                                
|                                
|                                
|                                
|Other assets                     |  |             | 41    |      |  |   | 648    | 
|                                 |  |             |       |      |  |   |        | 
|Total assets                     |  | $           | 5,322 |      |  | $ | 17,789 | 
|                                 |  |             |       |      |  |   |        | 
|Non-recourse debt                |  | $           | 5,403 |      |  | $ | 13,363 | 
|                                
|                                
|                                
|                                
|Other liabilities                |  |             | 93    |      |  |   | 472    | 
|                                
|                                
|                                
|                                
|Equity (deficit)                 |  |             | (174  | )    |  |   | 3,954  | 
|                                 |  |             |       |      |  |   |        | 
|Total liabilities and equity     |  | $           | 5,322 |      |  | $ | 17,789 | 
|                                 |  |             |       |      |  |   |        | 

7



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##### Table of Contents



6  RELATED-PARTY TRANSACTIONS

On July 16, 2001, the Company agreed to loan up to $192,000 to T. Scott Cobb,
the President and Chief Executive Officer and a director of the Company (the
First Loan). The First Loan bears interest at prime and originally had a
maturity date of April 30, 2002. On January 18, 2002, the Company and Mr. Cobb
modified the First Loan by (a) increasing the maximum principal amount by
$121,755 to a total of $313,755 and (b) extending the maturity date by four
months to August 31, 2002, subject to the requirement that Mr. Cobb prepay the
First Loan in certain circumstances. The proceeds of the First Loan are to be
used by Mr. Cobb to repay his personal indebtedness to a commercial bank.

On January 18, 2002, the Company loaned an additional $500,000 to Mr. Cobb (the
Second Loan). The Second Loan bears interest at prime, has a maturity date
of January 31, 2002, and is secured by a pledge by Mr. Cobb to the Company of
1,502,203 shares of the Companys common stock owned by Mr. Cobb. The
proceeds of the Second Loan are to be used by Mr. Cobb to repay his personal
indebtedness to a commercial bank.




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

The following discussion and analysis of the Companys financial condition and
results of operations should be read in conjunction with the Companys
consolidated financial statements and notes thereto included elsewhere in this
report.

Forward-Looking Statements

Certain matters discussed in this report, including the exhibits hereto, may
constitute forward-looking statements within the meaning of the federal
securities laws. Forward-looking statements are those that express managements
view of future performance and trends, and usually are preceded with expects,
anticipates, believes, hopes, estimates, plans or similar phrasing.
Forward-looking statements include statements regarding projected operating
revenues and costs, liquidity, capital expenditures, and availability of
capital resources. Such statements are based on managements beliefs,
assumptions and expectations, which in turn are based on information currently
available to management. Information contained in these forward-looking
statements is inherently uncertain, and the Companys actual performance and
results may differ materially due to a number of factors, most of which are
beyond the Companys ability to predict or control. These factors include, but
are not limited to, the Companys business relationships with significant
clients; the potential early termination of the Companys information
technology (IT) service contracts without penalty; the potential for the
Companys clients to reduce or increase their IT services outsourcing; the
Companys potential liability to its clients in connection with the provision
of IT services; the Companys ability to attract, develop and retain qualified
IT employees; changes in the utilization and productivity rates of the
Companys IT employees; the Companys dependence on key management personnel;
the types and mix of IT services that the Company performs during any
particular period; changes in the Companys gross margins due to a variety of
factors, including increased wage and benefit costs that are not offset by
billed rate increases; the Companys ability to finance, sustain and manage
growth; the Companys ability to develop or acquire additional IT service
offerings; the Companys ability to effectively identify, integrate and manage
acquired businesses; competition; the outcome of litigation involving the
Company, particularly the settlement of the shareholder lawsuit described in
Part II, Item 1 of this report; the results of the investigation being
conducted by the Securities and Exchange Commission (the SEC) into the
Companys past accounting and financial reporting practices; the trading status
of the Companys common stock; the Companys decision to focus on its core
competencies of IT professional staffing, outsourcing, and consulting; and
general economic conditions. The Company disclaims any intent and undertakes no
obligation to publicly release any revision to or update of any forward-looking
statement contained in this report to reflect events or circumstances occurring
after the date hereof, the occurrence of unanticipated events or circumstances,
or otherwise.

Results of Operations

Overview

The Company changed its strategic direction dramatically in fiscal 2001. Prior
to fiscal 2001, the Companys growth was driven largely through acquisitions,
diversification, and attempts at cross-selling services. In fiscal 2001, the
Company focused its resources on its core competencies of providing IT
professional staffing, outsourcing, and consulting services (the core
operations) and divested a number of its previously acquired business units
that are now considered to be non-core. The Companys non-core operations
consist primarily of computer hardware and specialty software sales, computer
equipment leasing, and enterprise resource planning (ERP) which was sold
effective as of June 1, 2001 (the non-core operations). The

8



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##### Table of Contents



Company derives substantially all of its revenue from its core operations. In
the first nine months of fiscal 2002, professional staffing, outsourcing and
consulting accounted for 72%, 14% and 14%, respectively, of the Companys
revenue from core operations.

The decrease in the Companys revenue from $100.2 million in the first nine
months of fiscal 2001 to $81.0 million in the first nine months of fiscal 2002
is a function of several factors. These factors include (1) the Companys shift
in strategic direction to focus on its core operations and to de-emphasize its
non-core operations; (2) the Companys sale of its Proven Technology and Global
Services business units in the third quarter of fiscal 2001, which resulted in
a $1.9 million decrease in revenue; (3) the Companys sale of its ERP business
unit in the first quarter of fiscal 2002, which resulted in a $15.1 million
decrease in revenue; (4) the continued wind down of the Companys computer
equipment leasing business unit, which resulted in a $1.9 million decrease in
revenue; (5) a $0.2 million decrease in revenue from other non-core operations;
and (6) the general softness in the IT services market.

The Company has historically derived a significant portion of its revenue from
a relatively limited number of clients. The Company currently performs services
for over 150 clients consisting of state and local governments, Fortune 500
companies, and other large commercial organizations. In the first nine months
of fiscal 2002 and 2001, approximately 57% and 43%, respectively, of the
Companys revenue was attributable to state and local governmental and
quasi-governmental entities (such as public utilities), with the balance being
attributable to commercial enterprises. In the first nine months of fiscal
2002 and 2001, the Companys five largest revenue-generating clients accounted
for approximately 54% and 56%, respectively, of the Companys revenue from core
operations. From time to time the Company has substantial accounts receivable
from its top five clients, but the Company has not experienced any significant
payment problems from these clients. A material decrease in services provided
to any of the largest clients of the Company or a significant payment problem
from any of these clients could have an adverse impact on the Companys
financial condition and results of operations.

The Companys fiscal year extends from May 1 through the following April 30.
The Company generally recognizes revenue as services are performed.

Comparison of Third Quarter of Fiscal 2002 to Third Quarter of Fiscal 2001

Revenue and Income from Operations.The Companys operating results consist of
its core operations and non-core operations. The Companys consolidated
revenue from both core and non-core operations decreased to $24.6 million in
the third quarter of fiscal 2002 from $31.1 million in the third quarter of
fiscal 2001.

Revenue from core operations decreased to $23.4 million in the third quarter of
fiscal 2002 from $23.9 million in the third quarter of fiscal 2001.
Professional staffing revenue increased $0.1 million for the quarter due to an
increase in average billing rate. Outsourcing revenue decreased $1.1 million
for the quarter. Consulting revenue increased $0.5 million for the quarter as
a result of higher billing rates. Excluding impairment and other charges
(recoveries), income from core operations increased to $3.5 million in the
third quarter of fiscal 2002 from $3.4 million in the third quarter of fiscal
2001.

Revenue from non-core operations (including sold business units) decreased to
$1.3 million in the third quarter of fiscal 2002 from $7.3 million in the third
quarter of fiscal 2001 based on the strategic decisions discussed above.
Computer hardware sales and computer equipment leasing revenue decreased a
total of $0.7 million for the quarter due to increased lease maturities. The
sale of the ERP business unit effective as of June 1, 2001, resulted in a $5.2
million decrease in revenue for the quarter. Income from non-core operations
decreased to $154,000 in fiscal 2002 from $786,000 in the third quarter of
fiscal 2001.

The Companys average billable headcount increased 2.3% for the third quarter
of fiscal 2002 versus the third quarter of fiscal 2001. Its average billing
rate increased 13.2% for the same periods.

Over the last two fiscal years, the Company has reported certain items
impacting the comparability of its financial results. These items include
professional fees relating to the ongoing SEC investigation, gains from the
sales of business units, and impairment and other charges (recoveries). The
Company believes that excluding these extraordinary items presents a more
comparative picture of the financial performance of the Company during the
third quarters of fiscal 2002 and 2001.

9



---



##### Table of Contents



The following table summarizes the components of the Companys consolidated
income from operations (in thousands) in the third quarters of fiscal 2002 and
2001. The SEC investigation professional fees have been excluded from
corporate expenses and the impairment and other charges (recoveries) have been
excluded from core operations and non-core operations to provide a more
comparable presentation.

|                                       |                                           |                                     |   |                    |     |      |   |        |       | 
|-------------------------------------- | ----------------------------------------- | ----------------------------------- | - | ------------------ | --- | ---- | - | ------ | ----- | 
|                                       |                                           |                                     |   | Three Months Ended
|                                       |                                           |                                     |   | January 31,       
|                                       |                                           |                                     |   |                   
|                                       |                                           |                                     |   | 2002               |     | 2001
|Income from operations reconciliation: |                                           |                                     |   |                    |     |      |   |       
|                                      
|                                      
|                                      
|                                      
|                                       | Income from core operations               |                                     | $ | 3,460              |     |      | $ | 3,372  |      
|                                      
|                                      
|                                      
|                                      
|                                       | Income from non-core operations           |                                     |   | 154                |     |      |   | 786    |      
|                                      
|                                      
|                                      
|                                      
|                                       | Corporate expenses                        |                                     |   | (2,471             | )   |      |   | (2,688 | )    
|                                      
|                                      
|                                      
|                                      
|                                       | SEC investigation professional fees       |                                     |   | (293               | )   |      |   | (45    | )    
|                                      
|                                      
|                                      
|                                      
|                                       | Impairment and other charges (recoveries) |                                     |   |                   |     |      |   | (289   | )    
|                                       |                                           |                                     |   |                    |     |      |   |       
|                                       |                                           | Consolidated income from operations |   | $                  | 850 |      |   | $      | 1,714 | 
|                                       |                                           |                                     |   |                    |     |      |   |       

The following table shows the impact of the SEC investigation professional
fees, gains from the sales of business units, and impairment and other charges
(recoveries) on the Companys net income (in thousands) in the third quarters
of fiscal 2002 and 2001:

|                                               |                                     |   |                    |     |      |   |      |    | 
|---------------------------------------------- | ----------------------------------- | - | ------------------ | --- | ---- | - | ---- | -- | 
|                                               |                                     |   | Three Months Ended
|                                               |                                     |   | January 31,       
|                                               |                                     |   |                   
|                                               |                                     |   | 2002               |     | 2001
|Income before income taxes                     |                                     | $ | 573                |     |      | $ | 828  |   
|                                              
|                                              
|                                              
|                                              
|Add: Impairment and other charges (recoveries) |                                     |   |                   |     |      |   | (289 | ) 
|                                              
|                                              
|                                              
|                                              
|                                               | SEC investigation professional fees |   |                    | 293 |      |   |      | 45 | 
|                                              
|                                              
|                                              
|                                              
|Less: Gain on sales of business units          |                                     |   | 75                 |     |      |   |     |   
|                                               |                                     |   |                    |     |      |   |      |   
|Adjusted pre tax income                        |                                     |   | 791                |     |      |   | 584  |   
|                                              
|                                              
|                                              
|                                              
|Income tax expense                             |                                     |   | 312                |     |      |   | 231  |   
|                                               |                                     |   |                    |     |      |   |      |   
|Adjusted net income                            |                                     | $ | 479                |     |      | $ | 353  |   
|                                               |                                     |   |                    |     |      |   |      |   

As shown in the table, excluding these extraordinary items, the Companys net
income increased 36% to $479,000 in the third quarter of fiscal 2002 from
$353,000 in the third quarter of fiscal 2001.

Corporate Costs.Corporate costs increased to $2.8 million in the third
quarter of fiscal 2002 from $2.7 million in the third quarter of fiscal 2001.
Corporate costs excluding SEC investigation professional fees decreased to $2.5
million in the third quarter of fiscal 2002 from $2.7 million in the third
quarter of fiscal 2001 as a result of managements cost reduction efforts.

Interest Costs.Interest expense decreased to $0.3 million in the third
quarter of fiscal 2002 from $1.0 million in the third quarter of fiscal 2001
primarily due to the reduction in the Companys bank debt and changes in
interest rates.

Tax Rate.The effective tax rate for the third quarters of fiscal 2002 and
2001 was 39.5% (the historical effective tax rate).

Comparison of First Nine Months of Fiscal 2002 to First Nine Months of Fiscal
2001

Revenue and Income from Operations.The Companys consolidated revenue from
both core and non-core operations decreased to $81.0 million in the first nine
months of fiscal 2002 from $100.2 million in the first nine months of fiscal
2001.

Revenue from core operations was $75.7 million in the first nine months of
fiscal 2002 and 2001. Professional staffing revenue increased $0.6 million for
the nine months due to an increase in average billing rate. Outsourcing
revenue decreased $1.8 million for the nine months. Consulting revenue
increased $1.2 million for the nine months as a result of increased billing
rates. Excluding impairment and other charges, income from core operations
decreased to $11.6 million in the first nine months of fiscal 2002 from $11.8
million in the first nine months of fiscal 2001.

10



---



##### Table of Contents



Revenue from non-core operations (including sold business units) decreased to
$5.3 million in the first nine months of fiscal 2002 from $24.4 million in the
first nine months of fiscal 2001 based on the strategic decisions discussed
above. Computer hardware sales and computer equipment leasing revenue decreased
a total of $2.4 million for the nine months due to no hardware sales. The sale
of the ERP unit effective as of June 1, 2001, resulted in a $15.1 million
decrease in revenue for the nine months. Excluding impairment and other
charges, income from non-core operations increased to $0.2 million in the first
nine months of fiscal 2002 from a loss of $0.8 million in the first nine months
of fiscal 2001.

The Companys average billable headcount decreased 1.2% for the first nine
months of fiscal 2002 versus the first nine months of fiscal 2001. Its average
billing rate increased 9.4% for the same periods.

Over the last two fiscal years, the Company has reported certain items
impacting the comparability of its financial results. These items include
professional fees relating to the ongoing SEC investigation, gains from the
sales of business units, and impairment and other charges (recoveries). The
Company believes that excluding these extraordinary items presents a more
comparative picture of the financial performance of the Company during the
first nine months of fiscal 2002 and 2001.

The following table summarizes the components of the Companys consolidated
income (loss) from operations (in thousands) in the first nine months of fiscal
2002 and 2001. The SEC investigation professional fees have been excluded from
corporate expenses and the impairment and other charges have been excluded from
core operations and non-core operations to provide a more comparable
presentation.

|                                              |                                     |                                            |   |                   |       |      |   |        |         |  
|--------------------------------------------- | ----------------------------------- | ------------------------------------------ | - | ----------------- | ----- | ---- | - | ------ | ------- | -
|                                              |                                     |                                            |   | Nine Months Ended
|                                              |                                     |                                            |   | January 31,      
|                                              |                                     |                                            |   |                  
|                                              |                                     |                                            |   | 2002              |       | 2001
|Income (loss) from operations reconciliation: |                                     |                                            |   |                   |       |      |   |       
|                                             
|                                             
|                                             
|                                             
|                                              | Income from core operations         |                                            | $ | 11,621            |       |      | $ | 11,808 |        
|                                             
|                                             
|                                             
|                                             
|                                              | Income from non-core operations     |                                            |   | 165               |       |      |   | (738   | )      
|                                             
|                                             
|                                             
|                                             
|                                              | Corporate expenses                  |                                            |   | (7,672            | )     |      |   | (8,349 | )      
|                                             
|                                             
|                                             
|                                             
|                                              | SEC investigation professional fees |                                            |   | (684              | )     |      |   | (894   | )      
|                                             
|                                             
|                                             
|                                             
|                                              | Impairment and other charges        |                                            |   |                  |       |      |   | 38,378 |        
|                                              |                                     |                                            |   |                   |       |      |   |       
|                                              |                                     | Consolidated income (loss) from operations |   | $                 | 3,430 |      |   | $      | (36,551 | )
|                                              |                                     |                                            |   |                   |       |      |   |       

The following table shows the impact of the SEC investigation professional
fees, gains from the sales of business units, and impairment and other charges
on the Companys net income (in thousands) in the first nine months of fiscal
2002 and 2001:

|                                      |                                     |   |                   |     |      |   |         |     | 
|------------------------------------- | ----------------------------------- | - | ----------------- | --- | ---- | - | ------- | --- | 
|                                      |                                     |   | Nine Months Ended
|                                      |                                     |   | January 31,      
|                                      |                                     |   |                  
|                                      |                                     |   | 2002              |     | 2001
|Income (loss) before income taxes     |                                     | $ | 2,448             |     |      | $ | (38,238 | )  
|                                     
|                                     
|                                     
|                                     
|Add: Impairment and other charges     |                                     |   |                  |     |      |   | 38,378  |    
|                                     
|                                     
|                                     
|                                     
|                                      | SEC investigation professional fees |   |                   | 684 |      |   |         | 894 | 
|                                     
|                                     
|                                     
|                                     
|Less: Gain on sales of business units |                                     |   | 396               |     |      |   | 1,385   |    
|                                      |                                     |   |                   |     |      |   |         |    
|Adjusted pre tax income (loss)        |                                     |   | 2,736             |     |      |   | (351    | )  
|                                     
|                                     
|                                     
|                                     
|Income tax expense (benefit)          |                                     |   | 1,081             |     |      |   | (139    | )  
|                                      |                                     |   |                   |     |      |   |         |    
|Adjusted net income (loss)            |                                     | $ | 1,655             |     |      | $ | (212    | )  
|                                      |                                     |   |                   |     |      |   |         |    

As shown in the table, excluding these extraordinary items, the Companys net
income increased to $1.7 million in the first nine months of fiscal 2002 from a
net loss of $0.2 million in the first nine months of fiscal 2001.

Corporate Costs.Corporate costs decreased to $8.4 million in the first nine
months of fiscal 2002 from $9.2 million in the first nine months of fiscal 2001
as a result of managements cost reduction efforts. Corporate costs excluding
SEC investigation professional fees decreased to $7.7 million in the first nine
months of fiscal 2002 from $8.3 million in the first nine months of fiscal 2001
for the same reason.

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Interest Costs.Interest expense decreased to $1.4 million in the first nine
months of fiscal 2002 from $3.1 million in the first nine months of fiscal 2001
primarily due to the reduction in the Companys bank debt and changes in
interest rates.

Tax Rate.The effective tax rates for first nine months of fiscal 2002 and
2001 were 39.5% (the historical effective tax rate) and 14.5% (the historical
effective tax rate less a valuation reserve of approximately $6.0 million),
respectively.

Reliance Upon Significant Customers

For the first nine months of fiscal 2002, the Companys five largest
revenue-generating customers accounted for 54% of its revenue from core
operations, a decrease from 56% for the first nine months of fiscal 2001. In
the first nine months of fiscal 2002, the following customers accounted for 10%
or more of the Companys revenue from core operations: State of Tennessee
(16%), State of Kentucky (13%), and Honeywell Inc. (12%). In the core
operation of outsourcing, one customer accounted for 82% of outsourcing revenue
for the first nine months of fiscal 2002, a decrease from 88% of outsourcing
revenue for the first nine months of fiscal 2001.

Liquidity and Capital Resources

Debt.On July 27, 2001, the Company obtained a five-year, $27.5 million credit
facility with a financial institution that consists of a $17.5 million
revolving loan and a $10.0 million term loan (the primary term loan). The
Company used $15.8 million from the new credit facility to retire its
short-term debt with one lender and $1.0 million to refinance its short-term
debt with another lender into a three-year, $4.0 million term loan (the
secondary term loan). The credit facility contains various financial
covenants based on monthly operating results and capital expenditures. The
availability under the revolving loan is limited to 85% of billed accounts
receivable plus 70% of unbilled accounts receivable.

The revolving loan bears interest at prime plus a margin (1.25%), and the
primary term loan bears interest at prime plus a margin (2.75%). At April 30,
2002, if the Company has achieved certain financial covenants, the
aforementioned interest margins will be reduced to 1.0% and 2.25% on the
revolving loan and the primary term loan, respectively. The primary term loan
is being amortized at the rate of $350,000 of principal plus accrued interest
per month. At April 30, 2002, the required primary term loan amortization will
be reduced to $275,000 of principal plus accrued interest per month if certain
financial covenants are met. At January 31, 2002, $6.8 million and $7.9 million
were outstanding on the revolving loan and the primary term loan, respectively.

The secondary term loan bears interest at prime plus a margin (2.0%). The
secondary term loan is being amortized at the rate of $70,000 of principal plus
accrued interest per month. Additionally, since the Company achieved certain
financial covenants during the first nine months of fiscal 2002, the primary
lender advanced the Company $1.0 million to repay part of the secondary term
loan. At January 31, 2002, $2.6 million was outstanding on the secondary term
loan.

The Company has $5.4 million in non-recourse debt that is paid through the
Companys $5.3 million investment in computer equipment leasing activities. Of
the non-recourse debt, $3.7 million is classified as current and will be paid
by $4.4 million from the current portion of the leases.

The Company repaid $2.3 million and $6.1 million in debt during the third
quarters of fiscal 2002 and 2001, respectively. The Company repaid $18.5
million and $23.9 million in debt during the first nine months of fiscal 2002
and 2001, respectively. At January 31, 2002, the Company had approximately
$2.1 million in available borrowing capacity under the revolving loan.

Capital Expenditures.The Companys capital expenditures primarily relate to
computer equipment purchases for use by the Companys professionals or to use
in outsourcing contracts. In the first nine months of fiscal 2002, the Company
had approximately $0.2 million in capital expenditures, a decrease from
approximately $1.3 million in capital expenditures in the first nine months of
fiscal 2001. The Company does not expect to incur substantial capital
expenditures during the remainder of fiscal 2002.

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Dispositions of Non-Core Operations.On May 2, 2000, Technology Management
Resources, Inc., a wholly-owned subsidiary of the Company, sold substantially
all its assets for $9.7 million in cash plus the assumption of $0.3 million of
liabilities. The Company used $8.9 million of the sale proceeds to reduce its
debt and $0.8 million for working capital.

On November 30, 2000, Proven Technology, Inc., a wholly-owned subsidiary of the
Company engaged in the non-core operation of computer hardware sales, sold
substantially all its assets in exchange for 50,000 shares of the Companys
common stock which are now held as treasury shares.

On November 30, 2000, Partners Resources Inc., a wholly-owned subsidiary of the
Company, sold substantially all the assets of its Global Services business
unit, which was engaged in the non-core operation of computer hardware sales,
in exchange for 10,000 shares of the Companys common stock which are now held
as treasury shares.

On June 20, 2001, Partners Resources Inc. sold substantially all the assets of
its Enterprise Resource Planning (ERP) business unit for $10.5 million in
cash. The Company used $8.5 million of the sale proceeds to reduce its debt and
$2.0 million for working capital and to pay expenses related to the
transaction.

Working Capital.At January 31, 2002, the Company had working capital of $8.3
million (including $0.3 million in cash and cash equivalents), a $17.6 million
increase from the working capital deficit of $9.3 million at January 31, 2001.
The Company generated net cash from operating activities of $7.1 million and
$8.4 million in the first nine months of fiscal 2002 and 2001, respectively.
The decrease in net cash provided by operating activities for the nine months
was mainly attributable to income tax refunds received in fiscal 2001.

Future Liquidity Requirements.Although it is difficult to predict the
Companys future liquidity requirements, the Company believes that its current
cash and cash equivalents, anticipated cash flows from operations, and
available borrowings under its credit facility will be sufficient for the
foreseeable future to fund the Companys working capital requirements and
operations, make required payments of principal and interest on its debt, and
permit anticipated capital expenditures.

Related-Party Transactions

On July 16, 2001, the Company agreed to loan up to $192,000 to T. Scott Cobb,
the President and Chief Executive Officer and a director of the Company (the
First Loan). The First Loan bears interest at prime and originally had a
maturity date of April 30, 2002. On January 18, 2002, the Company and Mr. Cobb
modified the First Loan by (a) increasing the maximum principal amount by
$121,755 to a total of $313,755 and (b) extending the maturity date by four
months to August 31, 2002, subject to the requirement that Mr. Cobb prepay the
First Loan in certain circumstances. The proceeds of the First Loan are to be
used by Mr. Cobb to repay his personal indebtedness to a commercial bank.

On January 18, 2002, the Company loaned an additional $500,000 to Mr. Cobb (the
Second Loan). The Second Loan bears interest at prime, has a maturity date
of January 31, 2002, and is secured by a pledge by Mr. Cobb to the Company of
1,502, 203 shares of the Companys common stock owned by Mr. Cobb. The
proceeds of the Second Loan are to be used by Mr. Cobb to repay his personal
indebtedness to a commercial bank.

Significant Accounting Policies

Long-Lived Assets. Goodwill represents the excess of the cost of businesses
acquired using the purchase method of accounting over the fair value of the net
identifiable assets at the date of acquisition and is being amortized using the
straight line method over periods ranging from 3 to 30 years.

The Company monitors events and changes in circumstances that could indicate
the carrying amount of long-lived and intangible assets may not be recoverable.
These events or changes may include a significant decrease in cash flow, a
significant decrease in earnings or a significant adverse change in legal
factors among other items. When events or changes in circumstances are present
that indicate the carrying amount of long-lived assets may not be recoverable,
the Company assesses the recoverability of long-lived assets by determining
whether the carrying value of such assets will be recovered through
undiscounted expected future cash flows after related interest charges. Should
the Company determine that the
13Table of Contents

carrying values of specific long-lived assets are not recoverable, the Company
would record a charge to reduce the carrying value of such assets to their fair
values.

Revenue Recognition.The Company recognizes revenues as professional services
are performed.

The Companys contracts with customers are in three forms: 1) time and
materials, 2) fixed monthly fee, and 3) fixed fee for an engagement. The
majority of the Companys revenue is billed on a time and materials basis. At
the beginning of each month, the Company bills for actual hours performed the
prior month. Some time and materials contracts contain a cap on hours to be
worked in which case the hours are monitored in order to not exceed the cap.
Less than 25 percent of the Companys revenue is performed for a fixed monthly
fee basis.

In instances where the Company accepts an engagement on a fixed fee basis, the
Company records revenue on a percentage of completion basis. Each month the
project leader of the engagement submits to accounting the percentage the
project is complete. Based upon the difference in the percentage between the
prior month and the current month, the Company records revenue. The Companys
agreement with the client calls for billing of fees at specified increments not
directly related to the costs incurred.

The Company records deferred revenue for payments received from certain
customers on service contracts prior to the performance of services required
under the service contract. Estimated losses are recorded when identified.

Income Taxes.The Company accounts for income taxes using the liability
method. Under the liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date. A deferred tax asset
valuation allowance is recorded when the realization of deferred tax assets is
not assessed as more likely than not.

Stock Based Compensation.The Company grants stock options for a fixed number
of shares to employees and directors with an exercise price equal to the fair
value of the shares at the date of grant. The Company accounts for stock option
grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and, accordingly, recognizes no compensation expense for the stock
option grants.




Item 3.Quantitative and Qualitative Disclosures about Market Risks

The Companys primary market risks include fluctuations in interest rates and
variability in interest rate spread relationships (i.e., prime or LIBOR
spreads). Substantially all of the Companys $17.4 million in outstanding
recourse debt at January 31, 2002, relates to credit facilities with commercial
lenders. Interest on the outstanding balances is charged based on a variable
rate related to the prime rate. The rate is incremented for margins in the form
of fluctuations in interest rates. The effect of a hypothetical one percentage
point increase across all maturities of variable rate debt would result in a
decrease of approximately $174,000 in pre-tax net income assuming no further
changes in the amount of borrowings subject to variable rate interest from the
amounts outstanding at January 31, 2002. The Company does not have any
derivative financial instruments outstanding.

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PART II  OTHER INFORMATION




Item 1.Legal Proceedings

As previously disclosed in the Companys quarterly report on Form 10-Q for the
fiscal quarter ended October 31, 2001, the Company and the individual
defendants in the consolidated lawsuit filed on behalf of the Companys
shareholders in April 2000 have reached an agreement with the lead plaintiffs
to settle the lawsuit. Under the terms of the settlement, the Company agreed
to pay $2.1 million into a settlement fund to be administered under the
supervision of the district court for the benefit of the plaintiff class. The
settlement payment will be made by the Companys insurer. The district court
preliminarily approved the settlement on December 7, 2001. The consummation of
the settlement is subject to certain conditions, including the approval of the
fairness of the settlement by the district court after a final settlement
hearing which is scheduled for March 15, 2002. In reaching the settlement, the
Company and the individual defendants have denied and continue to deny each and
every claim of alleged violations of law made by the plaintiffs in the lawsuit.

As previously disclosed in the Companys quarterly report on Form 10-Q for the
fiscal quarter ended October 31, 2001, the SEC is conducting an investigation
of the Companys past accounting and financial reporting practices. In
response to a preliminary notice of proposed charges received from the SEC
staff, the Company has held discussions with the SEC staff with a view to
resolving the investigation on a basis that would be acceptable to the Company
and would avoid or mitigate any potential injury to its business. There can be
no assurance, however, that the Company will succeed in these efforts.




Item 6.Exhibits and Reports on Form 8-K

(a)         Exhibits

The exhibits listed in the Exhibit Index following the signature page
hereof are filed as part of this report or are incorporated herein by
reference.

(b)         Reports on Form 8-K

None.

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SIGNATURE

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.

|                     |  |                              
|-------------------- |  | -----------------------------
|Date: March 14, 2002 |  | SCB COMPUTER TECHNOLOGY, INC.



| | By:/s/ Michael J. Boling
                          Michael J. Boling
             Executive Vice President, Chief
            Financial Officer, and Treasurer
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

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EXHIBIT INDEX

|        |  |                                                                                                                                                                   
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                   
|Number  |  | Description of Exhibit                                                                                                                                            
|11      |  | Computation of earnings per share (included in Note 2 of the Notes to
Condensed Consolidated Financial Statements (unaudited) in Item 1 of Part
I of this report).

17